The Center has isolated seven growth drivers and has weighted their impact on company growth.

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Pressure on Upper Middle Market Growth?

In The DNA of Middle Market Growth, published in 2018, the Center conducted an analysis of five years of Middle Market Indicator data. We were able to isolate seven growth drivers—market expansion, formal growth strategy, innovating and investing, attracting and retaining talent, financial management, cost efficiencies, and staff development—and weight their impact on company growth. In addition, from work we did for the 2Q 2019 MMI, we are able to isolate the effect of M&A on overall company growth. Putting those factors together, we can roughly gauge how changes in company investments will affect future growth.

The middle market’s pullback from international expansion is likely to have the biggest impact. A 33% decline in the likelihood of entering new foreign markets (compared to a year ago) will take one percentage point of growth away from the middle market—a substantial decline. That is unevenly distributed, of course: Wholesalers and manufacturers, more exposed to global markets in the first place, are more likely to reduce investment overseas and to see their growth slow as a result. So are companies in the upper middle market (those with revenues between $100 million and $1 billion).

The reduction in M&A plans—about 18% from a year ago—has less impact on overall middle market growth than one might expect. About one-tenth of the middle market’s 7.5% growth in the last year was inorganic. Cutting M&A by a fifth would, therefore, drop growth to about 7.3%, all else being equal. But that impact, too, falls unevenly. In the upper middle market, M&A accounts for about 15% of top-line growth.

Now, the bigger a middle market company is, the more likely it is to be global and the more likely it is to make acquisitions. In all likelihood, those two factors have depressed the performance of the upper middle market in this quarter. At 6.7%, its growth is, unusually, well below the growth of the lower (8.0%) and core (8.2%) middle market. If executives stick to their plans to slow international expansion and acquire less, these decisions will continue to weigh on the results of upper middle market firms.