Throughout 2018 and continuing in 2019, the middle market was one of the most active economic segments in the U.S. We recently spoke with Dallas Capital Bank’s clients Lee Dunlap, CEO and Founder of Quest Events, Grant Kornman, Managing Partner at NCK Capital and Gene Gray, President at Innovative-IDM and asked them their opinions about what trends we can expect to see throughout 2019.
In the fourth quarter of 2018, middle market companies reported a strong annualized revenue growth rate of 7.9%. Do you expect this to continue in 2019?
Lee Dunlap: I do expect it to continue in 2019 with the current administration ‘pro-business’ stance and the new tax laws passed, along with China and other countries we continue to ‘reset the fences with’ on trade.
Gene Gray: I expect to see the industrial space soften for the first half of 2019. Semiconductors will be slow all year, but automotive will pick up in Q2 due to pending initiatives by many of the large automakers retooling. The food and beverage industry will do as it typically does, and remain steady. I also believe life sciences will be strong.
Grant Kornman: I expect growth to continue to be strong and I believe it will likely continue into 2019 with one caveat – it all depends on what happens with the trade war. If trade relations with China continue to deteriorate, this will start to put pressure on middle market growth. But if Trump can deliver a trade deal, the economy should continue to be robust.
What is one of the greatest challenges/opportunities facing the middle market in 2019?
Lee Dunlap: The labor force is a crucial piece of my business. With 70 percent of our workforce being hourly, and the pressure to raise minimum wages to levels that some companies can’t and won’t be able to afford, this will be a challenge. The industrial sector will continue to mature with high M&A activity from not only traditional M&A firms, but also from large consolidation and strategic buyers as well. The challenge will be navigating the maturing market as a middle market competitor.
Gene Gray: The other challenge that we’ll all face is scaling our human resources, specifically technical talent.
Grant Kornman: I agree. It’s all about labor. We are pretty much at full employment and the labor markets are especially tight here in Texas. Recruiting and retaining excellent talent continues to be the biggest challenge in today's competitive marketplace.
What factors do you believe will contribute the most to middle-market activity? Increased private equity investment? Stronger M&A activity?
Lee Dunlap: With the feeling of a pullback or downturn on the horizon coming in the next 18-24 months, I’m seeing a lot of cash sitting on the sidelines and not in the market. For example, why isn’t this available cash being deployed into PE type investments? However, I don’t see a slowdown in M&A activity with PE funds still raising billions of dollars that they have to deploy and business owners looking to take chips off the table.
Gene Gray: With factories returning to the U.S., along with the retirement of the baby boomers, it will force American manufacturers to have to automate. It’s the only option to be competitive. That need will be addressed with traditional factories – from automation, robotics, to factory 4.0 initiatives, as well as integrating future disruptive technologies.
Grant Kornman: The dry powder in middle market funds is staggering. All these funds have a ‘use it or lose it’ provision in their fund structures. We are starting to see a bifurcation in valuations. Perfect companies are commanding unprecedented multiples, mainly driven by financial sponsors’ need to deploy its capital. Valuations on less than perfect companies have dropped over the last 12 months. As a result, sellers of these less than perfect companies continue to have unrealistic value expectations.
Do you forecast strong interest from foreign buyers in the U.S. middle-market space?
Lee Dunlap: I think foreign buyers will look at emerging markets in the U.S. over the long term.
Gene Gray: I do not expect to see much activity in the industrial sector.
Any final thoughts to share for “Trends to Watch in 2019”?
Lee Dunlap: I would love to see some data points around banking in regards to cash on the balance sheet and loans to deposits. I will be watching this closely with the next downturn in the economy.
Grant Kornman: Credit markets continue to be on fire, which is driving M&A activity, as well as high valuations.