COVID-19 and middle-market companies: key insights for recovery.

“Middle-market companies" — defined as companies with revenues between $10 million and $1 billion — occupy a unique position in the U.S. economy. They make up roughly one percent of all businesses while accounting for more than 30 percent of U.S. GDP. Considering that outsized influence, how they’re faring in the face of COVID-19, and the speed with which they’re able to get back on their feet, will have wide-ranging implications for the strength and speed of U.S. economic recovery in general.

With that in mind, how has the global pandemic affected middle-market companies so far? And what’s their prognosis as we pivot into recovery mode? These three key insights should help make that clear. 

pulse check: the middle-market and COVID-19

First things first: The middle market is extraordinarily resilient. That was true in the aftermath of the Great Recession of 2008, when middle-market companies were the primary drivers of job growth in the U.S., and it’s true in the context of COVID-19 today. In fact, early reports indicate that the value of middle-market companies has declined due to the pandemic, but to a significantly lesser degree than that of S&P 500s: 7.5 percent versus 16 percent, respectively. 

That said, distinct challenges remain for middle-market companies as they shift toward recovery. In one large survey of more 250 middle-market executives, respondents didn’t mince words: Half described the overall impact of COVID-19 on their companies as “major.” Another 44 percent said major restructuring would likely result. 

Zoom in on the results of the survey a bit closer, what’s more, and specific leadership challenges start to emerge:

  • Nearly one quarter of respondents indicated that their organizations are not managing cash-related issues very effectively — and five percent described those management practices as “not at all effective.” 
  • More than a quarter of respondents expressed concerns that they are not managing their supply chains optimally. 
  • Finally, 16 percent reported that their organizations are not managing customer experiences very effectively.

These answers reveal that middle-market companies may be confronting deeper issues than those brought on by the global pandemic alone. Is it possible that leadership is amplifying the worst effects of the crisis, rather than dampening them? In a deeply uncertain environment, businesses should at least be able to act with confidence about what goes on within their walls. It is troubling if, as the survey appears to indicate, that is not the case at some middle-market companies today. 

emerging trends in the recovery phase

Two trends are emerging for middle-market companies as they push toward recovery. Let’s start with the first one: curtailing plans for market expansion until the economy shows signs of bouncing back. 

That is, middle-market companies are scaling back the market expansion initiatives that they had planned going into the first quarter of 2020. We’ve seen this across the board, albeit with one wrinkle. Interestingly, if perhaps not altogether surprisingly, given their traditionally different appetites for risk, family-owned middle-market companies are proceeding far more cautiously than those backed by private equity. Among the former, 78 percent are putting market expansion plans on ice, compared to 60 percent of the latter. And, in a similar vein, family-owned middle-market companies appear far more likely to delay capital spending in the near term than their private equity counterparts. 

Strategically scaling back may be the big-picture trend, but that doesn’t mean opportunities have simply evaporated for middle-market companies in the near term. Private equity firms have been stockpiling dry powder, and with the onset of the global pandemic, they may have a chance to use it. The recently disclosed carve-out deal between KKR and consumer beauty company Coty is a good example of that.  

The other significant trend? With a lot of deals on hold, internal change may be the most viable approach to strengthening middle-market companies. In fact, nearly one in three has indicated that senior leadership transitions are likely in the foreseeable future. In light of the internal operating challenges we pulled out earlier, of course, that may not be entirely surprising. From a leadership standpoint, it’s also noteworthy that almost one in ten middle-market executives identified lingering operational issues around IT infrastructure and communications — areas that really should be in pretty robust shape at this point. So if progress on any of those fronts appears to be lagging, leadership change is probably the order of the day. 

resilience — and change — on the road to recovery


Despite clear challenges, middle-market executives are by and large confident about their ability to land on their feet in the near term. Indeed, four out of five believe they will be able to resume normal operations within six months, according to one survey. So far, the demonstrated resilience of middle-market companies in the face of the global pandemic is certainly grounds for optimism. 

Yet for many companies, the nature and meaning of “normal operations” itself remains uncertain and may be subject to additional change. Many middle-market portfolio companies have pivoted since the onset of the pandemic, rapidly mobilizing to deliver on pressing public health needs.

For example, Hilding Anders, acquired by KKR in 2016, had been a mattress company until COVID-19 hit, at which point the PE-backed company began manufacturing surgical masks. Similarly, UBTECH, a robotics company backed by Qiming Venture partners, is now building AI-powered temperature-detection tools to help screen for the virus. In the interim, how long any of these new business models will stay — and equally, how long demand for these products will remain sky high — is impossible to say. 

However things shake out, all middle-market companies will look to address questions like: 

  • When will traditional levels of demand in my industry pick up again?
  • What can we restructure in order to improve liquidity in the interim? 
  • Do we have opportunities to shift to more digital or online-centered models? 

Given the outsized influence of middle-market companies on U.S. GDP, when and how middle they respond to these prompts will not only determine the success of their own recoveries — but that of the U.S. economy at large. 

key takeaways

Middle-market companies have long been engines of growth for the U.S. economy, and that’s perhaps more true today than ever before. To be sure, COVID-19 has impacted these companies in salient ways, as we have discussed. Notably, it has:

  • focused attention on key leadership and management challenges 
  • derailed market expansion plans for many, while bringing business transformation efforts to the forefront
  • prompted scrutiny on existing business models, and highlighted the need to explore potential alternatives 

But if history is any guide, middle-market companies are more than capable of handling these challenges and more. Those that act decisively and strategically will likely emerge on the other side of the crisis stronger than they were going in. To find out how Tatum can help support your middle-market company on the journey to recovery, get in touch with us today.