Large corporates have easier access to finance and traditionally, small businesses have been the predominant focus of government policy. Although encouraging steps continue to be taken by government to address this, we find it is mid-market firms which are providing a disproportionately large contribution to GDP and that these firms require more support to reach their full potential.
The latest report on the European mid-market sector from GE Capital paints a positive picture of the UK’s mid-market firms. These companies, defined as having revenues between £15m and £800m, with around 28,000 organisations turning over an impressive £2.2 trillion between them. They also employ 11.2 million people and contribute £307billion to the UK’s GDP. To put this into perspective, that means 1.67% of companies in the UK are contributing over a third of private sector GDP, revenues & employment. Certainly more than their fair share, you might say.
So, what does an average mid-market firm look like? Mid-market firms vary widely of course but they typically employ 400 people and have revenues of £79m. They also contribute an average £11m each towards national GDP. If you delve deeper though, you see that there is a wide variety in mid-market firms in terms of their performance and outlook and across geographic locations.
Our research found that the UK, encouragingly, has a higher proportion of mid-market ‘Growth Champions’ than Germany, France or Italy. Growth Champions exhibit growth of at least 10% per year and 17% of mid-market firms in the UK fall into this category. This compares to 13% in Germany and Italy and 11% in France. But why is the UK mid-market outperforming Germany on this measure?
Perhaps by analysing the specific characteristics of these Growth Champions in each market we can find an explanation. The profile of an average Growth Champion in the UK differs to that of one in Germany. Amongst the top growing firms in the UK there is a strong emphasis on cost management, ability to gain access to capital, and a clear focus on expansion into emerging markets. The German ‘Growth Champion’ has slightly different characteristics – the ability to effectively implement government policy and a penchant for organic growth being principal drivers of growth. We get a sense of ambition from the UK Growth Champions, looking at fast growing export markets, which is perhaps not mirrored to the same degree in Germany.
More broadly across the four markets of France, Germany, Italy and the UK, our research indications that poor talent management is the most significant detractor to growth amongst Growth Champions. There is an interesting comparison to be drawn here with mid-market firms in general, taking into account those growing but also those flat or declining. When you look at this wider community, you see that firms are more focussed on external issues beyond their control than internal operational issues. The top factors cited as barriers to growth are the economic crisis, regulation, declining sales and finally financial barriers.
Looking specifically at financial barriers, GE Capital’s report showed that mid-market firms are worried about a predictable cash flow and maintaining sufficient working capital. Another recent study by Standard & Poor’s said that mid-market firms will struggle to meet their multi-billion financing needs in the next few years, as banks reduce their lending to the sector1. Turning to alternative funding sources, the “squeezed middle” needs to raise up to €3.5tn in debt funding over the next five years. European businesses have traditionally relied on bank funding, but deleveraging and tightening regulation are creating a scarcity of finance for European companies, and the problem is particularly acute for mid-market businesses.
Overall, the mid-market sector in the UK is in good shape and our 2,200 board-level interviews with these organisations shows that they are in a bullish mood. The difference between an average firm and a fast growing Growth Champion though? In short, Growth Champions focus on the things that are in their control and don’t let external factors hold them back.