Once braced for the worst, the middle market now hopes for a rebound

By Drew Yergensen

More than nine months since the pandemic arrived in the U.S., communities and businesses are still learning how to live and work safely, even as the threat of the virus still casts a shadow over the U.S. economy. At this pivotal juncture, middle-market companies have led the way, pivoting rapidly to remain operational despite COVID-19. Middle-market company leaders now feel the impact of the pandemic on their businesses has been the same or better than expected. That viewpoint can in part be attributed to smart actions taken early in the pandemic to help their business respond to and surpass the initial disruption.

Based on a recent KeyBank survey, the sentiment in the middle market shows stability and continued cautious optimism; however, it is tempered by uncertainty about the economy and sociopolitical landscape.

Business owners feel more positive about their own outlook than the outlook for the broader market.

Middle-market business leaders are more concerned for others than they are for themselves. In June 2020, middle-market business owners’ opinions about their company, state and the national outlook had begun to shift positively as compared to the concerns expressed at the start of the pandemic. Since June, their outlook at the national level has become a bit more pessimistic, with fewer companies indicating an “excellent” outlook. State outlook is also slightly more pessimistic than before, while company outlooks remain much more optimistic and have seen a slight uptick since June. In total, 59 percent of respondents said their own company outlook was excellent or very good, and another 21 percent said it was good.

Similarly, perceptions about the overall health of their business amid COVID-19 have remained flat since business executives were last surveyed in June. More than half of respondents (52 percent) say they are very or somewhat positive about the health of their business. The positivity can likely be attributed to the fact that most middle-market businesses continue to feel that the impact of COVID-19 on their business has been the same or better than their original expectations. In fact, respondents who say it has been better than expected have grown from 35 percent in June to 40 percent now. It’s germane to say that those expectations might have been low, given the lack of visibility into the future anyone had in the first few months of the pandemic.

Why do leaders have more concerns about the nation than about their business? It could be because they acted swiftly and decisively against the virus within their organizations. The majority of middle-market businesses report changing their operations somewhat or very much in response to COVID-19. These actions included taking additional safety measures (85 percent), seeking out loans or additional sources of credit (52 percent) and reducing staff or compensation (49 percent).

One good sign is that most middle-market businesses are in the process of getting back to normal operations since the initial shutdowns. The survey shows more than half of middle-market business owners say they are somewhat or fully back to normal operations and only two out of 10 report having to close more than once due to the pandemic.

COVID-19, however, is not the only game-changer of 2020. As the country has confronted a generational public health crisis, it is also dealing with an eruption of social activism and civil unrest over systemic racial injustices. In response, most U.S. companies have placed a renewed focus on efforts to address bias in their own operations. While a majority of middle-market businesses claim diversity and inclusion is very or extremely important to their company, their actions or planned actions are varied. Over the past 12 months, the most common actions have been strengthening anti-discriminatory policies (37 percent) and conducting diversity and inclusion trainings (33 percent).

The state of the current economy has also extended to the merger and acquisition (M&A) marketplace for middle-market firms. Fewer businesses have completed an acquisition in the past six months (27 percent versus 35 percent in June). The overall likelihood of a middle- market company completing an acquisition is also slightly down compared to earlier in the year. The majority of respondents (55 percent) say that the COVID-19 pandemic has somewhat or significantly impacted valuations, which may be what is dampening activity.

Middle-market leaders have never experienced a year like 2020. The year began with a positive outlook and expectations of growth and strong activity even amid recession concerns and political volatility. Then the extraordinary disruption of the COVID-19 pandemic took hold. The good news is many middle-market firms pivoted rapidly then managed well through crisis. As a result, they are now feeling tempered positivity even though the pandemic is far from over.

Drew Yergensen is the market president and commercial banking sale leader with KeyBank in Utah.