Despite current market challenges, optimism among middle market business leaders has surged heading into the second half of 2024. KeyBank’s latest Middle Market Sentiment survey, which gathered insights from 700 owners and executives of companies with annual revenues between $10 million and $1 billion, reveals a renewed confidence in financial performance. Notably, optimism has reached its highest levels in years, with 78 percent of respondents describing their company outlook over the next 12 months as excellent or very good.
Resilience remains a hallmark for these companies, many of which are also focused on expansion. Among respondents with a positive economic outlook, 52 percent anticipate engaging in buy-side mergers and acquisitions (M&A) in 2024. For those facing concerns around accessing capital and credit, 87 percent intend to explore alternative financing options, such as private equity and private debt lending, over the next three years to support upcoming transactions.
Technology is also a key component of growth plans. Over half of the surveyed leaders plan to integrate artificial intelligence (AI) by the end of 2024 to broaden their operational capabilities. Additionally, 46 percent of respondents aim to increase hiring, while 44 percent expect to launch new products—clear indicators that middle market businesses are not only weathering market fluctuations but are also actively positioning themselves for future growth and success.
While optimism is high, business leaders continue to express concerns over inflation, interest rates, and rising costs of labor, energy, and materials. To counter these pressures, many are intensifying efforts to boost operational efficiency and reduce energy usage. Additionally, these leaders are prioritizing expanded sales and marketing strategies to drive revenue growth, alongside investing in automation to improve productivity.
Cybersecurity remains a top priority, with one-third of businesses reporting incidents of cyberattacks or financial fraud within the last year. This may explain why 60 percent of companies are planning to implement AI-driven solutions specifically for cybersecurity and fraud prevention, underscoring the increasing importance of digital safeguards as companies strive to protect their assets and data.
Middle market business leaders are expressing greater optimism about their companies’ financial prospects compared to a year ago. Nearly 80 percent of leaders surveyed rated their financial outlook for the next 12 months as excellent or very good—an increase of five percentage points from last year. This rise in positive sentiment was particularly notable among leaders in the healthcare and retail sectors, as well as those from companies in the highest revenue brackets and businesses located in the Northeast.
Business leaders largely attribute their growing optimism to gains in operational efficiency and advancements in technology. Improved efficiency remains the leading contributor to a positive company outlook, with 64 percent of respondents citing it as a key factor—up from 56 percent at the close of 2023 and 52 percent in Q2 2023. Technological improvements also play a critical role, mentioned by 60 percent of leaders, rising from 54 percent at the end of last year and 49 percent earlier in 2023. Additionally, talent acquisition and retention remain vital, with 44 percent noting its importance in sustaining their optimistic outlook.
Middle market business leaders’ views on the broader economy remain steady. The percentage of respondents rating the U.S. economic outlook for the next 12 months as excellent or very good edged up by 1 point to 50 percent. Leaders especially optimistic about their own companies’ outlooks—particularly those in retail, companies in both the highest and lowest revenue brackets, and businesses based in the Northeast—also expressed a more positive economic outlook.
This optimism is fueling a strong appetite for mergers and acquisitions (M&A) among middle market leaders. Over half (52 percent) of those with a positive economic outlook anticipate buy-side M&A activity by the end of 2024. Looking further ahead, interest continues to climb, with 56 percent of optimistic leaders expecting buy-side deals in 2025 and 60 percent in 2026. Similarly, projections for sell-side M&A activity are on the rise, with 31 percent expecting to sell by the end of 2024, increasing to 36 percent in 2025 and 37 percent in 2026.
Leaders at public companies are more likely to pursue buy-side acquisitions than those at smaller firms, while middle market companies with revenues between $250 million and $500 million tend to explore sell-side opportunities.
On the buy side, identifying suitable acquisition targets emerged as the leading challenge for middle market leaders. For both buy- and sell-side transactions, leaders also highlighted the importance of building strong relationships with owners and executives of target firms. Cultural alignment—including shared values, beliefs, behaviors, and organizational norms—was another prominent concern, as leaders prioritize finding partners who align well with their corporate culture.
The latest survey highlights a strong link between private equity involvement and growth among middle market companies. Over half of leaders with a positive outlook on the U.S. economy reported that their organizations are fully or partially owned by private equity firms. Additionally, 41 percent of leaders with an optimistic company outlook indicated some level of private equity ownership.
When asked about the factors influencing their decision to engage with private equity, 50 percent of respondents pointed to growth opportunities as a primary driver, followed by access to capital (45 percent) and enhanced access to talent (37 percent).
Among leaders concerned about access to capital and credit, a significant majority (87 percent) plan to turn to alternative funding sources within the next three years. Private equity firms emerged as the top alternative, frequently cited by respondents as a preferred source for capital and credit solutions.
As growth remains a priority for middle market businesses in the latter half of 2024, many leaders are turning to advanced technology and automation, expanding their workforce, launching new products, and more. Companies with higher annual revenues are particularly likely to report investments across multiple expansion strategies.
Artificial intelligence once again emerged as the leading method for expanding operations, with over half (54 percent) of surveyed leaders planning to implement AI by mid-2024—a 10-point increase since the fourth quarter of 2023.
The three top reasons for implementing AI were data analysis, cybersecurity/fraud management, and data entry and/or data processing.
Inflation continues to be a significant concern for the middle market as of mid-year. Over one-third of survey respondents (38 percent) indicated that rising inflation is negatively affecting their business operations. The impacts of inflation are evident, including higher costs for raw materials and supplies, increased overhead expenses, and rising energy costs, including oil and gas.
Rising energy, oil, and gas prices continue to impact companies striving to manage inflation. Nearly one-third (29 percent) of leaders reported negative effects on their operations due to increased energy costs, with the proportion of those experiencing shrinking profit margins growing by 9 percentage points during the first half of 2024.
Additionally, 42 percent of leaders are seeing reduced revenue as a direct result of higher energy expenses, up from 36 percent at the end of 2023 and 37 percent in Q2 2023. In response, many affected business leaders are planning to enhance energy efficiency efforts and streamline processes to create operational efficiencies.
However, it's not all negative: some middle market leaders have reported positive outcomes from inflation. Among those with an optimistic economic outlook who noted at least some benefits from inflation, increased productivity emerged as the top advantage. Furthermore, the percentage of companies citing the ability to raise prices as a positive outcome rose by 12 percentage points to 41 percent since Q4 2023.
As of mid-year 2024, middle market business leaders' optimism regarding their companies’ financial prospects has reached its highest level since mid-2022, with nearly 80 percent of those surveyed expressing confidence in their outlook. This renewed optimism is largely driven by enhancements in operational efficiency and advancements in technology.
The past few years have been turbulent for businesses, and the middle market is no exception. Yet, as they enter the second half of 2024, most middle market business owners and executives are looking ahead with renewed confidence and a clear vision for future growth.
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