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Middle Market Companies Show Resilience Amid Economic Challenges

A recent survey from KeyBank highlights the resilience and optimism of middle market companies in the face of ongoing economic challenges. The report analyzes insights from over 750 senior executives operating within businesses that generate annual revenues between $10 million and $1 billion. As they navigate the uncertainties in the economy, focusing on controllable factors has become paramount for these organizations.

Unyielding Optimism

The findings reveal that 72% of middle market companies are optimistic about their prospects over the next year, though this figure shows a slight decrease from 76% in the previous quarter of 2024. The emphasis has shifted towards improving operational efficiency and technological advancements, with 51% and 48% respectively identifying these areas as their primary focus. Notably, both figures saw a decline of over 10 percentage points compared to previous year’s data, indicating that businesses are now concentrating on harnessing benefits from past technological investments.

Economic Confidence Remains Steady

Despite prevailing market uncertainties, 53% of executives expressed a favorable view regarding the broader U.S. economic outlook for the coming year. This figure has remained consistent since early 2023. However, executives voiced concerns regarding potential tariffs (32%), inflation (31%), rising interest rates (30%), and increased labor costs (29%), signaling that while confidence is high, vigilance is still necessary.

Allocating Resources for Growth

In light of current uncertainties, middle market leaders are making strategic investments to facilitate growth. Notably:

• - AI and Technology: Nearly half (45%) of the companies plan to augment their investments in AI and other technologies within the next year, aiming to enhance operational efficiency (71%), bolstering cybersecurity measures (67%), improving decision-making processes (60%), and refining forecasting abilities (59%). These steps are essential for adapting to changes and supporting scalable growth amidst an unpredictable economic landscape.
• - Operational Expansion: Furthermore, 37% of companies indicated plans for expanding their operations. This may drive positive momentum in capital expenditures, indicative of businesses seizing opportunities amidst disruption.
• - Talent and Innovation: A third (34%) of companies are also investing in workforce development and launching new products, thus signifying their confidence in market sustainability. In the aftermath of the pandemic, talent acquisition has become a challenge, leading leaders to prioritize employee retention and productivity to ensure business efficacy.

Mergers and Acquisitions

Looking toward the future, 63% of middle market companies are planning to explore mergers and acquisitions (M&A) by the end of 2025. Executives anticipate that clearer macroeconomic indicators will pave the way for aligning buyer and seller expectations, fostering a conducive environment for M&A activities into 2026.

Strategic Capital Management

In terms of capital planning, while 58% of companies aim to maintain their current capital levels, 47% are considering raising equity, and 42% are focused on increasing debt capacity as necessary to support their strategic goals. Preferred funding sources are predominantly private equity firms (56%), commercial lenders (53%), and venture capital firms (51%).

Observations from KeyBank

Ken Gavrity, President of Key Commercial Bank, emphasized the adaptability of middle market companies in this climate, stating that many are transforming policy and economic uncertainties into competitive advantages by enhancing operational efficiency and focusing on team productivity. He noted, "Disruption creates opportunity, and those middle market companies with robust balance sheets and operational agility are demonstrating a readiness to act in this environment."

Conclusion

As middle market companies continue to forge ahead against economic headwinds, their commitment to strategically investing in technology, workforce, and operational capabilities sets them up for potential growth. The findings from KeyBank’s survey illuminate a sector that, while facing challenges, remains steadfast in its journey towards resilience and strategic evolution.