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Finance Companies Lead the Middle Market Through Turbulent Waters

Date: Oct 04, 2017 @ 07:00 AM
Filed Under: Current Environment

Fundamental economic change often occurs through disruption, rather than gradual marketplace evolution. Throughout history, new ideas, new technologies, and new markets periodically transform industries, creating opportunities for companies that perceive their potential and dooming others that ignore them. In the years following the Great Recession, however, the pace and magnitude of disruption have increased dramatically, thanks for the most part to advances in technology.

Most discussions of paradigm shifts in markets focus on the role start-ups play in generating disruption and the effect this disruption has on large, dominant companies. Middle-market companies, however, are not mere bystanders in this struggle between large and small. Middle-market companies, especially those that are privately owned, have the opportunity to take a long-term view of the future of their market and invest accordingly.

The ability of middle-market companies to respond successfully to the challenges of disruption is a critical issue for the U.S. economy. Nearly 20,000 U.S. companies with revenues of between $100 million and $3 billion employ more than 30 million people and produce approximately $10 trillion of the $30 trillion annual gross receipts generated nationwide.

To find out whether middle-market companies are successfully exploiting their strengths and managing their weaknesses, Capital One surveyed more than 300 middle-market executives across 10 industry segments, including financial services. We hoped to determine if middle-market companies are prepared to withstand disruption and whether they are actively trying to become disruptors themselves.

A Focus on Financial Services Companies

Overall, the most striking finding was that many middle-market companies are complacent about disruption. There is a discrepancy between the survey participants’ estimate of their industry’s vulnerability to disruption and their own company’s vulnerability. Forty-three percent believe their industry to be quite or extremely vulnerable to disruption, while just 18 percent reported that their company is quite vulnerable to disruption.

Executives of financial services firms were a notable exception to this trend. Across the board, these respondents view disruption as primarily or completely an opportunity. Eighty-three percent reported that their company is actively pursuing a disruptive strategy—compared to just 60 percent in the middle market overall. One reason for this proactive approach? Seventy-seven percent said that disruption had already impacted the financial services sector, or was imminent in the next year. 

In addition to being proactive, financial services firms were also amongst the best prepared defensively. Nearly half of financial services respondents (47%) said they were quite or extremely prepared for a disruptive event—compared to just 16 percent of middle-market executives overall. Every single respondent from the financial services industry had taken at least one preparative measure. Seventy-seven percent have a contingency plan in place, while 70 percent have an in-person person or team responsible for identifying threats.

Strong Financial Partnerships and Technology Make the Difference

Considering the rapid pace of change in financial services over the past decade, it should be no surprise that these companies are among the most prepared and proactive. However, the survey findings also highlighted the crucial role that financial services companies play in helping other middle-market businesses weather disruptive events.

While 68 percent of our respondents overall report having a banking relationship that could provide critical financial advice and support in the face of disruption, 32 percent are left relatively underprepared in this arena. Having such a relationship in place is particularly important, because an infusion of capital is often necessary to adjust to disruption. Seventy percent of those with an ongoing banking relationship expect to need additional funding in the face of a disruption.

The value of these relationships has only increased with time. With large global pools of capital looking for a home, middle-market companies have access to an unprecedented array of capital sources—from private equity to bank and non-bank lenders. The businesses in our survey that we consider to be “disruptors”—those who consider disruption to be an opportunity and have a disruptive strategy in place—are much more likely to consider private equity, asset-based lending, asset securitization, as well as subordinated and senior debt facilities.

One way that these disruptors are protecting themselves from disruption is by streamlining and automating every possible back office process. They are conspicuous for taking advantage of disruptive financial technologies. Almost 60 percent said they are open to introducing new financial technology products in their business. Our survey revealed that disruptors are by far the most avid consumers of new and transformative solutions for bills, transfers, and accounting; payroll and benefits; merchant services; and loans and financing.

Taken as a whole, the message of our report is that middle-market companies have the potential to flourish in a disruptive environment, but only if they know not to take their natural advantages for granted. The survey findings strongly suggest that companies that automate and control their operations through savvy adoption of technology, who are proactive and visionary in imaging possible futures, and who foster close relationships with a variety of capital sources are likely to emerge from this disruptive decade stronger than ever before.

Dave Kucera
Senior Managing Director, Head of Financial Institutions Group | Capital One
Dave Kucera is Managing Director & Head ofthe Financial Institutions Group at Capital One. He has 25 years of investment and commercial banking experience advising owners and managers of financial assets, assisting in financing, raising capital and delivering customized solutions to clients in many countries. Before joining Capital One, he led the U.S. Securitization business for BMO Capital Markets, which he co-founded and helped build into a leading North American provider – providing more than $75 billion in funding for the lender finance markets.
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