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U.S. Middle Market Growth Continues to Exceed Expectations

April 14, 2023, 07:45 AM
Filed Under: Economy

Middle market private companies in the Golub Capital Altman Index experienced year-over-year earnings growth of 11% and revenue growth of 11% during the first two months of the first quarter of 2023.

Lawrence E. Golub, CEO of Golub Capital, said, “Revenue and profit growth again were positive surprises, building on the strength we highlighted in last quarter’s report. Our data suggests that many analysts continue to underestimate the health of the U.S. economy and the resilience of private equity-owned businesses. Profit margins on average expanded as our sample of companies continued to adapt to a challenging operating environment. Although the data in this report doesn’t capture the impact of banking system stress in March 2023, we believe the strength of our January and February data is encouraging for the upcoming earnings season.”

Dr. Edward I. Altman said, “Growth exceeded our expectations across all four sectors we track. The acceleration of revenue growth in the Consumer sector suggests that the tailwind of falling energy prices more than offset the headwind of rising interest rates on mortgage and credit card debt. While Consumer Revenue continued its strong growth, we do observe some softness in consumer profit and cash flow growth compared to prior quarters. Moreover, profit margins expanded even as the labor market remained strong, which suggests that cost-control measures are having an effect. That said, we’d advise caution in extrapolating from our data given the uncertainty about the potential economic impact of recent bank failures.”   

The Golub Capital Altman Index (“GCAI”), which is produced by Golub Capital in collaboration with credit expert Dr. Edward I. Altman, is the first and longest-running index based on actual revenue and earnings (defined as earnings before interest, taxes, depreciation and amortization, or “EBITDA”) for middle market companies. It measures the median revenue and earnings growth of approximately 110–150 private U.S. companies in the loan portfolio of Golub Capital, a leading middle market lender. Reported shortly before public company quarterly earnings season, the GCAI has served as a reliable indicator of the overall growth rates in revenue and earnings of public companies in market indexes such as the S&P 500 and S&P SmallCap 600 (“S&P 600”), as well as quarterly Gross Domestic Product (“GDP”), according to statistical back-testing dating back to 2012, when data began to be tracked.

The size and diversity of the Golub Capital loan portfolio ensure that the confidentiality of all company-specific information used in the index is maintained in both the aggregate and industry segment data.

We believe the results (1) are representative of the general performance of middle market companies, which are a major contributor to U.S. private sector employment; (2) can be easily compared to the performance of the public companies that make up major stock indexes; (3) are relevant to the aggregate economic performance of the U.S. economy and (4) provide timely information for the investment community.

The companies in the GCAI operate in a wide range of industries. Results are provided for the total universe of GCAI constituents and by industry segment. Given the index’s limited exposure to Financials, Utilities, Energy and Materials, comparisons are made to the S&P 500 and S&P 600 as well as to “adjusted” versions of those indexes that exclude the aforementioned sectors.

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