Don’t overlook the blossoming UK mid-market - Investec Comment

 
Edward Cottrell
German Mittelstand firms like Staedtler are a point of national pride
Germany's Mittelstand is a point of national pride, but Britain’s mid-market companies are often unfairly overlooked. While the largest firms gain attention by virtue of their size, and smaller businesses are regularly prioritised by government, mid-sized companies – broadly, those with an annual turnover of between £10m and £200m – don’t get the attention they deserve. And this is despite the fact they employ about 6.4m people (which equates to more than 20 per cent of British jobs) and make a significant contribution to the UK economy.
Indeed, the sector is blossoming. In June, we released the latest edition of the Investec Mid-Market Index, which measures the size, health and performance of 25,000 UK companies that make up the private mid-market sector. It found that the average operating profit was up 18.6 per cent in the year to August 2014, return on capital was at an all-time high, and revenue growth for the period was a healthy 3.2 per cent. And the Investec Mid-Market 100, a separate biannual list which highlights the top 100 UK mid-market firms in terms of growth, showed particular strength in the retail sector and in the North West: mid-market companies are not only thriving in difficult sectors, but have a wide geographical spread.
It’s not all plain-sailing, however. The UK mid-market faces some serious challenges. The four most critical issues we hear from our clients are: red tape, internationalisation, access to finance, and the skills gap.
Regulation is of course necessary, and mid-market companies are often better placed to deal with red tape than their smaller peers. However, regulation needs to work with business not against it, and all too often mid-market firms find their growth stymied because of bureaucratic rules that do not appreciate the challenges they work under. Excessive health and safety regulation, for instance, can impose outsized costs on mid-sized businesses, while labour market rules can be inflexible. Mid-market firms do not want red tape to disappear, but it should be tailored to their specific circumstances.
Internationalisation becomes critical when a company has matured in the UK market. If you have ambitions to become a £1bn turnover business, very few sectors of the British economy will be sufficiently large to allow for that. Often, however, mid-market firms do not have the resources or depth of experience to enter new markets, so government help is vital. Opening up and retaining access to other economies is part of it (for this reason some mid-market companies are concerned about the coming EU referendum), but it’s also about providing contacts and assistance on the ground to help companies break out of reliance on the UK.
Access to finance is a challenge the mid-market shares with smaller companies, and it is now admittedly less acute a problem than it was post crisis. As these firms are private they do not have access to capital markets and therefore need a specialised type of finance, involving a combination of debt and equity, to be successful. Schemes like the Enterprise Investment Scheme are sometimes not appropriate for the mid-market, so the challenge for government is to ensure that Britain has a vibrant financial services sector that is able to innovate, and therefore structure a number of different types of financing for these companies.
Finally, while the skills gap is an increasing problem for all companies, it is particularly acute in the mid-market. These businesses are hugely reliant on the quality of their staff, and they are struggling to find the right people to fill existing positions to meet their growth ambitions. While the long-term solution is ensuring the education system matches the skills requirements of business, in the short term, government policy needs to be sensitive to allowing skilled migrants into the country.

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