Q1 2022 Middle Market Business Owners Survey

Capstone’s Q1 2022 Middle Market Business Owners Survey Finds Inflation and Recession Scares Increase CEO Economic Uncertainty

Capstone Partners has released its Q1 2022 Middle Market Business Owners Survey Report, with insights from privately-owned companies across the U.S. This report combines Capstone’s in-depth middle market expertise with proprietary data obtained from 436 participating owners of privately held, middle market companies. Capstone surveyed middle market business owners across industries in the U.S. between May 17, 2022, and June 6, 2022. The full report, available for download below, evaluates the health and recovery of the middle market in Q1, with sections including:

1. Current Business Challenges
2. Strategies & Initiatives
3. Revenue Impacts, Forecasts, & Economic Outlook

The report also reveals data by quarter, highlighting statistically significant variances from prior quarters.

Key findings:

Rising Inflation Hinders Middle Market Recovery

The unfolding economic volatility in the wake of the pandemic has increasingly impacted middle market businesses in Q1 2022, with owners’ economic uncertainty rising 6.1% quarter-over-quarter (QoQ). Among those CEOs that experienced economic uncertainty in Q1 2022, 87.2% noted rising inflation as the leading issue, an increase of 12% from the prior quarter. As U.S. inflation reached the highest level in four decades, all industries surveyed felt the negative impacts on business operations, with more than two-thirds of owners in each industry identifying inflation as an economic hurdle.

In Q1 2022, 95% of owners experienced at least one challenge compared to 93% in Q4 2021, demonstrating the need for further recovery in the middle market. Owners have continued to focus on the immediate revitalization of business, prioritizing resources that align with their most prominent challenges. Among CEOs that experienced economic uncertainty, nearly half (48.7%) identified additional capital as a key recovery tactic and 28.2% pointed to institutional investment as a viable source of capital.

Supply Chain Disruptions Worsen in Q1

In Q1 2022, business owners suffering from supply chain disruptions identified materials availability as the leading cause (71.2%), followed by rising input prices (61.5%), production constraints (40.4%), and trucking bottlenecks (37.5%). Of note, CEOs experiencing rising input prices increased 16% QoQ in Q1 2022 as costs for lumber, crude petroleum, and natural gas have surged. Rising input prices have also been compounded by Russia’s war on Ukraine, which has caused disruptions in production and exports across the globe. Western nations’ sanctions against Russia have further limited available input goods, especially for the Aerospace, Defense, Government & Security (ADGS) industry as Russia accounts for a significant portion of titanium purchases made by major aerospace manufacturers (see Capstone’s Annual ADGS Industry Report).

Supply Chains Disrupted by Material Costs and Availability

Inorganic Initiatives Rise for Third Consecutive Quarter

In Q2 2022, nearly half (43.1%) of business owners reported that they will primarily be focusing on growth strategies, led by organic initiatives including enhancing market penetration, expanding products and services, and diversifying customer bases to capture a larger portion of the addressable market. However, the number of CEOs prioritizing inorganic initiatives has increased for the third consecutive quarter in Q2 2022 as business owners seek a prompt solution to liquidity issues. In Q2 2022, 29.3% of owners plan to engage in acquisitions, up 3.3% from Q1 2022, and 31.9% are projected to secure debt or equity capital. Of the 55 respondents planning to engage in an acquisition, only 34 have an investment banker in place for their business, demonstrating the need for greater professional representation among middle market business owners engaging in mergers and acquisitions (M&A). Owners that expect to secure financing in Q2 2022 increased 3.3% from Q1 2022, with most businesses utilizing debt or equity capital to fund new initiatives and ensure sufficient net working capital to fulfill their growth ambitions through 2022 and into 2023. Many CEOs also expect the added capital will defend against economic uncertainties.

CEOs Increasingly Prioritize Acquisitions and Capital Raises

Normalization Projections Stagnate in Q1

Middle market business owners’ sentiment towards market conditions in Q1 2022 has largely remained unchanged compared to Q4 2021 despite emerging COVID-19 variants. The surfacing of additional COVID-19 strains, coupled with new vaccine and additional booster rollouts, has resulted in a waiting period for most CEOs surveyed. It is also likely that recent inflation and geopolitical concerns have stalled progress towards normalized business conditions. At the industry level, technology-enabled participants have continued to demonstrate defensibility against COVID-19 impacts. Respondents in the ADGS industry represented the most optimistic group, as 39.1% reported improved conditions—likely driven by the increase in U.S. defense spending in 2022. Additionally, 38.2% of Technology, Media & Telecom (TMT) CEOs affirmed that conditions improved as digital transformations have expanded the addressable market.

Inflation and Geopolitical Concerns Stall Normalization

Download the Full Report

To access the full report publication, with an in-depth analysis broken down by industry, complete the form below.

Participate in our next U.S. Middle Market Business Owner survey!

If you are the owner or investor of a privately-held, middle market company in the United States, we kindly ask you to volunteer for our study. Learn more and register here.