THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM’S Q1 '16 INDICATOR SURVEY T h o m a s A . S t e w a r t , E x e c u t i v e D i r e c t o r T h e N a t i o n a l C e n t e r f o r t h e M i d d l e M a r k e t

Q1'16 MIDDLE MARKET INDICATOR WEBINAR | May 17, 2016

THE MIGHTY MIDDLE MARKET

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THE NATIONAL CENTER FOR THE MIDDLE MARKET

www.middlemarketcenter.org

The National Center for the Middle Market is a collaboration between The Ohio State University’s Fisher College of Business, SunTrust Banks Inc., Grant Thornton, and Cisco Systems. It exists for a single purpose: to ensure that the vitality and robustness of Middle Market companies are fully realized as fundamental to our nation’s economic outlook and prosperity. The Center is the leading source of knowledge, leadership, and innovative research on the middle market economy, providing critical data analysis, insights, and perspectives for companies, policymakers, and other key stakeholders, to help accelerate growth, increase competitiveness and create jobs in this sector.

MIDDLE MARKET RESEARCH & DATA EXPERTISE & OUTREACH

EDUCATION

Quarterly Middle Market Indicator

Research and Expert Perspectives

Interactive Benchmarking Tools

Executive Programs

Webinars

Share Research & Discuss Trends

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THE MIDDLE MARKET INDICATOR

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MIDDLE MARKET INDICATOR OVERVIEW

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A Quarterly National Survey Cut by Geography and Industry

Q1'16 MIDDLE MARKET INDICATOR EXECUTIVE SUMMARY

• THE MIDDLE MARKET CONTINUES TO LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB CREATION; P.E.-OWNED COMPANIES ARE PERFORMING MORE STRONGLY THAN THE MIDDLE MARKET OVERALL

• WHILE YEAR-ON-YEAR GROWTH IS HIGH AND JOB CREATION REMAINS STABLE, THE MIDDLE MARKET APPEARS TO HAVE ENTERED A PERIOD OF STABILIZATION

• CONFIDENCE IN LOCAL AND NATIONAL ECONOMIES HAS TICKED UP; INVESTMENT INTENTIONS REMAIN FAIRLY STEADY

• TALENT HAS EMERGED AS THE BIGGEST LONG-TERM CHALLENGE FACING MIDDLE MARKET COMPANIES, AND EXECUTIVES ARE INCREASINGLY WILLING TO PAY WORKERS MORE

Source: 1Q’16 Middle Market Indicator Report

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Q1'16 U.S. MIDDLE MARKET EXECUTIVE SUMMARY

CAPITAL INVESTMENT

63% WILL INVEST

CONFIDENCE

51% GLOBAL ECONOMY

73% NATIONAL ECONOMY

81% LOCAL ECONOMY

REVENUE GROWTH

6.3% PAST 12 MONTHS

4.6% NEXT 12 MONTHS

EMPLOYMENT GROWTH

3.6% PAST 12 MONTHS

2.7% NEXT 12 MONTHS

2.1% SMALL BUSINESS

2.2% LARGE BUSINESS

Source: 1Q’16 Middle Market Indicator Report 7

Q1'16 MIDDLE MARKET INDICATOR REVENUE GROWTH

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

US MIDDLE MARKET S&P 500 PE-OWNED 8 Source: 1Q’16 Middle Market Indicator Report

PAST 12 MONTHS

6.3% U.S. MIDDLE MARKET

7.8% PE-OWNED FIRMS

GROWTH FORECAST ADJUSTED FOR CONSERVATIVE BIAS

Source: 3Q’15 Middle Market Indicator Report

6.9 6.1

5.5

7.0

5.8 5.8 5.5 5.0

6.5 6.6

7.5 7.2 7.4 6.6

7.2 7.6 6.9 6.7

5.7

5.2 4.8

3.7

5.2 4.9 5.1 4.4 4.3 4.5

5.8 5.5 6.0

5.3 5.1

4.1

0%

5%

10%

15%

Actual Revenue Growth Projected Revenue Growth

Estimate Based on Average Historical Understatement

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Q1'16 MIDDLE MARKET INDICATOR INDUSTRY REVENUE GROWTH

Source: Dun & Bratstreet 10

Q1'16 MIDDLE MARKET INDICATOR REVENUE GROWTH FORECAST

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

U.S. MIDDLE MARKET PE-OWNED

4.6% U.S. MIDDLE MARKET

6.4% PE-OWNED FIRMS

NEXT 12 MONTHS

Source: 1Q’16 Middle Market Indicator Report 11

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

U.S. MIDDLE MARKET LARGESMALL PE-OWNED FIRMS

PAST 12 MONTHS

3.6% U.S. MIDDLE MARKET

4.9% PE-OWNED FIRMS

Q1'16 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH

2.1% SMALL BUSINESS

2.2% LARGE BUSINESS

Source: 1Q’16 Middle Market Indicator Report 12

Q1'16 MIDDLE MARKET INDICATOR INDUSTRY EMPLOYMENT GROWTH

Source: 1Q’16 Middle Market Indicator Report 13

Q1'16 MIDDLE MARKET INDICATOR EMPLOYMENT GROWTH FORECAST

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

U.S. MIDDLE MARKET PE-OWNED FIRMS

2.7% U.S. MIDDLE MARKET

3.5% PE-OWNED FIRMS

NEXT 12 MONTHS

Source: 1Q’16 Middle Market Indicator Report 14

WHAT INGREDIENTS ARE FOUND IN PRIVATE EQUITY’S SECRET SAUCE?

Source: Q1 2016 Middle Market Indicator 15

► Picking winners

► Leveraging the portfolio

► Relieving financial constraints

► Professionalizing management

CONFIDENCE, INVESTMENT PLANS, AND CHALLENGES

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Q1'16 MIDDLE MARKET INDICATOR ECONOMIC CONFIDENCE

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20%

30%

40%

50%

60%

70%

80%

90%

1Q '1

22Q

'12

3Q '1

24Q

'12

1Q '1

32Q

'13

3Q '1

34Q

'13

1Q '1

42Q

'14

3Q '1

44Q

'14

1Q '1

52Q

'15

3Q'1

54Q

'15

1Q'1

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GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY

U.S. ECONOMY

73% 73% PE-OWNED

LOCAL ECONOMY

81% 84% PE-OWNED

GLOBAL ECONOMY

51% 54% PE-OWNED

Source: 1Q’16 Middle Market Indicator Report

Q1'16 MIDDLE MARKET INDICATOR CAPITAL INVESTMENT PLANS

0%

10%

20%

30%

40%

50%

60%

70%

80%

1Q'12

2Q'12

3Q'12

4Q'12

1Q'13

2Q'13

3Q'13

4Q'13

1Q'14

2Q'14

3Q'14

4Q'14

1Q'15

2Q'15

3Q'15

4Q'15

1Q'16

PE-OWNED U.S. MIDDLE MARKET

Source: 1Q’16 Middle Market Indicator Report

FIRMS PLAN TO INVEST.

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THE MIDDLE MARKET SEES ECONOMIC EXPANSION CONTINUING

Source: 1Q’16 Middle Market Indicator Report

2% 9%

36%

49%

4%

Predicted 2016 U.S. Economic Performance

Strong Growth (3% or more)

Moderate Growth (1-3%)

Little change (-1% to 1%)

Slowdown (-1% to -3%) Severe downturn (-3% or more)

53%

11%

In retail: 62%

In manufacturing: 50%

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WHAT COULD GO WRONG?

Source: 1Q’16 Middle Market Indicator Report

Level of Threat to U.S. Economy Over the Next 12 Months (Total Middle Market)

50% 50%

48% 47% 46% 45%

42% 42% 41% 40%

37% 37% 37%

35% 32%

24%

36% 31%

31% 37%

32% 37%

39% 36% 41%

39% 44%

41% 38% 41%

41% 46%

14% 18% 21%

16% 22% 17% 20%

22% 19%

21% 19%

22% 24% 24%

27% 30%

Serious Threat(Top 2)

Middle Box Not a Threat(Bottom 2)

Slowing global economic growth

Political uncertainty in the U.S.

Volatility in Chinese stock markets

International political instability

Slowing industrial output in China

Weak consumer spending

Downturn in foreign stock markets

Damaged global oil industry

Turbulence in capital markets

Weakening emerging economies

Weak business investment

Fed action on interest rates

Negative interest rate environment in Europe

Slump in commodity prices

Potential growth in unemployment rate

Strengthening U.S. dollar

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Q1'16 MIDDLE MARKET INDICATOR CHALLENGES

TALENT AND REGULATION ISSUES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS

Source: 3Q’15 Middle Market Indicator Report 21

Q1'16 MIDDLE MARKET INDICATOR CURRENT WORKFORCE CONDITIONS

Source: 1Q’16 Middle Market Indicator Report

83%

6% vs. 5% 12%

Just about right

Excessive based on current market conditions

Insufficient for current market conditions

SIZE OF CURRENT WORKFORCE

13%

46%

32%

9% Less productive thanother companies

Just as productive asother companies

Somewhat moreproductive than othercompanies

Much more productivethan other companies

PRODUCTIVITY OF CURRENT WORKFORCE

The overwhelming majority of MM firms feel their workforce is the right size for current market conditions, and about half say their workers are more productive than workers at other companies in the same industry.

8%*

37%

38%

18%

80%

15%*

*Q4’15 22

MIDDLE MARKET EXECUTIVES ARE MORE OPEN TO WAGE INCREASES

Source: 3Q’15 Middle Market Indicator Report

Top 2 Areas Under Consideration for Improving Talent Retention

52%↑

44%↑

37%

25%

25%↑

9%

43%

34%

26%

28%

18%

7%

44%

36%

30%↑

29%

21%↑

9%↑

Salaries

Flexible work arrangements

Training / education

Health insurance

Vacation time

Maternity/paternity policies

2016 1Q 2015 4Q 2015 3Q23

SALESFORCE EFFECTIVENESS

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STRONG SALES MANAGEMENT DRIVES MIDDLE MARKET SUCCESS

Source: The Force Is With You 25

CLEAR OPPORTUNITIES EXIST TO IMPROVE SALES FORCE EFFECTIVENESS

Source: The Force Is With You 26

FLAGSHIP RESEARCH FOCUSING ON KEY CHALLENGES

MIDDLEMARKETCENTER.ORG 28