In love with the middle

Posted on 10 Sep 2013

Your company could be one of the current pop stars of the British economy - and you probably wouldn't even know it. Will Stirling on why everyone has fallen for the middle.

Everyone loves the “mid-market” these days.

Minister of Trade Lord Green congratulates Group Rhodes' managing director, Mark Ridgway OBE in 2012. Group Rhodes is a typical "hidden middle" manufacturer. Lord Green will speak at The Manufacturer's Export Connect event on October 16

The new darlings of the UK economy are those invisible firms, largely privately-owned, neither small nor very big, of indeterminate turnover range, who make up the “hidden middle”.

They represent a vast tranche of capital value, but carry no single public identity, are largely ignored by government business support schemes who tend to favour either the ‘S’ in SME’, or big companies who have the resources to tender bids for funds like the Employer Ownership of Skills and the Regional Growth Fund, where big companies often prevail.

In Germany they would be called the Mittelstand, but more specifically, the prized ones are known as ‘hidden champions’. Professor Bernd Venohr of the Berlin School of Economics says that in Germany these hidden champions – world leaders in niche, often hi-tech fields – number over 1,300 companies. In Britain, that number is rather less – Venohr, a Mittelstand expert, says we have just 67. These figures were published in 2007 but the ratio is unlikely to have changed very much.

GE Capital and Warwick Business School (WBS) might beg to differ.

Published in June, their benchmark report on the mid-market “Leading from the Middle” assessed over 2,000 mid-market companies in Britain, France, Germany and Italy.

It found that more mid-market companies in Britain – defined as private companies with £20m to £800m turnover – expected high growth in the next 12-months than those in the other countries.

While some will say this may reflect the Germans’ natural conservatism when answering market research rather than a true picture of real growth, the authors see this as a rise in the UK’s hidden middle, suggesting that the “Brittelstand” should take its position as a formal part of the economy with its own specific identity and specific needs.

In manufacturing, the allure and power of the mid-market is not new.

RBS with manufacturers’ body EEF published a report 18-months ago, The Shape of UK Industry, providing evidence that to secure economic growth, UK manufacturing needed bigger companies and more of them. It praised the mid-market, who “punch above their weight”.

But it said that the larger mid-market firms were more recession proof, exert more influence on government via lobbying, had the critical mass to retain skilled people better and in greater numbers than small firms, and were more capable of developing new products that ‘stick’ in the market than small companies are.

No revelation there, but the report was the first in a recent trend that recognised the importance of this unsung economic band.

In 2011, the CBI released its ‘Future Champions’ report, research that explored this demographic of high growth, privately-owned companies so often off the radar of policy-making. The CBI has since developed its M-Club programme, to visit and promote the ‘M’ in SMEs. And director-general John Cridland spoke fervently at the launch of GE Capital’s Leading from the Middle about the importance of finding, helping and nurturing this group as they were so central to economic growth.

Business advisers BDO LLP are working on a report for clients and staff on the ‘successful manufacturer’, pooling evidence that shows this medium-sized group can be profitable, have global markets, engaged staff and make their owners very successful. The final point was selected to give manufacturing a more positive image as a business sector alongside finance and media.

PwC and HSBC have their Private Business Awards, which taps into the hidden middle. Last year, digger manufacturer JCB won the overall award but many much less visible firms enter.

It is hardly surprising this capital cohort has become the white knights du mode – the mid-market is fertile ground for trade association membership and new customers for financial institutions and accountants.

But how strong is the UK middle?

While GE Capital and WBS’s research lauded the performance of British firms compared with their peer group in Europe, some question the methodology used to put them on this pedestal.

Amin Amiri, an investor in manufacturing businesses and chartered accountant, says several measures are likely missed when assessing these firms’ fortitude.

“Management charges, non-business expenses such as acquisition costs, R&D written off against tax and non-charges for notional rent are items that would not be screened in their research, that reveal a truer – and lower – valuation of the company,” says Mr Amiri, boss of a2e Venture Catalysts.

He adds that, in order to prove the conclusion that Britain’s mid-market is beating Germany’s (on some measures), the ownership structure of the these companies – venture capital or not – and the stratification of the mid-market population needs to be analysed. “How many are large middle and how many are very small? In Germany there is a much higher proportion of solid, say £20m to £80m, companies, while in the UK there are a few very large ones with a lot of very small ones.”

The sector the companies studied occupy may also distort the findings; a high proportion of manufacturing companies in the pool may not be growing as quickly as the digital or media sector, but will likely be adding more value per business to the economy.

A big fan of manufacturing firms, Mr Amiri says the UK is guilty of decades of value erosion of this core value group, through private equity purchase, asset stripping and sale, and foreign acquisition.

Most frustratingly, he maintains, investors in the UK have a tendency to shun a manufacturing business investment in favour of a service-sector company with a quicker return-on-investment profile. Investors have little room for sentimentality, but this “irrational aversion” often overlooks the fact that a manufacturing business has core fundamentals that – given a capital injection and appropriate management structure – will generate a better dividend over a longer period than businesses in alternative sectors.

Amiri has a track record of backing the rhetoric with action, most recently in the rescue of loss-making furniture company Montgomery Tomlinson. Other investors in the hidden middle manufacturers include ex-MD of Crown Paints and now ‘turnaround king’ Brian Davidson, who helped change the fortunes of one-time downbeat coachbuilders Alexander Dennis before the same treatment for Crown Paints.

Whether or not GE Capital and WBS’s research missed some key characteristics of these companies in concluding how robust each countries’ mid-market really is, the popularity of the hidden middle is unlikely to wane. More stakeholders – banks, lobbyists, businesspeople, economist and investors – are seeing the mid-market for what it is: a vital part of the wealth creating, export driving economy. Companies that can grow into hidden champions, and world beaters. Look at Renishaw, Strix, AESSEAL, Triumph and Sheffield Forgemasters.

Now the mid-market – the Brittelstand – just needs a voice. As well as lower taxes, quicker payment settlements, incentives to invest in capital equipment, a flexible workforce, better technology, Catapult centres, software……..

An interview with Amin Amiri of a2e Venture Catalysts will appear shortly on, linked to this article. Thanks to Bob Bischof for loan of the term Brittelstand.

Will Stirling