Gresham Monitor highlights growing optimism and deal upturn in middle market. National Insurance changes to hit profits and jobs

UK middle market managers are experiencing a burst of optimism about growth prospects for their own businesses and for the UK economy - the first real signs of increasing confidence for two years. That confidence is mirrored by a further rise in the number of companies expecting to undertake transactions in the year ahead.

A steady performance in terms of turnover and profits accompanies the rising optimism and potential upturn in deal activity. Of the 53 per cent of managers who reported higher turnover, nearly three-quarters also said profits were up.

On a cautionary note, a two year trend of rising overheads and increasingly burdensome red tape and taxes, exacerbated by the proposed rise in National Insurance, could unsettle even the best-laid business plans. And the speed and duration of the upturn is vulnerable to surprises such as the WorldCom debacle which emerged after completion of this research.

These are just some of the findings in the latest Gresham Monitor. The Monitor is a twice-yearly survey of the middle market commissioned by Gresham, the private equity house specialising in investing in this key component of the UK economy.

Highlights

More than two-thirds of middle market companies are buoyant about their own business prospects, up from 59 per cent a year ago.
Over half expect the economy to grow against 44 per cent in June 2001.
57 percent expect to undertake a transaction in the next 12 months compared to 50 percent in January; nearly four out of 10 businesses think it is more likely that they will do a deal against 27 per cent six months ago.
53 per cent report higher turnover and just under half rising profits.
55 per cent say overheads are up - a 20 point rise in the past two years.
Nearly three-quarters feel the Government does not understand their business needs.
Over three-quarters believe the NIC changes will hit profits and nearly 60 per cent expect job cuts to result.

The Monitor reinforces the resurgence in prospective deal activity indicated in January's survey. Privately-owned companies are particularly keen with 60 per cent expecting to undertake a transaction.

Gresham chief executive, Paul Marson-Smith, says: "It is very encouraging to see the increasing enthusiasm of middle market companies to undertake a transaction and their growing confidence about business prospects. The WorldCom debacle has caused turbulence on the stock markets, but other economic indicators are paving the way for vendors to adopt a more realistic attitude to pricing and provide an extra spur to deal activity.We have already completed three deals this year and have a healthy number of attractive prospects in our pipeline."

While banks remain companies' first port of call for funding, a quarter of middle market companies surveyed would consider private equity to fund their expansion or transaction plans.

The alarm bells rung in previous Monitors by the gap between the Government's stated policy towards the middle market sector and how its actions are perceived are ringing even louder. Some 42 per cent said they felt not at all well understood - 50 per cent more than two years ago.

Three-quarters say red tape has increased and 55 per cent that the tax burden has become heavier. The repercussions of the proposed increase in Employers' National Insurance contributions from next April on profits and jobs will only worsen the situation.

Manufacturing v service
The survey confirms the differences in performance and outlook between manufacturing and service companies. A third of manufacturers experienced lower turnover compared to 11 per cent of service companies. And the pressure on manufacturers' overheads has worsened.

52 per cent faced higher costs, a rise of 18 points since last summer. But service companies suffered too - 58 per cent said costs were up against 47 per cent in June 2001.

On the other hand, service companies have become more positive about the UK economy- 62 per cent are expecting growth against 49 per cent in June 2001. And only 10 per cent are gloomy about prospects for their businesses - less than half last year's figure. This compares to a quarter of manufacturers who are pessimistic about their own prospects and a little-changed 41 per cent who expect the UK economy to grow.

Regional variations
Regional variations also emerge from the research. Northern companies felt most misunderstood by the Government - 82 per cent. And nearly two-thirds reported rising overheads, more than double the figure last June. In contrast Northern companies' optimism about their growth prospects jumped from 53 per cent in June 2001 to 77 per cent making them the most optimistic of the regions. Just over two-thirds of Southern companies and 61 per cent of firms in the Midlands had a positive outlook for their own businesses.

Southern firms were hardest hit in turnover and profits terms. Just 49 per cent reported an increase in turnover against 60 per cent a year ago and nearly two-thirds in June 2000. Some 60 per cent of Northern firms and 51 per cent of Midlands companies said turnover was up. And just 41 per cent of Southern firms reported an increase in profits against 52 per cent of firms in the Midlands and North. Midlands firms were most keen to do a deal with seven out of 10 expecting to undertake a transaction in the next 12 months