respondents ranked regulatory/ legislative risk among their top five macro risks, while 37% said the same in 2020. Likely the uptick in middle-market executives’ concerns here is due to a change in administration and new and proposed regulatory changes, says Brian Williams, partner at New Yorkbased Carl Marks Advisors, a middle market investment banking firm. “Just the general political climate toward business is different now than it was a year ago and that creates uncertainty,” Williams says. “The federal administration—it’s more people viewing it as a less business-friendly climate. If you really asked people what specifically changed, what can’t you do today that you could do two years ago, people would have a hard time pointing to anything specific, but it’s a feeling of the energy and attitude of what things are.” Within regulatory/legislative issues, changes to regulations and tax compliance appeared to be of greater concern in 2021 compared to 2020. For instance, 40% of respondents said changes to regulations that impact business was a top risk compared to 28% in 2020. In 2021, 20% said tax compliance was a top risk compared to 10% in 2020. While regulatory changes and tax compliance were more concerning in 2021, legal compliance was cited slightly less often as a top concern. Twenty-one percent said sufficient compliance with regulatory laws was a top risk in 2021 compared to 26% in 2020.
BUSINESS INTERRUPTION
For many in the middle market, disruptions in the supply chain can be potentially disastrous. For example, earlier this year, New Jersey-based National Tree Company, a middlemarket provider of artificial trees,
The general political climate toward business is different now than it was a year ago and that creates uncertainty. Brian Williams Partner, Carl Marks Advisors
wreaths and other holiday décor had to make a decision about its supply chain, says Chris Butler, the company’s CEO. Since its business is seasonal and revolves around the Christmas holidays, not getting supplies from China could obliterate National Tree Company’s profits for 2021. So, instead of waiting, the company decided to pay higher container rates early on to ensure it would receive its products. Had the company waited, it would be in far worse shape, according to Butler. “For us, we had a crisis. We dealt with it very quickly,” he says. “We decided to pay the higher container rates, but a lot of people waited to see what was going to happen. We got in early and paid it.” Like Butler, many survey respondents were concerned about supply chain disruption. Business interruption risk ranked in third place among the top concerns cited in 2021, rising from fourth place in 2020. Within business interruption, the micro risk—fragile supply chain risk— increased significantly between 2021 and 2020. Thirty percent of respondents said it was concerning to their business in 2021 while 22% said that in 2020. Also, 14% said it was their top risk, up from 8% in 2020. Butler says that the middle market might be better able to weather the
supply chain storm, compared with smaller businesses or those without private equity funding. Since National Tree Company is backed by Floridabased private equity firm Sun Capital Partners, it has support that other companies don’t. “Smaller companies that don’t have backing will be in big trouble,” Butler says. “Their liquidity will be tough. A lot of mom-and-pop businesses will have been massively impacted by this, and it’s an unfortunate problem.”
IMPROVEMENTS OVER 2020
While the middle market appears more concerned about cybersecurity, business interruptions and regulatory issues, executives said that some of their worries have lessened in the last year. Pandemic macro risk declined in the minds of middle-market executives as an overall concern. In 2020, it was the third-highest macro risk, but in 2021, it’s fourth, according to the survey. For every pandemic micro risk in 2020—employee safety, pandemic impact on supply chain, lack of demand, ability to interact with colleagues, customer safety, cash flow, inability to meet demand and travel restrictions—business executives were equally or less concerned in 2021. As businesses feel less affected by
MIDDLE MARKET TRENDS REPORT // 2022
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