Investment Landscape

At first glance, the term “middle market segment” is not likely to be a headline grabber. At a closer look, midmarket companies constitute the backbone of the private sector in the MENA region. Reportedly, more than 80% of companies in this segment are established by families and first-generation entrepreneurs. They are typically businesses in services and light manufacturing with annual revenues standing at between $50m and $200m.

In general, these enterprises are exceptional performers in terms of revenue growth, cost containment, hands-on management practices, low leverage, employee retention, and a relatively strong pattern of profits’ reinvestments in the form of retained earnings. One of the reasons for their success could be traced to the long-term commitment of the founders-owners. Short cuts are rarely implemented, risky actions or hasty decisions are seldom the practice as they could cost the founders not only their main source of income but their reputational capital, which is a hard and rare currency for such entities. They cannot count on a global brand, or the strength of a franchise or the support of government (as in the case with state-owned enterprises) to secure credit with suppliers, or financing with banks, or enduring loyalty with demanding customers.

In fact, the success of midmarket companies is precisely their size. Their larger competitors provide their managers with deeper pockets for weathering difficulties, funding innovation and hiring key talent. And their relatively smaller size compared with larger enterprises makes them more agile, puts them in closer contact with customers and enables them to retain a bit of that entrepreneurial spirit. Such companies are poised for continued revenue growth, and this growth is mostly coming from continuous efforts: launching new services, putting more efforts into sales and marketing and focusing on operational efficiencies to sustain their business.

The middle market segment in the MENA region is the hunting ground of growth-equity PE firms such as Growthgate. The dilemma these companies face is that organic growth becomes saturated at a certain point, and inorganic growth comes with costly acquisition finance, that is if such managers have already the skills in-house to locate and negotiate suitable targets. Executives at middle market companies realize that in order to grow and thrive in today’s economy, companies have to change strategic course and scale-up their business model.