The Private Equity for Families Blog

Pay Attention to Your Neighbors

The European refugee crisis reminds us that a small disruption with frightening end game consequences (death, cultural cleansing and slavery) can set in motion larger trends with equally horrifying consequences. The European refugee exodus will impact neighbors for the rest of this decade.

So, too, are the economic effects of the war against coal. Some of the opposition is environmental. Some of it is political. The strength of the US Dollar and the abundance of natural gas are also complicit. Finally, $40 oil creates an economic dilemma for all but the most efficient coal operators.

Coal Country Disruptions

John Miller’s recent article in The Wall Street Journal “Mine-Equipment Firms Are Feeling Coal’s Pain” also reminds us that major and precipitous business contractions like the coal industry also have major impacts on neighbors. It is not only the coal companies that are contracting but also the web of suppliers that Mr. Miller estimates are 4x the size of the host industry and geographically concentrated in Pennsylvania, Ohio, Kentucky and West Virginia. Tool shops, mine equipment suppliers, coal country distributors and transportation companies have all been slammed. This geography is also where the huge expansion of natural gas fracking infrastructure has been concentrated in the last five years. As both coal and natural gas are challenged by a worldwide glut of cheap oil, an exodus of sorts is taking shape.

Just like the European refugees, these businesses are attempting to reinvent themselves by traveling across boarders to growing markets. The excess capacity represented by tooling capabilities, equipment manufacturing and aftermarket, transportation and outsourced services are migrating into adjacencies. The industries and companies in the Midwest and Appalachia and neighboring states with the lowest barriers to entry and the lowest profit margins like auto supply and outsourced services will be the first to feel the competitive threat. My experience with most small company owners is they know how to survive and can shift strategy and served markets extremely rapidly. A coming glut of capacity in Tennessee and North Carolina may be inevitable.

Winners and Losers

As PE managers we are always paying attention to these trends. We always want to grow profitably. That means finding niches where our companies provide value added products or services. We look for intellectual capital, know how, product design, engineering expertise, extraordinary service, regulatory barriers, and supply chain efficiency as just a few of the distinguishing features. In a case like the coal country exodus, there is both opportunity and challenge.

The opportunity is for service businesses like our ATM and payment services company. The labor force that handles paper jams, service calls, preventive maintenance and software glitches for banks and payment processors turns over quickly. Training replacements is time consuming and expensive. When you have a labor force disruption like the one we are seeing in coal country, there actually may be opportunity to hire and keep good ATM workers. Taking advantage of those disruptions with a regional density service strategy, though counter-intuitive, may actually make sense as the financial institutions in the affected geography undergo branch transformations to lower personnel costs without losing market share.

The challenges are also pretty easy to see. There is a vibrant supply chain for the automotive industry in North Carolina and Tennessee. Coal country’s excess machining and tooling capacity may travel south to challenge the low barrier job shops and suppliers in those two states?

Debtor Nations Need Inflation

One thing seems to be pretty predictable. Excess labor, commodity, and raw material inputs should keep manufacturing and service “cost of goods sold” low for as far out as we can see. While we should all cheer this news as the “dividend” of deflation, right now a highly indebted world actually needs some scarcity and inflation to help repay the mammoth central bank debt creation of the last decade.

Your insights are welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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