As stated in our mission, our goal at MCM Capital Partners is to achieve superior risk adjusted returns by investing in companies with competitive advantages operating in markets likely to experience long term growth generating above average operating returns. I believe our success is largely predicated upon our ability to opportunistically identify potential acquisition candidates operating in industries possessing attractive characteristics including, but not limited to, long term growth rates, fragmented nature of the industry players, and favorable macro-economic trends. Since our founding in 1992, we have deployed our capital in a wide variety of industries ranging from home accessories to specialty materials to medical component manufacturers.
Currently, we are seeking to invest in value-added manufacturers and distributors of building products. Our interest is predicated upon several macroeconomic and industry indicators. Many of the key macroeconomic factors for the building products and materials industry have improved since the recessionary lows including unemployment and consumer confidence. Western Reserve Partners, an industry leading investment bank, has recently published a report listing some of the key macroeconomic indicators:
- The leading indicators index has shown tremendous recovery over the last two years and is currently higher than pre-recession levels.
- The unemployment rate is improving from the peak reached in late 2009 and has been showing a downward trend in 2011 year to date.
- The S&P Index and DJIA have shown strong returns in excess of 60% over the last two years.
- Consumer sentiment has improved from recessionary lows.
- Key interest rates have been held at historic lows for the last two years.
Furthermore, while both residential and nonresidential construction spending trends have been depressed, we feel they have hit their nadir and are poised for a robust recovery. In addition to the macro-economic related statistics, the study shows empirical data supporting our investment thesis and a stabilization of the industry:
- The Architecture Billings Index has shown three consecutive months of growth for the first time since early 2008.
- Annual housing starts rose 7.2% to a seasonally adjusted 549,000 in March; similarly, housing permits increased as well with 594,000 issued in March; up 11% over February.
- Industry experts are projecting growth in 2011 and are expecting annual housing starts to once again surpass the 1,000,000 level in the latter part of 2012.
- Current annualized construction spending is at the lowest level since October 1999; however, the rate of decline is decelerating as February 2011 levels are down 6.8% when compared to 2010, versus a 14.3% decline from February 2010 over February 2009.
We have also partnered with a seasoned entrepreneur who recently sold his building products related company to a private equity firm to aid in our search for value-added manufacturers and distributors within the industry. He is a 20-year veteran having founded several companies in the building products industry and provides us with intimate industry knowledge and the ability to facilitate the identification of attractive acquisition targets.
As a result, MCM continues to educate ourselves about the building products industry. Most recently, I spent a day with this entrepreneur at The Kitchen & Bath Industry Show in order to gain a deeper understanding of the current market and talk to potential acquisition candidates. This show is the world’s largest international trade event focused exclusively on all aspects of kitchens and baths specifically serving kitchen and bath dealers, designers, architects, remodelers, wholesalers and custom builders. Product categories at the show included cabinets, functional and decorative hardware, vanities, accessories, plumbing fixtures, sinks, tile, shelving systems, along with a host of other niches in the industry.
According to the attendees and exhibitors that we conversed with during our walk from booth to booth, both he and I could sense a level of optimism the industry may have bottomed out and, in fact, may be turning a corner since the economic tsunami hit in late 2007. This optimism, combined with recent industry reports on the improving state of the building products & materials industry provide an indication the market is poised for recovery and possibly presenting us with some very interesting investment opportunities.
MCM Capital Partners is a Cleveland based MicroCap private equity fund investing in niche manufacturers, value added distributors and specialty service businesses. For more information on our private equity firm and investment principles, contact us today.