March 17, 2013
Interviewed by: David Snow
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Investing in Manufacturing Companies

Although important trends are changing the global landscape for manufacturing, sometimes “it’s better to be a follower than to be a leader” in chasing these trends with investment theses, according to TJ Maloney, President of New York-based buyout fund Lincolnshire Management. In a Privcap interview, Maloney gives an overview of the changing US manufacturing sector and how his firm approaches investing in companies with manufacturing operations. He also describes investments in two portfolio companies – True Temper, which makes golf club shafts, and National Pen Company.

Although important trends are changing the global landscape for manufacturing, sometimes “it’s better to be a follower than to be a leader” in chasing these trends with investment theses, according to TJ Maloney, President of New York-based buyout fund Lincolnshire Management. In a Privcap interview, Maloney gives an overview of the changing US manufacturing sector and how his firm approaches investing in companies with manufacturing operations. He also describes investments in two portfolio companies – True Temper, which makes golf club shafts, and National Pen Company.

Privcap: What are some of the most important trends affecting the private equity opportunity in the manufacturing space?

TJ Maloney:  Well, I think that there are a couple things going on. Number one is there’s been a lot written about the fact that manufacturing should be coming back to the U.S. A lot of it will be, actually, a jobless recovery because so much is going on in the world of software and robotics that a lot of these manufacturing operations are starting up in the U.S. And they’re just not employing as many people as they used to. And at some point, these operations become more efficient than those that are labor driven, no matter how cheap the labor is. So, I think that that’s something that’s been written about. Whether or not that fact has arrived is another story.

And I think that one of the things people have to realize in private equity is sometimes, it’s better to be a follower than a leader. And so we have manufacturing operations in the U.S. We have manufacturing operations in Asia. And I think that at this point, probably the intelligent thing to do, from an investing perspective, is to hedge your bets, if you will. And you also have to look at where your customers are. So, for instance, if you take a company that we called True Temper. It has a very large market share of steel shafts for golf clubs.

Probably the largest market of golfers is in the United States. People are hoping that the market develops further in China. Japan’s a very developed golf market. And we have manufacturing in the U.S. And we have manufacturing in Asia. But part of the reason we have to be in Asia is the actual golf club manufacturers which we supply a component remain. And most of their manufacturing operations are in Asia. They may ship the clubs back to the U.S., but we need to ship the components to them in Asia. So, I would say that with respect to manufacturing, it’s important, really, to sort of look at where your customers are. And that can be a big part of where you need to be.

Privcap: What do you look for by way of potential investments in the US manufacturing space?

Maloney: Well, I think you’re looking for some top line growth. I think you’re looking for good margins, both on the gross margin and operating margin basis. I think that’s extremely important. I think market share is important. Diversity of your customer base. A lack of concentration with one or two or three customers. And then, I think you also have to sort of look at the ultimate consumer of what drives the ultimate use of the manufactured product. And look at the underpinnings of that and the strength of that marketplace.

Privcap: Besides True Temper, any other portfolio companies in this space that you can tell us about?

Maloney: We have another business that we bought which is a direct marketing business. And it’s a direct market primarily of pens for businesses with less than 20 employees. They’re probably the largest in the world. And they have developed a manufacturing capability of not just making pens but of printing on these pens in small lots, which is a difficult thing to do from a manufacturing perspective because there’s a lot of set up and change over costs. And this company does a very, very good job of identifying businesses which there are millions of businesses around the globe that are small businesses that want to have something to identify it. So, if it’s Jake Plumbing or it’s Bill’s Electrical Services, they want to be able to hand out a pen during the holidays or otherwise, it has the phone number, good for their business, lets their customers know that they’re available. It’s good advertising overall. This company has really found a way to be able to effectively and efficiently manufacture to that marketplace.

It’s primarily direct marketing, direct mail, and they’re not just in the United States. They’re very large in Europe. The European marketplace, in fact, a lot of these small businesses tend to like to hand out pens. Sometimes, these little flashlights or key chains, that type of thing, to their key customers during the holiday period. And that’s a big part of the season for this company is the fourth quarter.

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