State’s manufacturing sector sends slowdown signals
Texas’ manufacturing sector could slow down in 2019.
Production in the sector was the lowest since August 2016, according to a monthly survey of Texas business executives by the Federal Reserve Bank of Dallas, and perceptions of general business conditions notably worsened.
Manufacturing is still increasing, but December’s index of 7.3 shows a second month of slowed production after the index dropped 9.2 points from October to November.
Meanwhile, perceptions of business conditions in Texas turned negative for the first time since September 2016. More than 20 percent of manufacturers reported that their outlooks worsened in December.
While manufacturers still expect general business conditions for the next six months to improve overall, confidence is much rockier than last month — the survey showed a 22.5 point decrease compared with November.
The state’s economy continues to grow, but it has begun to show signs of a slowdown. With oil headed for its first annual loss since 2015, experts at the Federal Reserve Bank of Dallas say Texas’ job growth may decelerate.
While the Dallas Fed numbers suggest manufacturing could slow in 2019, The Greater Houston Partnership, a business-financed economic development group, sees steady growth ahead for the economy at large, particularly in health care. The group projects that Houston will add about 71,000 jobs next year.
Service sector in Lone Star State is pulling back
Growth in the state’s service sector slowed in December, a signal that economic expansion in Texas is decelerating, according to a report by the Federal Reserve Bank of Dallas.
The revenue index, a key measure of the state’s service-sector conditions, fell more than 11 points to 10.1 in December. Positive readings in the survey generally indicate expansion of servicesector activity, while readings below zero generally indicate contraction.
The index is developed monthly by the Dallas Federal Reserve via surveys of Texas business executives. The service sector represents almost 70 percent of the state economy and employs about 8.6 million workers.
“December was a softer month for growth in the state’s service sector, as revenue and labor market indicators pointed to continued but slower expansion,” said Christopher Slijk, Dallas Fed assistant economist.
Outlooks of service sector businesses “deteriorated notably, particularly in retail,” Slijk said. Nearly 25 percent of respondents noted a weakening in their expectations of business conditions.
The future general business activity index plummeted nearly 22 points to -5.0 in December, its first negative reading in over two years, while the future company outlook index fell from 17.3 to 1.6. Other indexes of future service-sector activity, such as revenue and employment, also fell but remained positive.
The stroopwafel is airborne again on United flights
The caramel-filled waffle is returning to United Airlines’ morning flights.
Stroopwafels were introduced on United flights in February 2016 as the airline brought back free snacks. The waffle was served on flights departing before 9:45 a.m. until June, when the airline replaced them on most flights with a maple wafer cookie made by Byrd Cookie Co.
A United spokeswoman said the airline always intended to bring back the stroopwafel. It wasn’t discontinued but part of a snack rotation that, according to a June news release, was designed to “continue to appeal to a broad palate.”
Raises, technology used to counteract labor shortage
As a labor shortage continues to squeeze construction companies — 4 out of 5 report difficulties filling positions — most have increased base pay rates, according to a survey by the Associated General Contractors.
But many have also been using technology to reduce the amount of time workers need to work on-site.
More than one-quarter of construction companies are using off-site fabrication — a practice where parts of the building are delivered preassembled — or are using drones, robots or laser- or GPS-guided machinery to reduce the amount of work their crews need to do.
A growing share of companies are also saying they are comfortable with moving their documents to the cloud — 31 percent this year compared with 24 percent the year before.
Dustin Anderson, Sage Construction and Real Estate’s vice president of sales, however, observed that a number of companies, especially older ones, resist the idea of the cloud due to cybersecurity concerns.
“They’re willing to do it with more projectoriented data, things that are more qualitative,” he said.
But sensitive information, such as how much they will charge for certain projects, could jeopardize their businesses if other companies got ahold of it, since having the lowest bid often means winning a project.
windows and gray furniture. It looks like Wall Street. They insist otherwise. They don’t want oil and gas, and they don’t want to flip your business. They want to be your partner for life. Or, more accurately, the profitable life of your company.
Since founding in 2006, Platform has acquired 16 companies. Thirteen are headquartered in Texas, and nine of those are in Houston. They want to go where the opportunity is, but they say the opportunity is here.
“We like to be able to get in our car and sit down with the companies,” Brazelton said.
Most private equity firms hold businesses for just a few years. They hold onto their investments for as many as 12. If you act like you will own a company forever, they say, the success of both the company and the business relationship becomes front and center.
Most private equity firms specialize in one industry. They call themselves generalists. Most private equity firms have a minimum stake. They take a stake as small as 20 percent.
Platform has built a strategy around minority investments. Today, the firm invests in control buyouts and recapitalizations, minority equity and mezzanine capital.
“We structured Platform to be a one-stop shop for entrepreneurs,” Brazelton said.
Since Platform invested in Vortex, the company has grown from 40 employees in 2016 to 300 in 2018, Vellano said. The company’s annual year-overyear growth has been hitting above 25 percent since the capital commitment, and Vellano plans to close two more acquisition deals in the first quarter of 2019.
“We run the way we ran before, except we have a whole resource of experience to leverage on top of that,” Vellano said.
A majority of Platform’s businesses are financial services companies, but the partners reject the notion that they have a specific interest in one industry. For their firm, which manages about $450 million, they get into business with glass makers, aviation, vodka and of course, sewer pipes. Platform avoids oil and gas companies. In this town, there’s a lot of capital being thrown at that already.
But they really like Texas — for its wildcatter entrepreneurial spirit, for its business-friendly policies and for all of its rich people looking to get richer. Houston is a private equity utopia.
Lummis, Brazelton and Morgan were all born in Houston and grew their careers in the town. Brazelton and Morgan went to University of Texas at Austin, and Lummis went to Vanderbilt University. Platform has only raised capital once, last January when it took commitments of $129 million. They say they won’t raise capital again for at least another few years.
“We were born here, we spent our careers here, our investors are here, and we recycle capital here,” Lummis said.
The three have been together for 20 years. They describe their relationship to each other — and their companies — as marriage: trusting, compromising and in it for the long haul.
Their investors are personal friends and former business associates, CEOs of banks and energy companies. They see them at dinner. Many are successful executives looking to diversify a heavy oil and gas portfolio. The average investment in Platform is about $5 million.
Most of Platform’s investors are conservative with their money and want generational wealth creation for their families, the partners said. The average return on the company’s portfolio of 16 investments has been about 30 percent per year.
The companies they invest in are oftentimes spurred by a longtime connection. They say they’ll spend years chasing a company they like. They’ve been wooing a current muse for five years. As Morgan put it, in that amount of time they can teach themselves a new industry. Their toughest competitor is the entrepreneur deciding to wait, and that’s OK — they don’t want to rush the engagement.
Vellano said he speaks with one of the founders at Platform almost every day. Another business owner said he spoke on the phone with Fred Brazelton every week for years.
“For individuals to go out and grow as fast as we did, you have to have a huge amount of resources or you have to have the resources of an equity firm,” said Dan Bucaro, the founder of Landmark Aviation, a startup that Platform backed.
Landmark eventually sold in 2015 for a little over $2 billion to Signature Flight Support. The deal was the largest acquisition ever in the general aviation service industry at the time, according to AIN, a trade publication.
“Whether it was operations or financial, he was a constant sounding board,” Bucaro said.
There’s no formula for when Platform will invest, the partners said. Some years it doesn’t make any new investments. One month it made three. But, the partners know what they’re looking for: Most of their businesses grow between 20 percent and 30 percent per year and are valued between $10 million and $100 million. All of their businesses must be proven and profitable, meaning they steer clear of distressed companies.
The partners admit they haven’t seen everything coming. Right before the financial crisis in 2008, they took on too much debt. Brazelton said it was a scary time, and they had to support the firm primarily with equity. Since the crisis, they act more conservatively.
“When things are going well, you don’t think about what can go wrong,” Morgan said. “The financial crisis and when oil dropped here in Houston are two examples of that.”
The market changed in an important way since Platform was founded pre-2008 recession: People actually know what private equity is. Entrepreneurs are suspicious that they’ll get bought and stripped. When Platform first started, the first question was: “What is private equity?” Today, the partners instead have to answer questions about vulture capital.
“Private equity has a bad reputation,” Brazelton said. “A lot of that comes from the flipping of businesses. You do things that are not in the longterm interest of a healthy company in order to make quick profits.”
Entrepreneurs want capital but are less willing to give up a controlling interest than in the past, they said. Today, Vellano says selling a 52 percent stake in his company was a winning decision.
“You hear that you’ll lose control, that you won’t be able to make decisions, but it’s been the opposite of that,” Vellano said. “To me it’s a partnership, a friendship, that is tremendously helpful for us.”
“We structured Platform to be a one-stop shop for entrepreneurs.” Fred Brazelton, Platform Partners