Chip McClure felt the pain of the 2008 recession that turned life upside down for so many.
“We suffered like everybody else,” says McClure, who at the time was CEO of Tier 1 auto supplier Meritor. “I take great pride in the fact that although we got down to 32 cents a share, we did not go through Chapter 11. We were able to protect our employees, our customers and the community.”
One segment that didn’t receive a lot of support was the Tier 2 and Tier 3 suppliers to the auto industry, McClure says.
“We had some of them that did go bankrupt during the recession and it affected us,” he says. “So when I left Meritor, I wanted to do something in the Tier 2 and Tier 3 space because I came to realize it’s been an underserved, underinvested business for a long time.”
After 35 years in the industry, McClure founded Michigan Capital Advisors to invest in Tier 2 and Tier 3 global automotive and transportation suppliers.
“The value we can create is we know this market, this industry and the customers,” he says.
Addressing a market need
Essentially, there are three tiers in the automotive supply chain. Tier 1 suppliers provide parts or systems directly to the original equipment manufacturer (OEMs). Tier 2 suppliers make parts and often sell them to automakers, but serve other industries as well. And Tier 3 suppliers make raw materials used by upstream companies.
“At Meritor, when we came out of the recession, we were primarily in the heavy truck and commercial vehicle space,” McClure says. “It was our Tier 2 and Tier 3 suppliers that limited our ability to ramp up. My view is it’s absolutely critical to be able to provide the necessary parts, service, supply — whatever — to the Tier 1s and the OEMs.”
By founding Michigan Capital Advisors, he has created a private equity firm that addresses the lack of access to capital that prevents suppliers from keeping up with customer demand and diversifying beyond the auto sector.
“Can we bring cash to the deal? Yes,” McClure says. “Can we bring manufacturing expertise? Yes. But a lot of people can do that. What differentiates us is we have stayed focused and within our swim lanes. We know what we’re good at and that’s what we do.”
One metric that McClure pays close attention to in the auto industry is the seasonally adjusted annual rate.
“For the last couple years, it’s been north of 17 million units,” McClure says. “That’s how many vehicles are built. It’s starting to trend down. The clearest sign to show that is General Motors, which as we speak, is going through some significant repositioning of their plants and some significant layoffs. In my view, they are being proactive doing that. That’s one space we’re looking at that is starting to trend down.”
McClure has built a team of experts that can keep a close eye on the market and adjust accordingly as markets and industries shift and new investment opportunities arise in the wake of those changes. While he’s not expecting a significant downturn, he wants to be in a better position to support the Tier 2 and Tier 3 suppliers than he was a decade ago.
Informed advisors are an integral piece to meeting that goal.
“If you look at what’s a driver for the seller of potential companies,” McClure says, “they want to see who is going to bring the right skillsets to the table. Quite often, I will bring these individuals to make sure they feel comfortable that we have the right skillsets to support the companies where we’re looking to make an investment.”
Looking to the future
McClure is making some headway in his efforts to build a stronger foundation of Tier 2 and Tier 3 suppliers.
In October, Michigan Capital Advisors made an investment in Canton-based Fusion Coolant Systems. The company uses the unique characteristics of supercritical carbon dioxide to replace traditional machine and cutting oils.
“It was invented at the University of Michigan,” McClure says. “You can always tell when you walk into a plant and it’s got a lot of cutting oils because you can feel it, taste it, it gets into your clothes and some people get skin irritation from it. This eliminates all of that.”
McClure’s team has also invested in Wixom-based Ventech, which manufactures a liquid heat generator that has applications with heating systems and windshield defrosters, and Wixom-based Light Guide Systems, which uses proprietary software and industrial projector systems to guide and confirm the completion of complex tasks.
When he’s scouting out an investment opportunity, McClure says he takes a hands-off approach right from the start.
“I’m not looking to come in and groom management,” McClure says. “I want to spend the time with current management and know the capability of the current management team. And then invest in them as the jockey of whatever the horse is that we’re riding. Getting to know, being able to analyze and investing in the jockey is absolutely critical.”
He also starts thinking about exit strategy, even as negotiations about making an investment are happening.
“You need to understand what the next step would be,” he says. “It could be someone else investing with them or something strategic. There needs to be long-term focus to make sure that there is not only investing in the jockey right upfront, but what’s going to be the strategy in the future?”
