Five questions with Ned N. Fleming III, founder and managing partner, SunTx Capital Partners

1. You do a lot of your deals in Texas, where your firm is based, and then across the Sun Belt. What is your investing strategy? 

If you look at the last 25 years, the Sun Belt is where most of the growth in our country is occurring. Consider Texas. It has lower unemployment than the rest of the country. It continues to grow faster than the rest of the country. Texas is the No. 1 state for capital investment. So when we make a private equity investment, growth is important. In addition, places in the southern part of the U.S. can be cheaper to live and easier to do business. It is also important that we have access to great people. Right now, there are more opportunities in the South than there is capital.

2. How do you source your deals?

Investment bankers come to us, but we try to do business in a distinctive way by partnering with management teams that are looking for capital to grow their businesses. We provide these management teams with an infrastructure that most middle-market companies don’t have. We have a legal department that all of our operating companies use. Additionally, we have an in-house strategic consultant who teams up with SunTx portfolio companies and management to create a clear and concise strategy.

For instance, we are in the process of building a new plant to make drinks in Texas for [portfolio company] Carolina Beverage Group. We added two new production lines in North Carolina and doubled the size of that business. We were able to provide access to strategic people, operating people, legal people. We’ve owned the business three years and it is twice the size it was when we bought a majority share of it.

3. And Carolina Beverage Group recently tapped the high-yield debt market, an unusual move for a mid-market company. What was that experience like? 

We have utilized the high-yield market with two portfolio companies, Carolina Beverage Group and Interface Security Systems. It gives us the ability to better position the balance sheet for growth. That financial flexibility gives SunTx & the company operating flexibility to grow the business, increase its capacity, hire more people and add to the economy of the U.S. I think it’s a real positive thing. The company can increase its debt exposure but decrease the debt payments, because the amortization is eliminated. It also reduces covenants. Capital that ordinarily would be invested in debt principal payments can be reinvested into the business.

4. But don’t you have to do more work, getting these companies rated and whatever it takes to make these deals go forward?

We have not found the burdens to be that great. Our businesses are already doing much of the reporting that public-debt reporting requires. We run all of our businesses in a way that is institutional to begin with, so we have to hire very few additional people. I think it makes our management teams more professional. It helps reporting. If we want to do public offerings, our companies and management teams are already prepared to do the reporting that is necessary. And it gives us at SunTx better reporting for limited partners. It can be more work, but there also are some real benefits.

5. As you look forward into 2014, what big issues do you see that will affect your businesses and the way you run them?

We like relative market share businesses. We compete in a very specific geographic area. Each business has its own questions and focus, but we’re not as tied to the macro environment. Take our road and infrastructure company, Construction Partners Inc. headquartered in Dothan, Alabama, for instance. We’re very focused on what Alabama is doing with its infrastructure, but what Alabama is doing is very different from what Connecticut is doing. We try to put our capital in areas where we have less exposure to macroeconomic trends; we like to have more control over how these businesses are performing rather than just making a macro bet. We look at it from the customer backward rather than from the macro down. SunTx and our portfolio companies are customer focused.