Buyout firms

In the mid 1990s, buyout firms began to conduct leveraged transactions in the chemical industry. A slew of multi-billion dollar LBOs suggest the trend has intensified since the start of the new millennium. This chapter explores the relevance of private equity investors for the chemical sector and describes the value generation levers they apply it examines what traditional chemical corporations can learn from their financial competitors and concludes with a description of buyout firms challenges in the chemical industry and an outlook. 

Buyout firms, in turn, are keen to conduct transactions as they face pressure to employ the money raised from investors in recent years. According to estimates, the private equity industry as a whole raised USD 900 billion between 1998 and 2003 (3i/PwC 2000 to 2004). However, the industry has invested only about USD 800 billion, leading to a capital overhang of around USD 100 billion by 2003. Part of this immense capital wave is flooding into the chemical sector. European markets in particular are profiting from the capital inflow as many large and experienced US buyout firms have started only recently to build up resources in Europe in order to prepare for high profile LBOs (Lemer, J. et al. Dixit, A. Jayaraman, N.). 

In addition, many of the buyout firms that have already invested still monitor the deal pipeline for further acquisitions in order to strengthen the competitive position of their portfolio companies and/or to consolidate market segments. For example, in late 2004, The Blackstone Group announced it had bought Acetex for USD 490 million and Vinamul Polymers, ICI s emulsion polymer business, for USD 208 million in order to strengthen the competitive position of its portfolio company Celanese. 

The increased buyout activity in the chemical sector is a consequence of all the effects described above. However, this does not explain how top-tier buyout firms actually generate value through these transactions. Studies have revealed that, on... 

Due to these companies inherently private nature, there is still a lack of empirical data linking outperformance by leading buyout firms to specific value generation levers. However, it is still possible to describe the levers applied by buyout firms operating in the chemical sector. This is particularly useful for chemical company executives as it helps to demystify some of the myths that surround the operations of their new financial competitors. 

F. Parenting effect F-1. Restoring entrepreneurial spirit F-2. Advising and enabling Increasing revenues or cutting costs as a result of the benefits the portfolio company accrues from its association with the buyout firm... 

A detailed review of the levers applied by private equity players makes it clear that they are neither new to the chemicals business, nor ignorant of its particularities. Nevertheless, top-tier buyout firms perform so well that it seems that applying the right levers and aligning the interests of all parties can add significant value. 

By accumulating significant assets in chemicals, buyout firms have not only become acquirers of disposed entities but also respectable competitors for traditional players. They compete against each other in the market for capital, corporate control, and talent. And in many respects it seems that buyout firms could build a competitive edge. 

Executives therefore have to accept that their performance and value generation approach will be benchmarked against those of buyout firms. A better understanding of the buyout recipe should help them stay competitive. 

The second real danger lies in exiting the acquired assets. Buyout firms are forced to sell portfolio companies at the end of the predefined limited lifetime of their funds. It is no secret that this has become more problematic in recent years and that the average retention time of assets has increased. In fact, relatively few have managed to successfully divest in the past few years and exiting portfolio companies is one of the top issues for private equity players operating in the chemical sector. 

The need for timely and profitable exits for buyout firms has given rise to a growing secondary market for buyout transactions. Although they are historically less lucrative than both IPOs and trade sales, secondary buyouts have increased in importance and acceptance in recent years (Davison, C.). For example, Ripple-wood sold Kraton Polymers to the Texas Pacific Group in 2003 for USD 770 million and in 2004 Borden Chemical, held for nine years by KKR, scrapped its IPO plans and was sold instead to Apollo for USD 1.2 billion. 

It might seem counterintuitive, but the returns achieved by buyout firms depend crucially on public markets (e.g., Wright, M. Robbie, K. Gompers, P. Lerner, J. Clow, R. Smith, P.). Weak capital markets and the decline in valuations have made it extremely difficult to use IPOs as an exit channel. Structural impediments have also arisen. For example, an organization needs to be much larger now before it attracts analyst attention. This means that only businesses with financial critical mass are likely to have any chance of floating in Europe. The situation is different in North America where the market for mid-caps has remained popular, keeping the threshold for public businesses considerably lower. 

We do not expect the stock market exit option to pick up in the near future, at least in Europe (Davison, C. Smith, P. Maier, A.), but some of the large buyout firms have started to revitalize this channel. Compass Minerals, for example, com-... 

On the one hand, buyout firms have to make clear to potential investors why investments in their funds are worthwhile and why they are best positioned to satisfy investors needs and expectations. Buyout firms are placing increasing emphasis on enhancing the service they provide to their fund investors in order to differentiate themselves, and they are increasingly seeking ways in which they can make themselves attractive to fund providers (cf. Wright, M. Robbie, K.). 

Executives of traditional chemical companies can benefit from these developments. Buyout firms have become grateful acquirers of non-core businesses and have brought liquidity to some segments of the market. 

However, they also represent a competitive threat that needs close observation. By examining buyout firms, chemical executives can gain deep insights for their own strategies and the set of value generation mechanisms that they themselves should apply. 

Buyout firms also face important challenges that they may only overcome if they manage to achieve differentiation. They need to understand what will make them distinctive in the future in order to become or remain superior performers. Crucially, they need to understand their sources of competitive advantage. 

---