Private equity investments

European chemicals managers today are asking themselves the same question as their US counterparts did a decade or two ago how can private equity funds succeed, given their limited knowledge of the chemicals business itself Conventional wisdom says that such limited knowledge of engineering and chemical markets and a lack of operational synergies for such M A transactions should be obstacles to successful private equity investments. 

In an ideal world, a successful private equity investment would follow a clear trajectory identify a hidden, undervalued enterprise have a solid and actionable hypothesis on how to add strategic value finance it smartly develop a clear implementation path to improve the business strengthen the management to execute the strategy and find the best owner for the business at the exit point. In reality, of course, the situation is rarely so clear-cut, but some of these factors always play a role. In the real world, private equity firms also need to be involved in the evolv-... 

Financial markets value companies. The cycle of equity markets measured as a multiple of the current EBITDA performance of a company is important, as it influences the value and the timing of exits for financial sponsors. The availability of debt markets is equally important because LBOs require sophisticated debt financing arrangements. Conditions in both equity and debt markets have an impact on private equity investments. 

Two fundamental aspects need to be considered when assessing the impact of the financial markets on the success of private equity investments. First, all financial markets are cyclical, and the supply and demand of financial products drive the availability, volumes, and pricing of equity and debt financing. Second, European and U S capital markets provide access to different investors and therefore different market conditions. In almost all cases, the US market provides higher volumes and more favorable conditions for equity and debt transactions. 

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.). 

Lamm, R. McFall Ghaleb-Harter, Tanya E. 2001. Private Equity as an Asset Class Its Role in Investment Portfolios. Journal of Private Equity, vol. 4, no. 4 (Fall) pp. 68-79. 

Sood, Vamn. 2003. Investment Strategies in Private Equity. Journal of Private Equity, vol. 6, no. 3 (Summer) pp. 45-47. 

Private equity funds are attracted to the chemical industry for the same reasons as they like any sector - they believe they can generate good returns. The investment opportunities are driven by the industry s structural challenges and evolution. Therefore, continuous analysis of equities markets, consolidation trends, and related M A activity is essential. 

Taken together, these transactions confirm that chemical LBOs in Europe have been successful. Estimates suggest that the total returns after realizing the investments will be viewed as positive by investors in private equity funds. 

The private equity practitioners approach differs in three ways from that of a traditional corporate organization. First, they concentrate on specific metrics, second, they institutionalize change projects with a lasting impact on performance early on during the investment period, and third, they take great care over the choice of management teams. 

Where are the new opportunities to improve portfolio performance by creatively expanding the investable asset domain There are several assets that are now increasingly accepted and utilized in portfolios. The most important are hedge funds, private equity, and venture capital. Other new assets have shown the ability to improve portfolio performance but for various reasons have not yet made the leap to widespread recognition. These include inflation-protected securities and insurance-linked products. 

As in the case of hedge funds, managers are increasingly investing in private equity to improve portfolio efficiency. Although there is much less conclusive research on private equity and investing, the recent performance record of such investments is strong. 

There are varying definitions of private equity, but in general it consists of investments made by partnerships in venture capital (VC) leveraged buyout (LBO) and mezzanine finance funds. The investor usually agrees to commit a minimum of at least 1 miUion and often significantly more. The managing partner then draws against commitments as investment opportunities arise. 

The major issue with private equity is that the lock-up period is often as long as a decade. There is no liquidity if investors want to exit. Also, because the minimum investment is very high, oiily high-net-worth individuals and institutions can participate. In addition, investments are often concentrated in only a few deals, so that returns from different LBO funds can vary immensely. Efforts have been made to neutralize the overconcentration issue with institutions offering funds of private equity funds operated by different managing partners. 

Since common stock (or equity) costs more than bonds, why do companies issue stock This is because a company is only able to borrow money at a good rate if the lender is 100% sure he can get his money back plus interest. The less sure he is that he can get his investment back, the higher the interest rate. When a bank is asked to finance the building of a private home it will rarely lend more than 85% of the cost of construction. It also insists that the house be insured, with the bank having the first lien. This means that in case of a catastrophe the bank loan is repaid first. Then the other creditors and the owners receive what is left. A lien s significance is that it takes precedence over all other debts. Even under this arrangement an individual is... 

By contrast, in countries with a small market size, domestic demand is likely to be insufficient to justify large private outlays for R D. Pharmaceutical companies and equity flows available to such companies appear to be attracted to countries in which there is a sizable domestic market or, at least, public policies are favorable to the sale of pharmaceutical products. Thus, smaller countries, which inevitably have smaller domestic markets, tend not to be as well positioned to attract pharmaceutical companies and investment. In addition, such countries are more vulnerable to shortages in the event of national emergencies, such as pandemics. For this reason, some form of government intervention may be required, including government subsidy, public investment in pharmaceutical research, and even direct public production. 

The capital meirkets are "markets where capital funds—debt and equity—are traded. Included are private placement sources of debt and equity as well as organized markets and exchanges." JOHN DowNES Jordan Goodman, Dictionary of Finance and Investment Terms 59 (3d ed. 1991). 

In Germany, a privately placed loan instrnment, a Schuldschein, has mnch more acceptance than an investment in note format. By structuring a Schnldschein, German insnrance companies, for instance, can tap the larger pools for investment available in their general accounts rather than from the more limited fnnds otherwise available for CDO equity. 

Availability of investment capital and equity structure of the project (shareholders public/private, distributors, etc.). 

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