Private equity value

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 value generation can also be differentiated by the degree to which it depends on specific characteristics of the private equity investors. At one extreme,... 

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. 

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-... 

This chapter will explore the routes to value for private equity practitioners, focusing on how their pragmatic perspective leads them to act differently from the corporate world to achieve returns. 

Bottom-line performance improvement is the key to value creation for a private equity investor. Even before doing due diligence for a potential acquisition, private equity practitioners establish hypotheses on how to create value. They will usually focus on three factors organic growth potential, portfolio streamlining/add-on acquisitions, and cost improvement. 

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. 

Beyond the capital market analysis, a financial sponsor needs to judge the sustainable value of a business over the medium to long term. This needs to be adaptable, as equity markets may not be available for IPOs, equity increases, or larger acquisitions. From the financial sponsor s viewpoint this means that the private equity fund has limited exit opportunities during such periods. 

A limited number of value-oriented metrics and visible change projects have energized businesses acquired by private equity investors. 

Strictly speaking, the FIAT 1 transaction does not generate excess spread. This explains the high level of credit enhancement from the unrated class M notes (usually, unrated tranches are either privately sold or kept as an equity tranche by the originator). On the closing date, an amount of notes was issued which was equal to the net present value of all future cash payments due from the collateral (as opposed to the principal balance of the collateral). The discount rate used was the fixed rate payable to the swap counterparty (swap rate plus coupon on the class A notes and all fees associated with the transaction). Structured this way, the receivables always yield the discount rate, leaving no excess spread in the transaction. However, losses on the FIAT 1 portfolio can be covered to a certain degree from interest collections because the structure provides for delinquent principal and defaults to be covered before interest is paid on the class M notes. 

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