business
Private-Equity Investors Increase Stake In Chemicals Slumping business cycle creates investment opportunities for 1999 Ronald. S. Rogers C&EN Northeast News Bureau
P
rivate-equity investors are increas ingly purchasing chemicalfirmsas a viable means for generating profits. As the chemical industry continues to cope with a downward business cycle in 1999, industry experts say the opportuni ties for private-equity investors will in crease as more chemical firms, strapped for cash, sell off nonstrategic businesses. Private-equity firms manage pools of capital, typically organized as a limited partnership, that invest in well-established companies, representing opportunity for a high rate of return. Their investments gen erally include acquisitions or recapitaliza tions of public and private companies. Private-equity investments are differ ent from venture-capital investments, which typically provide seed or earlystage money to start-up companies. "If you talk venture capital, people think start-up businesses," says Stuart A. Auerbach, a general partner with privateequity firm Ampersand Ventures, Wellesley, Mass. "In the chemical industry, that's the smaller piece of the equity mar ket. The true venture side may be only 20% of the deals done. The much bigger chunk is private-equity investments in es tablished businesses." There are several types of privateequity firms. The most common type is an independent firm with no affiliations to any other financial institution. Amper sand is one such company; it focuses ex clusively on the specialty materials and chemicals industry. Ampersand currently has more than $200 million invested across three pri vate-equity funds. Each fund has a life span of 10 years and contains 12 to 15 companies. Ampersand funds its deals with its own money and by offering lim ited partnerships to endowment funds, foundations, corporations, and wealthy individuals who seek to diversify their own investment portfolios. "Our goal is to create and build busi
nesses," says Paul C. Zigman, a partner at Ampersand Ventures. "We consider our selves entrepreneurs and we happen to be practicing our entrepreneurial spirit as investors in companies, but we be have as part of a management team." Other private-equity firms are affiliates or subsidiaries of a commercial bank, in vestment bank, or insurance company and make investments on behalf of out side investors or the parent organization. Often these firms are generalists, invest ing in various industries. Chase Capital Partners (CCP), a divi sion of New York City-based Chase Man hattan Corp., is one example. CCP does not specialize in chemical firms; howev er, its portfolio does contain about 12 chemical companies at any given time, accounting for $250 million or so of its invested capital. "We are activefinancialinvestors," says Timothy J. Walsh, a principal at CCP. "We'll take control of companies and man age them through the board. We'll partici pate in key strategic and financial deci sions, but we're not managers—we're the owners, we're the investors."
Private-equity investments dwarf venture-capital investments in chemicals $ Millions
Private equity8
Venture capital
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 TOTAL
$1,099.8 3,512.7 1,394.9 316.3 351.5 314.1 821.7 391.4 222.7 54.9 229.6 $8,709.6
$ 31.5 29.5 48.2 49.3 26.2 46.7 5.1 38.0 35.4 63.6 74.6 $448.1
a Includes management buyouts, management buy-ins, and leveraged buyouts. Source: Venture Economics, Newark, N.J.
Auerbach: spin-offs are fertile ground
According to Venture Economics—a Newark, N.J.-based research firm focused on venture-capital and private-equity in dustries—private-equity investments in chemical firms was $230 million through November 1998, up from $55 million for all of 1997. In comparison, venture-capi tal investments in chemical firms totaled $75 million in 1998 (as of November), up from $64 million for all of 1997. The recent upswing in private-equity investments is being driven largely by the storm of deflation coming from Asia, which is hitting the commodity chemical companies where it hurts—the bottom line. Although tough economic conditions often punish these companies' profits, the same conditions can create opportunities for private-equity investors. "Bad conditions are good for our busi ness because chemical companies reassess their portfolios and exit nonstrategic or undeφerforming businesses," Auerbach says. "Corporate spin-offs are fertile ground for us to find new opportunities." According to industry experts, the next 18 to 24 months represent a good time for private-equity investing in chem ical firms for two key reasons. First, be cause the industry is experiencing a down cycle, chemical companies are more internally focused and less exter nally focused. Whereas in the top of a cycle companies may be looking to make acquisitions to improve their positions, in a down cycle they tend to divest busi nesses and focus on core competencies. Second, because there are fewer corpo rate buyers during down cycles, there are more opportunities for financial buyers willing to take the risks of the cycle. For JANUARY 18, 1999 C&EN 27
SOARING COSTS? WE CAN BRING THEM BACK DOWN TO EARTH Choosing a contract manufacturing partner doesn't have to be a flying leap into the unknown. MANUFACTURING CAPABILITIES. We have world-class expertise in: • Scaling up chemical manufacturing processes from lab bench to railcar quantities (and any amount in between). • Designing and refining commercial scale chemical processes to improve yields, boost throughput, lower costs, and minimize waste. • Managing and disposing of chemical waste streams in compliance with all regulatory requirements. CHEMISTRY EXPERIENCE. We understand the chemistries behind the production of: • Bulk pharmaceutical active ingredients (including peptide synthesis). • Agricultural chemical intermediates. • Specialty chemicals and polymers. ASSETS AVAILABLE. We can provide you with development and production capabilities from any of our integrated manufacturing sites around the world. SAFE LANDING. Before you leap into your next contract, look into what we can do for you. Ask for a free copy of "Paving the Way to Manufacturing Success" to learn more about Dow Contract Manufacturing Services. Call, fax, or write to us today.
CALL AND REQUEST OUR FREE BROCHURE TODAY. FOR GENERAL INFORMATION AND LITERATURE: 800-447-4369 PHONE 001-517-832-1542 INTERNATIONAL PHONE 517-832-1465 FAX TO DISCUSS A PROJECT: 800-304-1488 PHONE 001-517-636-4938 INTERNATIONAL PHONE 517-636-0986 FAX See us at INFORMEX Booths 622,624,626, and 628
Dow CONTRACT MANUFACTURING SERVICES The Dow Chemical Company, Midland, MI 48674
DOW. 'Trademark of The Dow Chemical Company CIRCLE 1 1 ON READER SERVICE CARD
business
&*
private-equity investors, new opportunities mean buying businesses at fire-sale prices and selling them later for a tidy profit. "When you look at the prices people pay for businesses, they tend to be lower in bad times," Walsh says. "The best investments we've made in the chemical industry have tended to be made in the worst times of the business cycle." Ampersand's ability to buy low and sell high is illustrated by its acquisition and sale of Daniel Products, a Jersey City, N.J.-based producer of pigment dispersions and paint additives, and of Tomah Products, a Milton, Wis.-based producer of specialty surfactants. In April 1993, Ampersand bought Daniel Products from Dutch-based DSM; it sold the company to Elementis in January 1996 for three times what it paid. Ampersand purchased Tomah Products from Exxon in November 1994; in April 1997, it sold Tomah to the company's management, which had the financial backing of Prudential UK. Again, Ampersand received nearly three times what it originally paid.
Last month's deal between IMC Global and Citicorp Venture Capital (CVC), the private-equity investment arm of New York City-based Citigroup (C&EN, Jan. 4, page 8), suggests the trend is continuing. In that deal, IMC Global sold its IMC Chemicals division, made up of soda ash and boron chemicals businesses, to CVC for $520 million. The deal originated with IMC Global's acquisition of those businesses as part of its $1.4 billion purchase of Harris Chemical Group in April 1998. IMC, which mostly was interested in Harris' salt operations, began looking for buyers of the soda ash and boron businesses soon after completing the deal with Harris. CVC, which had purchased another soda ash business from European-based Brunner Mond earlier in 1998, proved a willing buyer. Citicorp declined to say if it had plans to combine the two businesses, but such consolidations are not uncommon among privateequity investors. Another example is Hoechst's sale in late 1998 of its synthetic resins company, Vianova Resins, to Morgan Grenfell Private Equity, London, the private-equity arm of
Deutsche Bank. That deal was estimated to be worth more than $470 million. With few exceptions, most private-equity investors active in the chemical sector steer clear of small start-up chemical companies. Those deals fall more to the true venture capitalists. Instead, privateequity investors prefer the less risky, established businesses. An advantage to investing in existing companies is that they typically have proven track records and a defined market. CCP's Walsh describes it this way: "We're involved in buyouts of stable businesses with predictability regarding cash flows. Going in at an early stage at the venture end of the spectrum is a much higher risk profile." Another reason why private-equity investors shy away from start-up companies is the need to satisfy investors' appetite for liquidity and quick profits, usually within seven years after making an investment. Because start-up companies take longer to establish themselves, they are considered less desirable. "When we look at a business, it's important we see a path to liquidity over a
Call the Global Leader for
Pyridine Intermediates, and
Arriinopyridines
Rely on Reilly for Dozens of Products
When you need pyridine or related heterocyclics, call Reilly, the world leader. Count on us for pyridine, picolines, and dozens of intermediates in the aminopyridine, cyanopyridine and vinylpyridine product families.
t
Global Manufacturing for Fast Response and Reliable Supply
The Edge in Technical Support and Innovation
Reilly manufactures pyridine and derivatives in dedicated plants on two continents. We maintain inventories in the U.S. and Europe, and you can count on direct sales and technical support staff. Plus, we're basic in raw materials, so we exercise complete control over product consistency and quality. We're not dependent on other suppliers.
Expect better technical support from the innovator in pyridine and heterocyclic chemistry. No one can share more knowledge and experience. And no other supplier can offer more resources when your needs go beyond an off-theshelf product or process. So for pyridine, intermediates, and beyond, go with the global leader. Go with Reilly.
9
£w
Asia-Pacific: Reilly Industries Inc. Branch Office 801 Bank of America Tower 12 Harcourt Road Central Hong Kong Phone: 852-2522-6361 Fax: 852-2522-6665
s«»
Europe: Reilly Chemicals S.A. 154, Chaussée de la Hulpe 1170 Brussels, Belgium Telephone: +32-2-663 4400 Fax: +32-2-673 8104
* North America: Reilly Industries, Inc. Suite 1500 300 N. Meridian Street Indianapolis, IN 46204-1763 Telephone: 317-248-6411 Fax:317-248-6402
Visit Reilly on the World Wide Web at: http://www.reillyind.com/
CIRCLE 58 ON READER SERVICE CARD
JANUARY 18, 1999 C&EN 29
(•(υ?:
business four- to seven-year time frame," Amper sand's Auerbach says. "If a business looks good but will take more than five to sev en years to get to liquidity, that's not a business we invest in." When investing in chemical firms, pri vate-equity investors look for minimum returns of 20 to 25% on their total invest ment portfolios. About a third of invest ments in individual companies fail to meet this 25% return mark, and another third barely hit the mark. To make up the difference, investors must target
Chirai Building Blocks
Ά
99% chirai purity for pharmaceuticals OH
0
HO
OH
HO
fr ^
*OEt
( Cl )
companies that offer a much higher po tential rate of return. "You can't make investments knowing a company doesn't have the potential to be in the top third [of performers]," Auer bach says. "If we're looking for the whole portfolio to be in the high 20% [range], we have to look at much bigger numbers in the beginning as the likely outcome for a business, knowing that things go wrong. Some businesses won't make it, and oth ers will have to make up that 20%." When considering a potential invest-
Ο
Br OTs(°H)
/—y TsC>
OH
HO
Ο
HO
b °-
b
NHBz
H
Ν
"OTs
OH
(OMs
(MsO
I
Bz Ο.
Η
ί>^
OEt
Call us about 3-, 4- & 5-carbon intermediates for single-isomer drugs
L>C^Br
Y
Q0L· HO
Ph
^L-o
Q0L-
ο
Q0U
OH
(MOM)
NH 2
^
OH
Ο Me
^
OMe
SYNTHON, 3900 Collins Rd, Lansing, Ml 48910 USA Tel: (517)336-4661 e-mail:
[email protected] Fax:(517)332-5304 http://www.mbi.org/Synthon
y n t h o n corpomfon
CIRCLE 43 ON READER SERVICE CARD
30 JANUARY 18, 1999 C&EN
ment, private-equity companies carefully screen the merits of a proposed compa ny and invest in a small percentage of the businesses they consider. For example, CCP's staff of 85 profes sionals screens 5,000 companies across all industries each year. Even then, it adds only two or three new chemical compa nies to its portfolio annually. Because Am persand Ventures focuses exclusively on specialty materials and chemical compa nies, it looks at fewer opportunities— about 500 business plans per year—and invests in four or five new companies per year. Private-equity firms also tend to sell portfolio companies at a similar rate. Identifying and evaluating potential in vestments is akin to picking a good stock; it takes considerable knowledge and time on the part of the investor. Investment leads can come from a variety of sources, including referrals from industry insiders or from investment bankers who actively shop businesses on behalf of clients. "We like investing with people who come very highly referred—that's a real ly big screen for us," Auerbach says. "When something comes in and has no context associated with it, it has a tough time clearing the hurdle." According to Auerbach, many of Ampersand's referrals come through its portfolio companies. In other cases, companies that want to sell a business often will produce a selling brochure and hire an investment banking firm that will develop a business plan. For example, Borden Chemicals & Plastics, Columbus, Ohio, announced earlier this month that it had hired investment bank ing firms Evercore Partners and Salomon Smith Barney to assist in exploring strate gic alternatives to maximize shareholder value (C&EN, Jan. 11, page 15). Although Borden says it has no imme diate plans, it did acknowledge its busi nesses have suffered financial losses for five consecutive quarters, driven by a severe industrywide cyclical downturn. It also said the sale of one or more of its businesses—including polyvinyl chlo ride, methanol and derivatives, and nitro gen products—to another company or to private-equity investors was an option the company might consider. Regardless of where the opportunities come from, it's clear that as the chemical industry continues in a down cycle, pri vate-equity investors will stay perched to capitalize on investment opportunities. When asked to summarize the situation, Ampersand's Zigman sums up the prac tice this way: "We're making money and having fun."^
