The chemicals sector is becoming increasingly attractive to private equity firms. Around 30% of deals by value within the global chemicals sector were backed by private equity funding, according to findings from the Chemical Industries Association (CIA) report Private Equity in Chemicals, sponsored by KPMG, Gresham and Cogencey Chemical Consultants. This compares to past figures of around 5% of total transaction values in this sector. The figure rose to 20% in 2002 and now as many as 100 European chemicals companies are under private equity ownership. And with around €10bn European chemical assets currently up for sale that level of investment looks set to reach 40% in Europe during 2004.
James Drury of KPMG’s private equity group said: “The dramatic rise we are now seeing in the levels of PE investment in the sector is as a direct result of the spate of merger and acquisition activity which characterised the 1990s. These years have left a legacy of restructuring and debt reduction strategies, many of which are being facilitated by private equity investment.”
The private equity houses surveyed noted perceived weaknesses in the quality of European chemical sector management in the areas of strategic marketing skills, commercial creativity and financial discipline but stressed management teams were nevertheless highly qualified and very able in technical, engineering and operational issues. The report concludes the cause of these reported weaknesses is a lack of exposure to operating outside of wider corporate structure rather than lack of management talent.
The report also made the following observations about the sector’s exit potential. Holding periods are likely to be longer than the private equity sector norm of four to five years and portfolio management issues are becoming a greater issue for private equity houses as trade buyers are generally unwilling to undertake restructuring post-acquisition. Private equity houses are also considering partial disposals to match trade buyer requirements.
Drury commented: “Exits to trade buyers are available but are increasingly difficult to achieve. Early action to improve the attractiveness of businesses to trade buyers is essential and may include selective disposals to enhance potential synergies.”