Advent Insights
Chemicals: a partnership approach in a rapidly changing industry
July 12, 2021
For the chemicals industry, this is a time of great change, reorganization and consolidation – and for committed, long-term private equity buyers, it is one of great opportunity. Led by Managing Partner Ronald Ayles, Advent’s Chemicals and Materials Practice has a 35-year record of investments in a sector that has often proven difficult for financial sponsors.
The global chemicals industry is in a period of profound change. It is faced with increasing competition from emerging markets, volatile raw material prices and exchange rates, and shifting investor expectations. The leading companies have responded by seeking economies of scale, focusing on specialties, growing in emerging markets and driving growth through synergies. All these trends have been accelerated by the Covid-19 pandemic.
For many of the companies, this has meant concentrating on downstream, specialty, high-growth sub-sectors, and divesting the more volatile, non-core parts of their portfolio. This has created a great opportunity to invest in these spin-offs and develop them into high-potential standalone companies.
The benefits are mutual. Private equity backers can take a long-term view: they can see through cycles and are prepared to buy into declining earnings. They have the resources and nimbleness to react quickly when needed and can offer sellers higher transaction certainty than strategic acquirors, as they are not usually subject to the same anti-trust regulatory risk. Private equity owners have also shown to be better at driving growth in the sector: they can reinvest cashflow rather than paying it out in dividends, and they are more aligned with management teams behind a common purpose.
Nevertheless, these are complex businesses that demand significant operational experience and a willingness to invest over the course of the cycle. With Advent’s expertise and track record, we are well placed to partner with sellers. Time and again, we have successfully managed complex carve-outs from larger companies to build strong independent leaders such as allnex, Röhm and Oxea, among many others.
Our long-term, growth-focused approach, and our proven ability to sensitively manage relationships with all stakeholders – be they employees, customers, suppliers or local communities – has made us a trusted counterparty to some of the largest global chemicals companies, which have chosen to work with us on a repeat basis. This is particularly important in the chemicals industry, where carve-outs often lead to the utilization of shared sites or the establishment of long-term supply agreements with sellers.
We have a proven record in expanding operations into attractive downstream or speciality market segments, either organically or through M&A, and have overseen expansion into new growth markets on multiple occasions – investing wherever necessary to increase the manufacturing capacities needed to achieve this.
It all begins with our people. We can convene a global deal team with the in-depth industrial experience needed to play in this sector. They are backed by a world-class network of industrial and operating partners, and a Portfolio Support Group with an excellent track record of managing carve-outs, driving value-creation plans and executing ongoing mergers and acquisitions in the chemical industry.
The coating resins company allnex provides an example of our strategy in action. Advent carved out the company from Cytec Industries in 2013, on the basis that we were entering a fragmented industry with space for an emerging leader. We established allnex as an independent business with a strong market position through M&A – most notably, the acquisition of the resins manufacturer Nuplex in 2016 – and organic investments.
Advent has invested over €1.5bn in allnex’s growth, allowing it to more than double its number of employees, production sites, R&D centers and customers. On its agreed sale to PTT Global Chemical in July 2021, the company had become the leading global producer of industrial coating resins, with over €2bn in revenue, a global headcount of around 4,000, and a strong position in all key sub-sectors.
Röhm is another similarly persuasive example of the Advent approach to chemicals investments. The leading producer of methacrylates and derivative products (including the PLEXIGLAS brand) was carved out from Evonik in 2019 and established as a standalone company. We were attracted by the chance to invest in a truly global player with a highly defensible market position, integrated operations and diverse end-markets.
With Advent’s investment and guidance, Röhm has committed to the significant expansion of its facilities – a green-field investment of €500m – where it can deploy its proprietary LiMA MMA production process. Process optimization has added value, and the ability to develop the company’s downstream capability promises to future-proof its business model, improving margins and reducing cyclicality.
This was not an easy investment decision at the time, with the company experiencing declining earnings from a cyclical high. Its investment profile would have been hard to underwrite for public companies and many financially driven investors. However, we believed that the competitive new LiMA technology and site expansion offered great potential, and we are confident that this transformation will pay off in the long run.
Another key trend in the chemicals sector for every business is a sharp acceleration in the importance of sustainability, and this is another area where Advent’s team expertise and experience can drive transformational improvements.
At allnex, significant investments have helped lead the movement toward lower volatile organic compound (VOC) technologies, such as environmentally friendly waterborne resins. Meanwhile, Röhm has pioneered the use of lightweight materials that can improve energy efficiency where they are employed – most notably in the automotive sector – while its LiMA technology will significantly improve efficiency.
There is every reason to believe the trends that make chemicals a worthwhile sector for private equity are robust, and are set to continue. We believe Advent can and will continue to create global leaders by playing to our strengths: building teams of industry experts to help management execute ambitious value-creation plans, and professionalizing governance and operational capabilities so that carve-outs can flourish as a new business.
While the sector will always be a demanding one for many financial acquirors, we firmly believe that the ongoing reorganization will provide opportunities for specialist partners with the track record, operational skills and sensitivity to work effectively with management teams – creating new, cleaner champions in a rapidly evolving market.
