Coatings World - July 2016

is expected to cool to 5 percent CAGR through 2020, enabling the industry to reach $4.66 trillion.

Deloitte defines the aggregate growth
in PE Assets Under Management (AUM)
noted above as the sum of growth in
committed capital, often described as
dry powder, plus the unrealized gains in
the investment portfolios under manage-
ment. To thrive and survive, a PE buyout
firm must work constantly in two funda-
mental areas:
• Attracting capital and
•Deploying capital. (How much
money is flowing into PE and where
does it originate?)

In 2015 Prequin Ltd., a specialist consulting firm that tracks and analyzes alternative asset classes, tallied $152 billion of PE buyout fund closings with the largest single fund, Blackstone Capital Partners VII, closing at $18 billion. Not surprisingly, 8 of the world’s top 10 PE firms are based in the U.S. (2 in the UK), and typically over 80 percent of PE fund raising is done in the U.S. or Europe.

PE investors represent a broad spectrum. Again, taking data from Deloitte and Prequin, the top 7 investor groups allocating assets to PE funds are summarized in the table below.

This data can be viewed a number of ways, but a couple of observations are particularly striking. First, pension funds and insurance companies provide

55 percent of the investment capital, yet their overall risk is minimal as they are allocating only 5 percent or so of their investable funds to PE. Second, although they comprise only 5 percent of AUM, family offices are heavily invested in PE with an asset allocation of 27 percent.

Additionally, in-
vestor allocations
to PE appear to be
increasing. Prequin
data indicate that
only 21 percent of in-
stitutional investors
surveyed in the first half of 2016 had an
asset allocation to PE below 5 percent as
compared to 44 percent of respondents
below a 5 percent allocation level 18
months prior (second half of 2014).

Also, 56 percent of Family Offices surveyed in 2016 indicated “more appetite for private equity.” Taken in combination, one can sense the need for greater return on capital as even conservative investment professionals seek to increase their risk profiles.

Strategic Mega Deals. Increasingly, operational excellence on a global scale is a critical success factor in capital intensive industries such as chemicals. Producers need to be close to local markets, and operating leverage must be maximized to overcome high fixed costs associated with heavy capital investment.

Consequently, with organic growth increasingly difficult to achieve, corporations flush with cash and access to cheap debt are predictably deploying their dry powder in pursuit of global consolidation, diversification and economies of scale in a wave of high profile, highly valued strategic mergers and acquisitions. We have every reason to expect this trend to continue if not accelerate as monetary policy shows signs of moving toward a more historical norm.

The table below highlights a few of the most highly publicized recent transactions in the chemicals and energy market space.

Family Offices. In addition to the
growth in PE and the eye-watering scale
of the strategic mega-deals that domi-
nate the headlines, a less well publicized
emerging trend that has captured my at-
tention is the role of the Family Office as
a direct investor in middle market com-
panies. We are all familiar with terms
like strategic buyer and hedge fund and
private equity, but unless you closely fol-
low the world of wealth management
you may not be familiar with the lesser-
known concept of the Family Office and
the array of functions such an entity
might perform.

Let’s start with a basic definition of
the term Family Office. Investopedia de-
scribes the FO thusly:
“Family offices are private wealth
management advisory firms that serve
ultra-high net worth investors. Family
offices are different from traditional
wealth management shops in that they
offer a total outsourced solution to
managing the financial and investment
side of a affluent individual or family.
For example, many family offices offer
budgeting, insurance, charitable giving,
family-owned businesses, wealth trans-
fer and tax services.”
Since many family fortunes are de-
rived from successful privately held or
family-owned businesses, it comes as
no surprise that FO’s are among the top
tier of investors in the PE space as high-
lighted in the discussion above. It stands
to reason that there would be a natural
affinity for investing in privately held
companies if a family company was the
source of initial wealth creation.