Coatings World - July 2016

But PE firms charge management fees, typically 2% of AUM, and routinely take 20 percent of the profits upon exit. This model works best when the PE is significantly larger than the FO as the investor can leverage the benefits of asset pooling, but what happens when the FO and the PE are of equal size or the FO is larger?

The short answer, according to Russ Alan Prince (Forbes, December 2014), is that more and more FOs are electing to bypass the PE and invest directly. At a certain level the economics favor hiring dedicated professional staff and creating effectively specific, in-house buyout firms within the FO structure.

Some are well known, names like Pritzker, Gates and Dell, with billions of capital doing their own mega deals like Dell’s $67 billion acquisition of EMC. But in a January 2016 article published by Mergers & Acquisitions (www. themiddlemarket.com), Danielle Fugazy noted that most are focused on the middle market where good companies with differentiated market positions can be acquired and nurtured for the long term. She went on to write that, in 2014, 77 percent of respondents surveyed by McNally Capital indicated a preference for direct investing versus PE, up from

59 percent in 2010.

The middle market appears to be
a good fit as owners of middle market
companies often respond favorably to
the flexible deal terms, longer/indefinite
hold periods and ready access to capital
typically offered by the FO buyer.

Implications. Since this is Coatings World and we are all involved in the broader chemicals industry, I wanted to get an indication of the relative attractiveness of chemicals, and by extension, the paints and coatings value chain to potential FO investors. Data on just the coatings sector is not easy to find, but there are published statistics available summarizing the deal flow in the chemicals industry. The data in the table below was compiled by PWC and excerpted from its chemicals industry M&A summary for 2015.

Different sources define the term
middle market differently, but for the
purposes of this article I am thinking of
deals valued at up to $250 million. Based
on the PWC statistics, a typical year in
the chemicals industry produces at least
150 announced deals valued between
$50M and $250M. Add in the smaller
deals valued below $50 million and, as-
suming that the majority of deals with
an undisclosed value fall at or below our
$250 million cut-off, the total amena-
ble middle market for chemicals M&A
could be as large as 1100 to 1200 deals
per year.
In the next installment, I will take
a look at how Strategic Buyers, PEs
and FOs influence the world of merg-
ers and acquisitions and examine some
of the key issues and implications for
hot-button topics such as valuation,
deal structure and the potential con-
vergence between these three classes
of buyers as we consider the “new nor-
mal” going forward. CW
AcquiringCompany Target Value Comments
Dow DuPont $62B Merger & Spin Off