The Carlyle Group waves caution flag on chemical M&A

Private equity firm The Carlyle Group is exercising greater caution than usual in its approach to chemical and other industrial acquisitions in an increasingly uncertain business environment, said its managing director heading that sector practice.

“There’s a yellow flag on the racecar track. It is time to be careful and we will be very cautious,” said Brian Bernasek, managing director and the head of the global industrial and transportation team at The Carlyle Group.

“It’s clearly a more challenging environment than in the past several years, and it’s not certain where we are [in the economic cycle],” he added. Bernasek spoke at a meeting of the Chemical Marketing & Economics Group (CM&E) in New York.

ECONOMIC SLOWDOWN

Global economic growth is expected to slow further, with more choppy conditions in Europe and China. The greater-than-expected weakness in the latest US manufacturing PMI is also cause for concern, he noted.

Also worrying is the collapse of growth in global trade volumes coinciding with the US and China tariffs. This is hurting export-oriented countries, the executive said.

“The collapse in trade volumes impacts economies in proportion to the size of their exports and value chain participation,” said Bernasek. Yet even as macroeconomic challenges mount and earnings growth slows, mergers and acquisitions (M&A) valuations have persisted at high levels.

“Interest rates are likely to stay low for the foreseeable future, so equity values are likely to remain high with the caveat that business performance needs to be strong. We expect this high valuation environment to continue,” said Bernasek.

However, he also sees corporates becoming more cautious on their appetite for acquisitions.

“In general, strategics are becoming less bullish. So much of the competition [for deals] is micro-based - on whether it’s a great strategic fit or attractive growth opportunity for the company. But we’re pretty confident that… board rooms and CEOs are less enthusiastic than they were 6-12 months ago in doing deals,” said Bernasek.

DEAL SEARCH STILL ON

While The Carlyle Group is exercising caution, it is not shutting down the process of finding deals, he emphasised.

“Our investors expect us to invest through cycles, so we are always focused on finding opportunities. But frankly, the bar is high to get the returns we’ve achieved in the past,” said Bernasek.

“We are working really hard to find deals but there is a heightened focus on being careful versus in other environments.”

In 2011-2012, amid another growth slowdown and concerns about a potential double-dip recession, The Carlyle Group saw a green flag and made deals that worked out well.

“But this is not a ‘green’ timeframe now,” said Bernasek.

The Carlyle Group’s chemical and industrial portfolio includes Nouryon, formerly AkzoNobel specialty chemicals business, Atotech formerly Total electronics and metal plating chemicals business) and packaging company Novolex.

It is in the process of acquiring a 35-40% minority stake in integrated energy and petrochemicals company CEPSA.

Carlyle’s investment strategy comprises improving operations, finding and supplying disruptive growth and backing market leaders with management teams. It also specialises in industrial carve-outs.and sees energy as a “unique place to invest”, said Bernasek.