The Wall Street Journal recently reported on more than $550 billion in debt taken on by European companies acquired in leveraged buyouts which will be reaching maturity within the next five years.
This massive wave of approaching debt repayment obligations is a significant issue for a number of reasons. The PE firms backing many of these highly-leveraged companies have been grappling with the task of adding value in the throes a challenging economic environment, as well as with a reduced ability to exit via secondary deals and IPOs.
In the U.S. we haven't yet experienced the same types of debt problems because of the appetite for high yield bonds in this country. The buyout peak of 2007, which saw nearly $1.6T in deal volume by middle of that year in the U.S. alone, also spurred the creation of a lot of debt in PE-backed companies. We are beginning to see the maturity of that debt. Again, the problem here is that many of those companies haven't grown in the way they were expected thanks largely to a battered global economic landscape. The fallout in the U.S. is a trend of PE companies buying themselves more time on their obligations by refinancing. And these companies are avoiding exorbitant interest expenses in a high yield debt market which, fortuitously, is experiencing low premiums. Last year, KKR alone extended or refinanced nearly $60 billion of debt for its portfolio companies.
But banks across the pond are wary of refinancing the half-trillion in burdens coming due over there, and there is no robust debt market, as in the U.S., which is helping to alleviate the situation. Clearly, all of this debt crashing down at once will lead to a lot of scrambling and, most likely, a lot of restructuring. To exacerbate matters, some analysts are forecasting a growing and sustained debt aversion scenario, even here in the U.S.
This situation, as with any, cuts both ways. The multitude of steeply-leveraged companies and those with meager earnings will continue to struggle to find financing opportunities. And this is could very likely spell the end for many of the zombie companies which have been hobbling along for the past several years. The upside may come for those who will be splitting up the remains.
Specialty sector focused private equity with flexibility and cash position will do well as credit dries up and an acquisition environment looms. And unique funds will have the opportunity to contribute to the type of reorganization that can allow the true economic therapy to begin - putting an end to the zombies and building real commercial and investor value going forward.
Monday, March 26, 2012
Friday, March 9, 2012
Chemistry, Innovation, Economy - Perspectives on Clean Technology (Follow-on)
In 2009 I shared some thoughts here on clean technology development. After some positive feedback I thought it would be appropriate share additional perspectives to do a follow-on piece for 2012.
Clean technology is not a phenomenon that is going away, and that is becoming clearer with each passing year. A few pervasive fundamental drivers exist:
- The same motivating factors that were driving clean tech five years ago still exist, and some (emerging market demand and environmental stress) are even getting stronger
- Clean tech is an incredibly diverse industry and the term reaches into a broad array of business segments
- There is systemic inertia which continues to push toward greater efficiency and reduced environmental impact – not just in energy, but across the spectrum
- Need for sustained innovation and the effect of cost arbitrage
While folks are concerns about sovereign debt, regulatory changes, and increased competition, 2011 was a record year for clean technology deployments and I believe 2012 will be even a better year as capital flow increases and emerging dynamics continue to make the case for clean technology as a worthwhile industry. From energy, to materials, to natural resources, and
even governmental and regulatory action, developing clean technology is a mindset that a host of players are caught up in. And one issue that is frequently misunderstood is the utter scale and pervasiveness of what this area encompasses. To put it simply, clean tech is in play virtually everywhere that matters (e.g. water, smart or renewable materials, clean transportation, electric
vehicles, energy storage, etc.)
Energy issues do not seem to ever go away. Today, there is a lot of regulatory action which is setting out with the goal of correct arbitrage and imbalances between technological development and commodity pricing (think of the corn ethanol subsidy/drawdown). It serves as an impetus
for new tech growth, and that is what is important here. Appropriate regulatory action is certainly not slowing down development, as clean tech is also a politically popular and viable economic movement.
As I have said before, this is a different animal that what we saw in the 90s with the dot-com era (high initial capital infusion followed by a network of low cost start-ups to develop value). Rather, the clean tech industry is one that driven by “tech innovation AND implementation.” That is to say – the dissemination of innovative technology on a broad scale and the ability to ramp up production and utilization sooner rather than later. It is important to balance that point by saying that technology is the driving concern here, and a capital-intensive asset-driven
business is not. Technology developers should be implementing strategies which allow them to advance their developments with lighter asset burdens. Partnerships with manufacturers and high-infrastructure companies while focusing on research and development is a smart play – one which will see faster commercial realization. Once again, a savvy industry focused investor (e.g. specialty venture capital or private equity investment firms) should understand the difference of “asset plays vs. new technology play” and consider review both the immediate capital cost of deployment of a new technology as well as the long-term cash flows and liabilities that can be inherent in such investment consideration.
Nowhere is the implementation need more conspicuous than in sustainable and renewable energy. Traditional energy sources, especially fossil fuels, are creating incentives for their own replacement – both economic and environmental. To scale this sector to the point of wholly replacing traditional energy is far from a realistic proposition in the foreseeable future. What is important at the present moment is to scale deployment of new energy technology while reducing associated costs. The goal is to grow an important supplement to traditional energy, which will mitigate its costs. We are seeing this more every year (think of growth in wind and solar, as examples). Efficiency is another key theme in energy – one that can be addressed by clean tech advancement (but which necessitates the incentives to do so). Regulators can play an important role here. Certainly one of the biggest areas for clean tech development moving forward is powered transportation. Here we see some of the greatest energy consumption (again, particularly fossil fuels) coupled with high environmental impact. This is particularly true for emerging markets, where we see exploding industrialization and associated demand. The impact of these areas cannot be ignored. Much can be done to improve the industry on a technological basis. Fuels, materials, drivetrains, and motors are all components that are ready for innovation. Again, incentives must be in place.
The central theme of my view on clean technology is that it’s an expansive industry, which will provide consistent economic development opportunities moving ahead and chemical and specialty materials industry players are at the forefront of this movement. An innovation in “business of chemistry” could translate into an innovation for “clean technology industry”, and vice versa. What are you views?
Tuesday, February 21, 2012
View on Merger and Acquisition Landscape Q1 2012
2011 was an interesting period for M&A. The first half of the year saw the bulk of activity, with total global deal volume of about $1.27 trillion, benefitting from a better credit outlook and accelerating economic recovery. The second half of 2011 slowed down for just $875 billion according to Bloomberg, with an overall y-o-y deal volume growth of about 9%. European debt worries and macroeconomic issues, like the natural disaster in Japan, were contributing impediments. Despite these hurdles, however, 2011 was a fairly strong year for M&A.
Where does this leave us for 2012? There is a lot to consider, but the overall outlook is for another robust year. The biggest challenge currently, and one that U.S. firms are monitoring closely, is the European debt crisis, which poses some systemic concerns for the coming year. European problems could become American problems if Europe falls into a recession. U.S. exports are not currently growing, and a European downturn could exacerbate this if demand for U.S. products drops.
Higher oil prices are another factor which is holding the U.S. back from stronger GDP growth. Q4 2011 alone saw crude oil prices jump nearly 25% over the previous quarter. Turbulence in producing countries like Libya and increasing demand in China and other emerging markets are the culprits.
The American housing market is still in a slump. Mortgage rates are extremely low but potential buyers are wary of further drops in home value. There are still a lot of inexpensive homes on the market which means less new construction. One piece of good news here is that foreclosure saw a sharp decline last year.
Unemployment is another headline issue for the U.S. economy. While joblessness seems to be improving at a modest rate, underemployment is actually increasing according to Gallup, showing that more people have given up looking for work or have taken substandard positions. Faltering job growth has been a persistent remnant of the fading recession. We are still experiencing unemployment over 8% after 10 consecutive quarters of GDP growth. But don’t be put off by these difficulties. There is plenty to be enthusiastic about, and 2012 looks to be busy for M&A. To begin with, there is upwards of $500 billion in dry powder that is expiring soon, so financial sponsors should be chasing targets very aggressively. Lending markets are
looking more attractive, as well, particularly for larger firms with lower risk
profiles. Cash is available.
2011 also saw better U.S. real GDP growth rates with each passing quarter. Q4 ended with the fastest growth rate since early 2010. And consumer spending (one the chief drivers of our economy) jumped to 4.4% growth over 2.7% in Q3. This is the fastest pace in over five years. Manufacturing is picking up speed and U.S. economic recovery is accelerating.
Prospects in the middle market are particularly promising, and this is where the action is. The lower middle market is most active. 79.5% of middle market deals in 2011 were under $100 million. Most of these deals are being done in cash. Total enterprise value to trailing 12 month EBITDA ratios are also on the rise in the middle market: averaging 7.6 in 2009, 8.6 in 2010,and 9.2 last year. Higher valuations are coming in the wake of higher corporate cash reserves, suppressed interest rates, and more M&A activity.
The middle market is particularly active in the private equity segment, as well. In the first half of 2011, 75% of deals in PE were valued under $250 million. Deals under $500 million made up nearly 80% of deal flow for the year. Much of the deal-making here is in acquisitive growth (making up as much as 50% of PE acquisition in 2011). Business products and services was the most active industry segment for private equity, while the energy sector saw a drawdown, particularly in Q4.
Please feel free to review “M&A Outlook 2012”:
http://www.slideshare.net/ennovance/ma-outlook-2012
Where does this leave us for 2012? There is a lot to consider, but the overall outlook is for another robust year. The biggest challenge currently, and one that U.S. firms are monitoring closely, is the European debt crisis, which poses some systemic concerns for the coming year. European problems could become American problems if Europe falls into a recession. U.S. exports are not currently growing, and a European downturn could exacerbate this if demand for U.S. products drops.
Higher oil prices are another factor which is holding the U.S. back from stronger GDP growth. Q4 2011 alone saw crude oil prices jump nearly 25% over the previous quarter. Turbulence in producing countries like Libya and increasing demand in China and other emerging markets are the culprits.
The American housing market is still in a slump. Mortgage rates are extremely low but potential buyers are wary of further drops in home value. There are still a lot of inexpensive homes on the market which means less new construction. One piece of good news here is that foreclosure saw a sharp decline last year.
Unemployment is another headline issue for the U.S. economy. While joblessness seems to be improving at a modest rate, underemployment is actually increasing according to Gallup, showing that more people have given up looking for work or have taken substandard positions. Faltering job growth has been a persistent remnant of the fading recession. We are still experiencing unemployment over 8% after 10 consecutive quarters of GDP growth. But don’t be put off by these difficulties. There is plenty to be enthusiastic about, and 2012 looks to be busy for M&A. To begin with, there is upwards of $500 billion in dry powder that is expiring soon, so financial sponsors should be chasing targets very aggressively. Lending markets are
looking more attractive, as well, particularly for larger firms with lower risk
profiles. Cash is available.
2011 also saw better U.S. real GDP growth rates with each passing quarter. Q4 ended with the fastest growth rate since early 2010. And consumer spending (one the chief drivers of our economy) jumped to 4.4% growth over 2.7% in Q3. This is the fastest pace in over five years. Manufacturing is picking up speed and U.S. economic recovery is accelerating.
Prospects in the middle market are particularly promising, and this is where the action is. The lower middle market is most active. 79.5% of middle market deals in 2011 were under $100 million. Most of these deals are being done in cash. Total enterprise value to trailing 12 month EBITDA ratios are also on the rise in the middle market: averaging 7.6 in 2009, 8.6 in 2010,and 9.2 last year. Higher valuations are coming in the wake of higher corporate cash reserves, suppressed interest rates, and more M&A activity.
The middle market is particularly active in the private equity segment, as well. In the first half of 2011, 75% of deals in PE were valued under $250 million. Deals under $500 million made up nearly 80% of deal flow for the year. Much of the deal-making here is in acquisitive growth (making up as much as 50% of PE acquisition in 2011). Business products and services was the most active industry segment for private equity, while the energy sector saw a drawdown, particularly in Q4.
Please feel free to review “M&A Outlook 2012”:
http://www.slideshare.net/ennovance/ma-outlook-2012
Sunday, February 19, 2012
Perspective: The Marcellus Shale Boom as an Impetus for Technology Development
Strengthening domestic energy production has been a very hot topic for some time now, and for good reasons, such as drilling affect in the communities and environment, opportunities and consequences of developing an economy. American dependence on crude oil reserves from traditional foreign sources has become a more precarious situation with diminishing supply, skyrocketing demand, and geopolitical instability. To meet the energy needs of coming generations the charge is being led to bolster U.S. production, particularly with alternate and non-traditional energy sources. The natural gas extraction in the Marcellus Shale is an extremely valuable asset to petrochemical, which can convert ethane into a feedstock for their manufacturing processes in the downstream of the value-chain. Many chemical related business could indeed achieve lowest cost position in the world; thus strengthening our economic engine. Remarkably, many of the concerns and challenges associated with “Marcellus Shale” could be solved thorough chemistry related innovations and technology development.
One of the biggest windfalls for American energy in recent years has been the discovery of expansive natural gas reserves in the Marcellus Shale region of the Northeastern United States. Many of the most recent estimates peg recoverable gas supplies in the Marcellus at over 150 trillion cubic feet, with some experts suggesting a far more extensive untapped supply. Of course, ongoing technological improvements in extraction methods continue to grow this figure. Much of the gas is found in shale deposits at depths of 7,000 to 10,000 feet which, in the past, made for a prohibitively high cost exploration and removal process. Areas which were not commercially viable for gas wells fifteen years ago are now able to be exploited thanks to advances like directional drilling, where bore holes can penetrate laterally at the target depth to magnify accessibility to local gas. As the promise of unlocking a torrential supply of domestic energy in close proximity to the demand-intensive regions in the Eastern U.S. has become a reality, both public and private sector investment has surged.
And with more R&D going into extraction methods, we have seen improvements in environmental impact as well as increased supply. The primary and most efficient means of natural gas extraction in the Marcellus region is hydraulic fracturing (“fracking”). Hydraulic fracturing is actually a well-established technology, coming into broader commercial use in the mid-20th century. Recent years, however, have seen an explosion in new fracturing technology. According to IP Spotlight, the U.S. Patent and Trademark Office between January 2008 and August 2011 received more than 1,100 U.S. based patent applications which mention fracturing. This is an 80% increase over the previous 3-1/2 year period. This jump is a product of the shale gas boom – one that produced 140,000 jobs and more than $11 billion in value added in Pennsylvania alone in 2010.
On a basic level, fracking involves boring deep into shale formations and using very high pressure fluids to create fractures (or expand existing fractures) in the rock. This releases the trapped hydrocarbons for extraction. There has been no shortage of speculation as to the impact of the traditional fracturing process on local communities and water supplies, and the environment as a whole. These effects must necessarily be left to the experts to determine. What is certain now is that shale gas is a mainstream concept and a booming business, and the U.S. stands to benefit from better access to cleaner fossil fuels. What matters now to business is how they can find the safest way to exploit this resource without missing the boat. The most effective way to reach that goal is through innovation and investment in new technology.
And the more recent proliferation of the extraction process, investment, research, and regulatory pressure seems to be generating plenty of tech growth and secondary industry. Shale gas is a rapidly changing landscape. Areas like western Pennsylvania and Ohio are seeing new construction for wastewater treatment plants which process used fracturing fluids from gas wells. The plants typically operate under permits from state environmental agencies, which impose standards for use of new filtration and treatment technology. A competitive field of energy producers is striving to be the leader in the region by stepping up innovation. Chesapeake Energy, one of the largest gas producers, recently announced a new process which will allow used fracturing fluids to be recycled for new drilling at up to 100% efficiency, reducing both the burden on local water supplies and the need for wastewater processing installations. A new type of fracking method is also emerging, development from oilfield and shale gas giants like Halliburton and Schlumberger. “Super fracking” is based on several improvements to the existing process. New materials are being used to hold open shale cracks at the site of the fracture which allows a greater flow of hydrocarbons for a longer period of time. New types of pipe fittings for wells are making extraction much less time intensive and sparing about half of the surface water needed in the traditional process. And traditional plastic “valve” materials which, in the past, have had to be recovered in an expensive process after drilling are being replaced with new disintegrating materials. A Texas company called Jadela Oil is even experimenting with a waterless fracking process.
Natural gas itself is cleaner than other hydrocarbon fuels, which makes growing supply even more attractive and conducive to new tech. Burning natural gas for heat energy emits 30% less carbon dioxide than petroleum and 45% less than coal. Nitrogen oxides are reduced by two-thirds and sulfur oxides by nearly 99% compared to coal combustion. A rapidly growing supply of a cleaner hydrocarbon fuel is spurring new technology. Research is progressing in fuel cell technology which could expand on already robust electricity generation applications. Transportation is another promising sector. The U.S. is seeing growing fleets of government, public transit, and shipping vehicles powered by compressed natural gas. The Department of Energy speculates that a switch to natural gas in the U.S. transportation segment would reduce carbon-monoxide emissions by at least 90%, carbon-dioxide emissions by 25% and nitrogen-oxide emissions by up to 60%. There are even expectations to use natural gas in aviation, with estimates of 60% improvement in efficiency while decreasing harmful emissions.
Technology and innovation is developing very rapidly and is touted to present serious cost savings, as well as a reduced environmental impact. Developments like these are interesting, but also raise some important questions. In such a rapidly evolving business, what will gas producers have to do to stay relevant? The next few years should prove to be very exciting, as new technology and investment fleshes out alongside a developing regulatory scheme and a better understanding of the industry.
Chemistry is necessarily at the forefront of tech expansion stemming from the Marcellus boom because the natural gas industry is chemical intensive. As natural gas becomes more prevalent, the broader chemical industry is presented with a great deal of opportunity. It will continue to benefit from access to clean, domestic energy, as well as the demand for innovative technology. Recycling and wastewater treatment is highly dependent on chemistry, as are the new technologies in extraction. The high ethane content in Marcellus Shale gas has led to plans for ethane crackers in the region. Renewable Manufacturing Gateway and Aither Chemicals recently reached a deal for a $750 million petrochemical facility which will use shale gas as its feedstock. Clearly, energy development is a sector where chemistry continues to be relevant and our success in energy independence or economic prosperity is still INNOVATION!
One of the biggest windfalls for American energy in recent years has been the discovery of expansive natural gas reserves in the Marcellus Shale region of the Northeastern United States. Many of the most recent estimates peg recoverable gas supplies in the Marcellus at over 150 trillion cubic feet, with some experts suggesting a far more extensive untapped supply. Of course, ongoing technological improvements in extraction methods continue to grow this figure. Much of the gas is found in shale deposits at depths of 7,000 to 10,000 feet which, in the past, made for a prohibitively high cost exploration and removal process. Areas which were not commercially viable for gas wells fifteen years ago are now able to be exploited thanks to advances like directional drilling, where bore holes can penetrate laterally at the target depth to magnify accessibility to local gas. As the promise of unlocking a torrential supply of domestic energy in close proximity to the demand-intensive regions in the Eastern U.S. has become a reality, both public and private sector investment has surged.
And with more R&D going into extraction methods, we have seen improvements in environmental impact as well as increased supply. The primary and most efficient means of natural gas extraction in the Marcellus region is hydraulic fracturing (“fracking”). Hydraulic fracturing is actually a well-established technology, coming into broader commercial use in the mid-20th century. Recent years, however, have seen an explosion in new fracturing technology. According to IP Spotlight, the U.S. Patent and Trademark Office between January 2008 and August 2011 received more than 1,100 U.S. based patent applications which mention fracturing. This is an 80% increase over the previous 3-1/2 year period. This jump is a product of the shale gas boom – one that produced 140,000 jobs and more than $11 billion in value added in Pennsylvania alone in 2010.
On a basic level, fracking involves boring deep into shale formations and using very high pressure fluids to create fractures (or expand existing fractures) in the rock. This releases the trapped hydrocarbons for extraction. There has been no shortage of speculation as to the impact of the traditional fracturing process on local communities and water supplies, and the environment as a whole. These effects must necessarily be left to the experts to determine. What is certain now is that shale gas is a mainstream concept and a booming business, and the U.S. stands to benefit from better access to cleaner fossil fuels. What matters now to business is how they can find the safest way to exploit this resource without missing the boat. The most effective way to reach that goal is through innovation and investment in new technology.
And the more recent proliferation of the extraction process, investment, research, and regulatory pressure seems to be generating plenty of tech growth and secondary industry. Shale gas is a rapidly changing landscape. Areas like western Pennsylvania and Ohio are seeing new construction for wastewater treatment plants which process used fracturing fluids from gas wells. The plants typically operate under permits from state environmental agencies, which impose standards for use of new filtration and treatment technology. A competitive field of energy producers is striving to be the leader in the region by stepping up innovation. Chesapeake Energy, one of the largest gas producers, recently announced a new process which will allow used fracturing fluids to be recycled for new drilling at up to 100% efficiency, reducing both the burden on local water supplies and the need for wastewater processing installations. A new type of fracking method is also emerging, development from oilfield and shale gas giants like Halliburton and Schlumberger. “Super fracking” is based on several improvements to the existing process. New materials are being used to hold open shale cracks at the site of the fracture which allows a greater flow of hydrocarbons for a longer period of time. New types of pipe fittings for wells are making extraction much less time intensive and sparing about half of the surface water needed in the traditional process. And traditional plastic “valve” materials which, in the past, have had to be recovered in an expensive process after drilling are being replaced with new disintegrating materials. A Texas company called Jadela Oil is even experimenting with a waterless fracking process.
Natural gas itself is cleaner than other hydrocarbon fuels, which makes growing supply even more attractive and conducive to new tech. Burning natural gas for heat energy emits 30% less carbon dioxide than petroleum and 45% less than coal. Nitrogen oxides are reduced by two-thirds and sulfur oxides by nearly 99% compared to coal combustion. A rapidly growing supply of a cleaner hydrocarbon fuel is spurring new technology. Research is progressing in fuel cell technology which could expand on already robust electricity generation applications. Transportation is another promising sector. The U.S. is seeing growing fleets of government, public transit, and shipping vehicles powered by compressed natural gas. The Department of Energy speculates that a switch to natural gas in the U.S. transportation segment would reduce carbon-monoxide emissions by at least 90%, carbon-dioxide emissions by 25% and nitrogen-oxide emissions by up to 60%. There are even expectations to use natural gas in aviation, with estimates of 60% improvement in efficiency while decreasing harmful emissions.
Technology and innovation is developing very rapidly and is touted to present serious cost savings, as well as a reduced environmental impact. Developments like these are interesting, but also raise some important questions. In such a rapidly evolving business, what will gas producers have to do to stay relevant? The next few years should prove to be very exciting, as new technology and investment fleshes out alongside a developing regulatory scheme and a better understanding of the industry.
Chemistry is necessarily at the forefront of tech expansion stemming from the Marcellus boom because the natural gas industry is chemical intensive. As natural gas becomes more prevalent, the broader chemical industry is presented with a great deal of opportunity. It will continue to benefit from access to clean, domestic energy, as well as the demand for innovative technology. Recycling and wastewater treatment is highly dependent on chemistry, as are the new technologies in extraction. The high ethane content in Marcellus Shale gas has led to plans for ethane crackers in the region. Renewable Manufacturing Gateway and Aither Chemicals recently reached a deal for a $750 million petrochemical facility which will use shale gas as its feedstock. Clearly, energy development is a sector where chemistry continues to be relevant and our success in energy independence or economic prosperity is still INNOVATION!
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