Special feature: Private equity ups stakes for skills

17 July 2014 17:10  [Source: ICB]

Global merger and acquisition (M&A) activity in the chemical sector is expected to hit a four-year high this year as companies seek to reshape and restructure. Valuations and multiples are high and funding available, if still a little restrictive: it is a competitive arena once more.

But while the majority of deals are strategic, transacted between chemical companies, private equity is the driving story for chemicals M&A in 2014.


 Managers are being asked to deliver enhanced skill sets by private equity owners

Copyright: RexFeatures

The recent ICIS M&A listing of completed deals for 2013 showed that 10 out of 98 transactions involved private equity buyers. Those 
active last year include SK Capital Partners, 
Cinven, Invest AG, Cathay Investments, H2 
Equity Partners, Arsenal Capital and Advent 
International. A preliminary count so far in 2014 has private equity buyers in no less than a quarter of the 48 deals announced.

There are huge implications for businesses as they shift from strategic to private equity ownership. The more aggressive, hands-on style of management from the new financial owners can have a profound impact on the type of executives required and approaches to talent management across the business.

“The type of talent that private equity firms are attracting to these ventures needs to have more intensity around change management and to be somewhat more results-oriented than has been the norm in the industry,” 
explains Andy Talkington of US-based executive search firm CTPartners.

“Whenever private equity gets involved with a business, we see a demand for a ‘new’ type of senior management team possessing a high level of multi-faceted skills.”

The growing number of private equity deals is keeping the talent advisors busy for a number of reasons, he adds. “Private equity firms are looking for the right personnel to help win the deal, and then seeking to put the right leadership team in place on completion.”

But, as hold times for private equity investments have continued to be longer than in the pre-2007 era, they are also having to keep up the momentum during the period they are upgrading the company,” he explains.

And, when private equity firms come to realise their investment through an IPO or other liquidity event, there is a need to build up the non-executive board and bring in a management team with a set of skills appropriate to running a public company.

CTPartners’ Jim Aslaksen adds that the 
private equity talent profile for the chemical sector targets senior management with a higher degree of financial astuteness than might typically have been the case in a stock-
market-listed company.

“There’s also a focus on finding senior managers with a very deep understanding of the day-to-day aspects of the business – deeper 
understanding of feedstocks, cost of feedstocks, sourcing of feedstocks, and so on. Private equity firms are looking for a level of understanding, expertise and change intensity that many managers in the industry don’t have,” he said.

Talent assessment is a key issue here, says Talkington. Some private equity firms will keep the acquired management team in situ; others will come in and immediately change the CEO, CFO and senior divisional heads. If the original team is kept on, he adds, there will be close monitoring of performance metrics and decisions made after, say, six months as to whether the right people are in place and which managers are not up to scratch.

It is not just at the top amongst the senior management team that the differences in target talent profile emerge. Mid-level management may also need to be upgraded. One reason for this is that many major chemical companies use a matrix management approach which does not give profit and loss (P&L) responsibilities to managers at an early enough stage in their careers to allow them to broadly develop the skill sets required by private equity owners.

As a result, says Talkington, it may be that only senior managers have the experience and skills effectively to utilise analytics in the ways required by these demanding owners.

High demand for skills
The demand for top-quality management 
talent in the chemical industry is very high and will only continue to increase because of private equity’s involvement. There is currently a strong demand/supply imbalance, because there are a relatively limited number of senior executives who possess the sophisticated management expertise, experience and change-orientation skills necessary to meet private equity’s target talent profile.

The style and level of experience of the sought-after key executives are both different, says Aslaksen. Private equity firms are looking for managers with a good track record of success who can operate within looser structures, with good decision-making skills and can surround themselves with action-oriented individuals.

Performance levels need to be higher as roles are more demanding and contact with the owners is often more frequent and intrusive, as they take a close interest in the running of the business. As a result, says Talkington, you have to look at the comfort levels of individuals and see that they are capable of performing with such a high level of scrutiny.

Thanks to a number of these current trends, private equity firms are recognising that only the best teams are good enough to meet today’s challenges, notes Talkington. Among other reasons, this is because debt remains constrained so these deals tend to consume more equity than has previously been the case. With more equity involved, each deal must be more effectively managed and more aggressively led by the strongest possible management team in order to provide investor returns.

Aslaksen adds that CTPartners is seeing a cascading effect in terms of private equity’s impact on the overall industry’s need for talent. “The private equity firms look to bring in the absolute best quality senior management team (with highly sophisticated strategic, 
financial, and operational management skills) and then the pressure is on for that senior management team to upgrade talent throughout the organisation. This impacts what the competition needs to do as well.”

The team below senior management needs stronger, sharper skills also, he adds. “The talent implication at all key levels is this: people need the sophistication to understand what the business needs to achieve; and to be able to act quickly, very quickly, in terms of responding and making whatever shifts are necessary.”

A phrase CTPartners likes to use when describing this target talent profile is a “bias for action.” Another intangible that is highly valuable is “the tolerance for, and ability to deal with, ambiguity.”

The market for talent is thus very competitive tight now, says Aslaksen. “If an executive can achieve a high profile success in a private equity role, he or she will be highly sought after – especially if they have shown they have grown the business and the bottom line.”

Hedge fund impacts
In addition to the strong impact from private equity activity, the chemical industry is also being impacted by hedge funds and activist shareholders.

As one might expect given their activities in other industries, explains Talkington, hedge funds and activist shareholders are looking at the large chemical companies. These tend to have complex sets of businesses tied to complex legacy structures and the hedge funds are putting pressure on boards and CEOs to look for more aggressive ways to restructure those businesses to create shareholder value.

“That tends to lead to the same intensified focus on performance that we’ve seen with 
private equity firms,” 
he said. It creates a ­similar demand for ­high-­performance and change-oriented senior management teams, who will be able to come into these organisations and quickly achieve big changes, higher efficiencies, and target results. Recent notable examples include Dow Chemical, Ashland, DuPont, Air Products, all of which are looking at selling or splitting off businesses as a result of pressure to improve performance.

At Air Products, activist hedge fund Pershing Square last year forced management to take on additional board members, one of which, Rockwood Holdings’ chairman and CEO Seifi Ghasemi, has just been appointed to replace outgoing CEO John McGlade, who is retiring. Ghasemi, who is 69, will serve for five years initially and was previously a board member of UK gases company BOC.

Dow has attracted the attention of activist Dan Loeb and his hedge fund Third Point, which is publicly pushing for Dow to split its petrochemicals and specialty chemicals businesses. Dow is already looking to divest businesses which will bring in pre-tax proceeds of $4.5bn-6bn, including its chlorine and epoxy resins units.

CTPartners expects that the demand/supply imbalance will only become more severe, since there is a limited supply of senior executives who are best prepared to step into these roles in the chemical industry and achieve the results private equity firms, hedge funds and activist shareholders demand.

“This will require organisations to rely upon creative search strategies and a broad net in order to put the right executive in the chair,” concludes Aslaksen. "As seasoned executives continue to retire at an accelerated rate, the need for well-planned succession is essential to ease talent imbalance.”

By: John Baker
+44 20 8652 3214

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