Green Recovery Investments 376 views

Written by Michelle Lynch for CCD Partners
 

Evidence is mounting that a “green recovery” will be key to getting the economy back on track in the aftermath of the COVID-19 pandemic, focused on investment in the production of sustainable chemicals, materials, energy carriers and power systems.

 
There is a growing consensus that the “green recovery” will be key to getting the economy back on track in the aftermath of the COVID-19 pandemic. Researchers from Oxford University, UK recently published a study which pointed to green projects outperforming less sustainable options such as airline industry bailouts. 
 
Subsequently in conjunction with the International Monetary Fund (IMF), the International Energy Agency published its Sustainable Recovery Plan covering the period 2021-2023. 
 
The plan sets out three key aims: boosting economic growth, creating jobs, and building more resilient and cleaner energy systems. According to these reports, “building back better” will require investment in the production of sustainable chemicals, materials, energy carriers and power systems. 
 
Within those categories two areas will be considered in more detail here: i) hydrogen and ii) carbon dioxide capture, utilisation and storage (CCUS). Together these are attracting billions of dollars in investment. 
 
The territory is complex to navigate as there are many new innovative concepts for each, and a detailed understanding is required of the technologies and markets to make sound investment decisions. Some of the issues that need consideration are outlined below. 
 
1. Hydrogen. 
 
The majority of hydrogen is used as a feedstock to make chemicals and in the production of transportation fuels and other petroleum refinery products. More recently it has been employed for hydrogen fuel cells and this technology has moved from being a limited method of stationary source power to being a more mainstream transportation fuel in buses and trucks, mainly in China. Hydrogen fuel cells are now also in a small but growing number of passenger cars e.g. the Toyota Mirai and the company wants to make at least 1 million units by 2030. Hydrogen has been made for decades using processes known as “gasification” and “steam reforming” using coal and natural gas feedstocks. 
 
The production of hydrogen results in carbon dioxide (CO2) emissions. Currently 99% of hydrogen is made in this way and only 1% from a green method – water electrolysis. However, there is a strong and growing desire to decarbonise hydrogen production. In May this year, a group of electricity companies and industry associations including EDP, Enel, Iberdola, MHI Vestas, Orsted and SolarPower Europe launched a campaign called “choose renewable hydrogen” pushing the European Union to make renewable hydrogen a priority in its pandemic recovery plan. 
 
The options going forward to decarbonise hydrogen production include: use of a biobased feedstock e.g. biomass or biogas – Hazer Group in Australia is moving forward on this technology. Newer more efficient reforming methods such as autothermal reformers (ATR) and gas heated reformers (GHR) are in development, for instance at UK-based Johnson Matthey and partners. has These techniques would need to be combined with CCUS to be carbon neutral. There are also methods wihich avoid the generation of CO2 in the first place such as water electrolysis or methane pyrolysis. ITM Power, UK, Hydrogenics in Canada and a few others have water electrolysis technologies. Conversion of methane via a route which yields CO2-free hydrogen is seen as a “holy-grail” chemistry and many companies and research groups are working on such methods. Methane pyrolysis, for instance, takes natural gas and splits it into hydrogen gas and a useful solid carbon product such as carbon nanotubes (CNT). Gazprom in Russia is developing a methane pyrolysis method along with another route called methane adiabatic conversion (MAC). It is also working on its own water electrolysis technology. IHI Japan and CNRS France, TNO in The Netherlands and a German consortium based on BASF, Linde, and ThyssenKrupp are working on similar concepts for CO2-free methane.
 
In choosing a technology to invest in – one needs to be able to navigate the technology roadmap – with novel efficient reformers and bio-based feedstocks likely making an impact in the shorter term and a mixture of reforming with CCUS, water electrolysis in the medium-term and methane splitting and adiabatic conversion in the longer term. 
 
There is the possibility that one of these earlier stage technologies could make a significant breakthrough and leapfrog other concepts. 
 
Having a portfolio of investments across the different technology types may be a wise choice. 
 
2. CCUS. 
 
A key method in development for decarbonising chemicals production is to collect the point source CO2 emissions and either use them as a feedstock in place of virgin fossil fuels or to bury them in huge underground caverns on land or at sea. The benefit of the utilisation “U” part of the CCUS equation is that it allows the capture process to be monetised. For this reason, much of the CO2 currently captured is used in enhanced oil recovery (EOR), but there are many other options too. There are already technologies for making building materials such as cement, concrete and aggregates by turning CO2 back into solid carbonates – e.g. Carbon8 in the UK, Solidia, USA. In addition, it can be turned into a range of plastics – Econic Technologies, UK has a process for making CO2 into a feedstock for polyurethanes for instance and Newlight Technologies, USA ferments CO2 to make biodegradable polymers. 
 
Fuels are a key area of interest for CCUS – with many companies including Carbon Recycling International in Iceland (CRI) having a process to make CO2 into methanol for fuel. Breathe Industries in India also has such a process. Methane is another key target for CCUS and utilises “Power-To-Gas” technology by combining waste CO2 with electrolyser hydrogen in a process called “methanation”. Sunfire GmbH in Germany making significant headway with its version of this process. Specialty chemicals are another possibility. US-based Lanzatech takes off-gases from industrial plants such as steel factories and breweries and ferments them to make specialty alcohols as well as aviation fuels using its CarbonSmart™ platform. A start-up in Iceland – Gefn-ehf uses a set of reactors that look much like rubik’s cubes to pipe in a range of waste products from the oil and fat industry along with waste CO2 to make renewable chemicals such as glycerol carbonate for industrial solvents, household and personal care products. 
 
A key new technology for CCUS aims to remove CO2 from the air to bring the level back down to safe levels below 350 ppm. Climeworks in Switzerland, Carbon Engineering in Canada and Global Thermostat in the USA all have “direct air capture” (DAC) processes. DAC is currently much more expensive than CCUS and many researchers are looking to improve the DAC sorbent, which sits at the heart of the process. ExxonMobil is partnering with US-based materials manufacturer Mosaic Materials to come up with a metal organic framework (MOF) sorbent to improve the DAC process. Monetising DAC via CCUS is an important strategy and partnerships are being formed e.g. between Climeworks and Sunfire to make renewable methane. 
 
The CCUS sector is an ideal territory for investors and likely to become even more so over the next decade. Success of CCUS is based around partnerships along the supply chain from the emitter to the end-use application manufacturer. Investors can be guided in part by the presence of oil and gas majors, and large industrial majors within a start-up’s consortium, although it may be worth investing earlier for the most promising technologies. 
 
Dr Michelle Lynch offers consulting projects exclusively aimed at reducing the ecological footprint of chemicals, fuels, energy and power systems across their full lifecycles. 
 
She offers support to start-ups, SME’s, investors, multinational companies, government funding arms, and universities. Michelle runs her business out of London, UK and is passionate about helping technology developers to realise the goal of NetZero via high impact sustainable technology solutions. 

PE Explained 393 views

Written by CCD Partners
 

PE Explained: How it works, when to use it, and the 3 crucial calculations to understand

As the owner of a private company, you have likely considered ways to accelerate the growth and increase the value of your business. 
 
You may have explored fundraising routes to scale up output, strategic partnerships to widen distribution, or looked at ways to diversify and differentiate your commercial offering.  
 
The possibility of a majority investment from private equity (PE) may also feature among your options, but – like many business owners – you may have questions around the details of how such a partnership would work in practice.
 
CCD Partners meets regularly with private company owners who are curious to evaluate how a collaboration with PE could impact their business, as well as seeking to better understand the financial mechanics of such an investment. 
 
Typical questions include:
  • How does the PE model work?
  • What value does PE provide, beyond just cash?
  • What results / return are they targeting, and do I benefit?
  • How can I get the best deal?
This article is a walk-through of the basics of PE – designed to give private owners an idea of the types of questions they should be asking as they explore the option of working with PE. 
 
 
How PE works and when to use it
 
The underlying model of PE is relatively straightforward. They aim to buy low and sell high to realise gains for their own investors and themselves, typically over a 5-10 year time horizon.
 
Target returns and sample deal structure:
 
Although it can vary substantially, PE houses typically target a 3-10x overall return on their investments – equivalent to 20-40% per annum (compared to ~10% average stock market returns).
 
A typical deal might look like this:
  • A PE house values a company at £20m and acquires 75% from the owner for £15m. 
  • The PE house invests capital and provides expertise to help management significantly increase the value of the company, eventually selling for £120m. 
  • The original owner’s remaining 25% therefore nets them £30m – in addition to the £15m they had already banked on the initial transaction.
  • The PE firm has invested £15m (plus any investment capital), and sold for £90m, i.e. they have achieved an overall return of up to 6x.
As can be inferred from this example, the PE model is most effective for companies with significant value-creation potential that can be unlocked with an injection of capital and expertise. i.e. if your company could change from a £20m business to a £100m+ business in 4-5 years, and all this takes is capital and expertise, it could very well be an excellent option to consider. 
 
For private owners, what matters most (economically at least) in such a scenario is:
  • how much the PE house pays on entry (e.g. the £15m plus 25% equity), and 
  • how much might be achieved for the business on exit (e.g. the £120m).
 
The 3 crucial PE calculations
 
Once invested, the PE house will normally do a pretty good job maximising the chances of a high valuation on exit. 
 
The most important thing for private owners considering the PE route is to secure a good deal on entry.
 
Success here typically means: 
 
a) securing a high level of cash out, and 
b) retaining a healthy % of the equity.
 
How much any given PE house will pay you in cash and equity on entry is typically determined by the “3 crucial calculations” mentioned in the title. 
 
Understanding these 3 calculations is vital for private owners preparing to enter discussions with PE. 
 
This is a broad topic, but we have attempted to distill it down to PE’s top 3 considerations under each heading, as follows:
 
1. Exit Valuation – What is the expected value in 5 years’ time?
  • Market trend / customer pull – What is the current and projected future demand for the company’s product or service?
  • Competitive advantage – Do clients want the company’s specific service or product over other options? 
  • Exit options – How easily will the PE house be able to sell the company at the end of their investment lifecycle?
2. Journey Risk – How risky they think it will be (and how long) to get from entry to exit?
  • Organic factors – Does the journey require organic growth? How will that be achieved? What does it require? How risky is it? 
  • Inorganic factors – Does the journey require bolt-on or other acquisitions? How will that be achieved? What does it require? How risky is it?
  • Leadership – The PE house will need to believe in and trust the management team, whether that includes existing management or new recruits.
3. Entry Price – How much they have to pay to persuade you to sell to them? (Crucially, this is not the same as their valuation of the company).
  • Presented value – Does the PE house think you know the full transformative potential of your business – For instance, if you forecast your business to reach £100m in value but they think £400m is possible, would they tell you?
  • Data quality – Can they find any errors, risks, or concerns in your business plan (or your presentation of it) – If you agree a price of £20m but then a number of holes in your plan are discovered, even if these are not big value points, how much will they reduce the £20m? 
  • Other options – Do they think you have any other options – If they reduce their price by 20% would you still accept it? 
 
Optimal strategy – How to get the most out of PE 
 
Matched with the right company on the right terms, PE can unlock significant value. 
 
For private owners to fully participate in this value-creation requires an understanding of how PE houses approach investment opportunities and their rationale for both selecting and pricing investments.
 
Though by no means exhaustive, the below serves as a starting point for private owners looking to develop their own PE engagement strategy. 
 
1. Develop a PE-focused business plan, supported by:
    1. Market trend / customer pull data and rationale
    2. Competitive advantage data and rationale
    3. Exit options data and rationale
    4. Details of organic growth required
    5. Details of any corporate acquisitions required (if any)
 
A business plan specifically tailored to PE which demonstrates a detailed playbook for PE-backed value creation differs significantly from typical standalone corporate business plans. 
 
2. Have a top-notch leadership team in place, or at least available, preferably with:
    1. Prior (successful) experience with PE and M&A
    2. An amount of time in the business or engaged with the business
    3. All roles required for the business plan filled, or with detailed plans in place
 
Forward planning for the personnel involved in bringing the PE-backed growth plan to life is essential. Many PE houses do not like incomplete management teams, presenting a full management solution greatly widens the field of potential investors, which in turn greatly increases the potential pricing of any deal that might be secured.
 
3. Do your own due diligence:
    1. Collate and review all the documents PE would review in their due diligence process
    2. Build your business plan up from primary data that can be analysed and cut in multiple ways
    3. Make sure any “skeletons” are dealt with up front before pricing is agreed
 
Vendor due diligence not only protects business owners from surprises (and subsequent price negotiations) but also facilitates building an extremely credible thought-through business plan that investors can believe in. 
 
4. Run a professional process:
    1. Convince the PE firm that you know what you’re doing
    2. Use professional negotiators
    3. Use competitive tension
 
In any sale process format (from one-on-one to wide auctions), sellers are vulnerable to significant price reductions during late stages of due diligence and final pricing. The primary defences against this are 1) showing you can walk away to other options, 2) pointing to pre-agreed pricing mechanics and market norms, and 3) the threat of reputational damage (in the competitive world of PE it is advantageous to maintain a good reputation amongst the advisory community).
 
 
In short, if they want to avoid leaving significant value on the table, private owners should ensure they approach and engage PE with a well-defined strategy – one that protects their short and long-term interests and works to lay the foundations for a win-win partnership.
 
***
 
If you are a private company owner interested in the potential of private equity to unlock the transformative potential of your business, please contact CCD Partners for a confidential discussion. 
 
CCD Partners manages a network of regional, international, and sector-specialist investors in the chemicals and life sciences sectors, and works with business leaders planning for and securing investments that unlock the next chapter of their company’s growth.

ESG – An investment touchstone made real by Covid-19? 232 views

Written by Roger Green for CCD Partners

Could a renewed focus on Environmental, Social and Governance (ESG) be the start of a ‘green recovery’?

Ethics and economics have not always moved in lockstep in the world of business investment. 
 
This is set to change for good in the chemical industry with a renewed focus upon environmental social and governance (ESG) factors. There are two principal drivers of rapid change in the chemical industry, the first comes from a perhaps unlikely source: the Covid 19 pandemic. Whilst causing economic damage the crisis has unleashed a wave of government fiscal support and this concerted government action brings a greater ESG oversight than might be the case otherwise, with governments focusing on a green recovery (1) post Covid. A second, industry specific driver of change derives from a perceived weak performance, specifically in terms of carbon intensity and plastics waste, which pose an existential threat to sectors of the industry and make change an imperative. 
 
Ethical and ESG investments have outperformed the wider market in recent years(2), a trend that is both heartening to see and expected to continue. Indeed, if further evidence were needed, it appears that the converse applies. Taking the tobacco industry as an example of a sector which would fail most ethical screening tests, stable, often robust financial performance over the past three years, including great resilience during the pandemic, has been ‘rewarded’ with a near halving of enterprise value for a number of the majors.
 
Turning to the chemical sector, we see change afoot. Global majors are not always the most agile of corporations, however we should certainly take note of the announcements by Unilever and BP. Oil major BP set out an ambition of ‘net zero by 2050’ and consumer goods leader Unilever has pledged to replace all fossil carbon in its cleaning and laundry product formulations with renewable or recycled carbon by 2030. It is likely that these announcements will be looked back upon as the point of inflection at which the industry dynamic changed for all time.
 
As consumer sentiment swings relentlessly towards increased awareness of environmental performance, major corporations are enshrining these principles in their business objectives. It is therefore essential that chemical industry players and investors alike align business models with the changes that are set to sweep through the sector.
We can identify three key axes which are going to play a prominent role in the transformation of the sector, namely decarbonisation, biotransformation, and circularity. The themes are not exclusive; indeed, they are neatly circular themselves with biotransformation of (circular) waste leading to decarbonisation, for example.
 
At CCD Partners we have seen and increasing appetite for transactions built on sustainable technologies and some really exciting technologies built on biotransformation and decarbonisation.
 
Whilst there are no certainties in investment, catching the Zeitgeist of outstanding ESG credentials whilst swimming with the ‘green recovery’ tide provides a very sound foundation for success in the post-Covid era.
 
(2) Majority of ESG funds outperform wider market over 10 years. Siobhan Riding, Financial Times, June 13 2020.

The IM – An SME Seller’s Guide 289 views

Written by Matt Dixon for CCD Partners 
 
The creation of an Information Memorandum (IM) when selling a business can often be considered something of a formality – a pragmatic stepping-stone designed to introduce an opportunity and open dialogue with prospective buyers. 
 
In fact, the IM is a strategic document of vital importance – one that can have enduring impact on the pace, structure, and outcome of negotiations, anchoring the process and directly affecting the eventual sale price.
 
Based on decades of working with lower mid-market chemicals and life sciences businesses to achieve exits at market-beating valuations (often by more than 40%), and reviewing hundreds of IMs of varying quality on behalf of buyers and investors, the CCD Partners team shares its thoughts on creating successful sell-side materials:
 
Why IMs often fall short in the SME market 
 
Unlike bigger businesses where detailed vendor due diligence is common practice and teams of external advisers prepare highly detailed and relatively standard-format IMs, smaller businesses’ sale materials and, in particular, those prepared by DIY-sellers, are far more variable, often erring on the side of “less is more” and focusing on their own products and services rather than the value of the business as a whole to the potential buyer. At the same time smaller companies are often far less well understood than larger higher-profile companies – so, if anything, they need more, broader information in their IMs, not less.
 
The frustrating thing for us as advisors is that we see a lot of such DIY-seller IMs and we know the DIY-seller is unlikely to ever find out their IM has seriously undermined their position.  
 
Many buyers, who are often juggling multiple opportunities (often larger than the seller’s), will simply judge the IM on the basis of a cursory read and simply signal “no interest” without telling the seller that the IM failed to make clear why the buyer should be interested. 
 
Furthermore, such a DIY IM tells an interested, experienced buyer that the seller is inexperienced, so the buyer is emboldened to make unusually buyer-friendly demands or simply offer a lower price than they would be ultimately prepared to pay.
 
Getting it right 
 
An effective IM, therefore, addresses both of these problems: 
 
Initially, it catches buyers’ attention above other opportunities on their desks by clearly signalling that further assessment of this opportunity has a good chance of being worth their while – by both setting out the value of the opportunity to the buyer (high value), and making it obvious that information and data is readily available for review (low cost). 
 
Secondly, a well-produced IM will demonstrate to investors that the seller has experience negotiating M&A deals (or has such experience in their corner) and is well prepared. It will use the right wording and nomenclature, it will set out and define the key financial metrics common to most M&A deals, it will include references to further backing information and diligence reports, it will start building a clear platform for later negotiations (for example, listing areas of potential synergy with buyers), and will make all the necessary disclosures and address any areas of potential weakness up front.  
 
IMs which achieve these goals are usually simple in structure, built around a central narrative that dives progressively deeper into the same core pitch, walking the buyer through the opportunity and offering more and more granular levels of supporting data to continually reinforce the narrative. 
 
Building the narrative 
 
Although every IM is unique, we recommend that every seller should seriously consider the following workstreams to develop the fundamental building blocks of a pack of transaction-focused sales materials: 
  • Market review and competitive landscape 
  • Business plan (with and without external investment scenarios) 
  • Historic and forecast P&L, BS, and Cash Flow (preferably monthly) 
  • Working capital and capex analyses 
  • Quality of earnings analysis 
  • IP/Patent analysis where applicable
  • Identification of synergies that may be available to buyers 
These building blocks are then used to inform and underpin the IM which should tie together between five and eight key stand-out facts about the business (often referred to as “investment highlights”) into one cohesive and consistent transaction narrative that can be repeated across all core sales materials (pitch, teaser, IM, management presentations, full data suite). 
 
The first step in capturing value 
 
Contrary to many business owners’ natural instincts, an IM should be a more nuanced and complex tool than a straightforward ‘profile’ of their company. 
Well-executed IMs serve to: 
  • engage the best-matched buyers effectively 
  • present a clearly-structured value opportunity 
  • demonstrate seller sophistication
  • lock-in terms favourable to the seller from the outset 
IMs represent a highly strategic step in capturing maximum shareholder value and can materially impact the eventual sale price and deal structure secured from potential buyers. 
 
This is well understood at larger scales, but often seems to get lost in the lower-mid market. Even for businesses selling for as little as £5m, relatively modest swings in value (or a swing from no sale at all) can easily surpass the cost associated with building a top-quality IM. 
 
In our experience, top-quality professional IMs are well worth the investment.

Welcome to Chloe, NobleNet’s new digital media specialist 312 views

Delighted to welcome Chloe Neil to the team at Chemical Search International. Chloe joins to spearhead development of our digital marketing channels, both for Chemical Search and our new sister venture www.noblenet.co, launching fully next month. Chloe is based in our London office and has a degree in Fine Arts from the University of Brighton and a passion for harnessing the power of digital media for business growth. NobleNet members will be hearing a lot more from her.

Welcome Chloe!

NobleNet 472 views

Welcome to NobleNet 

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