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Blackstone Respects The Cycle
1:20 PM MST | January 25, 2011 | By VINCENT VALK
Last week, I attended Blackstone managing director Chinh Chu's presentation at meeting of Société de Chimie Industrielle here in New York. You can read Chu's take on the outlook for private equity and chemicals investments here. But he also made some points about his firm's – one of the world's largest private equity houses, if not the largest – investment process for chemical companies.
Comparing finding a good deal to "finding a needle in the haystack," Chu noted that Blackstone passed on 52 deals in the banking sector at one point before deciding on one. Patience is important for the firm across the board, he says – and in chemicals, that means "respecting the cycle." He was pretty adamant about this: "You can get the best company, the best management team, but if you get the cycle wrong you lose all your money," he said. Private equity, or at least Blackstone, is not going to buy your business at the wrong point in the cycle (whether this is a good or bad thing, I'll leave up to you).
So, who got the cycle right? According to Chu, SK Capital, in its 2008 acquisition of Ascend Performance Materials, otherwise known as Solutia's nylon business. SK Capital paid $44 million, plus an $80 million pension obligation, for a business that nobody wanted. Today the company has $350 million in EBITDA which, Chu says, could be levered up around 4x-5x. That's a nearly $1.4 billion return on a $44 million investment.
Well, you can't argue with that.
Cyclical respect aside, I've attended a few presentations by private-equity bigwigs and they tend to get a bit defensive about their business. I recall a late 2009 presentation by a partner at One Equity in which he made a point of emphasizing job creation at private equity owned companies. Chu made a point of saying that private equity has a lot of money and wants to invest in the businesses it buys before selling them. There's no reason to doubt this, but clearly the industry's reputation as "corporate predators" is distasteful to its practitioners. Significantly, Blackstone doesn't do hostile takeovers, though I somehow doubt that private equity firms will start giving people the warm-and-fuzzies anytime soon.