Five Minutes with Scott Wolff

Competition for deals is heating up in the chemicals sector, an industry ripe with new investment opportunities, says American Securities managing director Scott Wolff.

American Securities invested in the automotive sector for the first time last October. How has the sector performed since then?

Increasing vehicle sales and production in North America has led to strong volume growth. Additionally, as a result of changing fuel economy standards, manufacturers are shifting to higher speed transmissions. These transmissions have a higher content of our companies' products, which has driven above market growth.
What kinds of attributes do you look for when making automotive investments?

Within the auto segment, we look at a company’s competitive position and the demand outlook for the specific parts they supply. The companies we have invested in have the ability to make complex parts that are hard to duplicate.  Auto original equipment manufacturers (OEMs) spend substantial time and money designing new engine and transmission platforms, which often last ten years or more. A significant part of our diligence is focused on understanding the outlook for the key platforms a company is on.
You also focus on investments in the chemical industry. How do the trends look in that segment?

The chemical sector is very diverse with a wide range of end markets and demand drivers, so these examples are just a few we see. In the US, shale gas continues to be a key theme leading the US to become a low cost chemical producer. Chemicals tied to construction activity are interesting given the expected increase in US housing starts.  We’re also seeing a trend toward green or sustainable products. In emerging markets, continued growth of the middle class is driving growth for certain agricultural and mining related chemicals, while increased regulation in certain parts of the world is also causing a shift in demand benefiting some companies. Overall, we think these trends will drive above market growth at certain companies. Lastly, some large public companies have been active in M&A over the last several years and are now looking to divest non-core businesses.
How will the increase in use of sustainable products impact American Securities’ companies?

Some of our companies have benefited from this trend. The most notable is our pine chemicals company.  Its products are a sustainable alternative to hydrocarbon-based products. We have noticed that the company's customers have an increased interest in using sustainable or “green” inputs.
How would you describe private equity competition across the chemicals sector?

The chemicals sector is broad in terms of end markets, competitive dynamics and product types, so it’s difficult to generalise, but a broad set of firms have invested in certain areas while other investors have shied away due to the perceived commodity nature of products, cyclicality or potential environmental risks. Today, we’re seeing a bit more competition for new opportunities, unfortunately.