SK Is Ready For A New Round Of Purchases

If the eight companies owned by the New York City-based private equity firm SK Capital were a single chemical maker, it would have more than $8 billion in annual sales and rank among the largest chemical producers in the U.S. Together, SK’s holdings—mostly acquired since 2008 from large, established chemical companies—are almost as large as Eastman Chemical.

And those holdings are poised to grow even larger. Last year, private investors injected $1 billion of new capital into SK, twice as much as it had ever reaped before. If the past six years are any yardstick, SK’s name will appear on billions of dollars’ worth of future chemical deal announcements.

Barry Siadat, SK’s managing director, sees the new fund-raising as a vote of confidence. Many of the investors participated in SK’s $500 million investment round in 2011 and are doubling down. Although Siadat won’t get specific about the profits that brought investors back, he boasts that “many multiples of our money have been returned.”

Because SK is a private company, it is impossible to independently assess its performance.

It isn’t profits alone that brought investors back, Siadat adds, but also SK’s approach to investing. The company has a management team with experience in chemicals and pharmaceuticals that, in his words, “knows how to create value in a business by running it better.” Siadat himself is a Ph.D. chemical engineer and held technology and business development positions at W.R. Grace and AlliedSignal before his incarnation in finance.

“Our culture is unique and probably not a good proxy for private equity culture,” Siadat says. “Generally in the press you’ll hear private equity portrayed as cutting costs, selling off assets, and putting high leverage on businesses. Whether that is justified or not, we’re totally different. We are about building strong and sustainable businesses that generate attractive and growing cash flows.”

According to Siadat, SK’s main tool for improving the businesses it buys is “instilling a culture of accountability, speed, and simplicity.”

That may sound obvious. But Siadat claims these qualities are lacking in the operations SK wrests from chemical giants. “In the chemical industry, there are a lot of big companies that were certainly known for innovation and product technology leadership that have grown to become larger and larger conglomerates,” he says. Such firms build bureaucracies that “change the culture to an inwardly focused orientation. A lot of energy and costs are spent to fulfill internal requirements.”

Michael J. Shannon, global chair of chemicals and performance technologies at the consulting firm KPMG, agrees that changing the culture can lead to big improvements. “A lot of it is the entrepreneurial spirit that gets created when some of these companies get freed up from a larger entity,” he says.

According to Siadat, SK’s reforms have yielded tangible results at the firms it owns. Solutia’s nylon business, for example, lost more than $500 million before taxes in 2008, the year before SK acquired it. SK renamed it Ascend and started making cultural changes. The business earned about $350 million by 2010.

Siadat prefers cultivation to mere cost cutting. He points to Chemtura’s polymer additives business, now called Addivant. “The polymer additives industry, as a whole, has been an industry where there hasn’t been any innovation for 10 years,” he says. “The focus has been on costs. You can’t cut forever. You end up having nothing.”

Instead, SK refocused Addivant on technology. Now, a new nonylphenol-free phosphite antioxidant, used in polyethylene packaging, is winning regulatory approvals for food contact applications.

To SK, cultivating a business often means spending money on it. It is helping Ascend build a $1.2 billion propane dehydrogenation plant at its Alvin, Texas, complex. The resultant propylene will be used to make acrylonitrile, a precursor to nylon 6,6.

The formula seems to be working for SK, its investors, and its constituent companies. In fact, it is perhaps a good lesson for companies of every stripe. “We can have very high returns by just making a better business rather than buying low and selling high,” Siadat says.