Once again private equity received high-profile attention in the pages of Plastics News, as Onex Corp. bought KraussMaffei AG — yes, from another private equity company. And right now, it's on the minds of Americans, thanks to the presidential election.
You've seen those ads. The steelworker tells how Mitt Romney's former employer, Bain Capital Partners, destroyed his company. The Obama ads use a narrator to say things like: “When Mitt Romney led Bain, hundreds of plants, factories and stores were shuttered. Workers saw their wages slashed, their jobs sent overseas. Romney made a fortune.”
For the Romney campaign, his business experience is a central part of the message.
And Americans are paying attention to private equity — normally not a topic of conversation unless you work on Wall Street.
So is private equity good? Or is it bad? Answer: It's both. “Private equity,” like the economy, is too complicated to describe in a 30-second ad. Private equity can slash jobs and move work to China. It also can save jobs and invest money to modernize a factory, bring in new management, or encourage existing management to take a fresh approach, and give them an ownership stake.
The goal of private equity is simple: buy a company, then after a few years, sell it for more than you paid — these days, the new buyer often is another private equity owner.
We've seen private equity sweep into the plastics machinery industry. That still surprises me, because people in the industry say profit margins can be pretty thin, and the business is cyclical. Many big machinery makers now have global manufacturing, which can offset some of that. But it still seems odd that industrial machinery can be so attractive to the big-money players.
No doubt, people get laid off when private equity comes in. And if you're on the outside, and it's not your job, it's easy to say “That's getting lean — hey, that makes sense.”
Barbarians at the Gate chronicled the 1989 leveraged buyout of RJR Nabisco by Kohlberg Kravis Roberts & Co., which was the largest buyout in history at that time. The takeover cemented a public perception of private equity as slash and burn, loading on debt in highly leveraged deals. That's an old-fashioned notion, said Scott Oakford, managing partner of Hamilton Robinson Capital Partners LLC. It isn't about buying cheap, loading up debt to jack up the balance sheet, then selling, he said.
Hamilton Robinson, of Stamford, Conn., acquired Black Clawson Converting Machinery Co. in 2003, which was having financial trouble. Later, the private equity firm bought into Davis-Standard as the joint venture partner of majority owner Crompton Corp. (now Chemtura). By 2006, Hamilton Robinson also owned Chemtura's share of Davis-Standard LLC.
Oakford, who was chairman of Davis-Standard and Black Clawson, said private equity firms make money by building companies, not tearing them apart. “The goal is to make it a better organization, a better company,” he said. “If you do a good job building the business, somebody will view you as a better business.”
Hamilton Robinson brought people skills in management and lean operations and changed the corporate culture at Davis-Standard and Black Clawson, Oakford said. “We turned a whole group of managers into shareholders who weren't before,” he said. When the recession hit, the company cut the pay of all employees and paid down its debt. The machinery maker rebounded along with the economy, and Hamilton Robinson sold to Onex Corp., the Canadian private equity giant.
Let's look at a few other private equity forays into machinery:
* Certainly, some people lost their jobs when Onex bought Husky Injection Molding Systems Ltd. In just 31/2 years of Onex ownership, Husky got out of large-tonnage machines — ending founder Robert Schad's expensive effort to get into automotive molding — to focus on PET preforms and thin-wall packaging, Husky's core strength for decades. Husky had what's known as low-hanging fruit, going from Schad, the ultimate entrepreneur, to the money people.
Onex made a ton of money selling Husky to Berkshire Partners LLC in 2011. Then Onex promptly picked up Davis-Standard LLC, and now the big one: KraussMaffei, which includes Netstal injection presses and Berstorff extruders.
* Gloucester Engineering Co. is an interesting case. Located in lovely Gloucester, Mass., a fishing port, the unionized maker of film equipment emerged from Chapter 11 in late 2010, under ownership of Blue Wolf Capital Partners LLC. Blue Wolf, which had provided a pre-bankruptcy loan to the company, acquired a loan to the original seller, taken out by previous German owner SMS GmbH.
Blue Wolf, which has been profiled in The Wall Street Journal as a private equity success story, brought in new management, put in a computer system to help control costs and struck a deal with the International Association of Machinists. In fact, it was IAM that first contacted Blue Wolf to save jobs at the then-failing company.
They're back to making blown and cast film lines in Gloucester, issuing press releases about sales around the world. One of the leading makers of film machinery, could have gone out of business.
* Milacron LLC employees have seen the ups and downs of capitalism. Milacron filed for Chapter 11 bankruptcy in 2009, suffering from too much debt and a moribund machinery market. The company emerged under ownership of Avenue Capital Group. Avenue Capital invested money and brought in some new management while retaining core executives. Last year, Avenue sold to CCMP Capital Advisors LLC, which has brought in its own CEO and lured Ira Boots, of Berry Plastics fame, to be its chairman.
Milacron cut jobs on the recession, but lately has been in a hiring mode as machine sales bounced back sharply.
Jobs lost. Jobs gained. In Milacron's case, Avenue Capital held the company together in the dark days and built it up for the recovery. Today the company employs 850 in southeast Ohio.
Oakford of Hamilton Robinson pointed out that private equity can be a key source of financing for weakened industrial companies. That's especially true in tough economic times.
“The beauty of the private equity business as it relates to a company like that is we make investments in these kinds of companies that other institutional investors or public companies simply won't,” he said. “So we do provide capital that places bets on these kinds of business that otherwise couldn't raise capital. They'd be starved.”
So now we have to endure a few more weeks of campaign ads. If you want to see even more ads, come to Akron, Ohio, home of Plastics News. Ohio is a key swing state, and before it's over, I expect either Obama or Romney — or both — to hold a campaign rally in our parking lot at work.
Meantime, private equity marches on. Bain Capital was in the news for buying Consolidated Container Co. LLC. Romney no longer works for Bain, but if it shuts any plants between now and Nov. 6, expect to see his face superimposed on a plastic bottle, depolymerizing right on your TV screen.