The U.S. specialty chemicals sector remains an attractive sector for middle-market investors, despite modest global growth, the crude oil decline, the commodity capital cycle and the recent dip in public market valuations (as measured by a proprietary index that tracks the relative valuation of the specialty chemical sector), which may indicate lower multiples for acquisitions in the future. We expect deal flow over the next two to three years to continue to remain healthy, which, combined with an attractive investment thesis, could create substantial opportunity for private equity buyers.

The growth and earnings outlook over the next several years remains attractive for U.S. specialties. Growth in the U.S. is expected to be modest but stable, with favorable raw material tail wind from low-cost natural gas and crude oil, buoying the basic chemical feedstocks derived from them. The commodity capital cycle has featured new capacity additions for a series of basic chemical feedstocks in 2015 (ethylene, propylene, methanol, benzene, chlorine, and para-xylene) of 20 million metric tons (m.t.) with planned new capacity in 2016 of 25 million m.t.  In addition, Chinese expansions represent approximately 14 million m.t. in 2015 and an estimated 8 million m.t. in 2016. We believe these capacity expansions will continue to exert pressure on basic chemicals prices, and given that they constitute raw materials for specialty chemicals, will continue to have a positive impact on specialty chemical earnings.

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