Private equity investment in North American chemicals slumped to $60 million across 19 deals in the year to May 31, putting it on track for the slowest first half for the sector since 2018, according to S&P Global Market Intelligence data.

With macroeconomic conditions impacting investments across the board, the second half of 2023 is likely to be even more challenging for chemical businesses, which are seeing softness in demand, Deloitte & Touche LLP partner Philip Hueber said in an interview with Market Intelligence.

"Many of these private equity owners in their chemical businesses are really focused more inwardly on operational efficiencies, taking costs out of business, versus making M&A bets right now," Heuber added.

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The chemicals sector in the US and Canada pulled in about $20 million across five deals in the second quarter to May 31. By comparison, the total was roughly $850 million during the full second quarter in 2022.

Largest transactions

Only two of the recorded deals from Jan. 1 to May 31 were valued at more than $10 million.

A $14.8 million round of funding for Montreal-based Lavergne Industries Inc., which recycles post-consumer materials to produce plastic resin, marks the biggest transaction thus far in 2023. Canadian private equity firm Fondaction invested in the company's convertible notes.

Raleigh, NC-based Harpe Bioherbicide Solutions Inc. raised $10.7 million in a nonconvertible debt funding round. Investors in the round included US-based venture capital firms Alexandria Venture Investments LLC and iSelect Fund Management LLC.

H2 2023 outlook

The North American chemical space is expected to see an uptick in private equity activity during the second half of 2023. After two years of record fundraising, private equity firms are likely to start putting some of the raised capital to use by investing in the chemical industry, Hueber said.

The firms show a preference for noncyclical businesses, steering clear of upstream commodity markets within the chemical industry. They tend to focus on areas that are more fragmented with opportunities linked to sector consolidation, as well as companies that are closer to end users.

"Areas like adhesives, coatings, specialty polymers and resins; those are places where you have seen and you will continue to see private equity play in the chemical industry," Hueber added.