The problem: A portfolio company asked their equity owners for a significant capital investment to increase production capacity of a commodity chemical. However, the management team did not have sufficient data to support their claims that the market could absorb this additional supply without adversely impacting prices.
The solution: Across multiple end markets, we assessed utilization, price points, alternatives, price elasticity and switching costs. We also conducted in-depth conversations with competitors, domestic and international, to understand their perceptions on growth in demand and utilization of this chemical versus other alternatives. We discussed their production plans and intentions. Finally, we spoke to a number of industry experts within the verticals being served, to understand their objective viewpoints.
The result: Unfortunately for the management team, the research revealed that a new production facility would be an incredible waste of resources at current demand and well into the foreseeable future. There was very limited evidence that additional supply into the market was warranted. As a result of our research, the private equity client averted a major investment which would have undoubtedly been counterproductive.