HERE COME THE MONEY MEN

Private equity and venture capital investors have been circling the lead battery industry for well over the past decade. Their ownership can bring benefits but also difficult times — the only certainty with this type of parent is change. Wyn Jenkins and Michael Halls report.

A huge chunk of the lead battery industry — just think of such big names such as Clarios, Stryten, Ecobat, Microporous, C&D/Trojan — is under the throes of two types of aggressive investment ownership: venture capital and private equity.

Although there are differences between the two (see panel) both have one common aim. To buy into a company at one price and sell at a much higher one later on.

Profits from the investment and sale normally comes from a variety of types of banking endeavour.

For smaller start-ups, this may simply be enabling the financial backdrop for a company to succeed while it moves from transferring the technology of the laboratory to that of the manufacturing line.

This supportive behaviour enables the founders of the firm — who are frequently more technically oriented than commercially gifted — the scope to advance product development and marketing untroubled by the vicissitudes of financial pressure.

It is equally as likely to involve detailed financial oversight and management — particularly of cashflow — to achieve the advancement of the company.

For financial oversight and management read one word. Control. And that for the good or the bad.

For the bad it can be stultifying. One UK start-up, with a technology that has since been brought to market by another firm, failed in the early 2010s. “The problem we found was the opposite of what was meant to have had happened,” the former CEO told Batteries International after the closure.

“Rather than achieve a fast roll-out and the ability to sell the company at a healthy profit within a few years, we had problems with the technology.

Our investing group of VC firms then tried to stem our losses by every which way they could. We lost staff through downsizing (firing) and a natural attrition as we all became demoralized.

“We had to produce finance reports each week and each month we’d have to spend several days preparing for a management meeting with the investor group. They didn’t provide the financial backdrop we needed — rather they became the problem rather than the solution.”

The shame of it all was that the micro-management resulted in the firm’s demise and the technology being successfully finished elsewhere.

Some of the tales of micro mismanagement are legendary and the rise of the so-called “bean counter”, the financial director out of kilter with the mood of the workplace.

One battery start-up was apparently brought to its knees by the loss in morale caused when a free-to-use toprange coffee machine for the firm’s 40 staff was replaced with a kettle and a coffee kitty.

For larger firms the control is more absolute. The aim is for the financiers to examine all parts of the business and — typically — look at ways of improving the business model. This may involve huge structural changes, selling off or scrapping whole sections of a diversified business to provide a leaner more efficient business.

So, for example, one of the odd trends from the 1960s onwards was, the way corporate giants expanded their business into seeming growth areas that were unrelated to their core businesses.

The former Johnson Controls, for example, entered the battery business from its acquisition of Globe-Union in 1978, only to sell it to Brookfield Business Partners and create Clarios in May 2019. (This was in fact part of a larger restructuring including the merging with Tyco International in January 2016 to create a company headquartered in Cork, Ireland and (legally) away from many US tax requirements.)

In an odd fashion this underpins theories of capitalism, one business model is outdated or no longer fit for purpose, and is replaced with another.

The death of hugely successful firms such as Kodak which ignored the rise of the digital camera — perversely enough invented by one of its own staff — and successive restructurings were in the end unable to resist the momentum of a new business model that was eventually to prove suitable for the masses on the phone.

As one financier told this reporter decades ago: “the lifeblood of successful capitalism is the ability it gives companies to reinvent itself, to shred off bits of its business that don’t work and invest in the parts that do.” (Oddly enough the same financier said that one of the successes of the US financial system was that it enabled businesses to fail — particularly the so-called Chapter 11 and Chapter 7 provisions — but allowed them to pick themselves up and get going again until achieving potential success.)

“This isn’t an economic model that seems to fit with that found in Europe,” he said. “But it works with the way US businesses work and thrive.”

The history of restructurings and the like are also riddled with tales of financiers ripping the flesh of what could have been successful businesses in their search for easy profits. “People

WHEN IT GOES WRONG — RIGHT-SIZING OR ‘TIGHT-SIZING’?

“Downsizing is so 1990s? It’s rightsizing!” That was the merger and acquisition mantra of years gone by.

Now, insiders from three firms talking to Batteries International, on the grounds of confidentiality, say the process of preparing their companies for a later sale, is better called “tight-sizing”.

Put simply: cutting costs to beef up the balance sheet to enable the sale — but not necessarily for the greater good of the firm.

“I’ve never seen the morale in our company so low and I’ve seen us go through some very rough times,” one senior executive confided to Batteries International before Christmas. “The new management has got cut swathes of our top leadership starting at the top and replaced it with their own hires.

“Middle-management people have left in droves — are they the next to be axed they wonder? And now we have a culture not of can-do but how much does can-do cost?

“Their attempts, in my opinion, to cut costs and pretty-up the balance sheet have resulted in (probably) a better balance sheet but a less worthwhile company.”

Another executive told a similar story. “When I found that people in the accounts department were the ones approving my business trips for the firm, I gave up. For heaven’s sake, I’m the head of a department!”

hate the term ‘asset strippers’” one financier told Batteries International several years ago, “but these practices keep industries lean and competitive.” But at its basic it’s the way that outside investment entities — be they private equity or venture capital firms — take control of battery and related companies and try to push them into better financial circumstances.

So where does this all fit with today’s lead battery business? And, with a high number of lead- battery manufacturers and suppliers now owned by private equity or venture capital entities, what implications are there given the investment timelines and horizons such companies work to?

Geoffrey May, director at FOCUS

THE CLARIOS SAGA

It’s the case study that cannot be ignored — the story of how Clarios (formerly Johnson Controls Power Solutions) whose lead-acid batteries are used in about a third of cars globally.

Towards the end of 2018, the company, which boasts $8 billion in revenues, was sold by parent Johnson Controls International to investment firm Brookfield Business Partners, a listed private equity limited partnership that makes its investments through Brookfield Asset Management, for $13.2 billion.

The reason the business was sold is probably indicative of a trend, say industry observers, which is of larger conglomerates seeking distance from the negative associations with lead acid batteries — mostly as an established technology with no disruptive game-changing product and also, in terms of image, using a metal perceived to be unenvironmental.

At the time, Johnson Controls International said the sale would allow it to focus on its building technologies and solutions business, which makes heating, ventilation and air conditioning systems, as well as building access control and fire detection systems.

While the batteries unit boasted healthy margins, it had been capital intensive for its parent. Investors overall welcomed the deal.

Equally, also in line with this trend, Brookfield eyed a different future for its new purchase, based on it moving in a greener direction. In May 2019, the investment company rebranded the business as Clarios and mapped out a future in which it would become a “world leader in advanced energy storage solutions” including a move into making batteries for electric vehicles.

“Our vision is to power progress by creating the world’s smartest energy storage solutions that benefit people, business, and the planet,” said Joe Walicki, president of Clarios, at the time.

“As a global leader with a product used in virtually every vehicle from conventional to fully electric, we are well positioned to capitalize on market trends, including a move toward more electrified and autonomous vehicles that are elevating the critical role of the battery and accelerating the need for more advanced batteries.”

Such a strategy would appear to align with broader trends in the industry towards diversification.

According to market research company IMARC Group, the global automotive lead-acid battery market reached a value of $12.7 billion in 2021 and it is anticipated to reach a value of $15 billion by 2027. At the same time, the top automotive lead-acid battery companies are increasingly focusing on extensive R&D activities to introduce miniaturized automotive lead-acid batteries with enhanced efficiency, an IMARC report said.

“Several leading players are heavily investing in the deployment of hightech methods and the manufacturing of advanced and maintenance-free battery variants, which are propelling the market growth. Along with this, the growing environmental concerns and the increasing awareness among individuals about the harmful impacts of carbon emissions are providing lucrative growth opportunities to key players on the global level. In line with this, the widespread adoption of EVS among the masses is creating a positive market outlook.”

To a private equity company, therefore, a strategy for a newly acquired lead-acid batteries might be clear. The business is already successful and profitable: realign its strategic direction towards innovation and greener technologies and increase its desirability to investors in the process — as well as its product range and ultimate growth prospects.

One success it had in this regard was Clarios being selected in 2021 as a winner of the US Department of Energy (DOE) Office of Energy Efficiency and Renewable Energy’s Lithium-Ion Battery Recycling Prize competition.

Clarios’ project, “Powering the Future,” was intended to develop and apply innovative technologies to identify and separate lithium-ion batteries from lead-acid batteries, ensuring the proper and safe recycling methods for each chemistry.

Yet for all its ambition of moving the company in a new direction — perhaps a greener one more agreeable to mainstream investors — Brookfield has not so far succeeded in mapping a succession plan for the business. In May 2021, two years after a new strategic direction was unveiled, it filed paperwork with the SEC for an initial public offering.

Analysts suggested at the time, the company could seek a valuation of some $20 billion.

However, by July 2021, the flotation had been delayed. The company cited unsatisfactory market

To a private equity company, therefore, a strategy for a newly acquired lead-acid batteries might be clear. The business is already successful and profitable: realign its strategic direction towards innovation and greener technologies and increase its desirability to investors in the process — as well as its product range and ultimate growth prospects

Consulting, a business that provides technology and business support to the battery industry, reckons that while trends can be seen in why leadacid battery-focused businesses have ended up in private equity ownership, what the future and future ownership of each company looks like is less clear.

Each need to be considered on a case-by-case basis. “There are good and bad aspects of being private equity owned, and that very much depends on the unique circumstances of businesses — you have to look at each individual scenario,” he says.

“When large companies have decided to push out their lead operations, private equity can be a good solution. They have found some willing buyers. What happens next is less clear, however. In the case of the biggest companies, a trade sale seems problematic; equally the equity markets have not had the appetite for an IPO in some cases.”

An IPO — an initial public offering — is a major exit strategy for both private equity and venture capital investors. In the IPO the shares of the new or restructured company can be bought by institutional and private clients.

Valuations of the profits private equity and VC firms make can seem extraordinarily high. In part this is to do with opportunity, but also to that of risk. For venture capital investors taking a firm from scratch to a high market capitalization also means taking the risk that other investments that don’t succeed at all, or don’t succeed in any hugely profitable way.

“If only one in three firms you invest in have a workable exit strategy then you have two that you’ve lost money on. It’s part of the business model,” one venture capitalist firm told Batteries International. “You balance the returns from the overall portfolio.

“What people don’t realise is that

conditions. “While we are looking forward to taking Clarios public … we have elected to defer the IPO given current market conditions,” the company said at the time. Certainly the huge volume of IPO flotations already that year would have certainly been a dampener on investor interest.

Analysts say the IPO will have to resurface — partly because Brookfield has so few other options. The business is too big for a trade sale; the number of potential suitors is limited plus regulators may well raise anti-trust or competition law concerns.

“That’s not to say Clarios is not a good investment opportunity it’s more that its size and market position limits its parent’s options,” says FOCUS Consulting’s, Geoffrey May.

“Johnson obviously saw batteries as non-core and private equity gave them that exit. Assuming they [Brookfield] did their due diligence, it must be regarded as a reasonably good investment, but they will need C an exit at some point,” he says.

“The opportunities for further M consolidation on the trade side are limited. It was different in the past Y but if another major player tried to CM gobble up more competitors that MYcould fall foul of antitrust regulators. They are clearly trying to change the company and move towards the CY sexier side of electric vehicles. But CMYthat is not necessarily easy, and their core business is automotive lead K acid batteries. They are very successful at that.”

May believes it is hard for leadacid focussed companies to step into the lithium space in a meaningful way. “There are few common skillsets between lead and lithium,” he says. “The process is completely different, almost nothing is shared on the manufacturing side. So it is one thing wanting to innovate but simply moving from one chemistry to another will not be straight forward.”

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IT’S NOT JUST THE BIGGEST OF THE BIG FIRMS …

Private equity firms and VC firms own at least far more than 40 “significant” companies in the battery industry, says one analyst. These include batteries manufacturers such as Lionano, which raised $22 million in Series ‘B’ funding in 2018 led by WAVE Equity Partners, Helios Capital Ventures and NXT Ventures; and EaglePicher Technologies, which, also in 2018, was sold by parent Vectra to GTCR, a Chicago PE firm.

A number of companies classed as battery distributors also fall into this category. In 2017 PR firm High Road Capital Partners acquired Storage Battery Systems. In 2018 it added Nolan Power to its portfolio; it plans to combine the two businesses.

A similar story can be found in battery recycling. In 2018, Gopher Resource was sold by parent Norwest Equity Partners to Energy Capital Partners; in 2017, Eagle Battery was acquired by Cardinal Equity Partners.

Each of these companies will be on its own journey of change. Its investors may be investing or cost cutting, rationalizing or expanding the offering of each. Only one thing is certain: another change of ownership will occur for each at some point in the future. This may provide long term stability, or be yet another steppingstone to another owner — or worse.

VENTURE CAPITAL FUNDING DECLINES OVERALL BUT NEW ENERGY INVESTMENTS STAND UP WELL

The latest KPMG Private Enterprise Venture Pulse report, released this January, shows that global venture capital investment dropped for the fourth consecutive quarter in 2022 — falling from $102.2 billion on 9,767 deals to $75.6 billion on 7,641 deals. Global investment has fallen to its lowest levels since Q2’ 2019.

The decline comes despite large deals in the energy sector, including alternative energy vehicles, battery technologies, and alternative power generation and distribution technologies as governments seek to secure energy independence and meet their climate obligation.

The Americas and Asia secured the largest deals during Q4 ’22 accounting for the largest share of VC investment globally.

The US recorded the largest proportion of investment with Asia second, despite attracting three $500 million + megadeals across the quarter. Top deals from China included GAC Aion ($2.56 billion) and SHEIN ($1 billion) with the largest US deals including Anduril ($1.48 billion) and TerraPower ($830 million).

“Overall investment continued to decline this quarter, falling to the lowest levels since Q2 ’19. The combination of economic and geopolitical pressures, alongside turbulent capital markets and low IPO activity, have taken their toll on venture capital investment,” says Conor Moore, national venture capital co-leader for KPMG in the US.

“However, we continue to see encouraging levels of investment in the new energy and electric vehicle ecosystems, as venture capitalists continue to align with government initiatives and incentives in these areas deemed critical to energy independence.”

Private equity deals have slowed down and look set to stay that way. With war still raging in Ukraine and inflation still putting pressure on businesses, the buyout industry is bracing itself for another year of volatility.

Deal value in the first half of 2022 totaled $529 billion, a healthy figure by historical standards, but the latest figures for H2, due out shortly, are expected to show lower volumes.

From a private equity point of view, it’s important to note that the investor landscape has changed considerably — less than 10 years ago, a key statistic was that companies were staying private for four to six years and there were fewer than 100 private companies with a billion-dollar valuation or more.

Today, there are more than 1,170 companies that have a billion-dollar valuation and, on average, have been private for 10-13 years. from the moment we invest in a firm we’re also looking for the way to cash this in. Only an idiot invests without an exit strategy from the very get-go.”

Perhaps distressingly for the longer good of some parts of the battery market, however, the venture capital play is generally — not always — for an investment window of around three to five years. Private equity tends to be a longer play given the complexities that can be involved.

This does, however, lead to the question of whether private equity owners are more likely or less likely to invest in and drive innovation in a company for the longer term. That said their aim will be to increase the value of a company within a specific time frame. That can mean cost cutting and rationalization but also investment and innovation, in an attempt to realign a company’s offering.

Especially in the case of lead-acid batteries, it might seem prudent, as Stryten has done, to move towards alternative technologies. In the last two years, for example, it has moved into manufacturing sodium ion batteries, flow battery technology and the recycling of lithium batteries.

Andrew Haughian, general partner, Pangaea Ventures, a venture capital firm that invests in early-stage advanced materials, energy and environmental technology companies backing entrepreneurs “who are making a meaningful impact in the world” offers some context on this point. He says there are several reasons a company might invest in a company operating in the energy storage/battery space.

“VC funds invest in companies that have a highly differentiated technology solving a significant pain point. The battery industry is one where economies of scale and supply chain are critical factors to success and therefore new entrants must have enough of a differentiation that leapfrogging incumbents (who are also improving every year) is a possibility,” he says.

“VCs also like companies that have the potential to be a large, standalone business that has the potential to go public versus a component or materials supplier that is most likely to find a home under the roof of a large incumbent industrial. Finally, the quality of the management team is a first and foremost consideration for any decision to invest.”

But he says that investors will also be looking to accelerate growth and

innovation. He says that, generally, investors want to invest in companies that can hit meaningful inflection points within 12-18 months.

This can provide a basis for future fundraising. Investors will also look to help set priorities and make introductions from their network in order to accelerate growth.

The potential exit plan will never be far from mind, however — but this can be longer in the battery space than in other sectors.

Haughian says most investors playing in the battery industry understand the exit horizon will be at least five years, but possibly closer to eight to 10 years. “And there are only a small number of investors willing to make very early-stage bets where the horizon is even longer,” he says.

In general, VCs like companies that have the potential to be standalone independent companies with the potential to go public. However, if attractive M&A options arise long the way, most investors will be rational about considering a likely smaller but lower risk pathway to exit.

On the specific question of innovation, and the wider impact that can have on a sector, he admits that too much investment in one area can muddy the waters and cause an element of uncertainty.

“A perfect example of this is in that for developments in silicon anodes for lithium batteries where there are dozens of start-ups and an equivalent number of in-house corporate efforts. In such a competitive space, the bar is elevated for everyone. The challenge with this is that it may be difficult for the top players to become dominant as the performance differential compared to others can be limited.”

If finding the exit strategy is part of any investor private equity/VC approach it is also the start of a new saga for the firms themselves.

In 2013 private equity business Charlesbank Capital Partners acquired Trojan Battery Company, a specialist in deep cycle lead acid technology formed in 1925 by the Godber family.

Charlesbank’s acquisition marked the first outside equity for the company, with the Godbers, for a while, maintaining a significant ownership position. “It stopped being a family business at that point but it was the best way to achieve the investment needed for growth that we needed,” said a senior manager to Batteries International at the time.

In 2018, things had changed again when Charlesbank sold Trojan to C&D Technologies, a manufacturer of mostly flooded lead-acid batteries but also making lithium ion batteries and related products, and itself a portfolio company of another private equity firm: KPS Capital Partners. KPS had acquired C&D in 2017 with the stated intention of aggressively growing the company both organically and through strategic acquisitions.

It is not always a happy ending, as UK battery company Atraverda, which made ceramic bipolar batteries, found in 2012 when it was forced to call in the administrators. Formed in 1991, the company had previously secured two rounds of venture capital funding raising some £20 million (currently $34 million). Another round, however, was not secured in time.

PRIVATE EQUITY AND VENTURE CAPITAL

Private equity is sometimes confused with venture capital because both refer to firms that invest in companies and exit by selling their investments in equity financing, for example, by holding initial public offerings. (IPOs are the process of offering shares of a private corporation to the public in a new stock issuance for the first time,)

However, there are significant differences in the way firms involved in the two types of funding conduct business.

Private equity and venture capital invest in different types and sizes of companies, commit different amounts of money, and claim different percentages of equity in the companies in which they invest. • Private equity is capital invested in a company or other entity that is not publicly listed or traded. • Venture capital is funding given to start-ups or other young businesses that show potential for long-term growth. • Private equity and venture capital buy different types of companies, invest different amounts of money, and claim different amounts of equity in the companies in which they invest.

Private equity is a source of investment capital from highnet-worth individuals and firms. These investors buy shares of private companies—or gain control of public companies with the intention of taking them private and ultimately delisting them from public stock exchanges.

Large institutional investors dominate the private equity world, including pension funds and large private equity firms funded by a group of accredited investors.

Venture capital is financing given to start-up companies and small businesses that are seen as having the potential to generate high rates of growth and above-average returns, often fuelled by innovation or by carving out a new industry niche.

The funding for this type of financing usually comes from wealthy investors, investment banks, and specialized VC funds. The investment does not have to be financial, but can also be offered via technical or managerial expertise.

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