Chicago — Merger and acquisition activity in the plastics packaging sector is expected to remain healthy, according to one man close to the action.
Rick Weil is managing director at Mesirow Financial' s Investment Banking group, and his group has been involved in more than 150 deals to date. So he has a good feel for the market trends.
Private equity continues to be the straw that stirs the M&A drink these days, but that does not mean publicly traded companies have their eyes closed to potential deals.
Private equity has just become increasingly comfortable with lower returns on investments over time, Weil said at the Plastics Caps & Closures 2019 conference in Chicago.
Returns of, say, 5-10 percent can satisfy private equity these days, compared to profit requirements of 10-20 percent years ago, he said.
This means private equity firms are more aggressive about acquiring companies that they might have once overlooked.
Even 10 years into a bull market, Weil said, he still sees space for continued acquisitions.
"I still think there's going to be a lot of deal activity," Weil told the crowd at the conference organized by Plastics News.
"The publicly traded companies continue to be under pressure," he said. "They have their hands full competing with private equity."
That notion, just five years ago, would have been considered crazy, he added.
But private equity has figured out a way to settle for smaller returns while still being able to outperform other types of investments.
A pair of recent extended bull markets lasted 13 years on two different occasions, Weil said, ending in 1987 and 2000.
So with the current bull market clocking in at 10 years, the managing director believes there's still time to successfully do deals in the plastic packaging sector.
Continued fragmentation of the industry, despite years of deals, and the continued demand for plastic packaging allow that segment to continue to attract investor attention.
"It's a steady business for the most part," Weil said, with ubiquitous products. "Within plastic packaging, what do they like? They like food, they like medical, health care. Those aren't going away. Those aren't discretionary in nature, so you see a lot of money going into those sectors. Health and beauty is another one,"
Private investment firms are typically holding their acquisitions four to five years, but that's not always the case in an active market.
"There are companies that bought in '16 and '17 and they are on the market now," he said, thanks to strong interest.
Private equity's "full-throated" interest in the plastics packaging industry means the acquisition market continues to have legs, he said. "I still think that there is some runway to go."
Deal-making is also being fueled by the relatively low cost of borrowing money. "The cost to investors to earn a return as gone down precipitously," Weil told the crowd.
Private equity also has a stomach to take on debt, which can put them at an advantage when finding acquisition candidates, he said.
"I think it's the use of leverage, and I think the private equity firms aren't afraid to put a lot of leverage on it. So they put less equity in. And when you put less equity in, the returns are going to be better. So a little bit of financial engineering that perhaps sometimes gives them a bad name. But I think, by and large, and I know there are examples otherwise, but they've been very good stewards of the companies that they own," Weil said.