About a year ago, I got a reminder that I should trust the plastics industry experts that we talk to every day, not to mention the ones on our own editorial staff. It came after Reuters published a story with the provocative headline "Private equity's falling out of love with plastic packaging."
According to the story, private equity investors were losing interest in the plastics packaging sector because of environmental concerns. PE firms feared that plastics would lose market share as a result of government rules, like the European requirement that all packaging be reusable or recyclable by 2030.
"No plastic packaging firm would pass our internal ESG [environmental, social and governance] check, and we would pass even if such an investment would promise a large return," one private equity investor was quoted saying.
The story just happened to break when Frank Esposito, our senior staff reporter who has handled our mergers and acquisitions beat for decades, was on vacation. So I made a couple of calls to some of the M&A experts who specialize in plastics deals to see whether they agreed with the sources quoted in the Reuters story.
They didn't completely pour cold water on the story. A few cited some specific examples of PE firms that had been burned and were having trouble with a profitable exit.
They also told me about how some PE firms were, indeed, asking more questions about plastics and ESG than they have in the past. But they weren't backing away from plastics. Instead, they were seeking out companies that had a good story to tell about their sustainability expertise.
When Frank came back from vacation, he had the same reaction that the M&A experts had shared. He added that interest in plastics recyclers was picking up too, after years of very little interest in the M&A market.
Fast forward to today, and it's clear that Frank and the M&A folks were correct. In last week's Plastics News special report, we learned that 2021 was actually a record-setting year for plastics deals.
"It was unlike anything I've ever seen," said John Hart, managing director at P&M Corporate Finance in Southfield, Mich. He pointed out that the packaging industry has benefited from COVID, including increasing e-commerce and online shopping.
David Evatz, managing director with Stout Investment Banking in Chicago, said that medical and plastics packaging firms are highly coveted.
Phil Karig, managing director with Mathelin Bay Associates in St. Louis, said sustainability is driving interest in plastics.
Peter Schmitt, managing director at Montesino Associates LLC in Wilmington, Del., added that medical plastic packaging markets also are gaining in spite of concerns about sustainability.
There's a variety of reasons why plastics M&A is particularly strong right now. Some deals were delayed because of the pandemic. Others sped up to finish before 2022 as sellers tried to avoid potential higher capital gains taxes.
But what about waning PE interest in plastics? According to the data, the share of plastics M&A deals involving private equity firms actually increased from 41 percent in 2020 to 47 percent in 2021. PE firms are outbidding strategic investors for plastics firms, including plastics packaging. They see it as a stable market that still has room for growth and consolidation.
Maybe the PE experts quoted in the Reuters story will end up being the smart ones. We won't know the answer to that question for five or six years, when we see how these 2021 deals turn out.
But it is pretty clear that PE firms are still interested in plastics and specifically plastics packaging. That's a trend that's already changed the global plastics industry, and it's apparently not going to end anytime soon.
Don Loepp is editor of Plastics News and author of the Plastics Blog. Follow him on Twitter @donloepp.
