One sector that private investors are increasingly turning to is packaging, which remains saturated with untapped opportunities. Changing consumer behaviors, sustainability demands and market fragmentation all create a significant opportunity for PE firms to partner with packaging companies looking to remain competitive.
When everything comes together, it can generate a fantastic outcome. Sun Capital has made a number of successful investments in the packaging sector including Albea and Coveris. In 2018, Sun Capital completed the successful sale of Coveris Americas, a manufacturer of flexible plastic packaging. At the time of sale it was recognized as one of the top 10 converters of flexible packaging and other value-added products in North America, and the enterprise value had more than doubled since the initial investment.
Our work with Coveris Americas is a great example of how private equity partners can work with management teams to build an industry-leading packaging company through strategic acquisitions, bringing new innovations to market and meeting sustainability/ESG demands.
The packaging sector has many niche businesses that require special knowledge or equipment, or that may be too small or non-strategic for global enterprises. This means small and medium enterprises can build out scale and realize efficiencies through strategic acquisition. For example, Coveris Americas successfully grew through nine add-on acquisitions. A private equity firm can provide a medium-size packaging business with capital to invest in organic growth and acquire competitors to add capacity, complementary technologies, increased purchasing power and entry into new markets to serve more customers.
Few people realize how much innovation there is in packaging. Packaging is an increasingly important component of consumer goods. Technological innovations can significantly advance branding and visual appeal for products and simultaneously can increase the shelf-life of perishable goods and enhance customer convenience.
One of the Coveris Americas’ businesses created packaging for the banana farming industry that incorporated a non-transferable pesticide to reduce crop loss and increase yield for growers. By putting pesticide in the packaging itself, farmers had a better physical barrier protection for their crop and were able to spray less chemicals onto the produce itself. Less spraying means lower costs, fewer toxins in the environment and fewer chemicals consumers are exposed to in eating the end product – a win-win.
This sort of innovation requires significant investment in R&D, equipment, and marketing. A private equity partner can provide the capital for this without the business owner needing to withdraw from existing operations.
Another issue impacting the packaging sector is environmental sustainability. Consumers are demanding eco-friendly solutions from the companies they patronize and those demands get passed on to suppliers like packaging companies.
At Coveris Americas we prioritized “down-gauging” product development initiatives to commercial products that used less plastic without sacrificing performance. These new products reduced costs and waste, while enhancing the sustainability of the supply chain, aligning our interests with our customers.
An attractive sector
As shown above, there are many areas where private equity can have transformative impact on these businesses. But there are other reasons why private equity firms—and their investors—should look for opportunities in packaging.
While the potential for a recession has added caution to investing in certain sectors, packaging is relatively resilient throughout economic cycles thanks to stable demand for many packaged consumer and industrial staples. Additionally, product pricing is now better aligned with raw material costs. Historically, packaging product prices were not directly tied to the underlying cost of materials used to manufacture the product. Today, however, the majority of customer agreements include contractual pass-through mechanisms and the industry has gradually conditioned the market to accept those cost fluctuations. These combined factors have led to more consistent revenue and earnings, making packaging businesses attractive to PE firms, particularly at this later stage in the economic cycle.
Finally, consumers are demanding more convenience and, in turn, buying more packaged goods at a time when packaging itself is an increasingly important component of end products. This means packaging companies aren’t just vendors, they are highly-valued strategic partners to major consumer packaged goods brands and other customers. By partnering with private equity firms, packaging companies can tackle the challenges of advancing design and manufacturing, improving efficiency, enhancing margins, and accelerating product development.
Private equity firms can be a great partner to enable packaging companies to drive more scalable solutions from concept-to-market, transform the business, and stay ahead of the competition. With the many avenues available to grow revenues and market share, I expect to see a robust pipeline of packaging acquisitions by private equity to continue.