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Is the PE machine finally going for green packaging?

Investors are paying more attention to sustainability than ever, which could put paid to future deals in a sector that has long been a stalwart for private equity (PE).

For years, financial sponsors have relied on the packaging industry to deliver predictable returns. This is because packaging demand is often underpinned by non-cyclical industries such as pharmaceutical products. Where certain consumer goods fall out of fashion, others take their place and will need to be delivered to end users in some form of box, bag or film. In other words, cash flows are dependable.

But limited partners in PE funds are expecting more from their managers' investment decisions. Sustainability is the order of the day and single use plastics are anathema to ESG.

Still in the game 

For now, there is little sign of packaging deals in general letting up. Dealogic figures show that of the 62 deals targeting European packaging companies so far this year, PE is responsible for 19—a drop from the pre-pandemic heyday but not yet a downward trend.

By value, PE funds contributed €3.15 billion, boosted by KPS Capital’s €2.25 billion acquisition of Crown Holdings’ European tinplate business.

But there is good reason to believe that plastic packaging deals will face greater scrutiny. In the first half of 2022, the European Union is expected to propose an update to its Packaging and Packaging Waste Directive to improve recyclability. France is to ban plastic packaging for almost all fruit and vegetables from January. This will inevitably have an impact on investment decisions.

Virtuous circles

PE has a knack for turning a crisis into an opportunity. For those that already hold plastics packaging companies in their portfolios, sponsors have not missed the chance to emphasise how they will benefit from the unstoppable sustainability train.

3i Group, for example, is looking to exit its holding in Weener Plastics at some point next year. The PE firm is expected to tout the German business's niche in recyclable rigid plastic packaging, ticking the sustainability box and even representing a growth opportunity as Europe seeks to make single use packaging a thing of the past.

It’s a pitch that worked for Logoplaste, a Portuguese maker of rigid plastic packaging. The company showcased the green credentials of its business model, which cuts CO2 emissions from transportation and reduces secondary packaging, before its acquisition in February by Canada’s OTPP.

In Finland last year, sponsor MB Funds touted paper packaging company Kotkamills’ development of a technology to replace plastics in food containers when it successfully exited the business. Kotkamills' tagline is “Accelerating Circularity”.

That's a mantra the PE industry can get behind. Plastics packaging businesses that can score points with investors with closed-loop cycles will command high price multiples. The rest will be for the landfill.