How the changing private-equity market will impact packaging converters

Intense competition for deals, new regulatory requirements, a looming industry shakeout and changing limited-partnership (LP) sentiment are key themes coming out of the just-released Grant Thornton Intl. annual private-equity report, A force for growth. How will these trends impact packaging converters?

The study, based on interviews with 144 buyout firm executives worldwide, reveals that today’s uncertain global economic climate is the biggest challenge confronting the global private-equity (PE) industry. Successful firms likely have addressed the need to grow their portfolio companies by relying on operational improvements rather than financial engineering as a way to build value. Forty-six percent of respondents cited becoming involved in important management functions as a major driver of growth, while one-third reported financial planning and 30% human resources as key factors in generating growth.

“We’ve seen the private-equity investment model evolve to meet the challenges posed by global economic uncertainty, new regulatory requirements and additional LP requirements,” says Steve Brady, head of Transaction Advisory Services at Grant Thornton. “Despite capital markets volatility reshaping PE, our survey found that  sentiment among respondents was overall optimistic.”

CPGs are most active
The end users of converted packaging—CPG companies—were highlighted in the survey as the most active area of PE investment this year, followed by business services, manufacturing, healthcare and telecom/media/telecommunications. “It’s significant that the consumer sector is cited as the most active. This could change if a double-dip recession does occur,” Brady says.

The study also found that PE is well entrenched as a funding source in North America with a significant number of US middle-market companies owned by financial buyers. That’s certainly true for the packaging-converting industry. Still, four out of 10 North American survey respondents foresee cross-border M&As within their PE portfolios likely to take place, primarily involving Canadian and US companies. These groups also have less interest in investing in Asian, European and Latin American countries due to the complexity in structuring deals, cultural issues and their lack of offices in foreign countries.

When it came to deal flow in North America, 52% of respondents thought that the majority of transactions would come from family-owned businesses and privately-held companies. The US labelmaking field, in particular, seems to be ripe for private-equity takeovers as many of these owners are nearing retirement age without family members wanting to continue. Thirty percent thought that secondary buyouts would make up their primary source of new deals, while 15% said corporate divestitures would account for the bulk of deal flow.

Private-equity interest has continued at an elevated level—23% of fiber packaging and materials deals in H1 2011, after making up 25% of all 2010 deals, says Blaige & Co. This is a sharp increase from 2009, when financial buyers were involved in only 16% of transactions. A notable financial deal in the first half of 2011 was the merger of Ahlstrom Capital and Accent Equity’s respective portfolio companies (A&R Carton and Flextrus) forming the €500-million converting group, Arch Packaging.

Respondents to the GTI survey in North America believe that intense competition and new regulatory requirements, though, will create new jobs…but not converting-manufacturing operator jobs at the companies being purchased. Half of the respondents, for example, said they anticipate increasing organizational headcount over the next year for portfolio-company management, back-office research and deal origination.

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1 Response to How the changing private-equity market will impact packaging converters

  1. Pingback: How the changing private-equity market will impact packaging converters | Converting Guide

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