The waste sector is making headlines in the private equity world as investors are searching the rubbish for opportunities. Admittedly, it is not the most glamorous of industries, but there is good reason for the spiked interest in waste and recycling and it is likely to gain traction in the coming years.
The £1.4 billion bid for waste management company, Biffa, is the latest move in the rush of investment into waste and recycling. This follows moves by KKR to buy Viridor (waste management), Macquarie to buy Beauparc (recycling services) and Ancala to acquire Augean (hazardous waste management). Reconomy (waste broker) was acquired by EMK Capital in 2017 and has since embarked on an aggressive expansion strategy to become one of the sector’s biggest operators.
The pandemic has accelerated this trend, increasing the attractiveness of critical infrastructure and shining a light on its stability in uncertain times. Since then, the regulatory and political direction of travel towards the circular economy has boosted investment appetite.
The government wants us to recycle more, especially as rates have recently plateaued after years of rapid growth. It also wants to tackle the wave of plastic being sent abroad for ‘recycling’, which is landing atop toxic piles of waste in poorly regulated countries. To this end, plans include standardizing waste collections, introducing a deposit scheme to boost recycling of plastic bottles, and imposing ‘polluter pays’ rules that will force packaging makers to incorporate the cost of recycling into their products. According to analysts, the industry will have to invest up to £10 billion to fund the infrastructure needed to meet these commitments. Jacob Hayler, director of the Environmental Services Association, said “it definitely feels like a very dynamic, exciting growth area at the moment, with plenty of opportunity to invest.”
Companies with a strong portfolio of recycling or energy from waste (EfW) infrastructure are experiencing high profit margins and levels of growth, proving lucrative for private equity backers. The current energy crisis is favouring the domestic supply of energy and the government’s focus on a windfall tax for large oil companies has allowed many EfW plant operators to reap the rewards of higher prices. Sector specialists have explained that many of these plants were modelled on an expected power price of approximately £60 MWh, but current revenues are about £200 MWh, so income has tripled, turning biomass and EfW plants into green cash cows. As a result, large investment firms specializing in infrastructure are circling such projects. For instance, Copenhagen Infrastructure Partners has active investments in SSE’s Slough Multifuel project and is part of a joint venture with FCC Environment for the Lostock EfW plant.
The demand for recycled materials is also growing. London-based PE firm, Exponent, formed the wood recycling and biomass supply specialist, Enva, after acquiring DCC Environmental. Following an acquisition spree, it is now one of the largest wood recycling firms in the UK and supplies a large amount of recycled material to biomass plants which has proved highly lucrative. The site also turns waste into materials for the panel board industry and animal bedding products, the latter for which it won the Recycling & Waste Management Circular Economy Award in 2019.
Investors’ interest in waste management is underpinned by the increasing prioritization of ESG in investment decisions, and the swelling of ESG funds globally. Markets such as gas, electricity and water are also more mature and therefore harder to penetrate. The fact that there are only a few large players in the waste space, of which relatively few are listed opportunities, only adds to the excitement. That being said, the market is becoming more sophisticated. Biffa has been silently snapping up smaller players, spending £260 million on 25 deals since 2016. Further consolidation is likely to gather pace as regulations are tightened and operators try to scale up to mitigate supply chain issues; doing so helps reduce costs and carbon footprints.
Investors should be mindful that waste management contracts tend to be short term and volatile, unlike in wind power where long contract terms have helped fuel a construction boost. The sector is also not immune from the cost-of-living crisis, as recessions tend to see households produce less waste. Nevertheless, the political climate is such that investors should be excited about waste management assets that can offer steady returns and can demonstrate green credentials.
To discuss the current policy and regulatory environment for waste, EfW and recycling issues in more detail please email Thea Southwell Reeves on email@example.com.