investment viewpoints
Plastic circularity: why LOIM private equity?
In this Q&A, Christopher Tritten and Victoire Carous, co-leads of the Plastic Circularity strategy, explore the advantages of using private equity to invest in a lower-carbon circular model for plastics. From our investment goals to our established background in private equity and sustainability, we outline how this strategy finds value for investors.
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How does LOIM’s Plastic Circularity strategy1 envision tackling the plastic waste issue?
The solution to reducing plastic waste is the transition to a more circular model, which creates a closed loop system minimising the harm to nature and biodiversity that arises from the production and disposal of plastic. The plastic value chain’s emissions today (production and end of life) represent 4% of all emissions,2 which are comparable to the aviation sector. On the current trajectory, in 20 years’ time, those emissions could represent 20% of the annual carbon budget allowed under a 1.5oC global warming scenario.3
Encouraging lower carbon emissions in plastics means reducing the use of petroleum feedstock in favour of recycled content or bio-based inputs. Our strategy also contributes directly to reducing global plastic-linked emissions by investing in reuse, repair and refill options that change how we use plastic and extend its lifetime. Finally, the move towards circularity cannot be achieved without vastly improving and scaling how we collect, sort and recycle plastic waste.
What are the main goals of the strategy?
- Reduce plastic waste by avoiding or recycling waste and promoting a circular model for plastic
- Reduce greenhouse gas emissions in the plastic value chain
- Deliver mid- to high-teens net returns4
Why does private equity enable favourable access to investment prospects?
By tapping into private companies, investors gain access to parts of the economy not covered by listed markets because private companies represent a significant majority of the economy. For instance, in the US there are some 11,000 private companies compared to just 2,700 public ones with revenues above USD 100 million.5 The listed stock-market covers companies representing just 0.01% of companies in the US, whereas some 99.99% of companies are private. Private companies cover a vast array of businesses including young, highly innovative companies developing new solutions and family-owned industrial niche leaders with established technologies.
What is the LOIM’s skill set in private equity, sustainability and the technical aspects of plastics?
LOIM’s in-house investment teams combine proven private equity and sustainability capabilities with the support of strategic and technical partners. Having invested in private assets since 2007, our team manages a portfolio of over USD 7 billion generating a strong track record and benefiting from an extensive network with first-tier managers. Our established relationships with these investment partners provide us with privileged access to a full pipeline of co-investment opportunities that may not always be accessible to indirect investors. This is in part due to our proven co-investment expertise and ability to underwrite and execute on opportunities quickly, having invested in more than 60 co-investment opportunities over the past 5 years. This is an important source of deal flow for the fund, expected to be over half of the Plastic Circularity strategy’s portfolio, enhanced by direct investments led by our investment professionals with direct private equity investment experience.
The strategy leverages LOIM’s dedicated in-house sustainability expertise accumulated by a 30-strong team of researchers and sustainable investment professionals, of which three are actively contributing to the strategy. Our strategic partnerships expand our capabilities and knowledge, and include Oxford University, E4S (a coalition of Swiss universities) and Systemiq, the leading sustainability consultancy with particular expertise in plastic circularity.
We also collaborate closely with the Alliance to End Plastic Waste (AEPW) who acts as a technical advisor to inform the strategy on areas like recycling technologies, waste management or plastic design. This distinctive set-up affords us maximum insights, investment opportunities, value creation and, eventually, return opportunities.
Finally, the investment process is overseen by an investment committee composed exclusively of representatives of LOIM, which ensures that our investment philosophy and framework is fully and appropriated applied to the fund’s investments.
How does LOIM’s approach open investment opportunities?
Across our investment themes, we see dynamic and growing deal flow, with an estimated 700 transactions in the plastics space alone over the past five years. We can access this deal flow through our strong connections with first-tier private equity managers and within the plastic value chain. Our access to high-quality investment opportunities and investment partners clearly create avenues for investors, as well as accelerating the development of portfolio companies and successfully exiting with a strong understanding of what corporate and financial investors seek.
There is a tremendous opportunity for turning plastic waste into a resource, especially as changing consumer trends, corporate best practices and the regulatory environment are evolving to acknowledge the challenges around managing the damage from plastic-emissions. According to industry estimates, the investment required across the plastic value chain for its transition to a circular value chain in packaging represents a potential USD 1.2 trillion global economic opportunity by 2040.
Our investment team has already mapped hundreds of recent transactions in this space across all stages of maturity and transactions are expected to accelerate over the investment period due to the rapid changes underway in this emerging sector.
Recent fundraising rounds include GBP 50 mn series C round by Modern Milkman6 (November 2022), USD 91 mn Series C by Amp Robotics (November 2022) and Colombier’s private equity round (November 2022).
Recent transactional activity provides evidence of multiple exit options with IPOs (for instance Quantafuel6 or Purecycle in advanced recycling); corporate acquisitions (such as the Schwarz Group’s of Lidl and Kaufland retail chain’s acquisitions of recyclers in Germany, Poland, Luxembourg, Spain and Portugal); and private-equity funds increasingly investing in the space (such as the Brookfield Global Transition Fund investing USD 700 mn to build a recycling platform in the US).
A strong investment case study is Danish company Faerch6, a leading sustainable rigid packaging solutions provider for the food industry that focused its design on maximising recyclability and acquired a recycler in the Netherlands. Advent International (a GP in Lombard Odier’s private equity network) acquired the circular packaging company from EQT in 2017 at an Enterprise Value of EUR 700 mn in June 2017. Under Advent’s ownership the company increased its revenue by more than 60 percent, and the sponsor sold the company to AP Moller Holding for approximately EUR 1.9 bn in late 2020.
The strategy is well positioned to benefit from this window of opportunity through its access to the deep technical expertise of the AEPW’s dedicated Technical Solutions Centre, comprised of five industry experts from highly relevant verticals (plastics production, recycling and packaging, waste management and policy), each with 15-40 years of experience.
Another good example at the growth stage is Vinted6, the Lithuanian online marketplace for second-hand clothes. In November 2019, Vinted became the first Lithuanian unicorn after raising a cumulative EUR 282mn. By March 2021, Vinted’s valuation had quadrupled to more than USD 4 bn and growth has remained steady since.
How does LOIM’s private-equity team create value for the companies it invests in and therefore unlock positive sourcing opportunities?
Our networks and capabilities appeal to companies because they allow value creation across multiple areas including:
- Supporting investee companies to define their strategies, including their financial strategies
- Identifying growth opportunities into new technologies, geographies, segments or specific clients
- Aiding investee companies to deliver on these opportunities, especially by making introductions in the sector and providing access to talent and sector expertise
- Facilitating the exit of our investments by providing our investee companies with privileged access to strategic players and other sustainability investors
LOIM also provides environmental and sustainability stewardship to the investee companies and support for the impact reporting required by the strategy (in particular life-cycle analyses on carbon footprint), which we believe will become an increasing requirement for capital providers.
Figure 1. Investment stages and the innovation curve
Source: LOIM. For illustrative purposes only.
How will investments be allocated across venture capital, growth equity, buyout, and infrastructure types of deals?
The strategy targets a portfolio comprised of 20-30 predominantly minority investments in growth equity, and more opportunistically in late-stage venture capital, in buy-out and in other private asset strategies. As shown in figure 1, our strategy includes:
- As a focus: growth equity. Investment in relatively mature companies going through transformational events (such as entering a new market) and needing the support of external capital to unlock the next phase of substantial growth. Possibility to lead rounds or do co-investments
- Opportunistically: venture capital (Series A and B). Companies with a technology/business model in the process of scaling up their operations. Possibility to lead rounds or do co-investments
- Opportunistically: buyout. Investment in mature companies with the aim of improving efficiency and/or consolidating the space - for instance, combining smaller players to achieve scale and improve sustainability of operations. The strategy will opportunistically invest at this stage, typically positioning itself as a co-investor along GPs in our network
- Other: debt or value-add infrastructure.
Compared to venture deals, growth equity companies are revenue-generating with proven technology, applications and markets, proven unit economics and significant growth upside, leading to an attractive risk/reward profile. Growth companies seek additional capital to scale their operations with the potential to generate a higher positive impact (quantitatively speaking) on plastic waste and GHG emissions reduction compared to earlier projects.
As such, we believe that growth equity companies offer a unique combination of high impact potential and attractive returns to investors. Furthermore, in plastic circularity, we see few funds equipped to invest in the growth stage, which limits competition.
Plastic substitutes are not always better for the environment. How will LOIM ensure the alternatives it invests in do not create problems for the future?
As part of our Do No Significant Harm (DNSH) test, we systematically check during our due diligence process for possible negative externalities such as carbon emissions, hazardous waste, deforestation, and biodiversity. We map plastic's potential environmental impact on the planetary boundaries framework to capture externalities as far as possible. We also cross-check the EU taxonomy (the list of activities deemed sustainable by the EU) and relevant technology and market regulatory frameworks to ensure our investments’ sustainability. For example, we would exclude bioplastics made from materials that compete with food for land use, use uncontrolled polluting chemicals, or source lignin (a type of organic polymer) from non-regenerative forests.
To learn more about our Plastic Circularity private-equity strategy, please click here.
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