Investing in Circularity
Is the opportunity worth the challenge?
Open discussion with Andrew Shannon, Partner at Circularity Capital
May 27th at 11.00 am CEST
According to Jessica Matthews, Head of Sustainable Investing at J.P. Morgan Private Bank, by 2030, the circular economy could yield up to US$4.5 trillion in economic benefits globally. In other words, it could save up to 92 million tons of textiles in landfills, 1.3 billion tons of food waste, and 45 trillion gallons of water wasted through food production every year.
What makes it so difficult to invest in circularity?
What is Circularity Capital investment strategy?
Circularity Capital is looking for businesses to invest in across Europe. The activity started in 2015 and the first investment was closed in 2017. Currently, its portfolio aims at gathering 8 to 10 companies. Today there are 6 companies in it. To build this portfolio and detect promising companies, even before they are ready to be invested, Circularity capital works closely with Circular Economy ecosystems such as the Ellen MacArthur Foundation or more local Circular Economy initiatives.
Circularity Capital invests up to 10M€ in companies that already have clients and generate revenues, in the phase of scaling up their businesses. To succeed in Circular Economy, the right network, the right customer relationships and the right supply chain are required. On the other hand, to succeed in investing in Circularity, social and impact environmental have to join the equation of the financial performance.
What are the economic drivers for Circularity?
The overall idea is to increase the economic returns from resources by ensuring better asset and material productivity. In other words, it means that assets should be used more wisely, generate more value through maximized utilisation without draining resources.
Mobile phones are a good example to illustrate this. Over the last ten years, people have changed their mobile phone every 18-24 months and old ones are still drawers somewhere. However, after 24 months, the asset, which is the mobile phone here, is still able to provide utility, and the owner can even generate value from reselling it! There is a demand for second-hand mobile phones, it is proven by the fact Backmarket is valued at 3Bn€.
Another good example is the automotive industry. Renault buys and remanufactures 50.000 items (gearbox, drive trains, engines) every year to be reintroduced into their dealer network and sold alongside the new ones. They buy at low prices and sell at high prices while ensuring asset productivity
Direct outcomes of Circular Economy are local economy and incentives deployment as well as employment gain. Especially when the asset is existing and remanufactured locally.
Can Circular Business models drive disruption?
There are examples of disruptive and non-disruptive approach leading to successful circular business models. For example, sustainable packaging does not require the end-consumer to change their behaviour, and the B2B client to adapt their production processes as well as the whole supply chain. For big companies (i.e Unilever, Procter& Gamble) sustainable practices fitting their existing processes are very powerful and likely to scale.
On the other hand, both big companies and small players can drive disruption. There are examples of big, listed companies active in Circular Economy (i.e Brambles in Australia). They even work together. For instance, some large companies rely on smaller disruptors to transit from linear to circular (i.e SC Johnson acquiring Ecover in the field of detergent). More generally, the transition could not be made alone and need the supply chain including small and large companies.
Can circular business models be used in any sector?
The circular economy is immediately obvious to people when it comes to recycling. But recycling does not allow to maximize the value generated from an asset. For example, when recycling a laptop, only 9$ worth of materials are recovered, and the rest of the value is lost. Same for a car, only 6K€ can be recovered from a 25-30K€ vehicle through recycling. Before recycling, reuse, repair and remanufacture should be envisioned, that’s exactly what Renault does.
The economic feasibility of a business model poorly depends on the sector, the higher value is the asset, the more viable remanufacturing is. For instance, it would be too costly in terms of logistics to remanufacture a pencil. It depends also on existing supply chains, it is easy to send a garment or a pair of shoes through post services whether it’s more complicated to reintroduce fridges in the supply chains.
It’s also very interesting for investors when Circularity is included in products design as well as in business models that can generate value from it (i.e Amazon selling second-hand products).
Are there any key attributes that companies and teams need to deploy circular economy strategies?
Experience in Circular economy is not a must-have. The management team should align on a Circular Economy focus and always be customer-centric thinking about how the product creates value for the client.
The solution must be thought of as a business rather than a good solution for the environment.
What are the main exit strategies for circular companies?
There is no need for new exit strategies in Circular economy. Over the last years, an increase in the numbers of buyers of all types (private listed funds, public markets, traders and businesses…) has been observed showing that the ecosystem is building up.
Andrew is a member of the Investment Committee and part of the investment management team at Circularity Capital. Andrew leads Circularity Capital’s work in origination including the initial interaction with prospective investee management teams. Andrew is also Head of Compliance.
Capitalising on his strategic advisory, M&A and financing skills Andrew has successfully led several UK SME deals in a number of sectors, including plastic recycling and solar generation.
With his insatiable scientific curiosity and his ability to turn challenges into opportunities, Regis has developed unique know how to generate business and technical differentiation. Open-minded and creative, Regis is a recognized problem solver. Entrepreneur with PhD in material engineering, his work is generating IP and know-how.
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