Sustainable private equity: investing in plastic circularity and its opportunities

A growing number of clients are aware of the need to contribute to funding the transition to a sustainable economic environment and the opportunities associated with it. Due to the strong interest expressed by next generation investors, thematic strategies such as the circular low-carbon model for plastics are popular across all our markets. We asked Victoire Carous and Christopher Tritten, co-managers of the Plastic Circularity portfolio of Lombard Odier Asset Management (LOIM), for their perspective on the benefits of these sustainable private equity strategies, and how they can meet clients’ goals.

How can we tackle the problem of plastic waste?

The solution to reducing plastic waste (of which only 10% is currently recycled) involves the transition to a circular model, which creates a closed-loop system minimising damage to nature and biodiversity during the production and disposal of plastic. Emissions from the plastics value chain (production and end of life) currently represent 4% of all emissions¹, a level comparable to the aviation sector. On the current trajectory, in 20 years these emissions could represent 20% of the allowed annual carbon budget under a scenario of global warming of 1.5 degrees Celsius².

To make the plastics value chain circular and lower-carbon, we first need to change the way we produce materials, by reducing the use of petroleum-derived commodities in favour of recycled or bio-based inputs. Then, we need to invest in ‘reuse, repair and refill’ solutions to change the way consumers and businesses use plastic and extend its lifespan. Finally, circularity cannot be achieved without significantly improving and expanding the way we collect, sort and recycle plastic waste.

The transformation of plastic waste into resources represents a tremendous opportunity, particularly as consumer trends, business best practice and regulatory frameworks evolve to better address the challenges of plastic pollution.

Read also: 10 ways to rethink plastic through technology

Why does private equity facilitate access to investment opportunities?

By turning to private companies, investors gain access to parts of the economic environment that are not covered by stock markets, because these companies represent the bulk of the economy. For example, in the United States, there are about 11,000 private companies in which you can invest with a top line of more than USD 100 million³, compared with only 2,700 companies listed on the stock exchange. The publicly traded equity market covers only 0.01% of companies in the United States, while 99.99% of companies are private. Private companies can take on different forms, from highly innovative start-ups that develop new solutions to family businesses that are leaders in their niche market and have well-established technologies.

What are the competencies of LOIM in private equity, sustainability and other technical aspects relating to plastics?

The in-house investment teams at LOIM combine proven competencies in private equity and sustainability 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 that generates strong results and benefits from an extensive network, including leading managers. Our established relationships with these investment partners give us privileged access to a wide range of co-investment opportunities not always available to indirect investors.

The internal competencies of LOIM in the field of sustainability are based on a team of researchers and sustainable investment professionals. Our strategic partnerships expand our capabilities and knowledge; our partners include the University of Oxford, E4S (a coalition of Swiss universities) and Systemiq, a leading consultancy in sustainable development which specialises in plastic circularity.

Read also: Can plastic-eating enzymes solve the recycling problem?

We also work closely with the Alliance to Eliminate Plastic Waste (AEPW), which acts as a technical advisor to support our strategy in areas such as recycling technologies, waste management and plastics design. This approach allows us to obtain a maximum amount of information, pursue investment opportunities, create value and, ultimately, increase the prospects for return on investment.

How do you analyse investment opportunities? Can you give some examples?

Across all of our investment themes, we are seeing an increasing dynamic growth in transaction flow. Our investment team has already identified hundreds of recent transactions in this field, at all stages of maturity.

We can access this transaction flow thanks to our close ties with leading private equity managers and companies active in the plastics value chain. This network guarantees unique access to top-quality investment opportunities and accelerates the development of portfolio companies by catalysing commercial and strategic collaborations and ensuring a successful exit through a deep understanding of what companies and financial investors are looking for.

The Danish company Faerch⁴, a leading provider of sustainable rigid packaging solutions for the food industry, which has focussed its product design on maximum recyclability and has acquired a recycling company in the Netherlands, is an excellent investment case study. Advent International, a manager of Lombard Odier’s private equity network, acquired the EQT-owned circular packaging company in 2017 for EUR 700 million. Under Advent’s control, the company increased its top line by more than 60%, and the investor sold it to AP Moller Holding for around EUR 1.9 billion at the end of 2020.

Another good example in the growth phase is Vinted, a Lithuanian platform for second-hand clothing, 60% of which on average contains polyester, a type of plastic. In November 2019, Vinted became the first Lithuanian ‘unicorn’ after raising EUR 282 million. By March 2021, its valuation had quadrupled to more than USD 4 billion, and growth has not faltered since.

Read also: The CLIC^® Chronicles: How sustainable cosmetics brand Beauty Disrupted is reinventing the humble bar of soap