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How finance can unlock the opportunities presented by the circular economy

How finance can unlock the opportunities presented by the circular economy 1

By Jamie Butterworth, Circularity Capital partner.

 

Finance is becoming ever more pivotal to unlocking the opportunities inherent within circular business models and practices – both matters of increasing investor interest, explains Jamie Butterworth from specialist growth equity firm Circularity Capital.

 

The circular economy is based on the principles of designing out waste and pollution, keeping products and materials in use, and regenerating natural systems. A growing number of organisations are embracing circular business models to enhance resource productivity, develop superior products and services and, ultimately, create more valuable companies.

Investor interest

The rise in corporate businesses adopting circular strategies, combined with enabling information technology and a growing ‘sustainability imperative’ for governments, consumers and brands, has led to a corresponding increase in institutional investor interest in the circular economy.

As a specialist private equity firm supporting growth and innovation in the circular economy, we have gained valuable insight into how circular business models can provide a compelling growth opportunity. We have noticed this interest increase incrementally since Circularity Capital was established as the first of its kind to exclusively target this subset of business models in 2015. A number of financing facilities now exist which focus on this area, which we see as evidence of a healthy circular financing ecosystem, more than capable of helping circular business models to grow and flourish.

Circular business models can, if deployed correctly, create more value than linear economy business models. This is because improving asset utilisation by, for example, designing products to be used more than once, can simultaneously improve margins. Indeed, circular businesses often outstrip their linear equivalents in performance terms.

We believe that by combining a proven traditional grow-equity skillset with specialist insight, knowledge and a network in the circular economy, we can better source, select, win and grow businesses in this space. We believe that this approach is now being bourne out in our growing portfolio of European growth-stage circular economy leaders.

A good circular model

Our investee company Grover, headquartered in Berlin, is pioneering an alternative rental model for technology, whereby consumers are able to rent tech products on a flexible basis, according to their requirements. Once a product is returned to Grover, it is  refurbished into ‘as new’ condition and then shared with multiple customers over the course of its lifespan.

Grover’s business model creates more value than ‘business as usual’ by driving a higher return on assets and results in a decoupling of virgin product demand through extended asset lifecycles and enhanced product utilisation. The business has grown by 2.5xsince our initial investment in June 2018 and has reported a >10x hike in both active subscribers and Annualised Subscription Value (€67m per annum). Grover was recently announced as Europe’s second fastest-growing eCommerce business (2016-2019) in the ‘FT 100 – Europe’s Fastest Growing Companies 2021’ special report.

We backed Grover because the brand exemplifies the type of product as a service business model that is becoming increasingly attractive to investors. We knew our support in bringing a circular business model to finance and retail could deliver faster business growth. Grover now has a presence in the online channels of eight leading European electronics retailers and in more than 500 brick-and-mortar stores across Germany, with plans to build on this go-to market strategy.

The potential for growth in this market will be significant in 2021 and beyond. Indeed, Grover’s number of subscribers has already increased tenfold since we invested in the business two and a half years ago. This kind of business is new and disruptive and clearly highly attractive in its own right.

Shark Solutions, another brand in our investee portfolio, has an equally unique marketplace proposition. Based in Denmark, its business is centred around converting an existing waste stream into a valuable product. The laminated glass used in windshields and architectural and building glass contains a very valuable interlaminate polymer, designed to ensure that glass doesn’t shatter or fracture on impact.

Shark Solutions processes and separates the polymer from the glass, then sells it to a range of blue chip customers as a recycled, non-toxic, low-carbon alternative to incumbent  fossil fuel based materials including bitumen and PVC. Shark’s recycled PVB polymer has a wide range of industrial applications worldwide, including in carpets, paints, coatings and sound dampening. Circularity Capital’s investment in Shark Solutions will help further develop the company’s manufacturing infrastructure across Europe and the United States, whilst further accelerating the adoption of its product range into adjacent end markets globally.

Superior financial returns are key to accelerating the circular economy

Today’s linear ‘take-make-waste’ model of value creation is under pressure in a growing, increasingly resource hungry world. The circular economy provides an opportunity to transform this challenge into an opportunity.

It’s our firm belief that scaling the circular economy relies on demonstrating its ability to drive superior (not concessionary) financial returns, alongside measurable positive social and environmental impact.

Clearly however not all circular economy businesses are born equal, so key to this is developing a disciplined approach to the origination, appraisal, selection and management of investment opportunities. This is why we believe the combination of traditional growth-equity expertise and specific circular economy insight will be key to accelerating the transition towards the circular economy.

For more information, visit www.circularitycapital.com.

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