Investments in circular businesses set to spike, report finds

A report by BDO LLP, a business and accountancy firm, has highlighted a spike in investments in the UK’s circular economy.

‘Investment into the UK Circular Economy’ found a 64 per cent increase in circular investments between 2020 and 2021, with this growth set to continue into this year following capital investments of £500 million in the first half of 2022.

Over the past four years, the report highlights, a total of £1.5 billion of capital has been deployed into UK circular economy businesses, with 296 investments across equity and debt. Trends between 2020 and 2021 saw a notable increase, as the average disclosed cheque size increased from £7 million to £9.3 million

As a total of £778 million was deployed to the circular economy in 2021, the firm identified venture capital investors as making up 50 per cent of circular economy investments in that year, with a further 22 per cent coming from mid-market private equity investors, and debt funding making up 15 per cent of deals.

In particular, the report names the investment company Business Growth Fund (BGF)as the most active investor in the UK circular economy, with 12 deals completed over the past four years. It is quickly followed by financial services company HSBC and private equity firm Maven Capital Partners, which both completed 11 deals in the same time frame, along with the equity and debt firm Mercia Asset Management, completing 10, and specialist circular economy investor Circularity Capital closing six.

Among these deals, the body found that the industrials and manufacturing sector saw the largest deployment of capital, with 33 per cent of deals in the last four years going to companies in this space. Another third has taken place in the food and drinks sector, with retail, consumer and leisure making up 22 per cent, and technology, media, and telecom receiving 12 per cent.

Investors also seem to prioritise technology, with technology-led businesses receiving 26 per cent of investment in 2021.

Highlighting six key drivers for investors to look to opportunities within the circular economy, the report names increased efficiency and cutting of costs on waste and materials as the first key motivation for venture capitalists and private equity investors to deploy capital into the area.

Additionally, a pressure from institutional investors, and the attraction global corporations have towards specialist circular companies to meet their net-zero initiatives are two more motivating factors for investors. Firms have also identified growing consumer demands for sustainability, and so use the trend to gain public invest in their favour.

This is coupled with recent government legislation focused on incentivising circular business practices, such as the Plastic Packaging Tax, announced April 2022, and the Extended Producer Responsibility Scheme set for 2024. Finally, access to the expanding circular economy talent pool, as the arena takes on more importance, is a significant advantage for investment firms when considering circular options.

Rory McPherson, Corporate Finance Partner at BDO LLP, said: “The macro market trends have been favourable for dealmaking in the circular economy as environmental, societal, political and consumer trends have all raised awareness of the issues that many Circular Economy businesses are working to solve whether that’s material recovery, circular inputs, smart buildings or circular design. 

“With ESG firmly on the agenda, it’s clear the Circular Economy encourages economic innovation and growth – driving disruption across all traditional sectors, and therefore creating value within those industries. The opportunities for entrepreneurs in the sector and investors looking towards it are significant.”

Todd Mills, Assistant Director at BDO LLP, added: “There is growing recognition from investors that Circular Economy principles can deliver both environmental and economic benefits. This is reflected in the sharp increase in Circular Economy investments in 2021, with entrepreneurs and investors partnering to deliver innovative business models that reduce waste and inefficiencies.

“With levels of available private equity capital in the UK at an all-time high, more and more investors are turning to the Circular Economy and we expect 2022 to be another record year.”