Significant capital inflows are coming into the environmental services sector, resulting in a high level of platform formation and add-on acquisition activity. The favorable regulatory climate, governmental funding tailwinds, and sustainability imperative provide a foundation for defensible growth.
By Effram Kaplan and James Cocita
Over the last few years, the environmental sector has moved closer to the spotlight. The relative stability of the waste and environmental sector has long attracted investor activity because of its essential nature and traditionally strong growth profile. Customers are increasingly pursuing sustainability-focused solutions from their service providers, leading companies to seek acquisitions that can more rapidly build scale and expand service capabilities into adjacent technologies, waste treatment categories, and end markets. The companies that are able to adapt will be the more attractive assets for the investor community.
In our latest Insider covering the Environmental sector, we examine the key drivers that are leading to the prioritization of sustainability, the role technology plays in helping companies achieve their sustainability initiatives, and how select waste-to-value solutions are accelerating the transition towards a more circular economy.
How Technology is Transforming Sustainability in the Waste and Environmental Sectors
Technology is revolutionizing the recycling market, making it possible to use artificial intelligence (AI)-based solutions and robotics to dramatically improve recovery rates and reduce contamination while improving recycling economics. Proven waste-to-energy technologies such as anaerobic digestion (AD) are seeing improved use and rapid deployment, converting waste into valuable renewable energy. Technology developments to streamline the AD process, for example, target pre-treatment systems to increase gas production and software solutions including the use of sensors to improve processes.
For example, technology has played a significant role in advancing WM鈥檚 sustainability goals and strategy, particularly over the last few years. Automated technology such as optical scanners and intelligent sorting equipment at certain of WM鈥檚 recycling facilities offers benefits related to volume, efficiency, cost, and material quality, which all contribute to creating a more economically viable recycling process for everyone involved, including customers.
As the largest recycler of post-consumer materials in North America, WM plans to invest more than $1 billion from 2022 through 2026 to build new and update existing recycling facilities with state-of-the-art technology to increase the number of materials managed that can then be recycled and repurposed into new products. These planned investments are expected to result in nearly 40 new and upgraded recycling facilities, which is expected to add 2.8 million incremental tons of capacity annually.
鈥淲ith the benefits of technology, WM鈥檚 recycling facilities are expected to manage greater volumes, capture materials that have been more difficult in the past and deliver higher quality outputs. That helps the economics and, most importantly, can make recycling accessible and more sustainable for more customers in more markets,鈥� P.J. Foote at WM told Brown Gibbons Lang & Company (BGL).
In August, Rumple Recycling & Resource Center announced the opening of a new recycling facility that is considered to be the largest, most technologically advanced of its kind in North America. It will increase the processing capability from 160,000 tons of material a year to 250,000 tons. It also increases the material recovery rate to 98 percent.
The circular economic model follows the 3R approach of 鈥渞educe, reuse, and recycle鈥� to conserve resources and minimize waste and is aligned with the EPA鈥檚 Waste Management Hierarchy. The Waste Management Hierarchy ranks the ways for managing waste streams and materials according to what is best for the environment communicating core messages of waste prevention, resource conservation, and the efficient use of materials and energy.
Exploring the Emerging Opportunities in Waste-to-Value Solutions
Waste-to-value initiatives continue to play a critical role in the successful transition to a circular economy鈥攁 model of production and consumption where materials never become waste and nature is regenerated (Figure 1). Techniques such as anaerobic digestion and composting and other processes like pyrolysis, enable waste materials to be converted into new products or energy sources, thereby reducing the environmental impact of waste disposal and mitigating greenhouse gas emissions.
One area of waste-to-value that holds significant potential is the biogas industry. The American Biogas Council has identified 10,000 new sites as 鈥渞ipe for development,鈥� including 4,000 waste resource recovery facilities and 2,000 food scrap-only systems. Capital inflows are supporting the growth of AD systems across the country. Among the investors to announce AD investments over the last 12 months were Ares Management (Burnham RNG and Dynamic Renewables), Quinbrook Infrastructure (Purpose Energy), IFM Investors (GreenGasUSA), and Enbridge (Divert).
Other notable investments include Vanguard Renewables (Blackrock, 2022) and Bioenergy Devco (2021), both of which announced plans for aggressive expansion. Blackrock stated the goal to have more than 100 digesters in operation across the U.S. by 2026, a sizable expansion from the six in operation in Massachusetts and Vermont at announcement. BDC has constructed over 250 facilities worldwide.
The composting sector has experienced an influx of investor capital, according to L.E.K Consulting. Large environmental services companies are expanding their portfolio of composting facilities. Last year, WM added composting capabilities, including several new facilities and investment in the expansion of existing compost operations.
Another key market development in the waste-to-value economy is the development of alternative fuels such as renewable natural gas, renewable diesel, and sustainable aviation fuel, among others. Renewable natural gas (RNG) is a growing market driven by energy security and demand for natural gas, corporate focus on low-carbon energy solutions, and related low-carbon policy incentives. Versatile feedstock ranging from municipal solid waste to agricultural waste can be used in the initial production of RNG.
The U.S. is seeing rapid expansion with large environmental services companies announcing substantial capital investments in RNG projects. WM expects to commission five new RNG facilities by the end of 2024, as part of a longer-term plan to invest in approximately 20 new landfill gas-to-RNG facilities through 2026. The company has been operating WM-owned RNG plants since 2016. One of WM鈥檚 sustainability ambitions is to target the beneficial use of 65 percent of its captured landfill gas by 2026.
In June 2023, GFL completed the construction of its largest landfill gas to RNG projects, Emerald RNG, with its joint venture partner, OPAL Fuels. By 2030, at least 85 percent of GFL鈥檚 CNG fleet will be powered by RNG fuel, including RNG produced from its landfills.
Republic Services expects at least 8 RNG projects to be completed in 2024. Five RNG projects came online in 2023. The company has set a long-term sustainability goal to beneficially reuse 50 percent more biogas by 2030.
Sustainable Investment in Environmental Services
Significant capital inflows are coming into the environmental services sector, resulting in a high level of platform formation and add-on acquisition activity. Investors are attracted to the market鈥檚 stable demand, viewing waste as an essential service and, therefore, more recession resilient. The favorable regulatory climate, governmental funding tailwinds, and sustainability imperative provide a foundation for defensible growth.
Industry consolidators continue to pursue tuck-in acquisitions that are anchored in delivering sustainable solutions, while also helping to diversify and expand service capabilities to support core growth strategies. 鈥淐ertainly, sustainability plays into our M&A decision making. The core of what we do is so tied into sustainability that it must be part of the calculus,鈥� said Brian Brantley at VLS in an interview with BGL.
Significant dry powder is available in the market, which allows the creation of acquisition opportunities for companies that have a strong emphasis on sustainability in their operations. According to Pitchbook, private equity funds with an environmental services preference have amassed more than $1.3 trillion in capital globally while infrastructure funds have accumulated more than $500 billion (Figure 2).
According to Pitchbook, private equity funds have a keen interest in this sector, with those specializing in environmental services amassing more than $1.3 trillion globally
Best-in-class assets will continue to attract compelling valuations as the investor community and strategics continue to seek ways to deliver strong year-over-year growth while diversifying their mix of sustainability-driven solutions. The favorable regulatory environment, governmental funding tailwinds, and sustainability imperative will provide a foundation for defensible growth in 2024 and beyond. | WA
Effram E. Kaplan is a Managing Director and the Head of BGL鈥檚 Services and Infrastructure verticals. With more than 25 years of corporate financial advisory experience, Effram鈥檚 knowledge spans all facets of guiding an organization鈥檚 strategic and capital markets needs, including mergers and acquisitions, debt and equity capital, and shareholder and board advisory. His clients primarily include family and entrepreneur-owned, private equity-backed, and publicly traded companies. Effram can be reached at [email protected].
James M. Cocita is a Director within BGL鈥檚 Environmental Services team. His extensive transaction expertise encompasses mergers and acquisitions, recapitalizations, divestitures, strategic alternatives, valuations, and other financial advisory assignments for private, public, and private equity backed companies. James can be reached at [email protected].
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