Could 'Waste-to-Value' Develop into a Prominent Realm within Private Equity Investments?
In the realm of private equity and infrastructure, it's no secret that renewable energy and electric transportation have hogged the headlines, primarily due to their rapid growth and unstoppable momentum. However, as a sustainability investor, I've been noticing a quiet evolution: waste-to-value is gradually stirring up interest.
I intentionally use the phrase "waste-to-value" instead of "waste treatment" or "circular economy." While the latter falls under the former, not all waste-to-value solutions are circular. For instance, treats and discards soil at Superfund sites during soil remediation, unlike using waste for other valuable purposes.
My firm has explored various waste categories within the past year, including fabric recycling, waste gasification, anaerobic digestion of animal waste, carbon capture with useful byproducts, metals recycling, municipal solid waste sorting, battery recycling, landfill gas capture for sustainable aviation fuel, and numerous others. Despite its complexity, the opportunity is massive.
The UN Environment Programme's 2024 report prophesized that municipal solid waste generation would balloon from 2.1 billion tonnes in 2023 to 3.8 billion tonnes by 2050. To manage this waste, the world would exhaust an astounding $640.3 billion annually by 2050, if no action is taken. Incentivized by waste prevention and management methods, net annual costs could be limited to $270.2 billion in 2050, according to the report.
Consequently, waste-to-value initiatives have been gaining traction with infrastructure and private equity investors. Here's why:
- Political Neutrality Waste is a universal challenge that cuts across political boundaries, making it less prone to party-based disputes. Moreover, waste is a lost chance for efficiency and economical improvement - thus, everyone stands to gain from waste reduction and resource utilization. Consider this tracker of state-level PFAS legislation; the correlation between red and blue states is minimal.
- Diverse Revenue Streams By embracing waste-to-value opportunities, investors can generate multiple revenue sources. For instance, operators can collect fees to process waste and then generate additional income by selling resulting products. If these products hold consistent demand, long-term contracts follow. A prime example is anaerobic digestion of animal waste, where renewable natural gas and fertilizer are produced as byproducts.
- Localized Solutions Waste-to-value approaches often require amenities close to where waste production occurs or where final product demand resides, reducing transportation costs. Localized solutions also tend to create sticky, captive customer relationships.
- Technically Simple Solutions Waste solutions do not require complex, cutting-edge technology to work. Most waste solutions prioritize waste management capabilities, commercial execution, and project development skills rather than relying on intellectual property.
While the appeal of waste-to-value seems compelling, there are pitfalls:
- Diverse Waste Inputs Municipal solid waste along with other industrial waste streams are naturally heterogeneous, containing an assortment of materials, moisture levels, and toxicity levels. This heterogeneity is challenging for many treatment and processing systems.
- Smaller Scale Projects Smaller, distributed projects endure higher transaction costs, labor expenses, and timely difficulties. Infrastructure investors sometimes favor fewer, larger projects as it allows them to better manage transaction costs and complexities.
- Limited Market Opportunities for VC Investors Staying true to venture capital's preference for universal solutions with a large addressable market, waste-to-value may not immediately appeal. However, waste is still a massive, untapped market, promising significant returns for anyone unlocking its secrets.
Infrastructure and private equity investors have taken notice of waste-to-value opportunities. As the market begins to mature, waste can potentially become the private equity sector's next growth catalyst.
- In the realm of private equity and infrastructure, there's a growing interest in waste-to-value initiatives, which offer a politically neutral solution to the universal challenge of waste management.
- Venture capital firms are recognizing the potential of waste-to-value ventures, as they present diverse revenue streams through processing fees and the sale of byproducts.
- Project finance is being explored for waste-to-value projects, especially those that require localized solutions, as they reduce transportation costs and create captive customer relationships.
- Renewable energy sector players are also investigating waste-to-value opportunities, such as landfill gas capture for sustainable aviation fuel, as a means of expanding their equities in the energy transition.
- Private equity investors are limiting their exposure to the potential risks of waste-to-value projects by adopting a limit on the types of waste inputs and focusing on the technical simplicity of treatment and processing systems.
- Despite the challenges associated with heterogeneous waste inputs and small-scale projects, infrastructure and private equity investors are seeing waste-to-value as a promising growth catalyst, particularly in the context of waste becoming a massive, untapped market.
