The COVID-19 crisis has put into stark contrast the need for increased investment in solutions like better resilience, local job creation, affordable healthcare, secure food supplies and a diminished dependence on international trade, which can make us less vulnerable to some of the daunting long-term environmental and social challenges we currently face – namely climate change.
The gulf is wide between talk and action, however, and using institutional capital to address our society’s most pressing issues at scale is far more complicated than just taking money from one pot and putting it into another. Impact investing is about solving huge, complex problems, which means you have to think about the investments more holistically than just investing to make great returns.
As CEO of Circulate Capital, an investment firm that manages a $106 million fund focused on mitigating and solving the ocean plastic crisis by investing in companies operating in the waste, recycling, and circular economy sectors in South and Southeast Asia (SSEA), I understand these challenges first-hand.
Perhaps the biggest takeaway from our work thus far is that you can find terrific companies in emerging markets that are EBITDA positive with incredibly smart management teams – and they need hands-on support from a number of actors along the way to generate the impact at scale.
Our goal is to invest in companies developing the new technologies and recycling infrastructure that advance the circular economy – particularly in SSEA countries that “leak” more than 50% of the world’s ocean plastic, yet lack the proper recycling and waste management infrastructure.
Circulate Capital is providing risk capital for entrepreneurs, helping to build track records and prove business models, all the while driving to scale. But our secret sauce is working with our Limited Partners, including PepsiCo, Procter & Gamble, Dow, Danone, CHANEL, Unilever, The Coca-Cola Company, and CP Chem, to help our portfolio companies join the multi-national supply chain. An essential part of our role is to push the entire industry forward, helping it move beyond an organic growth / commoditized view and bringing it into the international recycling supply chain, advancing the circular economy and creating resilient jobs along the way.
Our first investments are in two companies with inspiring stories and promising businesses.
- Lucro Plastecycle Private Limited (Lucro): A homegrown Indian manufacturer located in Mumbai, Lucro specializes in recycling difficult-to-manage flexible plastic for its own production and for sale as high-quality commodities to other facilities across the country. They have an excellent team with an entrepreneurial mindset; established operations with a proven business model and a focused expansion plan. There is a market opportunity for recycling flexible plastic, a material that many leave behind and we believe that Lucro is poised to capture it.
- PT Tridi Oasis Group (Tridi Oasis): Based in Jakarta, Indonesia, Tridi Oasis specializes in recycling beverage bottles, which are used to manufacture circular packaging and textiles. Tridi Oasis is led by two inspiring women: a Harvard grad with a fascinating story about how she ended up running a recycling firm and a skilled engineer who built her first recycling line by hand. Though a relatively young company, Tridi Oasis has already set the standard in Indonesia for transparency and traceability, two essential issues for any recycling business that wants to operate on an international scale. They have successfully ramped up business and there is strong demand for rPET.
Here are a few things I’ve learned along the way that may help others as they try to scale investment in solutions that can address the most critical environmental issues we face today.
Focus on growth
Nearly all of the businesses we have looked at have grown organically – they’re essentially bootstrapped and have never accessed outside capital. Their survival has put them in the top tier of entrepreneurs because they are cost conscious and adept at managing risks. But, you can’t grow and scale that way.
To become part of an international supply chain, you need to invest – and invest a lot. So the question is how can you transform these companies from slow growth to, say, 10x growth, so you can scale their impact?
Developing a growth mindset means patiently helping team evolve its decision-making processes; it means helping them think bigger a management – whether it’s about the international dimensions of their work or the growth possibilities for the business that are based on a realistic glidepath. In the cases of Tridi Oasis and Lucro, developing a growth mindset also meant working with them to provide media training and marketing support so they could develop a better narrative for their businesses and talk about it in a manner and style that reflected the sophistication of their work and met the expectations of outside investors.
Our investors are powerful, multinational corporations. They bring a vast amount of knowledge about recycling processes and the international supply chain as well as other valuable resources that these small and mid-sized enterprises (SMEs) could never have accessed otherwise. As a result, they are providing direct support that should help these companies leapfrog to the next stage of growth with the right pieces in place to scale.
These global corporations possess a sophisticated understanding of key aspects that can make or break a recycling process – they know all of the specs of a product, the safety and health standards, operational protocols, financial controls, and more. They have spent time on the ground working with our portfolio companies to help them improve their standard operating procedures so they can meet international standards. Just this month, one of the investors did a training for a portfolio company on the entire PET recycling process.
What’s more, some of the investors have connected the SMEs with their own packaging sourcing providers so that the SMEs could put in place processes that meet the specifications of these global suppliers.
Seek local knowledge
The rapid emergence of COVID-19 presents unusual challenges for asset managers in SSEA. That this crisis is causing headaches for asset managers around the globe, and many are scrambling to provide a variety of assistance to their portfolio companies — relaxing covenants and other kinds of contractual “fixes,” many asset managers are trying to find ways to provide some sort of bridge financing for their portfolio companies by cobbling together a bridge fund from LPs or turning to organizations like Open Road Alliance for support.
SMEs in the SSEA region desperately need help to weather the storm, but debt financing, at least by foreign investors, is not always permitted in the region. This means that asset managers operating here need to be extra resourceful to find pathways that can help these companies survive. At Circulate Capital, we’ve partnered with Leapfrog Investments to leverage their talent management program to provide six months of free crisis training and support to our SMEs’ management teams to help them get through this. We view this kind of support as being critical for these young management teams.
There are many other stories I could share about the innovative thinking and the multifaceted levels of support that all of the actors in the recycling value chain are bringing to their roles in building this circular economy – from the lawyers who first constructed the innovative blended finance structure of our organization to the LPs to the fantastic team we have at Circulate Capital who have been so active in building a pathway for these companies to succeed. Building a circular economy is incredibly complex, particularly in emerging economies and during the COVID-19 crisis. But we have powerful tools, entrepreneurs, and partners to work with, giving me confidence that we can get there – and generate attractive returns while doing it.