One of the greenest segments of the UK economy is bucking gloomy trends on the M&A scene, according to a major report from accountancy and business advisory firm BDO. 

Investment into the UK Circular Economy, published in May, examines the buoyant deal activity currently underway involving companies founded on so-called ‘circular’ principles. Circularity is based on concepts of re-use, regeneration and recycling either to preserve materials in use for as long as possible or to repurpose them, thereby minimising – or even avoiding – waste.

In 2023, economic headwinds drove an overall 15% to 20% dip in UK private equity (PE) transactions compared to 2022, the report warns. However, the number of UK circular economy M&A deals rose by 30% – marking the fifth straight year of growth by deal volume and the second-largest annual percentage growth since BDO began measuring.

By value, total disclosed investment of £1.3bn marked a 50% annual surge, with average disclosed deal size growing from £9m to £11m. A key driver was the increased role of mid-market PE, with the percentage of relevant transactions up from 17% to 21%.

Some of the deals mentioned in the report include:

• Consumer goods – Nestlé invested £7m in impact recycling, which processes hard-to-recycle flexible plastics typically used in food packaging into reusable pellets.

• Aviation – Wizz Air put £5m into Firefly Green Fuels, which has devised a process for converting sewage sludge into sustainable aviation fuel.

• Food and drink – a consortium including former Ireland rugby captain Johnny Sexton and the founders of the Sipsmith and Beavertown beverage companies led an £8.7m Series A funding round for DASH Water. The business turns ‘wonky’ fruit that retailers would discard into the main ingredient for a range of soft drinks. 

A sense of purpose

BDO’s decision to focus on the circular economy stemmed from its work five years ago on the sale of a sustainable business to specialist Edinburgh-based PE provider Circularity Capital. BDO Deal Advisory Partner Rory McPherson explains that a few years prior to this, Circularity Capital had attracted £80m of funding from investors who were focused on the circular economy. More recently, a second fund of around £200m has been raised to invest in circular businesses. 

McPherson says investors’ behaviours are changing: “The underlying thesis is simple. If you are redesigning traditional business processes in a circular way, then businesses should be more efficient, more profitable and generate greater returns for investors. In a world where M&A activity in general has been subdued, but we have a parallel trend that shows no sign of stopping, keeping an eye on circular models has been time well spent from our perspective.”

Many target companies on the radar of potential buyers or PE backers are driven by a strong sense of social purpose. However, when it comes to putting themselves in the shop window, the deal environment is not governed by charity – so normal rules apply.

“A circular business model enables problems to be solved,” McPherson says. “Making yourself attractive means demonstrating that you have a sustainable proposition, where you’re winning market share and can see profit and cash generation rising in a market that’s growing. If you can show all those things, you could garner interest from a range of investors and create some competitive tension and excitement around the asset.”

Driving synergies

Owners must also understand which KPIs specialist circularity investors want their business models to meet – and these will differ from one company to the next. Advisers can help management teams keep the relevant KPIs front of mind and position their businesses correctly to get them ready for sale or investment. “If you start earlier, you can prepare more effectively and potentially execute the transaction more quickly,” McPherson says.

In the post-deal phase, the objective is to drive synergies to make the most of the combination. They may include revenue synergies or identifying duplication of effort and spotting costs that no longer need to continue under the combined business. Meanwhile, operational points may consider which of the two companies’ systems or processes should be used across the entire, merged business.

“It’s rare that businesses are acquired and nothing changes,” McPherson says. “There are always opportunities to make things more efficient.”

Looking ahead at the next three to five years, McPherson believes the positive trend this report identifies will continue, buoyed by increased interest and greater risk appetite from traditional, mainstream lenders. At the same time, the circular economy is starting to appeal to greater numbers of PE backers, he says.

“We think that a broader range of investors, including generalists, will begin to look at the circular economy. Whether the trend will continue at the same rate is hard to say. But if M&A conditions are broadly flat, something with a social purpose that enables us to be more efficient and use fewer resources – while generating healthy returns – feels like a good area to focus on.”

Shaping the economy

ICAEW Head of Corporate Finance David Petrie says: “BDO’s report highlights a trend discussed in detail in 2022’s ESG in Deals and Investment, produced by ICAEW’s Corporate Finance Faculty in partnership with Deloitte. Our conclusion was that environmental, social and governance (ESG) matters are no longer simply factors to be explored in due diligence. In their own right, E, S and G are now strategic drivers, leading to technology acquisition, access to markets and regulatory or societal compliance.”

This is not a new phenomenon: for many years, compliance with law and regulation has helped to drive M&A and investment activity. For example, the EU’s Waste from Electrical and Electronic Equipment (WEEE) directives, implemented in the UK in 2007, transformed the white goods market.

Petrie adds: “PwC’s latest Annual CEO Survey shows that 43% of business transformation projects in the UK are driven by the march to net zero. So the imperative set within many organisations is itself creating M&A activity and shaping the economy away from ‘extraction, manufacture and dispose’ to ‘production, use and recycle.’ 

“As such, investors and advisers are simply following the money: supporting the net-zero objectives of companies large and small for a combination of altruistic, commercial and regulatory reasons.”

Further reading

How circular economy principles are influencing corporate reporting habits alongside companies’ manufacturing processes.