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Magazine Issues » March 2009


Biffa, a UK waste disposal firm bought by private equity investors for £1.7bn, plans to use the rubbish it collects to generate energy. Nick Fitzpatrick looks at growth in the energy-from-waste industry...

When the price of oil starts to rise again, if it stays high next time don’t be surprised if a whole new industry is created that focuses on mining plastics out of landfill sites. Recycled plastics can be turned into a substitute for oil and producers of this fuel have benefited from the high oil price in recent years after users sought cheaper alternatives. 
In fact the maligned plastic bottle has never been so popular and has its very own spot price index. Performance hasn’t been great, however. At £80-£160 per tonne in the UK, the price of recycled clear blue plastic bottles is down from the January 2001 price of £110-£170, according to, which produces the index. 
But it is the value in the process of turning plastic into energy that counts more than the commodity and the ‘waste-to-energy’ sector, which recycles a plethora of materials into energy along with plastics, is attracting more interest from private equity firms offering expansion cash. 
The interest follows landmark deals such as Biffa, one of the UK’s biggest landfill operators. In April 2008 a consortium led by private equity firms Montagu and Global Infrastructure Partners bought Biffa for £1.7bn (€1.9bn).
In January this year Biffa said it would transform itself into a waste-to-energy firm by recycling the waste it controls. Biffa operates 30 landfill sites and handles over 10m tonnes of waste a year from more than 70,000 commercial customers and 1m households.
Andre Horbach, CEO, says: “The UK is going through a massive reorganisation of its waste processing infrastructure over the next five years. The majority of waste has been going to landfill but EU legislation and taxation is driving change.”
The waste-to-energy industry goes beyond the UK and is a global activity involving both publicly listed and private companies, along with government initiatives. For example, Covanta, a listed renewable energy business in the US, is expanding its operations in Europe and Asia. In the Middle East, Abu Dhabi’s Masdar initiative seeks to establish a Silicon Valley for ‘future energy’ companies. 
China is also in the business, while a further private equity deal in the UK saw Terra Firma Capital Partners identify waste-to-energy as a significant margin driver when it combined Shanks, which was the third largest landfill operator in the UK, with WRG, another landfill firm. It sold the waste disposal businesses of the two groups and created a renewable energy generator instead, now rebranded as Infinis. The transaction size was €850m. 
Parallel to these mega deals, a crop of other private equity funds are either beginning or expanding their investments in smaller companies involved in recycling waste into energy. They join a number of already established funds investing in public companies.
Typically, these funds are aimed at wealthy investors, but some of the private equity houses say that pension funds and consultants are also now paying interest.
Bruce Jenkyn Jones, a managing director at Impax Asset Management, an environmental finance specialist with £1.09bn of assets under management in private and public companies, is one of them. Impax is quoted on the Alternative Investment Market of the London Stock Exchange and its private equity investments include New Earth Energy, a recently formed renewable energy business set up by New Earth Solutions in the UK.
“The waste industry is a very interesting area. The sector splits down into makers of equipment, those who operate it, and the commodity recyclers who buy and sell paper, plastic and other materials,” says Jenkyn  Jones.
Interest from pension funds has brought with it a greater interest in benchmarks. “With this interest from pension funds comes an interest in what benchmarks are appropriate for investors in the sector,” Jenkyn Jones says. 
As an indication, Jenkyn Jones says that funds investing in listed waste companies should be expected to outperform small caps, meaning that the MSCI Small Cap Index is a useful reference. 
For private equity investors in the sector the goal is to float a company or exit through a trade sale. Kimberly Tara, CEO of FourWinds Capital Management, says waste-to-energy companies need to be of a similar size to Biffa before floatation. FourWinds is investing in smaller companies that are looking for expansion capital to get them there. 
“The waste programme is a new programme for us. We are focusing on recycling and waste-to-energy companies by investing in operators and technology producers,” Tara says.

Opportunities in Europe
She adds: “Historically there have been a lot of opportunities in the US, but because of regulatory reasons we are seeing more opportunities in Europe.”
It is a raft of European environmental and energy legislation that has created a foundation for the market. Matt Christensen, executive director of the European Sustainable Investment Forum (Eurosif), says: “There is a fair amount of recycling legislation coming out of Europe and individual member states. For example, the EU is looking at rolling out investments that match clean technology investments by the private sector. The EU is concerned that the Middle East and North America will better incentivise the people with the brains in these sectors to leave Europe and go elsewhere, and the EU does not want to lose those companies.”
Beyond environmental legislation, Jenkyn Jones at Impax says a second driver is market liberalisation and privatisation, which have seen state-run enterprises spun out into the private sector. 
Biffa was itself previously part of Severn Trent, a UK water company that was created with the privatisation of the state-owned water utility.
The third driver is the changing economics in the industry, says Jenkyn Jones. “Commodity prices have come down which is a negative for recycling. But landfill taxes have gone up.” Local authorities pay these taxes for refuse buried in landfill sites, incentivising them to divert waste to recycling and waste-to-energy firms.
Matt Taylor, a partner at Foresight Group, an alternative asset manager, says: “There’s an amazing dynamic in the waste industry. Local authorities will see the cost of waste disposal rise by 300% if they miss their targets for diverting waste from landfill sites, and landfill costs for the whole waste industry are rising as landfill tax is set to climb by 50% over the next two years. These pressures are unleashing a wave of investment in infrastructure for recycling and recovery of waste.”
Foresight Group, which has £200m of assets under management, launched the Foresight Sustainable UK Investment Fund in 2007. Standing at about £25m, the fund invests in unquoted UK companies, specifically infrastructure deals in areas including waste-to-energy and recycling. These include AWP Environmental, which plans to generate power from waste using an advanced ‘gasification’ technology that reduces harmful emissions.
The wealthy are still being advised to invest. Eurosif estimated that sustainable investments represented approximately 8% of portfolios for wealthy European investors as of 31 December 2007 and predicts that by 2012 the share will have increased to 12%, surpassing the €1 trillion mark. 
Burkhard Varnholt, CIO at Bank Sarasin, a Swiss private bank, says that selected renewable energy groups should perform well over the next year.
Oil prices and power
But the sharp fall in the oil price in recent months has had negative consequences for sustainable investments in the energy sector for the time being. In a report, Varnholt says: “The investment case for many projects, which is based on the cost differential between the provision of renewable energy and fossil fuels, is being undermined by the low oil price at present. This development also explains why the investment themes of energy efficiency and renewable energy did not perform as well as expected during the past year.”
Similarly, Jenkyn Jones at Impax says: “The oil price has gone down dramatically so it is less economic to use energy from recycled plastic at the moment. Recycling energy from plastic is more profitable when oil is higher.”
However, the International Energy Agency (IEA) forecasts that the oil price will average US$100 per barrel between 2008 and 2015, and $122 thereafter. At the same time the IEA expects energy demand to rise by 50% until 2030. This may give companies and consumers a major incentive to start searching for alternative energy sources again.
There is also another important driver for the sector: the new US president, Barack Obama. The agenda of the US administration includes a number of important sustainability topics including renewable energy.
In a report Robin Batchelor and Poppy Allonby, fund managers of BlackRock’s New Energy Fund, say: “This year may well be a turning point for the sector, given that the world’s largest energy consumer has just elected as president a vocal supporter of new energy.” 
President Obama has talked of investing $150bn in clean energy over the next ten years. His plans include creating five million new jobs in the new energy sector and he wants to introduce a national standard ensuring 10% of electricity comes from renewable sources by 2012 (25% by 2025).

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