Singapore-based private equity firm Circulate Capital plans to deploy half of its new $300 million fund in India and its neighbouring countries, betting that tightening recycling regulations and a maturing circular economy would make the country its most attractive market.
“We invested half of our previous fund in India, and we expect to invest half of the capital from our new fund in the country as well,” said Circulate Capital founder and chief executive Rob Kaplan in an interview with Mint. “There's been strong extended producer responsibility (EPR) regulations in place for over a decade and that has now evolved into mandatory recycled content regulations as well.”
The firm announced a first close of $220 million for its second fund, which has a targeted corpus of $300 million. Through the new fund, Circulate is looking to make 16-18 investments across South and Southeast Asia, of which half will go towards India and its neighbours, while the rest will go to companies in Indonesia, Thailand, Vietnam, the Philippines, and Malaysia.
Conglomerates such as Coca-Cola Co, Danone, Dow, and Procter & Gamble have once again come in as limited partners in the second fund. This is in addition to development finance institutions like British International Investment, the French DFI Proparco, the International Finance Corporation (IFC), and Builders Vision, the family office of Lukas Walton, the grandson of Walmart founder Sam Walton.
On an average, the firm invests between $15 million and $25 million in a company and picks up a minority stake in the range of 15-25%.
The firm's second fund comes at a time when investors across the globe have pulled away from pouring money in companies catering to environmental as well climate-specific problem statements. Much of this has to do with how such investments have failed to produce any healthy exits for investors or meaningful impact at scale.
Nonetheless, for Circulate, policy tailwinds have been a major driver in its decision to keep writing cheques to companies in India. “Regulations started with plastics first, then into electronic waste, where a limited number of commodities were covered under EPR regulations. That list keeps growing,” said Prashant Purohit, investment partner and co-head, South Asia for Circulate. He added that apart from plastics and electronic waste, the government is also mulling regulation around textile recycling, a nascent area which is showing early signs of growth.
From Circulate's $188 million first fund started in 2019, the firm invested in seven Indian companies, according to data on Tracxn. It has completely exited its investment in Recykal, a digital waste management platform. The firm has partially exited two of other investments in the country, Lucro, a recycler specialized in difficult-to-manage flexible plastic packaging and Srichakra Polyplast, a food-grade plastic recycler.
Evolving with the times
Circulate has adapted its thesis on investing in India, based on the the evolving regulations. While it earlier invested in companies mainly focused on plastic waste collection and repurposing, with the new fund it is looking to invest in companies that are extracting rare earth minerals from electronic waste.
Rare earth element (REE) extraction has become a key concern for India as it mostly depends on imports for access to materials such as lithium, cobalt, and others. India has traditionally relied on China for the import of some of these materials, which are used in the manufacture of electric vehicles, semiconductors, solar panels, smartphones, jet engines and even guided missiles. While the country is home to some of the richest reserves of REEs, it doesn't have the processing capacity of a country such as China.
While many investors are looking to back companies that are able to extract REEs, Circulate is looking at where they're already found. “We see the opportunity as being able to recover critical materials from used devices and electronics, but the problem is that those materials are trapped in those devices and the circular economy provides the opportunity to recover them,” said Kaplan.
Recycling of polyolefins, widely used to create laundry detergent bottles and other fast moving consumer goods is an area the firm is bullish on. This is in addition to paper packaging innovations and textile recycling. According to Kaplan, there are only six or seven companies globally, which are capable of doing textile-to-textile recycling. Earlier, most textile recycling headed ‘downwards’, where the material is shredded to be used as rags or insulation.
Scale-hungry generation
A large part of the firm's decision to renew its focus on India's circular economy segment is the fact that many of these businesses are no longer just families that are looking to keep the businesses running ‘as-is.’ They are hungry for scale.
“Entrepreneurs are now ambitious about taking the scale of their operations to pan-India levels,” said Purohit. “These are family businesses that are looking to institutionalize themselves.”
As a result, Circulate's deal pipeline in India is a mix of companies that have never taken a cheque from an institutional investor as well as venture capital-backed startups.