Investing $100m in Asian recycling may be easier said than done

One of the high profile elements of the industry's new $1 billion Alliance to End Plastic Waste is the $100 million philanthropic investment firm Circulate Capital.

Circulate wants to pump that $100 million, which comes from large consumer product companies and Dow Chemical Co., into plastic recycling projects in developing economies in Asia, where the ocean pollution problem is most severe.

It's a sizable amount of money, but Circulate's top executive cautions it should be thought of more like a down payment toward what will ultimately be needed, rather than a solution.

“This challenge is really going to take billions and billions of dollars,” said CEO Rob Kaplan, during the mid-January launch of the alliance. “It's more than a hundred million, it's more than the billion that the alliance is announcing.”

The New York-based firm, which featured prominently in the unveiling of the alliance, plans to make its first two or three investments this year and deploy its full $100 million over the next five years.

It aims to focus that money in developing countries in Asia that lag in waste management systems. Studies estimate that more than half the plastic flowing into the oceans comes China and Southeast Asia.

Circulate says it can provide seed capital to demonstrate to larger investors that they can make money in the fragmented and sometimes opaque plastics recycling markets in Asia.

“We need large scale institutional investors,” he said. “This is the start of building those on ramps for those large scale institutional investors... that will be bringing together the capital for the future of infrastructure in southeast Asia.”

In a mid-December interview with Plastics News, Kaplan expanded on the challenges building recycling infrastructure in India and southeast Asia, where Circulate is initially focusing its attention.

Kaplan said that while there are many creative companies in recycling in the region, they generally lack the ability to scale up quickly.

That creates a shortage of investment opportunities and prompted Circulate last year to start an incubator program with consulting firm SecondMuse and environmental group Ocean Conservancy, to better support entrepreneurs.

“In many cases it's often harder to deploy the capital than it is to raise it,” he said. “Part of the reality of why we have this problem today is there haven't been enough investments in basic infrastructure across the board and recycling is just one key example.”

The small size of individual plastics recycling companies in Asia is a practical problem for investors because it's essentially the same effort for an investor like Circulate to evaluate a company, whether the ultimate investment is for $100,000 or $10 million, he said.

“Size is definitely part of the challenge to get to investability,” he said.

Kaplan said Circulate will follow a similar model to the Closed Loop Fund in North America, which took $40 million in funding from consumer product companies and retailers in 2015 and used that to unlock about $125 million to invest in recycling in the United States.

Kaplan co-founded Closed Loop before launching Circulate last year.

“We are using that benchmark as our target,” Kaplan said. “For every dollar we invest we hope to bring in another three to four dollars from co-investors.”

“But I think that's just a beginning,” he said. “Even if we were successful in that and at the end of the day we talked about $500 million, that's still just a drop in the bucket of the billions that are needed.”

David Taylor, the chairman of the AEPW and the chairman, president and CEO of consumer products giant Procter & Gamble Co., said Circulate's model of “catalytic capital” is important to directing money to the right organizations at early stages, when investing is riskier.

“It's absolutely critical,” said Taylor. “In order to de-risk some of the investments that Rob talked about, we're going to have to put some money in up front, while we still don't know the solution, to let these entrepreneurs go invent new solutions.”

While Circulate was featured prominently in the alliance's unveiling, its $100 million in investment capital is not directly funded from the AEPW, Kaplan said.

Rather, AEPW is directly funding Circulate's incubator network, while alliance leaders P&G and Dow contribute to Circulate's $100 million, Kaplan said.

“The AEPW commitment is an amazing and unprecedented start,” Kaplan said. “But, it is not the entire solution. We need many different forms of capital over the coming years — philanthropic, investment, human [and] technology.”

As an example of the kind of support companies need, Kaplan pointed to an Indonesian PET recycler, PT Tridi Oasis Group, which has had to engineer its own recycling lines as it's grown. It can be difficult for larger investors to evaluate a company like that, Kaplan said.

“There aren't enough investors and the ones that are in the space are looking for more technology, Silicon Valley style opportunities,” Kaplan said. “I think you'll find that a lot of companies... are really struggling to find investors.”

“If a company is raising $10 million, we can that first $3 million or $4 million, which helps give other investors confidence when they don't have experience in this sector,” he said.

Kaplan said Indonesia and India are early targets for Circulate's investments — Indonesia in part because some landmark studies have said it's the second-largest source of plastic marine litter, behind China.

“At the end of the day, we're trying to make an impact on this issue by taking capital off the table as a barrier for making change,” he said. “So we're going to a place like Indonesia, where entrepreneurs are struggling to raise capital.”

Studies peg China as the largest source of plastic ocean pollution, but it's a more challenging place to invest, and Kaplan said he's not sure $100 million would go as far there as elsewhere in Asia.

“In China, I think you could make a pretty good case that capital is not the barrier,” he said. “Our strategy is more about can we prove and demonstrate models that work in Asia and then bring them to China and the Chinese government to show them what could work.”

After China and Indonesia, the remainder of the top five nations that studies say are the largest sources of marine plastic pollution are also in Asia: Vietnam, the Philippines and Thailand.

India is not in the top five, but Kaplan said Circulate is targeting the country for two reasons. One, it thinks India may be undercounted as a source of ocean litter, and two, Circulate's early work has found more investment opportunities among India's 1.3 billion people than in smaller Asian countries.

“As we looked across the region, the highest volume of investment opportunities are in India,” he said. “It has a stronger entrepreneurial culture there. It has a stronger history of investment, compared to a Thailand or a Vietnam, which is more nascent than in India. And also by its sheer size, it has so much more activity.”

He said Circulate is moving quickly: “In many cases it could take two years to get to this point and it's probably taken us 6 months.”

It's raised its $100 million from a handful of large companies, led by Pepsico Inc., Procter & Gamble, Dow Chemical Co., Group Danone SA, Unilever plc and the Coca-Cola Co., and will try to raise more capital for the next year or so.

Kaplan said it's important for the plastics industry to solve the waste problem, or risk losing public confidence in its “license to operate,” as consulting firm McKinsey & Company described it in a December report.

“I think the question really is, what's the business case for the industry to solve this problem and how do they do this credibly to end plastic waste and turn it from a problem into a resource and a competitive advantage for the industry,” Kaplan said.

“Dow is an incredible leader in the sustainability topic among the chemical industry,” he said. “I think it's time for much of the rest of the chemical industry to join them. The future of the industry probably depends on it.”