2022 expected to be record year for investment in circular economy, says BDO

More than £1.5 billion of capital has been deployed into UK circular economy businesses over the past four years, and 2022 is expected to be a record year, according to a new report compiled by BDO LLP’s Scotland mergers and acquisitions team.

The accountancy and business advisory firm has unveiled the Investment into the UK Circular Economy report, saying the headline sum accounts for just under 300 investments across equity and debt.

Annual deal volumes grew by two thirds from 2020 to 2021 alone and the average disclosed cheque size increased from £7 million in 2018 to £9.3m, while venture capital accounted for half of 2021 transactions, followed by mid-market private equity leading on 22 per cent of investments, and debt funding comprising 15 per cent of deals. The first half of this year has seen 80 investments made with a combined value of more than £500m.

BDO said growth capital investor BGF has been the most active UK circular economy investor over the past four years, with 12 deals completed in the sector, adding that Circularity Capital has established itself as the leading specialist circular economy investor with six investments over the same period.

Rory McPherson, corporate finance partner at BDO, said: “The macro market trends have been favourable for deal-making in the circular economy as environmental, societal, political and consumer trends have all raised awareness of the issues that many circular economy businesses are working to solve, whether that’s material recovery, circular inputs, smart buildings or circular design.

“With [environmental, social, and governance] firmly on the agenda, it’s clear the circular economy encourages economic innovation and growth – driving disruption across all traditional sectors, and therefore creating value within those industries. The opportunities for entrepreneurs in the sector and investors looking towards it are significant.”

BDO’s research found that a third of circular economy deals have been done in the manufacturing and industrials sector, the same proportion in food and drink, and 22 per cent have been in retail, leisure and consumer markets.

Patrick Graham, head of Scotland and Northern Ireland at BGF, which has been found to be the most active UK circular economy investor. Picture: Lisa Ferguson. Patrick Graham of BGF images Paddy Graham

Benefits

Todd Mills, assistant director at BDO, which earlier this year agreed a long-term office lease in Glasgow and also has a presence in Edinburgh, added: “There is growing recognition from investors that circular economy principles can deliver both environmental and economic benefits.

"This is reflected in the sharp increase in circular economy investments in 2021, with entrepreneurs and investors partnering to deliver innovative business models that reduce waste and inefficiencies. With levels of available private equity capital in the UK at an all-time high, more and more investors are turning to the circular economy and we expect 2022 to be another record year.”

BGF earlier this month highlighted strong deal flow north of the Border in the first half of 2022, with the long-term patient investor saying close to £25m had been invested into growing businesses in Scotland and Northern Ireland in the period.

'It’s clear the circular economy encourages economic innovation and growth,' says Rory McPherson of BDO. Picture: Rob McDougall.

The news came hot on the heels of the publication of annual results for BGF in the UK and Ireland that marked a “record-breaking” 2021 for the organisation, during which it backed 67 new companies, investing £600m altogether.