Sustainable Operations as a path to value creation
A shift in waste and recycling operations through proactive risk mitigation is driving the path to value creation. The US Waste and Recycling (W&R) market is expected to grow from ~USD $91 billion in 2022 to USD $134 billion by 2030. Deal activity in the sector is experiencing pre-pandemic growth levels.
In this article, dss⁺ highlights four reasons for the shift: A promising sector backed by major funds, a recession resilient market, mounting pressures on EBIDTA margins and a changing regulatory landscape.
A promising sector backed by major funds: The US Waste and Recycling (W&R) market is expected to grow from ~USD $91 billion in 2022 to USD $134 billion by 2030, at a CAGR of approximately 5% p.a. The amount of dry powder held by North American Private Equity (PE) funds active in the W&R sector is expected to be ~4.5 times the market size. Deal activity in the sector is experiencing pre-pandemic growth levels as PE-backed transactions have increased at ~16% p.a. to $8.5 billion in 2023.
Recession resilience is significant: The US W&R sector is far from plateauing as waste volumes continue to rise. Driving the increase are pandemic tailwinds and elevated consumption levels, supported by rising e-commerce, a rebound in economic activity contributed by industrial and construction waste generation, recycling mandates by municipalities, and increasing consumer awareness of recycled materials for residential waste. Combined, these drivers contribute to growing investments in a recession resilient market.
Mounting pressures on EBITDA margins: W&R companies face challenges to manage operating EBITDA margins due to an inflationary economic environment compounded by a slow recovery in the labor market and mounting wage pressure. Yet, as the rate of growth in cost structures outpaces that of fees to end-customers, which are leading to higher scrutiny on EBITDA margins, W&R companies continue to seek safety, efficiency, and sustainability in Materials Recovery Facility (MRF) and fleet operations.
A dynamic federal and state regulatory landscape: The Environmental Protection Agency’s (EPA) National Recycling Strategy is designed to make commercial and residential recycling more resilient and cost-effective by enhancing the Municipal Solid Waste (MSW) recycling system. While states are encouraged to manage non-hazardous solid waste, set criteria for MSW landfills, and regulate the open dumping of solid waste, PE investors should be cognizant of various regulatory developments. W&R companies are updating their MRF and fleet operations in response to federal actions and rulemaking covering EV and lithium-ion battery recycling, the Extended Producer Responsibility (EPR) rule for packaging laws, classification of certain hazardous chemicals/substances under the Superfund Law, and updates to the Renewable Fuel Standard Program.
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