Seed Money

When Lehigh Technologies of Atlanta, Ga., wanted to secure financing to help expand its geographic reach and R&D work, it looked to venture capital firms to provide that funding.

The tire recycling company and manufacturer of micronized rubber powder was able to secure some $16 million in funds from a number of firms led by Leaf Clean Energy and including Kleiner Perkins Caulfield Byers, Index Ventures and NGP Energy Technology Partners.

Alan Barton, CEO of Lehigh, admits that securing this sort of funding isn’t easy in today’s economic environment. However, Barton explains that a few of its equity partners already had invested in the company going back to about 2007. “They stuck with us through all the hard times and the good times, and they’ve put more money into this equity raise that we’ve completed last year,” Barton says. “At the same time, we’ve talked to multiple new investors, and then the one we ended up striking a relationship with was the Clean Leaf Energy guys.”

Barton acknowledges, though, that with the impact of the recession and hard times for the solar energy and some biofuel sectors, it’s a difficult market in which to raise money. “There are many good companies who have just not been able to raise the money they need to grow,” he says.

In Lehigh’s case, the investment was all about growing the company following the September 2012 announcement that it would expand in the European market thanks to its partnership with HERA Holding, a Spanish waste-to-resources company. Barton says market development is now underway and the company expects to invest in a Spain-based manufacturing operation in 2014.

According to Barton, often the best way to find private equity connections is through existing investors, which already have relationships and networks established. The other major approach, he adds, is through investment banks. “That’s their business to know all these people, and so very quickly you can come up with a list of targets that they think and you think fit both your strategy and the size of the investment you are looking for.

“There are a limited number of options for smaller, venture-backed companies that are still in the early stages of company building,” explains Barton. “Our existing investors reinvested, and we welcomed a new clean-tech focused investor (Leaf Clean Energy) to our syndicate.”

Barton says Lehigh was an appealing company for its venture capital partners because its micronized rubber powders essentially offer “green for free.”

“The concept of endless cycles of use for chemical compounds is going to be an important part of the future of the chemical industry,” says Barton. “We are in the vanguard of that movement, hence the desire for clean-tech-oriented investors to be involved with companies like Lehigh.”

Lehigh is just one of the many examples reported on in recent months in which a recycling company has sought or received funding from private equity or venture capital partners to either help grow the business or to embark on a new strategic direction. While there are many sources of financing available for companies that operate within the recycling industry, private equity financing has apparently become an appealing source of capital for companies large and small. And the industry’s fragmented nature and impressive growth potential are apparently catching the eye of many prospective equity partners.

Singular Mission
One of the larger players that has experience in the private equity arena is Charlotte, N.C.-based ReCommunity Recycling. That company was formed in the first half of 2011 when the venture capital firm Intersection Partners and a group of investors acquired some of the recycling assets of Casella Waste Systems Inc. The new company was named ReCommunity, and it has grown to become what it describes as the largest “pure play” recycler in the United States. The company operates 30 material recovery facilities (MRFs), five transfer stations and one glass processing operation. ReCommunity’s strategy, says president and COO Sean Duffy, is essentially to focus exclusively on recycling.

For ReCommunity, private equity investment was viewed as an effective growth strategy, at least in part because of that pure-play mission. “We rely 100 percent on the benefits of how well we operate recycling facilities, recover material and market them for the highest values,” explains Duffy. “We don’t have any other segments of a business that could compete with it.” He explains that the company has no landfills, no collection division, no waste-to-energy facilities. As such, it’s not torn between the conflicting cost motives of disposal, collection and recycling. Ultimately, Duffy says, ReCommunity has only one alternative: “to do the best that we can to recover valuable resources.” He says that singular mission to provide best-in-class recycling services to its communities is one factor that made ReCommunity attractive to private equity partners.

“We truly are a very solid company with a pure mission,” he says, “so that becomes a very easy or attractive investment for those private equity groups.”

An added consideration, Duffy says, is the fact that recycling is a growing business and that communities are seeking economic development, added jobs, reduced expenses and increased revenues. Those are the types of benefits he says firms like ReCommunity can provide. “When you have those types of attributes to a program, that is attractive to any type of investor in the private equity group such as ours that sees that as a good growth platform.”

Duffy observes that private equity is only one means out of a few that can be employed to help companies fund their growth. He points to traditional debt servicing through banks and consolidation through acquisition. While private equity may not always be the answer, growth throughout the industry will continue, he says, keeping private equity investment on the table as a viable option.

“You see more and more that there’s vertical integration for people that are looking for the resources,” says Duffy. For example consumers of paper and plastics will increasingly want to ensure their access to those streams. “I think you’ll see more and more of that type of growth because of the resource scarcity that’s out there,” he says. “I believe private equity will be a portion of that.” He says private equity groups will selectively pick partners that they feel can meet those needs and drive growth in the industry.

Vertical Integration
One example of that vertical integration is the recent merger between Chicago-based Lakeshore Waste Services and Recycling Systems Inc. to form the diversified company Lakeshore Recycling Systems LLC. Lakeshore Waste Services was a collection company, while Recycling Systems Inc. was a large MRF. The deal was financed by the private equity firm Tensile Capital Partners, based in San Francisco. The Chicago office of financial consulting firm Livingstone Partners served in an advisory capacity to both organizations.

Doug Dossey, managing partner with Tensile Capital Management, says the merger is a great example of how the balance of power has shifted when it comes to waste disposal and recycling. “If you go back, not so many years, you have an industry where it’s all about building and operating landfills,” says Dossey. “If you controlled the landfills, you basically controlled the waste industry.”

Now, says Dossey, thanks to the green movement and the value of the commodities, more power lies with the entity that controls the waste stream coming from the home or business, and the tonnage going to landfills is dropping. “It’s a fundamental economic shift which is just driven by the value of these commodities, and what has emerged is a situation where that stream can be recovered and reproduced and not end up in a landfill.”

Dossey says Tensile has studied this area for the last five years or so, and his company isn’t the only one that has become interested. “Our focus turned to businesses that were lower fixed cost, not long landfills and in control of more of the waste stream,” he says.

Dossey describes Lakeshore as a collection company with both residential and municipal contracts, with a valuable commodity—the waste stream itself—but it had been uneconomical for them to dispose of it. Meanwhile Recycling Systems LLC was operating the largest MRF in Illinois and stood to gain from a larger and guaranteed stream of material.

For these reasons, he says, the deal was “incredibly compelling.” “The synergies established between them were so extraordinary,” says Dossey.

In this case, Dossey says, the partners were introduced through Livingstone. He says private equity worked because there was a need for additional capital that couldn’t come from a senior lender and the partners also wanted the flexible, intangible “been there-done that” benefits that only a private equity sponsor could provide. “We were the right phone call and it turned out we were very interested in the people in this situation,” Dossey says.

Teaming Forces
Another industry deal making news in recent months was the creation of Wastebuilt Environmental Solutions LLC by Millbrook Capital Management, a New York City investment firm. Wastebuilt was initially formed with the acquisition of two equipment companies: Stepp Equipment Co. and Galfab Inc.

In a press release announcing the deal, Alan Rivera, executive vice president of Millbrook says, “We believe that national haulers, municipalities, dealers, distributors and local haulers in the waste and recycling industry will benefit from a well-capitalized and customer-focused source for equipment, parts and maintenance.”

John Powers, vice president at Millbrook, says that Wastebuilt continues to seek additional companies that serve or supply the waste hauling industry. He says the recycling supply industry is appealing partially because it’s a “highly fragmented” one, being more regional in nature in terms of suppliers, dealers and distributors.

“The purpose of Millbrook’s formation of a new company is to try to put together some of these smaller companies to create a company that has a bit more critical mass on a national level,” Powers says. “There’s a benefit to the customers to having a larger company that can service them better.” Additionally he says, “these are good companies in a good industry that we want to invest in.”

Powers says another reason for Millbrook’s interest is its favorable outlook on the recycling industry as well. “It’s a growing industry with some pent-up demand from the recession and a longer term growth trend,” he explains.

Powers says putting these high quality companies together is a win-win for Wastebuilt. “Our goal is to put together some of the best companies in the industry under one umbrella so we can serve our customers better,” says Powers. “We think the companies will benefit and we think the customers will find it favorable to deal with one large organization as opposed to several regional organizations.”

The author is managing editor of Recycling Today Global Edition and can be reached at lmckenna@gie.net.