Environmental Services: Attracting the attention of private equity
ESG continues to be a hot topic going into 2023 and beyond. We are seeing a lot of interest from mid-tier private equity in the Environmental Services sector. Here’s what you need to know.
Background
Climate change and carbon emissions are at the forefront of many government agendas and in the headlines more than ever. The impact companies are having on the environment is therefore under intense scrutiny.
Businesses need to avoid:
- negative headlines;
- breaching stringent ESG targets; and
- paying heavy fines.
This means demand in the environmental consultancy market is experiencing rapid growth and the long-term outlook is very strong.
Environmental awareness is driving demand
Environmental services markets are growing at pace and the momentum is strong. Increasing environmental awareness from the public is ensuring governments are clamping down on businesses. This is leading to more severe efficiency targets and greater regulatory enforcement. It is also not a local issue, countries around the world are working together to tackle global warming and climate change. COP26 brought together 120 world leaders and over 40,000 registered participants to tackle issues including the science and solutions towards a sustainable, low-carbon world.
In the UK existing regulations are set to underpin demand in many markets, but greater enforcement of these will drive growth. Companies are looking to environmental service providers to help them:
- avoid higher financial penalties from environmental contraventions; and
- ensure efficiency targets are met to reduce operating costs.
Whilst many other industries are seeing diminishing demand as interest rates soar and inflation rises – players in the environmental services space appear to be much more resilient, maintaining growth despite difficult macroeconomic conditions.
A fragmented landscape means M&A opportunities are plentiful
The sector is highly fragmented and there are a significant number of buy-and-build opportunities. This, alongside very positive underlying market drivers, makes the space even more attractive to investment. With many businesses expected to grow organically at pace – now is considered an opportune moment to purchase assets before they reach maturity. Valuable M&A opportunities are often owner managed businesses where founders are seeking exit routes, but significant growth opportunities exist. These can be accelerated through PE investment and an increased focus on marketing and recruitment.
Staffing remains a critical issue
Given this expected growth in demand – many businesses are experiencing capacity constraints. Addressing staffing shortages is vital. The capability to service growing demand and maintain high standards can set businesses apart and lead to greater pricing power. Although many businesses in this space are resilient to inflationary pressures, the ability to maintain margins is paramount to investors, especially those seeking to finance acquisitions through loans requiring strict debt covenants.
Any potential investors should consider whether management teams have implemented sensible strategies to cope with staffing concerns. Strong militants against these recruitment challenges include:
- the provision of training;
- offering attractive long-term careers; and
- hybrid working for support staff.
Speak to Jack if you would like to discuss opportunities in the Environmental Services sector.
Jack Hibbs
[email protected]
+44 7883 296 346