What are investors looking for?

Historically low rates of alternative treatment when compared to the rest of Europe ensure that the UK is the focus of attention for many investors looking for enhanced returns.

However, whilst industry fundamentals are strong, investing in an evolving industry always carries with it a high degree of risk. The UK market currently looks to have a glut of investment opportunities yet the difficulty for investors is, as ever, determining which potential investments carry the optimal balance of risk and reward.

Investment expert, Nick de Mestre, is an associate at FourWinds Capital Management – a specialist in global commodities investment

Investors seeking higher returns will typically be looking to avoid those options which are the preserve of large corporates, such as PFI backed mass burn incinerators and into the smaller scale, high technology options, such as anaerobic digestion and advanced resource recovery (e.g. lithium ion batteries, phosphorus) which are mostly being put in place by newer entrants to the market.
In evaluating these opportunities investors typically focus their assessment on four key things – inputs, outputs, technology and the management team.

The current “land grab” in the UK market means investors favour businesses where a waste stream has been locked in for as long a period as possible rather than relying on merchant waste. This significantly de-risks the investment, especially where the feedstock is a revenue stream.

In terms of outputs from an anaerobic digestion (AD) plant, for example, it is relatively easy to be comfortable that energy sales and Renewable Obligation Certificates/Feed-in-Tariffs will be bankable for at least the medium term.

More difficult is the issue of digestate – there is significant doubt as to the marketability of digestate as a value added product at present and the negative impact on returns of having to landfill digestate would be catastrophic. Having a feasible outlet for digestate even at a slight cost is almost essential when looking into an investment in an AD business.

Reliability 

Investors seeking to invest in newer, higher growth technologies will also be looking to see how reliable and efficient the plant is, how long it has been in commercial operation and on what feedstock.

Finally, and most importantly, investors will focus on finding strong management teams with a good range of skills from engineering and operations to planning. It is also more important than ever that management teams have vision but tempered with enough conservatism to ensure their business model is robust enough to weather the bad times as well as exploit the good times.

It will take some time to see who the biggest winners in this brave new world will be, however one thing is certain – the victors will be businesses led by skilled, focused management who have put their energy into ensuring that, for their investors, there are no surprises along the way.