Corporate Growth Conference 2024: Growth opportunity abounds in industrial and specialty waste sector

Growth in the industrial and special waste sector has outpaced growth in the solid waste sector over the past six years, with numerous niche players specializing in innovative and emerging solutions offering attractive investment opportunities.

That cycle of innovation and entrepreneurship remains strong in the industrial specialty waste sector, said panelists in a session titled Growing Opportunities: Industrial and Specialty Waste at the 2024 Corporate Growth Conference, held Nov. 20-21 in Chicago. The session, moderated by Effram Kaplan, managing director and principal for Cleveland-based investment banking firm Brown Gibbons Lang & Co., examined the segments, investments and opportunities in the environmental services industry beyond solid waste.

The specialty waste market, which includes hazardous and nonhazardous waste streams, is growing faster than the publicly traded companies are consolidating, Kaplan said. Those public companies own less of the special/industrial environmental services market today than they did in 2018.

“The publics can’t keep up,” he said. “What’s that say to me? It says opportunity.”

In 2018, the waste industry was a $100 billion market, Kaplan said, with $63 billion of that attributed to traditional solid waste (municipal solid waste and construction and demolition debris) and $47 billion to special waste. In 2024, the solid waste total addressable market (TAM) has grown to $80 billion, representing a 3.5 percent compound annual growth rate (CAGR), while the special waste TAM has ballooned to $80 billion, a 9 percent CAGR.

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The market has evolved over the past 10 years and continues to do so, said Glen Roscoe, managing director at Stonepeak, a New York-based private equity firm.

Over the past decade, Kaplan said, there’s been a divergence in terms of valuations of companies.

“The industrial market is so interesting because there’s not a great barometer to evaluate valuation, and that’s why understanding the specialty sector is critical in investing,” he said.

The industrial sector is becoming more interesting to private capital investors, Kaplan said, and there’s plenty rationale to continue to invest from the private market. However, as investing in environmental services continues to get more competitive, companies looking to be acquired need to have an angle to be interesting to investors, he said.

When looking at potential investments, said Justin Brauer, group head, metals, materials and construction for Fifth Third Bank, banks typically look for a stable market, niche market leadership and fragmented business plans.

“If you have those three things, you can make good returns,” he said.

While private debt markets can be a good option as a niche place in the market, especially in terms of offering flexibility, Brauer said the regional bank model has covered the large majority of solid waste investment.

Fifth Third, which has a specialized lending group for environmental services, has chosen to invest in circular economy-focused specialty waste businesses such as a reusable packaging business, a used cooking oil to biodiesel business and a waste parts replacement platform over more traditional solid waste businesses because they offer a better return on investment.

“We can win where people aren’t competing as much,” Brauer said. “We think there are still pockets of specialty waste that are available.”

In recent years, industrial and specialty waste founders have done an impressive job of scaling their business, Roscoe said. He said he’s seen an increased proliferation of scaled platforms as well as sustainability-focused models as landfill capacity shrinks over time.

“People don’t want landfills, they don’t want incineration, they don’t want waste in general, so what do we do? We have to find other homes for this waste,” Roscoe said. “We’ve found a number of models that are very creative to find resource streams in that waste and pull it out, monetize it and make it circular, and we think there are more to come.”

At the end of the day, said Andrew Wilson, partner at Aurora Capital Partners, a Los Angeles-based venture capital firm, specialty waste continues to be a relationship-driven industry.

The current private capital market—including private equity, infrastructure funds and impact funds—favors well-run companies in fragmented areas of the environmental industry with strong management and positive track records.

When looking at deals, Wilson said he is seeking founders who can bring something other than the ability to write a check.

“You add value by bringing capabilities as a founder—an ability to be creative, to be a minority advisor, to start earlier, to be structured,” Wilson said. “All of those nuances get you in the door.”

Roscoe agreed, saying a partnership mentality is huge in making decisions on deals.

“On a micro level, you start with five facilities and guy doesn’t show up one day and all hell breaks loose… are you going to be the capital partner that yells at the management team and says, ‘you guys screwed this up’?” Roscoe asked. “Or, ‘here are some resources I can bring to bear to help you get through this problem. We know there are going to be bumps in the road and we’ll get through them together.’ That’s a big differentiator.”

As for what investors are looking for in an acquisition, Brauer said that it’s about having multiple levers to pull in a business plan. That could include recurring revenue streams and good contracts, he said. Roscoe added that safety culture and a management team that’s focused on its people, good company culture and customer retention are important factors as well.

“Are you the type of business that can generate recurring revenue with the same customers? Does that cohort of customers grow over time?” Roscoe said. “That means you’re doing something really well.

“If you have a good culture, you can keep really good people, they all work well together—this is a mission-critical business, it’s a very team-based business—you’re starting from a really good spot which drives all those other items I talked about.”