Operational lens: Circularity backs P2i

We want to support businesses on their sustainability journey by articulating its positive impact so the team can promote it. It’s about adding value to each business, rather than simply having the right ESG policies, frameworks and metrics in place.

In December 2021, Circularity Capital, a specialist private equity firm supporting growth stage European SMEs in the circular economy, made an £8m investment in P2i. The investee business is a liquid repellent nanotechnology product, which works with global original equipment manufacturers (OEMs) to enhance devices. This improves reliability, extending the useful life of electronic devices and reduces e-waste.

According to Circularity, the circular economy is by design, restorative, in which component and material flows re-enter the biosphere safely or are designed to circulate at high quality. A circular economy aims to ‘design out’ waste, so it doesn’t exist - products are designed and optimised to re-enter the economy, whilst maintaining maximum value. “We support investee businesses decouple their growth from resource constraints, enhance resource productivity and drive competitive advantage,” states its website.

Private network

Circularity relies heavily on its own networks to identify and secure investment opportunities. P2i came on its radar in May 2021 via an inbound request to partner Andrew Shannon. “We’ve got a strong origination network, and while we have good relationships with many advisors and finance houses, we’re not solely reliant on them to source opportunities,” explains Jenny Boyd, head of reporting and compliance at Circularity.

After seven months, Circularity cash-completed in December 2021. The investment was pure equity, however, complexities arose due to the capital structure of P2i. “It’s a complex business with complicated technology and operations across the UK, the US and Asia,” notes Boyd.

Circularity doesn’t have in-house counsel so the firm outsourced the legal work for P2i, just as it had done in previous processes. “We chose DLA Piper, specifically because it’s an international firm with expertise in the operational elements for this particular  process,” Boyd says. “We considered a different law firm, but as they were already working with us on a separate opportunity, teaming up with DLA enabled us to spread the workload.”

It’s all in the detail

As with each investment process, the firm’s operational functions were heavily involved in P2i’s due diligence. “Firstly, the team identified that the business operated with a circular business model, that it was a growth stage company, and identified that the funding level required matched our investment mandate,” says Boyd.

Once an opportunity has been identified, Circularity’s second stage is an impact and ESG assessment. For P2i, the firm’s partner Jamie Butterworth had overall responsibility for the ESG and impact elements of the pre-investment process. “He’s a prominent figure in the circular economy, with extensive experience,” explains Boyd. “Our operational functions assessed in great detail what we call, the Theory of Change. We have a rigorous process of assessing any business, understanding how it differs from the linear competitors and assessing the additional impact it’s delivering. This then enables us to use the GIIN impact metric framework to help define and calculate the applicable metrics we’ll measure throughout our holding period, to be able to report P2i’s overall impact to our investors.”

For the third stage, once the investment opportunity has received investment committee approval to proceed, Circularity moves into its due diligence phase where the team produces a more detailed impact assessment alongside customer, legal and financial due diligence. “Following DD, once we complete an investment, such as we did with P2i, we use a detailed framework for our 100-day plan.”

Boyd explains that often companies are making a positive impact but not effectively communicating that to their customers and the wider world. “We want to support businesses on their sustainability journey by articulating its positive impact so the team can promote it. It’s about adding value to each business, rather than simply having the right ESG policies, frameworks and metrics in place.”

With a strong sustainability story in place, Circularity is able to report back effectively to its LPs, while meeting the firm’s ongoing regulatory requirements. “Having the metrics and the detailed understanding in place enables us to build our knowledge of the business from the ground up,” she adds. “At exit, we’ll have collected all the data we need and implemented all the correct systems, which will add value to the business. We’re then confident it’s in a really good position for new owners to take that sustainability and positive impact growth story to the next level.”

For P2i, Circularity logged all communications into its Intralinks data room, giving the team a holistic view of every interaction that took place. “It automatically links to our email which enabled seamless logging and was a game changer for efficiency.”

Operational pinch points

Looking back over the overall process, Boyd highlights the investment financing was challenging. “Everyone wanted everything done and wrapped up as quickly as possible, especially ahead of the end of the year. It got tight for time to ensure we could cash complete.”

To smooth out this process going forward, Boyd says the team has set up a fund finance facility, which will be available for its next fund. “From an operational perspective, it will provide much more flexibility in terms of being able to bid confidently on new investment opportunities in a competitive market, while being able to work to much tighter timelines," she explains. “That has been an operational pinch point over the last few investments, to ensure we’ve got capital over the line.”

Furthermore as the team grows, Circularity is constantly refining how the team works and collaborates together, particularly with regards to IR and communications, which is headed up by Butterworth. “Every potential investee company is using a different technology,” she adds. “As a relatively small team, we want everyone to be part of the process because the operational functions are involved in each aspect of the transaction.

“Going forward, when we complete an investment, we want to be able to give our investors as much notice as possible of when to expect the drawdown to be issued, so it becomes an operationally smoother process for all parties. Each investment is a learning curve, and I don’t think the learning ever stops.”

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P2i

A liquid repellent nanotechnology product, which works with global original equipment manufacturers (OEMs) to enhance devices by making them liquid resistant. It improves reliability, extends the useful life of electronic devices and positively reduces the negative impact of e-waste.

Fund: Circularity Fund I
Deal: £8m, pure equity transaction
Deal started: May 2021
Deal closed: December 2021
Deal sourced: Own network