Investors go for gold in garbage

One man's trash is another's alpha.

Investment strategies in waste management — including trash collection, separation, disposal and recycling — are gaining institutional interest as landfills globally are reaching capacity at the same time that commodity prices are skyrocketing, according to analysts and managers.

“Clearly rising prices (in raw materials) have made all the recycling much more profitable and interesting,” said Jvan Gaffuri, senior equity analyst at SAM Research AG. SAM Research is a subsidiary of SAM Group Holding AG, an asset management company based in Zurich, with 8.5 billion Swiss francs ($8.2 billion) at year-end 2007.

In addition, stricter disposal and recycling regulations caused by limited landfill space throughout the world, particularly in Europe, have increased the cost of waste management. Technological advances have also made the process of converting waste into reusable energy or raw materials more efficient, investment managers said.

“The biggest opportunities are in waste (energy) and recycling,” said Kimberly Tara, chief executive officer of FourWinds Capital Management, a Geneva-based alternative asset management firm specializing in global commodities and natural resources with $1.6 billion in assets under management as of June 30.

In July, the Abu Dhabi government-owned International Petroleum Investment Co. invested $300 million in a fund that invests in projects that convert gas emitted from crude oil production into electricity and other products, confirmed a source close to the IPIC who declined to be named.

The fund, which aims to raise $1.5 billion, is managed by MTM Capital Partners Ltd., a subsidiary of London-based Man Group PLC, which is the world's largest listed hedge fund with about $78 billion in assets under management.

Rikky Hasan, managing director of MTM, declined to comment.

“Recognizing the convergence of energy, resources and the environment has been a long-standing challenge for many countries worldwide,” Khadem Al Qubaisi, managing director of IPIC, said in a statement issued in July when they announced the transaction. “We believe the strategy developed by MTM solves this issue and serves as an enabler that can produce significant benefits to host countries.”

Man also runs the China Methane Recovery Fund, which has about $600 million in assets under management and invests in projects to capture methane gas from coal mining and use it to generate electricity and earn carbon credits.

In addition to sovereign wealth funds, pension funds and insurance companies are also investors in waste management investment strategies, managers said.

“We don't see a lot of appetite for pure waste management allocations,” said Yannick Daniel, head of Societe Generale Index, a subsidiary of Paris-based Societe Generale. “Investors prefer to play the waste management theme along with other environmental topics like water and alternative energy.”

Investors generally gain access to the sector through listed stocks or funds that have similar properties to both private equity and infrastructure, according to Rachel Whittaker, associate at Mercer LLC based in London.

Ms. Whitaker added that shifts in regulations or the political climate can pose significant risks to “any environmental strategy. So often, country-level responses are more important to consider than global trends or initiatives.”

San Francisco became the first U.S. city to ban plastic bags and New York City required sizable retailers to establish recycling plans in 2007. In Europe, the European Parliament and Council agreed on revisions to the Waste Framework Directive that aims to reduce recycle 50% of household waste and 70% of construction waste by 2020. In the U.K., landfill tax has increased to about £32 ($64) per ton in 2007 from £8 per ton, according to a report published by SAM.

Performance has helped to lure investors. Data from the SGI Global Waste Management index indicates the sector has outperformed the Morgan Stanley Capital International World index in the six months, year, three-year and five-year periods ended June 30, according to back-tested and real returns. The index, which launched in September 2007, tracks about 30 companies that mainly collect, transport, process and dispose or recycle trash.

“There are more defensive characteristics within these stocks,” said Mr. Gaffuri of SAM, which invests in waste management companies as part of the SAM Smart Materials Fund. “A weakness in the global economy would affect industrial waste, with volume declining. But on the municipal side, people even in a very difficult (economic) environment are ready to pay for waste to be taken away.”

At FourWinds, officials are launching a fund this autumn to invest mostly in midcap companies in the waste management sector. Aiming to raise between $300 million and $500 million, the fund manager hopes to profit from niche areas such as composting, recycling and landfill management.

For example, FourWinds is considering investing in technology that breaks down used tires into three components — steel, carbon and oil — to be reused, according to J.K. Lim, FourWinds' managing director and head of the Asia environment team. Another potential investment involves anaerobic digestion, which is a microbiological process that converts organic waste into methane, which then can be turned into electricity. Other potential investments target engineering projects that recycles thermal energy from cement and steel plants.

“Waste is the world's largest (source of) natural resources,” Mr. Lim said, “and the wave of the future is being able to recycle or reuse waste and making a business out of that.”

Contact Thao Hua at [email protected]