When Singapore-based Circulate Capital launched Asia’s first recycled plastics fund in 2018, climate investing was on a hot streak. That scene has since taken a significant hit, with investment and specialist fundraising declining significantly from 2021 peaks.
“There used to be no downside to communicating about [ESG or impact investing]. But now there’s risk to communicating about it, whether it’s from the government or from other stakeholders,” said Circulate’s managing partner, Rob Kaplan, in an interview with PitchBook.
On the brighter side, European LPs are still showing receptivity to ESG and climate, he said. Some LPs are also becoming more sophisticated, asking smarter, more technical questions about the space. These same LPs are independently doing direct deals, which has allowed them to better understand the problems they are trying to solve.
Circulate Capital manages $480 million across four funds, covering South Asia, Southeast Asia and Latin America. It counts the Coca-Cola Company, Danone, Dow, Procter & Gamble, British International Investment, Proparco and International Finance Corporation among some of its LPs.
Kaplan spoke with PitchBook on the back of its $220 million Fund II first close in April. It aims to fully close the fund at $300 million by the end of 2026.
This interview has been condensed and edited for clarity.
How different was the fundraising journey for Fund II versus Fund I? You did them at very different time periods.
It was at two different time periods, but also at very different stages for us. We were a first-time fund in 2018-19, and at the time, the topic of ocean plastic was really hot, so we were very uniquely positioned to be a solution provider for a problem that the world was freaking out about. So that helped our fundraising a lot initially.
For Fund II, there’s a lot more focus on DPI than there was before. So being able to tell a clear story about how you can drive liquidity and what is possible there is important.
What kinds of questions are LPs asking these days? How have their views about the circular economy evolved?
I would say they are asking more specific questions on the technical side of the companies we’re investing in. It’s not just about recycling. Is it polyethylene terephthalate, polyethylene or polypropylene recycling? What are the unit economics between those three different areas? There’s more interest and understanding in these fundamental businesses than five years ago.
Another area that has come up is social impact. When you think about recycling, oftentimes we just think about the environmental impacts of plastic getting into the environment. But in Southeast Asia, there are millions of people whose livelihoods depend on collecting and trading plastic waste. They’re called waste pickers or informal waste workers. They’re at-risk populations.
As we invest in our companies, the question that has evolved is: How do you improve the livelihoods and mitigate those types of social supply chain risks in waste management and recycling?
How has the Trump presidency affected the conversation around fundraising for ESG and impact?
We are seeing less interest from institutional investors in the US on anything ESG or impact-related. We’ve also seen less interest in communicating about it. There used to be no downside to communicating about impact. But now there’s risk to communicating about it, whether it’s from the government or from other stakeholders. So we don’t see that much interest in the US, but there is still some in Europe. As a result, we are seeing more LP interest from Europe and Asia for Fund II.
How do you make deals if you don’t know whether a particular business is going to run into future issues with this much macro volatility?
We have pretty clear points of view about where the markets are headed and where demand is going as a result of these trade changes, regulatory updates, oil prices and all that.
All of our corporate partners are much more interested in how they can access recycled materials in a way that strategically benefits their value chain. They’re not interested in doing it for environmental reasons alone. They also need a very strong business case. So a lot of this hedging against oil price and trade volatilities is becoming more important to them.
Another big difference between India and Southeast Asia is the regulatory environment. India has been much more aggressive on regulations and policymaking in this space. We’ve seen that play out over the last five years, and seen it fuel the growth of our recycling companies there.
Depending on the kind of plastic you’re using, around 20-30% minimum recycled content is required in all packaging.
One of the first key regulations we saw in India was the enforcement of Extended Producer Responsibility. What this means is, if you’re a brand and you’re selling lots of packaging material in the market, you also have a responsibility to make sure that it gets collected and is not polluted. There are penalties and fees if you are not compliant.
This is a concept which is very big in Europe and enforced in parts of the US, like California, Maine, Oregon and New York.
What were some of your takeaways from Fund I, and how did you incorporate them into Fund II?
We were actually trying a couple different strategies in Fund I. We had a VC strategy, a growth equity strategy, and a debt component to Fund I so we could do some loans. When we set all of that up, we weren’t totally sure what was the exact right form of capital to achieve the objectives we had.
But for Fund II, we’re scaling our growth equity strategy. One part of that is because that’s where our best performance comes from. Most of the companies we invest in are SMEs and family businesses. They’ve been around 10 or 20 years, they’re profitable, but they’ve never had outside capital before.
We’re the first institutional investors coming in, helping these companies professionalize and scale up so they can become suppliers of Danone, Coca-Cola, Dow and our other partners.
The second takeaway we’ve had is more specific to our sector. If you think about recycling supply chains and the circular economy, it’s a value chain. You’ve got collection, sorting, processing, recycling and manufacturing.
What we found in Fund I was that our most challenged investments were the ones that were just the collection side of the business. In some ways, they are the most important, but it is the least value add. The margins are the toughest in that part of the business.
The companies which have been the most successful for us have been more vertically integrated. For instance, you may be working at a recycler, and you’re helping them backward-integrate into opening their own collection network. This allows them to have better control over their feedstock and also capture the margins of transformation.
The third piece of our evolution is that, as we move forward, we’re also thinking more broadly about sustainable packaging overall. Everything we’ve done has always had some kind of plastic impact, but we’re also looking at other types of materials like paper and metals, and new circular material opportunities like electronics and textiles.
The big thing about electronics is actually critical materials. Most people are focused on how we can extract more from the Earth. The other way to solve that problem is to recover it from all the devices that it’s currently trapped inside. We see that as a big opportunity in the coming years.
Can you give us a sense of your fund performance and exit pipeline?
Fund I has been performing pretty well. Our portfolio is marked up about 20% gross IRR right now. We had three liquidity events last year: two partial exits and one full exit, all in India. These three exits across the board are about 2.6x MOIC.
We potentially have one or two more exits that we’re working on this year. Obviously, liquidity and DPI are the priorities for all fundraising conversations in Asia right now.
So far, we’re benefiting from the Indian secondary market, and we see it as very active. In two of our secondary exits in India, the companies were raising rounds which were oversubscribed. In Southeast Asia, the exit market is still tight and our portfolio is a little less developed.
What are some of your takeaways between India and Southeast Asia when it comes to quality of talent, market depth and margins?
The types of companies we invest in across markets are very similar. Let’s say PET water bottle recycling. We do that in India, we do it in Indonesia, we do it in Thailand, the Philippines and Malaysia. There are similar types of business models—but the local markets are very different.
The big difference is that you have much more opportunity and scale in a market that has a billion people.
So the domestic market in India is super strong in and of itself. Whereas in Southeast Asia, it’s very difficult to scale your business by relying solely on your domestic market. You’re much more reliant on exports. So that’s had a big impact over the last year, where we’ve seen a lot of volatility in trade.
First it was tariffs. Now, the Middle East war. So that extreme volatility has had lots of shocks across the supply chain. But our portfolio companies have actually fared pretty well, especially during the war, because now, as a result of oil prices going up, recycled plastic is cheaper than virgin plastic. So they’ve had a massive influx of demand for their products.
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