Raising Capital for the Environment with Houlihan Lokey’s Scott Sergeant

January 8, 2014

Scott Sergeant combines his lifelong passion for the outdoors with his professional career at international investment bank Houlihan Lokey.

JOHN SHEGERIAN: Welcome back to Green is Good. We’re so honored to have today Scott Sergeant. He’s the Director of Houlihan Lokey’s Industrial Group. He’s also a friend of mine. Welcome to Green is Good, Scott Sergeant. SCOTT SERGEANT: Thanks a lot, John. I really appreciate you having me on the show today. I’d love to tell my story about the world that I’ve dedicated, which is investment baking in the environmental resources space. JOHN SHEGERIAN: Well, that’s great because we haven’t covered that space as much, but before we even get into investment banking and environment, can you share a little bit about the Scott Sergeant story and the journey leading up here? How did you even get to this position and how did you end up at Houlihan Lokey in this unique and leadership position? SCOTT SERGEANT: Yeah, sure. I’d be happy to talk about that. Basically, I’ve been with Houlihan Lokey for about 12 years now. Houlihan Lokey is an international investment bank that is a full service in terms of advisory services, client mergers and acquisitions, markets, financial restructuring, evaluation services to our clients around the world. We’ve got 900 employees and we cover a whole variety of different industries in those services. Over the years, I was just an investment banker spending all my time executing transactions. M&A and raising capital for middle market clients and a few years ago, my personal and professional life collided and what I mean by that is that I all of a sudden when I decided to really spend my time in a particular area, I wanted to focus my banking career on something that truly mattered to me and it was something that I had a passion for. I’ve always loved the outdoors. I grew up on the Jersey Shore watching all the regulation through the ’80s to really clean up the waterways and was always exposed to that and that was something I had a passion for and now that I have children, and hopefully grandchildren one day, I’m caring, increasingly so, about the environment that they’re growing up in and so as an investment banker, I was fortunate enough to get exposed to a variety of very cool companies that provide services that really address some of these environmental problems, companies that recycle soil for beneficial reuse, collect and recycle, use more of the oil that comes out of your car when you have to do an oil change, companies that have big roles in terms of cleaning up the BP oil spill, things like that, companies that are really making a difference so I was fortunate enough to work with companies like that and as I said, my personal passions kind of collided with that experience and I a few years ago, decided to spend my entire career in banking just focused on working with companies like that because I personally, as a finance guy, am not personally changing the world like these companies are but I get to be exposed to these companies on a regular basis and help them raise the capital or look for owners for their businesses to help them do what they really want to accomplish. JOHN SHEGERIAN: So, you are then the Director in charge of the Environmental and Industrial Services Group, so you’ve mentioned some of those different sub sectors, Scott. Talk a little bit about environmental services. What does that really mean, for our listeners out there, in terms of the categories that you cover and the businesses that you cover? SCOTT SERGEANT: Sure, yeah, so the way I define environmental services, first of all, it’s a huge market. Depending upon how you define it, in the U.S. alone, it’s a $200-billion-a-year kind of business and it’s very fragmented so it covers a lot of different kinds of companies but the services that the companies that I work with, what they do is they really help other companies focus on sustainability, safety, just keeping them environmentally compliant, energy efficiencies, these are the things that these companies are helping just regular industrial commercial consumer product companies focus on. Another way to define it is that if you just think of any waste stream. If it’s the garbage that you put out at the curb, your recyclables, contaminated soils, waste water, air pollution, whatever it is, these are all different forms of waste streams that are produced by our society, there are so many services that touch those waste streams when they move from offstream where they’re generate to downstream where they ultimately have to be eliminated or put into some sort of final resting place, if you will, and so upstream, those waste products have to be tested, engineered, or analyzed. These are professional services, Downstream, those waste products are recycled, treated, incinerated, or ultimately landfilled, less so and we can touch on that a little bit but then in between at various points these waste streams are being touched in many different ways. They’re being cleaned, remediated, collected, transported, and stored and now there’s a big trend that a lot of these waste streams are finding their way into a closed loop system so there is now final resting place. You’re continuously recycling the same product over and over again for continued use, whether it’s plastics or metals, or something as unique as used motor oil. I’ve done some transactions in that particular sector. JOHN SHEGERIAN: If you’re just joining us now, we’re with Scott Sergeant. He’s the Director of Houlihan Lokey’s Industrial Group. If you want to follow along like I am right now, I’m on my iPad while visiting with Scott here and I’m on his great website, www.HL.com. Scott, talk a little bit about what you’ve seen now. You’ve been at Houlihan Lokey for 12 years. You’re in the middle of a very interesting and important segment of the business in the investment banking world, Is there a lot of interest in investing in the environmental services sector right now? SCOTT SERGEANT: The short answer is, absolutely. There is a lot of corporate M&A activity so there are large businesses that are acquiring smaller businesses and even large companies. Private equity is an enormous pool of capital that needs to be put to work over the near term. These are institutions that have to spend billions of dollars in private enterprises and they are increasingly trying to build investment pieces in this particular sector and just put their money to work and again, there’s just billions of dollars in that pool of capital alone. Venture capital has always been an interesting sector in a variety of different areas like green tech and some other emerging or fast growing opportunities and I spend a lot of time with both large companies and private equity funds, like helping them think about places where they can build businesses, where to expand, where there’s consolidation opportunities and aside from doing and executing transactions for clients, that’s where I spend a lot of time, helping people think about where to build their businesses in this particular sector but a lot of activity. We closed four different transactions in the month of August alone, which is on a monthly basis but certainly I think it’s an indication of activity in the sector. We represent a company called Peri Renewal, which is a non hazardous liquid waste business and our client sold their business to Darling International, which is a large publicly traded food rendering and food service recycling waste recycling company. We helped restructure and sell a company called Synagro Technologies, which helps recycle the solids that are separated from waste water treatment plants that is then sold to a European infrastructure fund called EQT, which is an interesting transaction. We also, in the month of August, sold a waste to energy facility down in South New Jersey to Covanta Energy, which is the largest waste to energy business in the United States. Then we helped a company called Santech Waste, which is a municipal solid waste landfill company to recapitalize their business so it all kind of touches on a variety of different areas if you go back to definition of environmental services, John, it touches on a variety of those different pockets. JOHN SHEGERIAN: Really, as opposed to how the media portrays the investment banking world today, you’re an investment banker who’s actually doing good. You’re doing well for of course, your firm and for yourself, which is part of the wonderful capitalistic world and society that we live in, especially here in our democracy in the United States, but you’re also doing well by getting the right support, as you so say, in terms of raising capital or creating alliances and collaborations for the brands that you represent so they can do more of the important and great work that they do to help fix our great environment and the world that we live in. SCOTT SERGEANT: You said it very well, John. That’s what gets me really excited about going to work every day because I get to work with companies that are really making a difference and bring value to them in the form of capital and helping them partner with the right groups to help them grow and become stronger businesses. JOHN SHEGERIAN: Let’s talk a little bit about trends. What are some of the hot trends that you see right now? What’s hot and what’s not with regards to environmental services that you’re seeing? Because you’ve got great visibility on this. SCOTT SERGEANT: There are a bunch of different trends. I think they make it very interesting place for people to put money. There are a couple of themes that everyone talks about and hears about. I think worth mentioning sustainability and landfill avoidance. Those are two good examples and they’re big terms and big words that people maybe even over use a little bit but they are not trends anymore. They’re very real and talking about sustainability for a second, most if not all Fortune 500 companies today have just massed this sustainability initiative and now even have a chief sustainability officer working in their company. It’s good PR. It’s good for brand imaging but they’re also proving to be economical in cost saving initiatives. Landfill avoidance, you see it everywhere right now. You have so many alternative outlets to put your waste. It was just taking the traditional glass, paper, and aluminum out of your trashcan and now you’ve got avenues to take your food and compost, John. You’re helping facilitate this huge universe of electronic waste and there’s a whole variety of other specialty waste streams where there are ways to dispose of it, not put it in a landfill and that leads into another theme that I really like, which is just creating value from waste streams so there are some of the large integrative waste companies, like Waste Management, they don’t call waste, ‘waste’. They call it ‘alternative materials’ because they know that they’re controlling this valuable product. I even heard one CEO, one executive in passing saying everything can be recycled except asbestos. If you think about it, there’s maybe a cost to recycling certain things more than others but at the end of the day, you can find an outlet for almost anything out there. JOHN SHEGERIAN: That’s so interesting. For our listeners out there that are investing, just picking stocks and things of that such, what are some of the bigger pitfalls for investors that you would highlight or you’d like to highlight for people to be careful of while they’re looking at their opportunities out there in terms of placing their own capital? SCOTT SERGEANT: Sure, so a couple things: Growth is always probably the biggest growth driver in every instance. It ultimately drives, whether you put a big multiple or a small multiple on a business and I think the one thing you’d want to be careful about is what kind of tailwinds the business has to grow it so we just talked about landfill avoidance initiatives. In some areas the waste streams that are being generate are being generated are not the fastest growing markets. In conjunction with landfill avoidance, there’s just no raw focus on reducing or minimizing the use of certain waste streams or raw materials used to manufacture so you just want to focus on truly what is driving the business, the growth of the business. One other thing that we come across sometimes is the exposure to commodity prices so a lot of the value that we just talked about comes out of these waste streams or commodities like it could be tied to oil prices or metals or some other commodity so you just want to understand sort of what the exposure is that the company has to those that are really sort of outside of the control of the service that you’re providing so the companies that really differentiate themselves are ones that are creating an essential service where you’re getting paid to provide something that is essential to the ongoing business that just thrives. JOHN SHEGERIAN: Got it. You’re in New York City, and you travel a lot and things of that such. What do you see in terms of cross-border activity in the environmental services sector? SCOTT SERGEANT: That’s a good question. You know, we’ve seen across the industrial world that I’m a member of at Houlihan, and we’re the most active industrial advisor in terms of M&A. We see just a tremendous amount of cross border activity and we’ve transacted a large percentage of our deals with Asian and European, even South American businesses buying U.S.-based companies. Specifically within environmental services, surprisingly we’re starting to see a lot more of that and what I think it interesting is if you pick the world apart, there are different countries and continents who are at various stages of evolution in terms of progression towards focus on environmental issues. Europe, for instance, is in many respects, way ahead of where the United States is and so Europeans kind of view the U.S. as almost an emerging market in some ways so putting aside the issues that a lot of European countries are having right now, I think you’ll see an increased focus as they come out of recession, on looking at investing in the U.S. On the flip side, if you look at countries in Asia and South America, like China and Brazil, they are way behind the U.S., and now they are actually looking at U.S. businesses’ services, technology companies, so that they can adopt the best practices that we have here, maybe make an investment, bring home some of those technologies or learn best practices by owning businesses here and then bring them back to their home countries. JOHN SHEGERIAN: Interesting. How about pending regulation? Is that one of the major forces of velocity supporting the companies and pushing the companies forward that you are investing in or you are finding investors for? SCOTT SERGEANT: Regulation is a big trend that we’re always focused on for all the businesses that we deal with. Regulation is a very good thing for the businesses that operate in the sector because it protects them. It’s a real driver for why these companies exist and why they need to exist and you have the comfort that regulation is continuously increasing and it’s kind of an irreversible trend if you just look over the decades since the 60s when all the regulation started, You can just kind of pile on decade after decade more regulations, which are good for all these companies. That said, you want to be careful not to rely on regulation because often it’s very hard to predict when the EPA or federal or state agencies are going to really enforce new regulation. You know that it will happen but it’s a matter of when so you want to be careful not to truly bet on certain new regulation but you can rely on the fact that it’s only going to get stricter over time and what exists today is not going away and there are a number of big themes out there that I think could be really game changing for a number of industries. As you know, John, e-waste is one area of it’s just a matter of when that becomes a national more federally regulated industry. The fracking rules deal with the wastewater around the oil and gas sector. That’s a huge area where regulation varies state to state in terms of what you can do with that waste water and there’s other pending regulation around air pollution, waste water, other waste products like coal ash, what to do with all that and whether that can go into traditional landfills or specialty landfills so there’s a lot of things that the EPA is working on and there will be definitely some big regulation in the near future. JOHN SHEGERIAN: We’re down to the last minute-and-a-half or so, but you get an interesting visibility into so many great companies in this country because of where you sit at Houlihan Lokey and some are in your sector, in industrial or environmental services, and some are not. They’re just other companies. Do you see, given your unique spot that you sit, green and sustainability as a competitive advantage for the companies that you represent in environmental services and industrials? SCOTT SERGEANT: Yeah, across the board, if you provide a sustainable solution or green solution, I think all else being equal, it is a competitive advantage and what I mean by that is so long as it’s not a more expensive or if you’re not providing more expensive or significantly more expensive service, all else being equal, consumers and industrial businesses will choose the more sustainable green option so yes, it does become a big competitive advantage for these businesses. JOHN SHEGERIAN: For our listeners out there in the last couple of seconds here that want to be the next Scott Sergeant, we’ve got a lot of young listeners across the United States and across the world that want grow up and change the world like you get to change the world. Any last pearls of wisdom for them as they embark on college or grad school? SCOTT SHEGERIAN: Sure. There are so many emerging opportunities out there. We work with a lot of mature businesses but we work with a lot of emerging businesses and there are so many really interesting companies that are continuously being developed and new business models out there so I guess, for the younger listeners, I would just look for some of these opportunities because I think those companies will become bigger and bigger and more relevant over time. JOHN SHEGERIAN: Scott Sergeant, thank you so much. For those who want to learn more about Scott and what Houlihan Lokey is doing, it’s www.hl.com. Scott Sergeant, you’re a great sustainability leader, a good friend, and truly living proof that green is good.