Hernan Saenz, Bain & Company | A Glance into the Future of the Planet, the Power of Circular Transformation and the Role Private Equity Can Play

I'm Sean Mooney, Bluewave's founder and CEO Bluewave is the go-to expert of those with expertise. Bluewave connects proactive business builders, including more than 500 of the world's leading private equity firms, to the very best service providers for their critical variable, on-point and on-time business needs.

That's a little bit about me.

What's that all about, and how did that become something that you've become interested in?

Where have we been? We have been in a place where we have a very long, very global, very brittle, very opaque supply chains. And they are optimized around one and one variable only lowest unit cost. But there's a number of forces that are applying pressure on that type of design, one of those forces is geopolitics, right? We came from a world where you could assume that any particular input could go anywhere in the world be turned into something that got manufactured, and that output could go anywhere in the world.

That's no longer true. There are not only tariffs, but there are trade barriers of other types. We are now in a post-globalized world, and in that post-globalized world. There's a lot of questions about where to actually put your manufacturing, where to shore if you will. But that's just one of the forces, there's other forces.

There are natural forces, the pandemic was another force. So we're seeing supply and demand shocks. Think of those that come from climatic events, those that come from labor force challenges, from a boat being stuck in some canal. So our supply chains have become incredibly brittle and they are breaking.

And that's a massive problem. We did not build any flux into our supply chains in the past, and the third thing is, it was perfectly fine to have a supply chain that was both brown and opaque. You didn't have to know where it came from, and you did not care about what externality it might have created.

None of those things are going to work in the future. The world is trying to build right-shored, more flexible, more transparent, green supply chains that still have to make money. And so there's a massive issue out there. Why is circularity sort of coming to the top of the list because it is an enabler to many of these things?

It is an enabler to much more sustainable supply chains, it is an enabler to growth and improved economics, it is an enabler to resilience. And in that way, it's coming out as the great enabler of the future supply chains of the world.

We may collect cotton from a field, right? We convert it into a product, the cotton turns into a t-shirt or a pair of jeans. We use the product and then we dispose of it, and the next time we're going to make something, we go back to the field and extract from it.

Now, as our global population has grown, the size of our planet has not, and so we are consuming more, producing more. With a relatively fixed Earth, just to give you a sense, we're extracting right now over 100 billion tons of materials per year. That number has quadrupled since the day I was born, 50 years ago.

And today, if you looked at the biological capacity of the Earth, what the land can give us, what the oceans can give us, what the lakes can give us. We are basically consuming about 1.

75 earths every year, so our demand by July 28th we're done. The Earth has given us what it can give us for the year. And the problem is we start depleting the earth's supply for future years. Because we end up overfishing and then we don't have fish anymore.

Or we end up killing, creating dark spots in our lakes, in our rivers, in our oceans. By the way, that date, July 28th, has moved up two months in just 20 years now. Think of a circular world in a circular world. You're trying to not use a virgin resource, you're trying to use a resource you already extracted and put it back into the economy.

So that alone starts solving a lot of the problems of sustainability, but extracting resource requires energy.

And converting also requires energy If you use circular principles, you can actually reduce greenhouse emissions by about 40%.

So it's amazing, right? So what circularity can do is actually fundamentally change the equation of the sustainability side, but, by the way, does it also solve resilience? Of course, imagine being able. All of those things that are in short supply, they cannot go to the waste pile.

They have to come back, so it helps with that. And as we'll talk, I'm sure it can lead to dramatically improved economics, right? Circular companies Circular models have created remarkable growth and remarkable profitability.

We're 20 years into this.

The question is, what happened? Why have we been talking about circularity for 20 years but not achieved circularity at scale? And I would say that there's probably three things. The first one is that we focused circularity on sustainability. So we wanted to do it because it was sustainably good.

Well, a model focused only on sustainability and not focused on economics is not going to scale in a market economy. And so, yes, we need to focus on the sustainable implications of circularity, but also the economic ones. Once we make sustainable circular models that are also economical, it will scale. That's point number one. point number two, as you said, is that we equated circularity with recycling.

We said, OK, let's be circular. That means recycling. So I'm not an engineer, but I think I understand this well. You have an optimized system, right? and you change one variable in that system. I'm no longer going to use Virgin Resource.

I'm now going to use recycled resource. What happened? When you change one variable of an optimized system? you suboptimize it. Is any business going to rationally scale a suboptimal system? No.

So we can't just play with recycling. In order to create models that work, we have to change all of the other variables. You said one of them remanufacture, right? But there's plenty more. Can you refurbish?

Can you repair, can you reuse? And so, if you can change all of the variables, then you can create a system that is optimized at a different level. Not for a line, but for a circle. And the third thing, as you said, is companies did it alone. I am going to turn the world into a circular world through my own value chain.

Well, it takes a village, in fact, I would argue it takes multiple villages. Because the whole value chain needs to become circular, so you have to work with your suppliers and their suppliers. Probably with your competitors in a pre-competitive space, and with your customers and consumers, so that the whole value chain can become circular. And by the way, you often have to work with adjacent value chains because your inputs may. Your outputs might be useful to somebody else's inputs, not necessarily to you as inputs. And so we need to build ecosystems.

And so, you know, traceability is a big, it's going to be a big part of the solution.

They, they require reusability, recyclability, et cetera. There's also in Europe what's called the EPR extended producer responsibility. And basically, this is an approach or a law that basically says producers have financial and or physical responsibility for the treatment of their post-use products. And so all of this is happening in Europe, and so that's very, very soon.

There's going to be incentives and also punishments for not having, for not having sort of circular circular value chains. Now in the U.S is not necessarily far, far, far behind. The National Recycling Strategy is asking is aiming to increase recycling to 50 percent by 2030.

That's, that's actually a massive increase. Twelve states have introduced or implemented EPR legislation, twenty five states now have electronics recycling laws. And what's what's really amazing is China is also not far behind they they have.

They want to remember, material productivity has not really increased in the world. China is basically saying, by 2025, that's two years from now, they want a 20 percent increase in material and resource productivity. They they are hoping to reduce energy consumption by about 14 percent, water consumption by about 16 percent.

This is in the context of a growing economy. They are planning to phase out single, single use plastics. They want recycling of electronic waste at 50 percent by 2025. So let's be clear, right?

If you think that a linear model is going to be profitable and winning in 10 years, I don't think the answer is yes. Now can they make money today? Absolutely right, because we haven't had the full transition.

First of all, the consumers care, and the short answer is they do if you ask the average consumer. And I know that the average consumer doesn't exist. But if you ask the average consumer what they care about, they care about. Climate change, plastic waste, water pollution, water shortages, waste of food, deforestation and waste of water.

All of the ones I just mentioned are related to circularity. They care, and by the way, they say they're going to act on the basis of those of those things that they care about. So, 71 percent would say that they are, that they want to buy sustainable products. Seventy five percent are willing to pay a premium for the sustainable or circular product. Eighty percent of them are willing to recommend, you know, using NPS type metrics, sustainable products once they use them. Et cetera, et cetera, et cetera. So so the market sort of appears to be there.

Now we all know there's something called the say do gap. I say that I care, I say that I'm going to behave in a certain way, but my wallet operates in a different way. And so there are two forces here, one force is the experience curve. These circular models are not far down on the experience curve versus linear models.

So you have to go down quickly to have the curves cross, so the market will start picking up more once it becomes not only the sustainable solution, but also the economic solution. And the other curve you want to care about is the S curve, the penetration curve, right? Certain segments will move faster, in fact, they're willing to pay more, and certain segments will move once it is the economic.

Now what's happening right now is we probably haven't gone down the experience curve. So part of it is we don't have as much product or price in the market. But we we have other problems. Like these products are not easy to find relative to to the other products, and by the way, you don't trust them, right? Imagine like the number of green certifications out there has obviously led to greenwashing concerns, and that includes the circular economy.

So what? One problem is, one barrier is that the governments and the market need to operate together, and the governments are acting, and the market wants to act right. But we, we now need companies to get into the mix, go down those experience curves, segment the market correctly so that you get into the S curve movement relatively quickly. But you asked me a question, right? Which is like, Look, what's hard? and let me let me give you the four things that I think are hard.

One of them is companies are not organized to move from a linear to a circular world because companies are still vertically organized. They are functional in nature, there are siloed, and they have functional excellence and nothing wrong with that in a stable environment, but we're not in a stable environment. And to move from a linear to a circular supply chain, it's a cross-functional, horizontal problem. You have to change your strategy, your go to market, how you segment and talk to customers, you have to change the supply chain, you have to change the IT.

So a companies are not organized for this, by the way. We saw that they were not organized with this type of transformation. 10 years ago when we were trying to implement digital, and it was very hard. The second problem is, is traceability, right? Like we don't have the data, we don't have the technology, and therefore we don't have the visibility.

And so, right in order again, in order to bend a line into a circle, you have to see the line, and today that line is. Is is connected through through a chain. That does not have the right data connectivity in it, it does not have the right enabling technology, it does not have the right visibility. The third problem is that this is, as we were discussing, this is an ecosystem problem, and ecosystems don't exist.

I mean, we are all scared of working with our competitors and getting in trouble with the law, and so there's no muscle to work with competitors in a precompetitive space. We all work with our suppliers, but we don't work with our suppliers, suppliers, right? And we certainly don't ask our customers what are they going to do with our product?

And so that ecosystem is not built. And the last one is, there are parts of this market that simply don't exist. Recovery services, right? I mean, this is all going to create massive economic growth, but some of some stuff's not getting recovered, and so there's some circular markets that actually don't exist.

And so that that becomes really so. Those, to me, are the big, big, big barrier.

So can big companies change their linear models to circular models? Yes, and also can entrepreneurs come into the market and fundamentally change a market that has been linear to one that is circular? Yes, so examples of incumbents, right?

Schneider Electric and its process drives its eco drives in France, right? They have the ability to collect it from the customer, triage it into a refurbished, remanufacture, recycle, or resell environment. And basically, you have essentially a circular model for their, for their process drives, similar with Philips and their professional medical equipment, right? Relatively large, modular pieces, similar to to Schneider Electric.

You know, Mahindra and Mahindra, the big one of the big automotive companies in India. 70 percent of the waste generated in the end of life of every one of their vehicles is now either reused or unrecycled. So these are big companies with fully circular models.

BlablaCar is a carpooling platform in France, so the French are no longer buying as many cars because they carpool through this platform. To get to Paris or to the city they work in, so we are now not producing as many cars for them. By the way, we're utilizing massively underutilized capacity because cars get used less than two percent of the time. They have a nasty, nasty, nasty carbon footprint.

Right, making them is really expensive for the environment, and we don't use them, right? And so this solves it. The RealReal, one of the many platforms that sells luxury goods and apparel in secondary markets, right, is doing incredibly well.

Ralph Lauren now has the capacity to authenticate many of its best garments, allowing them to to participate and partner in secondary markets. And one more insurgent in Europe called Back Market. They refurbish and resell electronics, and and by the way, they're traded, and their value is probably higher than most of the electronic retailers in Europe these days. So, look, these models exist.

Can tech be leveraged to support the circular economy, and what are some emerging trends in the space?

They need to be connected, the data has to be connected, data has to be visible. And so, to me, one of the big, big, big applications that we need is digital traceability. And digital traceability is the ability to see something. From the inputs coming in to the conversion, to the transportation of the inputs, to the conversion process, to the transportation into the distribution centers, eventually to the end user.

And, by the way, in its post-use life. And I believe that blockchains are going to be the answer here because they're a very good platform to store and share the data, both securely and privately. But allowing you to do everything. To me, the digital traceability is one of the big enablers of circularity.

Circularity is an enabler, it's not a goal, and measuring circularity takes us away from the outcomes we're looking for. What's the end goal? Economic growth, profitability, resilience, less virgin material extraction, less greenhouse emissions, gas emissions. So I think we should be measuring those as they are enabled by circularity.

The other thing is, there's an economist in Japan, Yuichi Kaya, who developed what he calls the Kaya identity equation. And he developed it as a way to think about, how do we get carbon solved? But I think there's a general form of his equation that basically decomposes circularity into three things. Are we using virgin versus recycled inputs? How much input do we need for the output?

And can the output provide a service for more people or for longer? And that's, I think, how we should measure it. We should measure as inputs. What percentage are we using raw virgin material productivity? can we improve it? Can we use less input to produce the output?

And the last thing is, can we get that output through sharing economy, through refurbishing, remanufacturing, reuse, to last a lot longer and serve a lot more people? And so I like using the Kaya identity as the best measure.

So, as you know, Blue Wave's primary client base is private equity firms. And many of our listeners come from that world, so I'd like to spend a little bit of time there. Starting off, what is the role of private equity in promoting the circular economy, and why is it important?

They will literally trade at a different multiple.

And that may be hard to do in a public market, and a lot easier to do in a private market. There are also small businesses that are ready to literally change the dynamics of an industry, and they're ready to disrupt and they need to be scaled professionally. And that has been one of the things that private equity has done well, so I think both in incumbent businesses and insurgent businesses, private equity is the right vehicle. Not only from the funding source, but bringing some of the know-how.

Because because of a of a circular vector, I think, well, you know, private equity funds are are well known for their academic, their their intellectual rigor. And so, you know, to me again, the two tools that I would be using are experience curves, right? When does the circular solution cross over to become as good, or even better than a linear solution? You can do that in a subsidized environment with governments, or in a non-subsidized environments. And then what do we think the penetration, or S curve, is going to be?

And, in particular, how do we segment the market to accelerate moving through that S curve as quickly as possible? And so I actually, again, because of the sophistication and rigor of private equity funds, right? You can use these tools relatively quickly to identify how how to scale these assets. By the way, can these assets be turned from a certain being valid at a certain multiple to a different multiple? Because in addition to being economically good, they are sustainable. And this will be at the intersection of the particular legislation, what incentives are out there, what specific laws will make it very difficult to be linear. As well as the market, are there segments that are large enough that are willing to shift share or pay a premium here? Where are we seeing the most activity?

Remanufactured. And by the way, they have some very important materials that are no longer in in plant, in plentiful supply.

Large technology devices for business, particularly those that can be.

Modularized. We talked about process drives, we talked about health tech. Absolutely have the potential to be part of the circular economy. A lot of machinery has the ability, right?

To be refurbished, upgraded, et cetera reused in different contexts. Automotive as we were discussing, we're seeing not only Mahindra Mahindra, but a number of players. By the way, it's not just changing the supply chain, it might be moving to A, to a sharing economy, right? And so, you might, you might not sell trucks, but you might, you might sell access to trucks, right? So it's basically anything as a service, obviously. In CPG and plastics, if there is any way right to to, to to find solutions to some of the plastics and packaging problems we have today. Because you can expect that there will be.

Regulation associated with both micro plastics as well as single use plastics. I believe the construction and the built environment will also have significant amount of circularity. Um, electric batteries, Uh, this is, this is big, right? In fact, one of the large automotive manufacturers in Japan is probably not going to sell its electric vehicles. It's probably going to lease them, but maintain ownership of them.

Why? Cause they want the electric battery back. That that tells you a lot. And then I think, later in life, not yet. But apparel, you know, we. We cannot continue to buy the number of goods we buy and dispose of them, you know, in a in a waste spot. So actually, I think there's going to be more rather than less opportunity.

Cause I just gave you a lot of sectors, and these are sectors covered by regulation, uh, by incentives. And where we have seen consumers and customers tell us that they care, yeah.

So right, maybe it's economic because we have a subsidy for the gap from the government to do something, but what if that subsidy actually comes, disappears or comes down? We also have a say do gap. You know, private equity funds can talk to consumers and they'll say, Yeah, yeah, of course, I will buy this product. Uh, I don't pay a premium.

And we'll, How do you close that? say, do gap? Um, and I think. But I think the biggest challenge for private equity is this may take longer, right? if you are into relatively short holding periods, right?

This may not now work out, so it might take you might have to hold the asset a little bit longer. To actually get some of the stars that I was just talking about to align. The other one is if you're buying global businesses, right? All of this will not move in synchronicity. Uh, and so it's going to be easier to do it with businesses that are covered by similar regulations, similar, similar dynamics.

Second, can I build a new economic model, anything as a service, right? and and actually monetize in a different way? Third, can I enter what I'm going to call adjacent moves, for example? Can I create a circular marketplace? can I create recovery services?

Can I create enabling services? And against all those moves, look at, do I get growth, do I get profitability? do I improve resilience? do I improve the carbon footprint?

Do I improve virgin material utilization? And, by the way, does that actually has an have an impact on my multiple? And based on that analysis, I would, I mean, you're not going to do all the circular things. But then I would prioritize based on the on the what I'm going to call the the economic potential of the move and the likelihood of success, which I do believe is going to include regulation.

The last thing you need to have, if you're a private equity fund is you need to have a scaling plan. Because I also believe that circularity is like digital is a place where pilot purgatory can always happen, and so you can't just pilot things. Do you have the op model, the ecosystem, the data tech infrastructure, the use cases to actually scale?

Or all of those that are related into those value chain.

And the last thing is, governments want to implement circularity, they don't know how to implement circularity. And so private equity funds, uh, that that have very well-developed ideas, can go to the governments and say, look, this is the type of legislation. These are the types of incentives that, for this particular industry, can can help us all move into a circular world.

And I'm so glad that I had the chance to, um, dive deeper into it with you. And I'm so thrilled that you were able to join me today. And I just can't thank you enough.

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