Private Equity in the circular textile economy
The textile industry is at a crossroads as the need for circularity becomes more urgent. Despite a near doubling of global investments in circular textile companies from 2020 to 2022, systemic challenges such as fragmented supply chains, high-risk perceptions, and lack of expertise hinder widespread adoption. Private Equity (PE) firms have a unique opportunity to accelerate this transition by leveraging their financial resources and strategic influence.
Circularity in the textile industry
The urge for applying circular practices in textiles is gaining traction as the world grapples with the environmental and social consequences of the linear “take-make-dispose” model. While the urgency for circular practices is evident, investments to accelerate this transition remain limited. Reports indicate that between 2020 and 2022, the total capital invested globally in circular textile companies has nearly doubled.1 Nevertheless, the overall market lags due to challenges in scaling innovative solutions and addressing systemic bottlenecks.2
The textile value chain is complex, and significant barriers— technical, financial and political —impede progress. Private Equity (PE) firms remain hesitant to fully commit to the textile sector, despite the potential for circular practices to foster customer retention, strengthen brand loyalty, and offer sustainable competitive advantages over time. This article explores the opportunity for investors and their vital role in accelerating the circular transition for textiles. We invite PE firms and stakeholders to join the conversation, share their insights, and collaborate on actionable strategies.
Invest-NL aims to contribute to a more circular textile chain. Given that we are facing a wicked problem, where many activities must be undertaken by multiple stakeholders on various levels, only a holistic approach can drive systemic change towards a more circular textile industry. From our position at Invest-NL, this project helps us to understand how we can contribute to realizing our mission:
Our mission is to make the circular textile industry financeable. From an independent position, we realize the necessary system change. Together with entrepreneurs, financiers and policy makers. This is how we contribute to a sustainable, innovative and just circular textile industry in the Netherlands.
The role of Private Equity in driving change
PE firms are uniquely positioned to drive transformative change in the transition to a circular textile economy. With their access to significant capital and ability to influence strategic direction, they can enable scalable solutions that might otherwise remain limited to small-scale efforts. Additionally, PE firms can play a critical role in helping organizations transition from a linear to a circular business, by providing the financial resources and strategic guidance needed to adopt circular practices. By investing in circular textile initiatives, PE firms can unlock new markets, support the development of advanced recycling technologies, foster innovations in sustainable materials that promise long-term competitive advantages and help companies limit their customer churn rates through circular practices such as repair and customization services.
PE firms, in particular, have the expertise and resources to integrate fragmented supply chains and create synergies among stakeholders. Their involvement can help overcome structural inefficiencies, building cohesive ecosystems that are essential for circularity. Moreover, the growing consumer demand for sustainable products presents an opportunity for PE firms to capitalize on shifting market preferences. As circular business models evolve, they can yield not only environmental and social benefits but also robust financial returns through cost savings in resource use, regulatory incentives, and enhanced brand loyalty.
Finally, as global momentum builds for circularity, forward-thinking investors who prioritize circular textiles can position themselves as leaders in shaping the next generation of sustainable industries. By leveraging this opportunity, they can not only mitigate risks associated with linear practices but also capture the financial and reputational rewards of aligning with future-ready business models.
While public funding and venture capital have traditionally spearheaded circular economy initiatives, private equity involvement can bridge the gap between innovation and market maturity.
“While public funding and venture capital have traditionally spearheaded circular economy initiatives, private equity involvement can bridge the gap between innovation and market maturity.”
Why PE firms remain hesitant
Without financial backing, companies driving circular innovations face significant challenges in scaling their solutions. Transitioning to circular textiles requires systemic change across the value chain, from sustainable product design to improved recycling practices. Yet, PE firms remain cautious, as they perceive several barriers:
● Fragmented ecosystems: Circular textile projects often require coordination across multiple stakeholders, from suppliers to retailers, which increases transaction costs and complexities.
● High risk, low(er) short-term returns: Circular initiatives often struggle to match the profitability of linear models, making them less appealing for short-term-oriented investors. Additionally, ultra-fast fashion brands increase the pressure on companies to prioritize cost over sustainability.
● Limited expertise: Few investors possess the necessary knowledge to evaluate and manage circular textile investments, leading to uncertainty and hesitancy in committing to such ventures.
● Challenging market dynamics: The slow progress toward circularity, compounded by high consumer demand for fast fashion, undermines the potential for circular models to achieve scale. New innovations often fail to attract significant investor interest, especially from PE firms.
Pioneering a circular textile economy
Circular textile offers unique chances for PE to spearhead the circular transition, as innovative solutions are needed to align with the upcoming shift in both consumer demand and legislative policies. To unlock the full potential of PE in the circular textile industry, further research is needed. On behalf of Invest-NL, Route Circulair is conducting an exploratory research to understand the current impact of PE firms on circular economy practices in the textile industry and the role PE firms can play in order to accelerate the transition through financing.
For more information about the research, please contact Krista Smit (kristasmit@routecirculair.nl).
Sources
1 Towards a Dutch Circular Textile Industry: Exploring the common thread. Invest-NL. September 2024.
2 Financing the Transformation in the Fashion Industry. BCG & Fashion For Good, 2020.