Investment Opportunity

Water is essential, underpriced, non-substitutable, and broadly taken for granted by most individuals until it is unavailable. Worldwide water demand is increasingly driven by population growth, higher protein diets, urbanization, industrialization, and expanding energy needs. Simultaneously, global supply is being constrained by inefficient use, pollution, poor groundwater management, and increased variability of precipitation due to changing weather patterns. As a result, water is an increasingly limiting factor to macroeconomic growth and in some cases social stability trends as well as most communities and industries are highly dependent on water availability for success.

The worldwide water industry is experiencing revolutionary changes due to both demand factors, and the increasing scarcity of inexpensive supply alternatives.  This is prompting unprecedented investment opportunities in infrastructure, resource development, efficiency, water quality/quantity monitoring, privatization, industry consolidation and technological change. In the developing world, more than 1 billion people lack access to a reliable and adequate water supply and to safe wastewater disposal systems. Addressing their needs requires hundreds of billions of dollars of investment by governments and private industry. The OECD estimates that by 2025 water will make up the lion’s share of global infrastructure investment with water spending topping $1 trillion that year.  This amount is nearly triple the amounts needed for investments in electricity or transport. For developing countries alone, an estimated $103 billion per year is needed to finance water, sanitation, and wastewater treatment through 2015.

The water industry provides investors with attractive inflation linked pricing, monopolistic business models, sticky customers, high visibility cash flows, and long term contracted revenues. The very local aspect of water creates regionalized supply and demand imbalances not affected by global supply swings. As a non substitutable resource, water's relatively inelastic demand insulates it from economic cycles when compared to other most other commodities and investments. Water rates have demonstrated positive pricing power, historically increasing at a rate greater than inflation, largely driven by infrastructure upgrades and expansion.  Presently, there are a growing number of privatization opportunities expected as weakened federal and state balance sheets look for solutions to rising and unavoidable capital spending needs. Finally, the water sector has numerous ESG/SRI attributes as most water issues are readily solvable through proper investment and pricing.

Investments in water provide valuable investment diversification and inflation protection:

  • Inflation Hedge: The value of water has historically acted as an effective hedge against inflation. In the United States, overall water prices have consistently risen in excess of the rate of inflation. This increase in water prices is driven mainly by the need to upgrade infrastructure and sources of new supply (storage, transmission, treatment) and competition among users of water (industrial, agricultural, residential and environmental).

  • Lower Pricing Compared to Electricity, Gas, Cable, Telecom: The current low price of water leaves ample room for price increases to more accurately reflect full cost and delivered essential value.

  • Low Correlation and Volatility:  Water demonstrates a low level of correlation with a broad universe of commodities and equity indices, and has also tended to increase in value more consistently over time.

  • Diversification:  Water is a critical input to the majority of future growth areas: food and energy production, oil and gas development, manufacturing, mining, housing, and data storage among others, allowing investors in water to gain broad exposure to a variety of real assets and economic activity.

Water Asset Management believes that these factors are producing an unprecedented period of transformation in the industry in which a limited number of water companies will thrive and a select number of water assets will prosper, offering investors the ability to realize substantial capital appreciation as well as sustainable long term income, with relatively low levels of risk and volatility.

Market Update

The American Society of Civil Engineers (ASCE) 2017 report card gave the country’s water and waste water systems a D.  A large portion of the nation’s drinking water infrastructure is nearing the end of its useful life with an estimated 240,000 water main breaks per year. Some water systems date back to the mid-1800s with most water infrastructure components having a useful life of between 15 and 100 years. It is estimated that the most urgent investments to restore water infrastructure could be spread over 25 years at a cumulative cost of approximately $1 trillion. Wastewater infrastructure faces the same hurdles with between 700,000 and 800,000 miles of public sewer lines in the U.S., many installed in the early 1900s. More than 56mm additional customers will be added to centralized water treatment systems over the next 20 years. Investments in these pipes account for 85% of dollars spent in the sector with still an estimated 900 billion gallons of untreated sewage discharged each year.

In addition to infrastructure costs, water managers throughout the Western United States are facing unprecedented uncertainty of their water supplies, and states are realizing the strategic importance of long-term water supply diversification and are seeking to ensure adequate future water supply for increasing populations, energy production and other growth areas. As the marginal cost of new water supplies increases (desalination, reuse, transportation, etc.), so will the value of regional water supplies and storage. Providing dynamic low cost, high volume solutions to Western water scarcity problems requires institutional capital and expertise. As more institutional capital and managers enter the sector, deal flow and transaction sizes will likely increase. To-date potential returns have not yet begun to contract as the knowledge and execution skills needed to succeed in the water resource area require local relationships and execution experience.