Water is precious; it is a limited resource and furthermore a necessity to human advance and existence. Despite water being the most important commodity, there exist only a few investment opportunities, therefore making it a rather illiquid and expensive market to access. Investing in water exposes the investor to another potential risk, which is government regulation, making it a significant variable, which is hard to forecast. How is it still possible to participate in this exciting market and benefit long-term from its development for a reasonable price and appropriate risk level?
The French publicly traded companies Veolia Environmental Service and Suez Environment take the biggest share in the waste-water management sector globally, according to their combined revenue of £2.25 billion for the year 2015. In 2012 Veolia sold a 90% stake in its UK water business for £1.1 billion to a joint venture named Rift Acquisitions, owned by Prudential and Morgan Stanley Infrastructure. This shows that highly reputable financial firms are dealing actively in the water utility market. The world’s largest sovereign wealth fund, the Abu Dhabi Investment Authority, invested into the firm Thames Water via its holding company Kemble. Thames Water is the responsible water-utility company for Greater London in the United Kingdom. This brief outline of deals and companies involved shows the scale of importance of the water utility sector. We don’t hear much about Water-Utility deals on the news, compared to other financial deals or mergers. Nevertheless, it is a very important sector; some tend to underestimate in its investment opportunity and scale of reach.
An excellent indirect investment opportunity in the waste utility industry would be the purchase of an ETF (Exchange-Traded-Fund), containing a diversified selection of global equity securities. Preferably these companies operate in developed markets and have a substantial share of their business activity in waste-water management. This investment approach offers a vast coverage of the main firms in the sector and portrays an excellent start into water investments. The standardised financial product and the ability to sell the ETF back to the issuer at any given point adds to the suitability of the product for risk-neutral investors, who want to enhance their portfolio.
The water utility industry in Northern America and in the United Kingdom has become especially very complex due to the process of privatisation decades ago. In 1980, Great Britain became the first country in the world to sell off its entire water industry. This created a large oligopoly and divided the water industry for years, making it difficult to understand the implications on prices and who exercises control in which locations.
Looking at the ongoing research, it can be indicated that major cities like Paris, Berlin or Buenos-Aires have re-municipalised their system for waste-water management over the past decade to regain control.
Water utilities is a market worth keeping our eyes on; it contains substantial upward potential and investment opportunities. Considering the pace of nowadays financial innovation, we might see new financial products, which possibly enable institutional investors to participate directly, via an OTC market, in the waste-water sector. Time will show, and there are always interested minds thinking about how to advance an industry-sector, and I hope you’ll keep your eyes on waste-water, too, having read this article.