When President Trump signed a measure in April to address a 19-year decline in the flow of the Colorado River, it was another sign that the management of one of Earth’s most precious resources is becoming more important and urgent in the face of climate change.
It’s a reality that Water Asset Management, a New York-based fund with $500 million under management, anticipated long ago. Since its founding in 2005, WAM has focused solely on water resources, water utilities, technologies and related treatment and sanitation projects. And it has done so with a strong impact investment and ESG overlay.
Since 2005, Diserio’s firm has targeted its clients’ investments into a host of water-related industries globally, including water utilities, treatment and conservation technologies, and companies that seek to ensure people in the developing world have access to clean water.
“Water is the new oil,” says Matthew Diserio, WAM’s president and co-founder, in an interview with Karma. “The main negative effect of increased carbon emissions, which is warming our planet, is on the hydrological cycle – increasing the incidence and intensifying the severity of drought and flood. Driving private capital to water and sanitation projects is fundamental to fighting climate change.”
The Perfect Stormwater
The number of funds and social venture capitalists targeting water resources has exploded in recent years.
UBS, the Swiss giant bank, estimates total market volume for water investment is approaching $600 billion. About 35% of that represents investment in managing stormwater and wastewater, including treatment plants, drainage systems. Wastewater is the segment’s biggest single category. Niche markets, too, have proliferated, some of them with very high growth and often spurred by regulatory requirements. For instance, UBS reports that investment in ballast remediation – the decontaminating of water used to stabilize marine vessels of all kinds – is growing at about 20% annually. Investment in desalination technologies are growing about over 10% a year.
Public markets have taken notice, too. Water indexes which track the subsector’s top companies have proliferated, including the Dow Jones US Water Index (focused on the US water sector), the S&P Global Water Index (50 water related companies around the world); the NASDAQ OMX Global Water Index (focusing on companies innovating in water purification, desalination and conservation). ETFs, too, have appeared in the past five years, with the global investment bank Ivesco regularly topping industry ratings for returns.
But for the alternative investor, WAM and other water specialty funds – Summit Water Capital Advisors, for instance — offer something deeper.
“We know the world is looking for yield. We know much of the world is looking for water,” says Diserio. “Put the two together and you have the ultimate impact investment.”
Global impact investment advocates agree. PRI, the United Nations-funded association that monitors investments that advance the world body’s Sustainable Development Goals (SDGs), regards water as “a multi-impact investment because it affects the microclimate, food supply, industrial chain, health, productivity and the environment overall.”
Water management and water-related services are not just about impact investing.
Water utilities, in particular, generate high earnings per share (averaging 5% to 7% in the past two decades) as well as annual cash dividends that average 3%, according to Standard & Poor’s.
“The water utilities have outperformed virtually every asset class for the last 10 years, 20 years and more, and that includes other commodities, oil, and the S&P 500,” Diserio said. “One of the themes is that governments, which really managed and owned a lot of water-related infrastructure for generations, have mismanaged it to a large extent, and there’s a massive privatisation opportunity. So essentially what we’re doing to a large degree is arbitraging government inefficiency and governments’ inability to access capital.”
The WAM pitch looks something like this: The world is searching for yield. But let’s take a quick peek at today’s world. The annual return on the S&P 500 in 2018 was -4.38%. Yes, negative. Commercial real estate cap rates – the ratio between a project’s operating income and the original cost of capital – currently hovers in the low 4s, and in some markets, as low as the 3s. The yield on 10-year US Treasury bill is once again (as of May 23) falling, now at a two-year low of 2.234%.
In such a world, how does a return of 5%-7% sound? Plus the knowledge that your money is making the world a more sustainable place.
That’s a message that resonates with investors, impact and otherwise.
Water Asset Management’s other co-founder, Disque Deane Jr., the firm’s chief investment officer, counts as a genuine water pioneer. Back in 1995, Deane, then a trader with Lazard, became transfixed with water, and in particular, forecasts from some scientists that the booming economy of the American West was at risk of drying up within the foreseeable future unless someone started thinking strategically about water.
Deane first dipped his foot the water in 1995, purchasing water rights to a mining tunnel in Summit County, Colorado — best known as the home of Vail, Beaver Creek, Breckenridge and other world class ski resorts. The company he co-founded, Vidler Water, intended to sell water to Colorado municipalities. But Vidler found that the market was not ready to properly price water. Deane left Vidler discouraged but not defeated.
He was still hooked on water. With Diserio, a college friend, Deane founded WAM with about $3 million in their own money, betting that ownership of water assets would underpin a good growth strategy. Today, WAM is a $500 million fund and believes the good times have only just begun.
“There’s no life or no economy without water,” says Diserio. “It’s underpriced. It’s completely misunderstood by the capital markets. People just assumed water would come out of the tap, and because of that, there’s been a massive underinvestment in our water infrastructure and water supply. What this has done is created a multi-trillion dollar capital investment catch-up supercycle that is underway, and that massive capital investment supercycle is providing a very steady tailwind to the companies and assets that we invest in that solve water quality and water supply issues.”