Tapping The Increasing Need For Water

Massive, essential water-related infrastructure projects are creating opportunities for investors

September 13, 2023, LONDON—Investors stand to benefit from the high levels of investment in the water space that will be required over the next 30 years. However, identifying companies that play best to the water-related theme is challenging, according to the latest Cerulli Edge—Global Edition.

Recent media coverage of UK water companies has focused on the relative lack of expenditure on treatment facilities and other key equipment—and on the implications of this lack of investment for water quality. Other countries face similar problems. For example, in France waste management with relation to water is a pressing topic. The country has adopted the International Strategy for Water and Sanitation (2020–2030) and is amending its water sanitation practices.

“Some 30% of the French institutional investors target clean water when allocating capital to responsible investments, the highest among the European markets we cover,” says Justina Deveikyte, director of European institutional asset management research.

Investing In Water

Demand for water is driven by megatrends such as global demographics—including population growth and rising living standards in developing countries—as well as industrialization and climate change. Water is used across the board, from making semiconductors and pharmaceuticals to growing food.

With the necessary investments in water infrastructure and technology yet to be made, the imbalance between water supply and demand continues to grow. Water companies will need to spend hundreds of billions of dollars to bring their infrastructure up to the required level, even before the implications of tighter regulation are taken into account.

Water-related investments have outperformed the broad market over the past five years and tend to be less volatile than other environmental themes.

However, identifying companies that play best to the water-related theme is tricky, given that the water business is fragmented and there are few pure-play water companies. Conglomerates that oversee broad business units control much of the innovative technology and regulated utilities do much of the buying, selling, and treating of water. Active management firms maintain that their passive counterparts are unable to provide pure exposure to the water theme.

Furthermore, there is a limited number of listed options available in the regulated utilities space—of the 10 original UK water operators, for example, only three remain listed. Veolia (an environmental services group headquartered in France) remains one of the few players listed in Continental Europe.

Investors typically categorize water-related holdings as defensive-industrial or utility-sector exposures; thematic investors typically categorize them as either climate- or health-related exposures. Most managers focus on investing primarily on the supply side, which represents companies that are providing products or services related to water.

Other Findings:

• The increasing wealth of Asia’s high-net-worth (HNW) and ultra-HNW individuals is fueling demand for family offices, especially in Singapore and Hong Kong. Cerulli research shows that whereas some asset managers are securing family office clients directly through their institutional teams, others are relying on private banks due to lack of transparency and information available in this segment. Digital advisors are also expanding their reach into the family office segment. Accessing the wealth segment is not without challenges.
• The generally stable returns offered by private debt is proving to be a drawcard for a growing number of investors in the US. The “Swiss Army knife of an investment portfolio,” private debt is increasingly being used as a key building block for larger alternative platforms to grow permanent capital that can provide steady fees through long-dated, open-end fund structures.

About Cerulli Associates

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Headquartered in Boston with fully staffed offices in London and Singapore, Cerulli Associates is a global research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.