Trends Watch: Water Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Matthew Diserio, President, Water Asset Management.

What is your outlook for investing in companies dedicated to water quality and supply?

We believe the outlook for water investing is positive for years to come. Scarce clean water is the resource defining this century, like oil and gas defined the last. WAM was founded in 2005 on that core belief and we are one of very few fund managers focused exclusively on public and private equity investing in water. The capital spending super cycle underway, to make up for decades of underinvestment in water infrastructure, is a long-term tailwind for earnings, dividends, and asset growth. Developing markets are growing even faster to meet rapidly growing and increasingly urban populations.  Water companies are outstanding businesses for steady capital appreciation since most are either regulated monopolies or are part of oligopolies with positive, durable, inflation-protected pricing power.

Where do you see the greatest opportunities and why?

We focus on three specific water themes driving investment opportunities. The first is the need to increase water supply reliability in the U.S. Southwest as structural drought worsens to deliver cash flow while providing the most scalable, low-cost, low-carbon solution to water supply reliability in the region. The second is the need to improve water quality and water transmission infrastructure globally. This is becoming more critical especially since the primary negative effect of climate change is intensification of drought and flood. We see this as investing in climate adaptation for the world we have now, like it or not. Finally, our granular focus on the world’s hydrology provides early insight into companies in food and agriculture, mining, chemical, and manufacturing facing negative earnings, business interruption, and value destruction risks from worsening drought, flood, and pollution. Hence, we short stocks facing climate risk.

What are the greatest challenges you face and why?

Execution risk, and time. Since it’s hard to imagine a scenario where the positive long-term fundamentals for water investing change, the challenge is proper investment selection to maximize return and reduce risk. In addition, we don’t use leverage. However, sometimes our development work to create long-term, inflation protected, water-lease cash flows, (with zero capital intensity) take longer than planned, so compressing time can be a challenge.

What keeps you up at night?

With the unprecedented easy money and liquidity provided by global central banks, the tightening labor markets, and rapidly recovering economies, inflation is becoming a growing concern for many investors. However, water is an excellent inflation hedge because many water companies and real assets have inflation pass-through mechanisms built into their business models. Investing in water, which is an essential resource, non-replaceable, scarce, capital intensive and poorly understood by most investors, for the most part helps us sleep like a baby.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.