Outlook 2017: Where investments flow

Like rivers and streams, you may want to consider letting your PE investments flow into water in 2017.

Water scarcity and its finite nature almost makes investing in it seem like a no-brainer. Nearly 70 percent  of the world’s freshwater withdrawals are committed to agriculture, with the industrial sector a far-off second (19 percent) and households and municipal use taking a 12 percent share, according to the UN’s Food and Agriculture Organization.

Where water flows, there are ways to make its use more efficient. The US has come face to face with water scarcity, particularly in recent years, as some of the worst droughts – in California, New Jersey and elsewhere – have put a huge strain on existing resources.

Germany-based Global Agriculture delivered a simple message: “Although water is a finite resource, it will not be used up as long as we do not render it permanently unusable. However, it is important to integrate human water usage into the natural hydrological cycle and to use the locally available water in an adequate, effective, sustainable and fair way.”

But, obviously, history shows that hasn’t always happened. As many readers are aware, climate change, aging infrastructure and the highly water-intensive – and wasteful – agricultural industry continue to put major strain on water supplies.

Of the 70 percent of the world’s accessible freshwater consumed by agriculture, 60 percent of that is wasted “due to leaky irrigation systems, inefficient application methods as well as the cultivation of crops that are too thirsty for the environment in which they are grown,” according to the World Wildlife Fund.

But the inefficiencies open up vast opportunities for private equity investments.

Water Asset Management, a US fund manager that’s investing in water through water rights associated with US farmland, is one private equity firm focused on closing inefficiencies – and making money along the way.

The firm, highlighted in a commentary earlier this year, buys properties, increases water efficiency – by some combination of improving irrigation systems, replacing low value crops to higher value ones, or by simply allowing parts of the land to go fallow – and then sells or leases the water rights to those willing to pay a premium.

Australia’s BlueSky is another fund manager that has put water at the core of its real assets business and investment strategy, through investments into water entitlements.

Private equity investment into municipal water systems is another new frontier, which kicked off in the US in 2012 when KKR teamed up with United Water to win a 40-year water and wastewater contract from the city of Bayonne, New Jersey.

In developing nations, people walk long distances to collect water and carry it home, while others lack access to clean drinking water. The challenges there are clearly immense, but create additional opportunity for savvy investors to make smart buys, while potentially helping millions of people along the way.