Agri’s water waste is a classic PE opportunity

Private equity managers and investors can reap financial rewards from the growing water crisis in the US and globally.

Water is often taken for granted, allowed to flow from faucets, shower heads and sprinklers like some limitless resource until, suddenly, it becomes scarce.

Parts of the US have come to realize that more than ever before. To name a few, California is coming out of its driest five-year span in history. The Department of Environmental Protection recently declared a drought warning in 14 New Jersey counties. And the Colorado River basin is undergoing one of its worst droughts ever.

Climate change, aging infrastructure and the highly water intensive – and wasteful – agricultural industry continue to put major strain on water throughout the country. Private equity is one of the keys to helping solve this crisis, while rewarding investors along the way.

Agriculture uses 70 percent of the world’s accessible freshwater and 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. For large food producers like India, China or the US, that means they are now very close to reaching their water resource limits.

By no coincidence, the same inefficiencies WWF cites are creating great opportunity for private equity funds and their investors.

“We understand that there is substantial value in these farms locked up in their water rights,” says Vincent Vasquez, managing director at Water Asset Management, a fund manager that’s investing in water through water rights associated with US farmland.

The firm provides exposure to the water resources and infrastructure through global long only and long short equity as well as US private equity investments.

As part of its strategy the firm navigates complex and fragmented US water rights laws to make value-add investments in farmland, often targeting the western states where older – and arguably antiquated – laws give some farms higher water appropriations than others, Vasquez explains.

In a typical case, the firm first buys a property and then 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. The company then sells or leases water rights to those willing to pay a premium, which can be a multiple of the firm’s original investment.

But apart from the financial rewards, Vasquez says that Water Asset Management is seeking to play a significant role in solving the water supply crisis, particularly in the western US.

“Conservation will be a big part of the landscape because you’re going to see more crops produced with the same amount or less water,” he says. “In the Southwest, for instance, anywhere between 75 and 80 percent of the water is in agriculture and the rest is consumed in urban areas. But imagine if you could get more efficient with some of that farm water and transfer just 10 percent into the urban sector. That would solve a lot of supply problems.”

A surge in private equity looking to invest in water by capitalizing on agriculture’s water waste could potentially magnify these types of results across the US and the world. But the interest in water also fits into a broader theme among private investors who are more interested in sustainability than ever before.

Dave Chen, a principal and chairman at Equilibrium, noted recently at the Agri Investor Forum Chicago that over the course of the last two years people have come to recognize that “sustainability is more about investment management than it is about responsibility”. “[But] five years ago, for me to speak about sustainability themes, I might as well have had three heads and been speaking mandarin,” he joked. 

As climate change progresses, infrastructure grows older and agriculture continues to waste massive amounts of water, private equity investors are growing wiser by listening more carefully.