Water investment is on the rise as the level of Lake Mead continues to sink while the worst megadrought in 1,200 years continues to threaten farmland and cities in the American West.
Lake Mead in Nevada is ground zero for Matthew Diserio’s asset management strategy, in addition to being his background photo for his video calls with investors these days as more of the Western U.S. is coming to terms with what it means to be living through a megadrought.
For Water Asset Management President and Co-Founder Diserio, the headlines of recent weeks detailing the rapidly shrinking reservoir of Lake Mead is not news and the dramatic bathtub-like ring is the culmination of a decade or more of increasingly more water going out of the lake than snow melt or rain could replace. That could spell disaster for cities such as Los Angeles, Phoenix and Las Vegas that rely on Lake Mead.
He describes the best risk-adjusted returns for private equity in water are in the U.S., which he describes as a $1 trillion market opportunity.
Diserio’s Water Asset Management owns water rights on the Colorado River, which is connected to farms that the firm also owns, but that is only part of his alternative investment firm’s investment thesis that combines real assets, private equity and equity investing both long and short.
“We started in 2005 and the strategy is that clean reliable water is the valuable resource defining this century as oil and gas did last century,” he said in a recent interview with Alternatives Watch. “It is the most self-evident investment opportunity you can find,” he added.
If water touches it, chances are high Diserio invests in it too. From the equity of companies that ensure water supply to direct investment in wastewater, desalination business models and irrigation equipment and water quality analysis technology and water data — the firm is active in all of it.
Every company that Water Asset Management has invested in is about getting water to people or improving water quality for industry and the environment, and so far the strategy has beat the market since inception.
Within public equities, the team invests in global listed equities in a long-only strategy via private investment vehicles. A retail version around a SMA format was recently introduced, and a UCITs version is launching this month.
Recently, Schafer Cullen Capital Management and Water Asset Management launched the Schafer Cullen Water Asset Management Impact Strategy. The strategy invests in companies whose businesses directly help solve water quality and scarcity challenges, while making a measurable and positive impact on water sustainability globally.
Investing in water can be considered ESG investing but it also falls under impact investing.
In 2015, the United Nations released 17 Sustainable Development Goals (SDG) as a blueprint for peace and prosperity for people and the planet. One of those goals is to “ensure access to water and sanitation for all.”
According to Water Asset Management, this investment strategy is focused not only on generating returns for investors but also to accelerate progress towards the UN’s Sustainable Development Goal of water access for all by collaborating with portfolio companies.
Water Asset Management also donates a portion of the strategy’s investment fees they receive as sub-advisor to WaterAid, the world’s largest water and sanitation focused charity. Additionally, the firm will systematically encourage portfolio companies to provide capital, technical assistance, personnel support and other resources to support WaterAid’s water and sanitation programs.
Separately, the firm’s long/short equity fund is global in scope and relies on reservoir and river flow data from all over the world that informs an expanded shorting opportunity set. Looking at power companies that rely on hydropower where rivers are 20% to 30% capacity, that’s a short and even mining companies and Taiwan Semiconductor that rely on water are also a short.
According to Diserio, the hedge fund strategy is one of the few that are generating returns from shorting climate change phenomenon.
“Looking at the world through the prism of water has enabled us to gain perspective on what others miss,” he said. For instance, the drought in Brazil has proven out more shorting opportunities in many industries beyond hydroelectric plants.
On the long side, some U.K.-based water utilities have seen earnings growth. In America, American Water Works, a water utility serving a large portion of the Midwest, is growing as the execution of their water supply is done well and is transparent.
In addition, a capital spending super cycle is underway to make up for decades of underinvestment in water infrastructure. This provides a potential long-term tailwind for earnings, dividends and asset growth
On the private equity side, water rights are also a key component. The firm will buy farms that have specific rights to water supply and then they implement efficiency programs on those farms that free up some water that instead of growing alfalfa to feed livestock can be augmented for environmental flows and for use in cities and that makes water the primary crop when they buy the farmland.
And as the water level decreases, the opportunities to make a difference only grow. On the public equity side, the opportunity set includes over 250 global companies helping ensure the supply and quality of water. This is done across five distinct water industry segments: water infrastructure and services, water utilities, water treatment technologies, water test control and measurement and water resources.
