Whether it is an issue of liquidity or substantial revenue streams, water investment seems to be on the verge of having a moment.
To hear John Rosenberg of Loughlin Water Partners tell it, the investment return on water seems obvious, but the implementation of science and engineering-based insights is not something that everyone is able or perhaps even willing to do. Over the last few years, he has written a number of essays and papers on water investing as a way to not only educate investors on the topic but to outline the framework for his own thinking on why water is so vital to our economic life as well as our very life on this planet.
His fund invests in companies that engage in water management or manufacture of equipment to manage, measure or lessen the intensity of water use. He founded his Greenwich, Conn.-based firm in 2012 after having worked at private investment firm Geneve Corporation, where he helped oversee $2 billion in assets and managed a separate equity portfolio and some side pockets. Prior to that he gained experience investing in private equity and corporate transactions work including with MD Sass Asset Management, the Latin American Trade Finance and at the Federal Reserve Bank of San Francisco.
Alternatives Watch caught up with Rosenberg just as flooding rains were impacting the San Francisco Bay Area — potentially ameliorating the decades’ long drought in the region. The unprecedented low level of Lake Mead, however, was still making headlines.
How did you come across water as an investment idea?
Rosenberg: I had worked for a family office primarily as a generalist, though I had focused on some areas in which I had prior banking experience, but I really wanted to specialize. When I came upon an opportunity to seed this fund, I thought about how I would like to differentiate myself from many other equity funds I knew about. I know a number of people in the alternative space focusing on tech and healthcare and didn’t think I could offer anything new in that space. I had also lived in the in the American West and was aware of water and climate issues so I spent the better part of two years going to water industry conferences, talking to as many people in the water sector who worked as operators and staff at NGOs and reading as much as I could before ultimately forming Loughlin. In a sense the process distilled 5,000 years of economic history: select, differentiate, amplify.
What exactly is your investment approach and how does it differ from other types of funds in the alternative investment space?
Rosenberg: There aren’t that many funds focusing on water in the alternative space. Water as an investment theme is far more prevalent in Europe and over there is it predominantly long only. So in that sense we are unlike most other alternatives, also we do short companies but at the end of the day we are playing a very long term secular growth play.
Our process at Loughlin is a bit different than many other more traditional managers we know and encounter at analyst meetings, plant tours and industry conferences in that we seek companies that have technologies that decrease or mitigate the need for water whereas many water funds stick more closely to water utilities and water related industrials that manufacture equipment used in the water sector.
A prominent yet admittedly unsuccessful example of this was an investment in a company that was developing a fracking process using gas to pressurize the wells as opposed to water. It was a promising technology that never really adapted to commercial use. We have also successfully invested in companies making software and hardware to track crop plantings — there have been a few of these over the years that have successfully developed this type of equipment notably one that was acquired by Monsanto.
Is the return profile of water as an asset class changing? Why?
Rosenberg: Yes it is. A good deal of water equipment has traditionally been correlated to residential or commercial construction thus the results of many companies involved in the space were also tied to housing or construction.
But recent climate events such as Hurricane Harvey in 2017 dumping an unprecedented volume of water on Houston, the historic drought in the West that has drained Lake Mead — part of reservoir system serving some 40 million people — to its lowest level on record, and problems with water utility systems in Flint and Jackson have heightened awareness of water and related climate issues.
Additionally, more technology is entering the water sector as in every other type of endeavor and sales of internet connected pumps and advanced metrology are likely less cyclical than past construction related expenditures.
Lastly, as climate related issues have come to the fore the last two infrastructure related bills have earmarked more federal funds for water expenditures in the US. Internationally order patterns are more dictated by Federal governments but in the U.S., this will likely add to a long secular tail of increased water spending for the foreseeable future.
Given the historic drought in the Western U.S. and an aging water infrastructure across the country, what should investors know about water investment that could inform their portfolio and risk management approach?
Rosenberg: There are a few myths associated with water investing. For one thing, every four years the American Society of Civil Engineers (ASCE) issues a report card on the state of US infrastructure and makes a recommendation of how much money should be spent. That amount is never met. And, of course ASCE has its own agenda for doing this.
Also water is hyper local and in the US the water utility industry is highly fragmented. Technology adoption can be maddeningly slow and there are rarely silver bullet type of solutions that result in winner take all market dynamics. In fact, the American Water Works Association (AWWA) rules are in place specifically to prevent those outcomes.
In many other industries, there is a commercial component to technology adoption but it is more data driven – or that way in pharma, genomics and biopharma anyway. In water there are other factors work.
Conversely, unlike biopharma — again as an example — we don’t see these all or nothing outcomes so few established water equipment tend to suffer existential or near existential events that cause their enterprise values to plunge towards zero.
And investors need to be aware of the hyperlocal nature of water regs and best practices that vary from region to region within the United States and vary on a national level outside of the U.S.
Can a strategy such as yours be viewed as an ESG type investment?
Rosenberg: Our strategy as it is now constituted certainly aligns with impact investing. We do not necessarily incorporate ESG factors and considerations into the strategy but most impact companies are score positively in terms of ESG criteria. At this point we are not a signatory of the UN PRI but that is not a high hurdle and if our LPs or potential LPs asked that of us it would be very feasible.
I have to note that there is a lot of obfuscation and problems with ESG investing particularly as a number of different ESG raters have gotten involved in the business; there are conflicts as to which factors or attributes to use and how to weigh them.
Right now, I would say that Loughlin Water Partners is certainly an impact fund that is ESG aware, but utilizing the factors and criteria in every situation, particularly private investments and smaller cap public companies, can present challenges.
How can investors have an impact on the future of clean water in the U.S.?
Rosenberg: By providing capital to the sector in myriad ways. Investing in the public equities, private equity, venture, green bonds or public private partnerships.
Pardon the pun, but what kind of liquidity does a water fund such as yours have in relation to other types of real asset funds?
Rosenberg: Loughlin has invested in 144a equities and converts but by and large holds public equities and public equity derivatives long and short. There have been a few public issues that trade by appointment but by and large liquidity has never been a problem.
What kind of return stream should investors expect given the dynamics at play?
Rosenberg: Loughlin targets market-like returns with significant covariance to the major indices. If the fund trails the water and clean tech indices by a few hundred basis points in 20%+ type year but then significantly beats and ekes a small positive return or small loss in a down year, which we have done, then the portfolio has done its job. We have had some very successful alpha generating shorts in up positive market years but in years like 2019 or 2021 in which the S&P is up nearly 30% most shorts and hedges will prove to be a drag.