Blog  /  January 2017  /  Water Investment: Three Stories to Watch in 2017

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The water industry is growing exponentially. A myriad of issues-from scarcity and contamination to aging infrastructure and growing regulation-are increasing the need for faster response from relevant players, more efficient deployment of existing solutions, and technological innovation. The seemingly relentless demand for solutions is a strong backdrop for investment, and the opportunity to positively impact the lives of millions is a powerful draw for those investors looking to do good while doing well.

Given this environment, it is not surprising that we are seeing a variety of players taking part in the “water rush” in a variety of ways.

GE Water

GE Water & Process Technologies, itself the product of several acquisitions over the years by GE, is now being sold to help smooth the path for the integration of recent acquisition Baker Hughes into the GE family. While a big player in the water industry, GE Water is just one business unit within one (GE Power) of nine divisions of the overall conglomerate, accounting for less than 2% of GE’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Despite its small impact on GE, the division’s sale was big news in the water industry immediately after GE’s intentions were announced last fall. Immediate speculation focused on strategic purchasers who could supplement their existing businesses with the purchase, while already having the size to afford and absorb such a large operation. According to more recent reporting, (including this article from the New York Post) the short list of potential acquirers is now filled with private equity firms. Blackstone, Bain Capital, and Clayton, Dubilier & Rice are all said to be in contention with bids estimated to be approaching $3 Billion.

This story is worth following because of the nature of private equity players: they are financial players who can put their money to work in a variety of areas, and tend to get involved only when they believe there is potential for significant upside to a business. In other words, they think one of water’s biggest businesses has significant room to increase profits and grow in value. It will be fascinating to see who the winning bidder is, and what the sale price turns out to be. The priorities set by the new owners will tell you a lot about what some of the leading investment minds think about the future of the water industry.

Y Combinator

Y Combinator is a seed funding business accelerator located in Mountain View, CA. Founded in 2005, it has become one of the most respected accelerators in the tech space, having been called “the world’s most powerful start-up incubator” by Fast company. They fund startups in batches, twice a year, and  put them through a three month program designed to help them build a successful business. They have funded over one hundred startups including such notables as Airbnb, Reddit, and Dropbox.

On January 3rd of this year, they issued what they refer to as a Request for Startups specifically for water-focused entrepreneurs. The stated reasons for doing so included their belief that “natural fresh water supplies could be at serious risk around the world.” But that “We’re close to a tipping point where technology will let us make clean water extremely abundant and cheap.”  They will put $120,000 behind the companies selected to be part of their program, as well as the power of their considerable network.

In making water one of their focus areas for 2017, Y Combinator is telling us something important: some of the leading innovators of Silicon Valley see the water industry as ripe for innovation and want to be a part of what’s to come. It will be intriguing to follow who is accepted into the program and their areas of focus within the water space.

Bank Financing

The rapid growth of the water industry and the need for more capital has not escaped notice of the banking sector. While traditionally banks have had a role to play in underwriting municipal bonds that help to pay for water infrastructure, many are starting to recognize the opportunity to fill funding gaps that hold back necessary improvements. Whether it is project finance, equipment finance, or lines of credit to support commercial operations, many banks are expanding their teams and offerings to the water industry.

Bank Leumi has been a leader in this area. In 2017, they plan to expand their support of the water industry into a national business. Bank Leumi is uniquely suited to recognize the needs and provide the right kind of support for the water industry based on their history of doing so in Israel. Israel is a global leader in water technology and Bank Leumi has gained expertise in that laboratory in supporting technology across the spectrum of water including areas such as irrigation, agriculture, and desalination. The boutique nature of the bank also allows them the ability to be nimble about how they support the growth of their clients.

While Bank Leumi has led in this area, it will be interesting to watch how other banks respond. With success will certainly come competition, and it will be fascinating to see what resources other banks are willing to put behind the efforts. Watching how banks organize their teams in response to the demands of the water industry will tell you a lot about their commitment to the space.

2017

The year ahead promises continued water industry growth with an increasing roster of players looking to take part. By keeping a close eye on who is active and how they are responding, you can stay on top of the industry trends. By following those who are committing capital, you can benefit from their due diligence, start to anticipate where future demand will be most plentiful, and properly position yourself for the road ahead.