Here we go again. For those of my vintage, the last week has generated a not insignificant amount of 2008, Lehman Brothers anxiety with the fall of Silicon Valley Bank (SVB). The risk-taking banking execs caught out when interest rates increased. An astonishing 48-hour, Twitter-accelerated run on a bank with over US$212 billion of assets. The U.S. President holding an emergency conference to declare your deposits are safe. The eagerness to shrug it off, then the risk of contagion rears its ugly head with Credit Suisse now in the crosshairs.
It’s times like these when Bluefield Research takes solace in the extremely solid fundamentals of the water sector. Water is the anti-banking industry. More than other infrastructure sectors, it moves tortoise-slow compared to banking in terms of market shifts. It is massively regulated due to its impact on public health. The baseline of its supply and demand dynamic, although becoming more erratic due to climate change, is extremely predictable. And more recently, venture capitalists and private equity investors, of the type that were warning about SVB, are taking note of it. So as the red ink gushes with bank losses and the tweetstorm continues, Bruce Lee comes to mind: Be water, my friend.
Just in the past month, a series of industry events reinforced the prospects for strong investment in the water sector. To name a few:
- The U.S. Environmental Protection Agency (EPA) has released stringent guidelines for maximum contaminant levels of Per- and Polyfluoroalkyl Substances (PFAs) in drinking water, proposed at four parts per trillion. The move underlines that regulatory drivers for increased investment in treatment technology are gaining momentum. The European Union aims to impose similar guidelines as it inventories contaminated sites.
- The U.S. Infrastructure Investment and Jobs Act is channeling funds through the EPA for critical asset upgrades in several states. As of Q4 2022, total announced funding associated with the legislation had reached US$186.3 billion, to be distributed across more than 6,900 projects in over 4,000 U.S. communities.
- Drought-stricken Western Europe is working towards greater resilience with new regulation on minimum requirements for wastewater reuse that will take effect on 26 June 2023. The region’s focus on circular economy, and the increasing costs of climate change are pushing for greater investment in water conservation.
- Deals continue to close that underscore the ongoing attractiveness of the water sector to financial players and strategic industrial investors. Most recently these include assets divested out of the Suez-Veolia merger: Turnspire Capital Partners’ purchase of USG Water Solutions, and Italgas negotiating purchase of Veolia’s Italy water utility concessions. Investors in tech start-ups, likely more shaken by SVB’s collapse, have recently found exits as well with Badger’s acquisition of Syrinix, and Xylem pairing up with Idrica. Also seeing the long-term fundamentals of water scarcity, Aetos Capital recently acquired water rights data platform Westwater Research.
Knee-jerk reactions to financial calamities will abound as the banking industry falls under greater scrutiny. This is unfortunate considering SVB’s unique client profile and business model which is a far cry from the 2008 financial crisis. Global stock indices are down and share prices of bellwethers such as Xylem and Veolia are flagging despite decent 2022 earnings reports.
The water sector requires a departure from short-termism and a focus on longer term investment strategies…
The water industry cannot isolate itself from the banking industry as its lenders facilitate the massive, required investments in infrastructure. Banks, and their venture capitalist clients that pushed start-ups to SVB, also fund companies bringing much needed innovation to a sector that faces major inertia for change.
But the water sector requires a departure from short-termism and a focus on longer term investment strategies underpinned by strong regulatory, environmental, economic, and demographic fundamentals. Rather than a casualty from a broader financial system failure, we expect most banks have and will adjust their portfolios with these fundamentals in mind.
