water investment environment
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March 2007
Investment Environment in Water
Nothing contained in this presentation constitutes tax, legal, insurance, or investment advice, nor does the presentation constitute a solicitation or an offer by Aquillian Investments Inc. or its affiliates to buy or sell any securities or other financial instruments. Securities are offered only by Private Placement
Memorandum or Prospectus. Investing involves risk up to and including loss of all principal. Aquillian Investments Inc is a member of FINRA/SIPC.
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Outline
1. About Aquillian Investments
2. Overall Investment Opportunity
3. Global Trends and Drivers
4. Water Market and Expected Growth
5. Sub-sector Focus
6. Company Examples
7. Select Investment Opportunities (ETF, Mutual, Hedge, PE/VC)
8. Water Investment Strategies
9. Investment Risks
10.Conclusion/Questions
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Firm Overview
• Specialized investment research and consulting on emerging themes across all alternative asset classes
– Venture capital, private equity, project finance– Hedge funds, fund of funds– Real estate, commodities– Direct investments
• Thematic investment expertise focused on generating alpha through resource efficiency
– Clean technology– Sustainable natural resources – Health and wellness innovation
• Informational edge achieved through qualified industry experts
– Founded in 2004• 12 person team
– Based in San Francisco, CA• Offices in New York, Los Angeles, Connecticut, Chicago
– Serving fund of funds, corporations, foundations, endowments, family offices, public and private pension funds, and ultra high-net-worth investors
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Service Offerings
• Industry research– Analyze opportunities and deliver investment recommendations– Publish specialized research reports– Conduct seminars and presentations for institutional investors
• Opportunity identification, selection, and due diligence– Evaluate leading investment managers in thematic disciplines– Perform deep due diligence on selected opportunities– Identify direct investments for strategic venture and M&A advisory
• Investment policy creation and implementation– Define goals and provide strategic direction for funds in formation– Provide access to thought leaders, managers, and service providers– Assist in negotiating eventual transactions
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Resource Efficiency Thesis
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Water - Overall Investment Opportunity
• Water has no substitute at any price
• $400 billion market growing at 10-15% annually in developed economies, 4-6% in developing economies
• Demand for reliable, safe supply of water unaffected by inflation, recession, interest rates, inventory loss or change in taste/preferences
• Exponential growth in demand due to urbanization and industrialization around the world
• Supply side infrastructure in need of significant, long-term improvements and investments
• Regulatory environment driving innovation and adoption of clean technologies
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Global-Macro Trends and Drivers
• Long-term Supply-Demand-Geographic Imbalance
• Aging Infrastructure Worldwide
• Urbanization and Industrialization
• Public Health Emergency, 1.1 billion people lack access
• Increasingly Stringent Regulatory Environments
• Moving Towards a Water Oligopoly
• Climate Change/Fluctuation in Precipitation/Snowmelt
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Supply Imbalance
Areas of Physical and Economic Water Scarcity
Source: International Water Management Institute (IWMI), 2006
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Persistent US Drought Conditions
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Demand Imbalance
Aggregate Daily Water Usage Per Capita in Selected Regions(in gallons)
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Aging Infrastructure
• Estimates of US investments to bring water infrastructure “back to acceptable rates” is between $277 and $420 billion
• The City of San Diego buys 300 million m3 of water every year, but 25 million m3 are never actually used, which costs the city approximately $22 million.13
• Total water loss nationwide is in the region of 23 million m3 per day, which is equivalent to the combined water consumption of America’s ten biggest cities.
• In France and Spain water is also being used inefficiently: around 30% of water is lost before it even reaches the end consumer
Source: USEPA, 2002; AWWA, 2007; European Environment Agency, 2007
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Industrialization Drives Demand, Diminishes Supply
Global Demand For Water
Source: National Geographic, 2002; World Bank, 2001
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Water Sector Consolidation
Water Technology M&A and IPOs, 2005-2006
Source: SVB Alliant, 2007
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Select Water Acquisitions (1998-2007)
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Current Market Size
Distribution and Management– Water Mains (New) 33 B– Water Main (Ren) 10 B– Sewers (New) 35 B– Sewers (Ren) 14 B– Pipes (all) 42 B – Valves 4.5 B– Pumps 8 B– Management 20 B
• Water and Food– Bottled Water 91 B– Organic Food 33 B– Irrigation 9-30 B
• Advanced Water Treatment– Sewage Treatment 104 B– Wastewater Treat. (Equip.) 12 B– Wastewater Treat. (Mem.) 4.2 B– Wastewater Treat. (Chem.) 13 B– Drinking Water Purification 129 B– Ozone Treat. 0.3 B– UV Treat. - 0.5 B– Membrane Systems Treat. 1.9 B– Thermal Desal. 2.5 B– RO Desal. - 2.4 B– Desal. Operations 7.3 B
• Demand-Side Efficiency– Ind. Wastewater Treat. 24 B– Domestic Install/Appl. 10 B– Wastewater Reuse 1.3 B– Water Meters 2.4 B
Source: SAM
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Expected Water Sector Growth
• Investments of $400-500 billion annually (10-15% Growth)
• Distribution and Management– Water Mains (New) 7.2%– Water Main (Ren) 4.3%– Sewers (New) 7.4%– Sewers (Ren) 5.5%– Pipes 3.4%– Pipes (Plastic) 4.4%– Valves 6.7%– Pumps 4.3%– Management 10.0%
• Water and Food– Bottled Water 10%– Organic Food 10-12%– Irrigation 10%
• Advanced Water Treatment– Sewage Treatment 4%– Wastewater Treat. (Equip.) 6%– Wastewater Treat. (Mem.) 19%– Wastewater Treat. (Chem.) 4%– Drinking Water Purification 4%– Ozone Treat. 10%– UV Treat. 14%– Membrane Systems Treat. 20%– Thermal Desal. 4%– RO Desal. 8%– Desal. Operations 9%
• Demand-Side Efficiency– Ind. Wastewater Treat. 4-5%– Domestic Istall/Appl. 10%– Wastewater Reuse 17%– Water Meters 12%
Source: SAM
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Representative Water Investment Opportunities
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Specific Sub Sector Opportunities
Treatment and Purification• High Purity Water• Desalination
Monitoring, Security and Safety• Leak Detection and Monitoring• Control Systems and Smart Metering Technologies• Advanced Sensors• Agricultural Harvest, Transport and Food Washing
Distribution• Distributed Treatment, Storage and Delivery Systems• Separation of Water into Use-types
Demand Side Efficiency• Smart/Precision Drip Irrigation (Low-volume Irrigation)• Smart Appliances
Disposal• Water Recycling and Reuse• Biological and Mechanical Wastewater Treatment (non-chemical)• Sludge Minimization
Energy From Water• Tidal and Wave Power
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Remote Water Quality Monitoring
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Water Storage
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Food Safety
• Ioteq was founded in Sydney, Australia, in 1999 with the specific aim of developing an iodine-based water sanitation system.
• Currently raising funds for US launch.• Alternative to chlorine due to the significant environmental, health and
safety problems associated with chlorine.• 150 successful commercial installations across Australia and New
Zealand in several agriculture sectors– Fruit and Vegetable Post-Harvest– Nurseries and Hydroponics– Food Processing– Poultry– Dairy
• The business model is that of “razor-razorblade” with one-time sales of the system equipment and subsequent regular purchases by the customer of the specially formulated iodine from Ioteq for use in the system.
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Food Washing
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Food Safety
• Based in Pleasanton, CA• Recently closed $25M Series C Round• Chemical-free, ozone-based family of products has been approved by the
FDA, EPA and USDA to kill deadly, food-borne pathogens such as E. coli and Salmonella, while remaining 100 percent organic
• Safest and most natural purification and disinfection agent for both bottled water and pharmaceutical applications.
• Pre-harvest and post-harvest packaging, transport and cold storage processes.
• Thin-film sunshield, made from harmless calcium carbonate crystals, reduces sunburn damage and product losses for growers, resulting in better quality product and increased returns.
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Distributed Water Treat.
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Distributed Water Treat.
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Niche Water Systems
• Water and Wastewater Systems in the Caribbean
• Mobile Desalination Plants – Emergency and Contingency Water
• $20 million round Q1-2008 was led by TPG Growth and Element Partners. Virgin Green Fund, Advent-Morro Equity Partners and CEO Doug Brown also participated.
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Water Efficient Treatment
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Demand Side Efficiency - Residential
How US Households Use Water (%)
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Dual-Flush Toilets
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Tankless Water Heaters
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Smart Irrigation
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Grey Water Recycling
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Grey Water Recycling
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Energy – Water Nexus
• Investments in Energy Efficiency translate to Water Efficiency and vice-versa
• There is an increased understanding and appreciation of the energy and water interrelationships
• We are experiencing a “double whammy”– Increasing energy costs and a decreasing or degraded water supply
• Increased need and value for technologies that: – Increase energy production while decreasing water use– Increase water supply and quality while reducing the energy required to
provide it
• Two of the largest sectors of the global economy
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Energy-Efficient Desal.
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Wave Power
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Tidal Power
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Exchange Traded Funds
Ticker PHO PIO CGW FIW
Manager PowerShares PowerShares Claymore First Trust
Expense Ratio 0.66% 0.75% 0.50% 0.70%
# of Holdings 35 40 51 36
Top Ten Holdings % 38.05 42.07 54.56 43.29
Average Market Cap 22.04 B 19.55 B 17.59 B 5.41 B
Average P/E 24.96 23.17 22.41 25.77
Sector Allocation 26.03% Misc. Manu. 21.02% Env. Control
31.44% Water 23.82% Misc. Manu.
17.03% Water 14.25% Machinery 15.96% Electric 21.61% Water
13.43% E&C 13.33% Misc. Manu. 14.70% Misc. Manu 15.56% Machinery
Geo. Allocation 88.57% US 24.92% US 31.82% US 89.44% US
4.14% France 10.08% Japan 20.35% France 4.69% Brazil
3.45% Germany 9.93% Germany 13.67% UK 4.41% France
Source: www.seekingalpha.com, November 2007
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Water-focused Mutual Funds
• Pictet Asset Management – Criteron Water Infrastructure Fund – Canada (VEN5400)
• Sustainable Asset Management - US
• Kinetics – US
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Criterion Water Fund
Source: Criterion, www.globalblue.ca, 20008
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SAM Water Fund
• The fund invests worldwide in companies providing technology, products and services relating to the water value chain, such as:
– Water distribution– Water management– Water treatment– Water analysis– Irrigation– Demand-side management
• Fund Basics– 64 Holdings– Top Ten – 37%– Less utility-focused– Tilted to mid to small-cap– Benchmarked to the MSCI World Index– Approx. 80% of holding have 20% of
revenues attributed to water– DCF model for sustainability and fair value
• www.sam-group.com
Source: SAM; S&P Fund Analysis, 2008
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Kinetics Water Infrastructure Fund
• Aims to invest in securities issued by companies operating in the water infrastructure and natural resource sector globally. The companies targeted in the water sector will include, but are not limited to:– Water production companies– Water conditioning and desalination companies– Water suppliers– Water transport and distribution companies, – Waste water, sewage and solid, liquid and chemical waste treatment companies– Sewage treatment plants – Equipment, consulting and engineering services companies
• Fund Basics– Inception Date: 06/29/07– Trading Symbol: KWINX (KWIIX- Institutional, KWIAX – Advisor)– Assets (12/31/07): $6,139,795 – Sales Charge: None– Total Expense Ratio: 1.74%– Investment Minimum: $2,500– Objective: Long-term growth of capital– Sub-Adviser: Aqua Terra Asset Management, LLC– Portfolio Management: William Brennan, Portfolio Manager
• www.kineticsfunds.com
Source: Kinetics, 2008
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Water-focused Hedge Funds
• Master Water Equity Fund - Summit Global AM (US)
• Water Partners Fund - Aqua Terra AM
• The Water Fund – Terrapin AM (US)
• The Reservoir Fund – Water AM (US)
• The Oasis Fund – Perella Weinberg (US)
• Signina Water Fund – Signina Capital AG (Switzerland)
• MFS Water Fund of Funds – MFS Aqua AM (Australia)
• Triton Water Fund of Funds – FourWinds CM (US)
• Water Edge Fund of Funds – Parker Global Strategies
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Venture Capital and Water
Venture Capital Invested per Cleantech Segment, 2003-2006
Source: Cleantech Group, 2007
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VC Activity in Water
Water Technology VC Investments, 2003-2006
Source: Cleantech Group and SVB Alliant, 2007
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Leading PE/Venture Capital Opportunities
• Water Pure Play Funds– 100% Water or Near-water Company-focused– Deep Water Industry Experience– Water Company Realizations/Exits
• Specialist Cleantech Funds– 3+ Investments (or 1/4) in Water or Near-water Companies– Compelling Water Investment Theme/Strategy– Internal Water Industry Expertise and Experience– Significant Number of Realizations/Exits from Overall Portfolio
• Generalist Cleantech Funds– <3 Investments in Water or Near-water Companies– Expressed interest in Water Investments
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PE/VC Investment Strategies – DD
• What level of internal water industry experience and expertise?• What external sources of industry expertise, access to academics and
thought leaders, relationships with CEOs and entrepreneurs?• What is the underlying "use" or "role" of water for the technology or in
the business model?– Input?
• Agricultural, heating and cooling, beverage– Manufacturing Process?
• Automobile, semi-conductor– Energy generation?
• Hydro, wave, tidal– End-Product?
• Drinking Water, ultra-pure water– Increase Energy and/or Water Efficiency or decrease?
• Smart meters, smart appliances• Number of investments and rationale/value proposition?• What problem/inefficiency are the attempting to address and thereby
profit from?• Opportunistic or part of a larger water investment strategy or theme?• Number of and time to realizations/exits?
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PE/VC Investment Risks - DD
• Technology Risk– Proven, protected, existing/potential competition, operational/financial sustainability?– Address safety, reliability or profitability?– Hardware, software or service?
• Business Execution– Business model: direct sales, distribution, licensing, etc.– Team risk
• Market Adoption Risk– Who are the customers? (Utility, Agricultural, Commercial, Residential)– How large is the market?– What pain points is the water technology/service addressing?– What is the ROI?
• Regulatory Risk (Quality and Quantity)– EPA, Utility Commission/Water Authority, Municipality
• Price Risk (Right vs. Commodity)– How do the customers/users value water?
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Conclusion
• Global trends and drivers are real and occurring now
• Water companies are capitalizing on these trends with real technology/service solutions and scaleable business models
• Water investment vehicles are performing well, but for diverse reasons
• Water investing requires a distinct theme/strategy and discipline
• Investors and advisors should identify their existing water sector exposure and evaluate new opportunities with an added level of due diligence
• Water is not the next oil….oil has substitutes!
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Aquillian Investments, LLCOne Post Street, Suite 2775San Francisco, CA 94104
www.aquillian.com
Thank You…Questions?
• Robert Steiner, Director– rsteiner@aquillian.com– (415) 677-9118 ext. 219
Additional Slides
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Water Supply Chain
Source: Sustainable Asset Management, 2006 and SVB Alliant, 2007
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Water Value Chain
Source: SAM Group, 2008
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Smart Meters
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Monitoring/Valves
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Perth Seawater RO Plant –Emu Downs Wind Farm
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Precision/LV Irrigation
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Competence Correlation Matrix of Water Companies
58
Source: 3Stone Advisors
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Water Infrastructure Value Chain
59
Source: Perella Weinberg, 2007 (*=Private Company)
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Wastewater Treatment
60
Source: Wm. H Reilly and Co., 2008
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Water Treatment
61
Source: Wm. H Reilly and Co., 2008
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Water Valuation Continuum
62
Source: Goldman Sachs Research
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Public and Private Water Facilities
63
Source: Environmental Protection Agency (EPA)
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Water Sector Outperformance
64
Source: FactSet, Goldman Sachs Research
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Water Shortages and Population Growth (1995)
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Energy – Water Nexus
• Investments in Energy Efficiency translate to Water Efficiency and vice-versa
• There is an increased understanding and appreciation of the energy and water interrelationships
• We are experiencing a “double whammy”– Increasing energy costs and a decreasing or degraded water supply
• Increased need and value for technologies that: – Increase energy production while decreasing water use– Increase water supply and quality while reducing the energy required to
provide it
• Two of the largest sectors of the global economy
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Water Use for Fuel Extraction and Processing
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Estimated Energy Use Integral to Water End Use
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Energy Needs Throughout the Water Use Cycle
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Estimated U.S. Freshwater Flows in 1995 (total ~341,000 Mgal/day)
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Estimated California Freshwater Use in 1995 (36,000 Mgal/day)
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Energy – Water Interrelationships
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CA Energy Snapshot
• Population: 34 million,1.1% per year growth
• Multiple Utility Service Territories
• 2004 Electricity Use: 262,000 GWH
• 2004 Peak Demand: 54,500 MW
• Annual growth:– Consumption - 1.4%– Peak - 1.65%
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CA Electricity Production (2004)
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Water System’s Demand for Electricity
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Electricity Use Per Capita
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CA Water Snapshot
• 2/3 of Precipitation in North
• 2/3 Demand in the South
• Water Demand: 43 maf– 9 maf Urban– 34 maf Agricultural
• Energy Use:48,000 GWh; 4,300 MTh
• Population by 2030: 48 million
• 2030 Water Demand: 43-50 maf
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Regional Disparities
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