December 4, 2009 – by Federica Dalamel, Cleantech Group
Look to conservation and efficiency, recycling, residential consumption and technology solutions, say McKinsey and Summit Global Management.
Two new reports remind us that demand for water is already greater than supply, especially in developing countries, and that population growth and climate change will only create further opportunities in water.
The recently released McKinsey report Charting our Water Future also reminds us that the same rationale and models used for energy can be applied to water, for instance in how demand for water in countries such as China and India will see an increase as quality of life improves.
U.S.-based investment management firm Summit Global Management’s The Case for Water Equity Investing 2010 describes the water sector as a particularly safe investment choice amidst the current financial jungle. It cites “exploding demand for water”, “an aging and insufficient infrastructure” and “increasing regulations and awareness” of the shortage.
Also, water being an underestimated resource, many might not realise that it represents the “world’s third biggest [industry sector] in terms of embedded capital behind only oil & gas and electrical power”, and the global market is estimated to near $500 billion per year according to the report.
Moreover, large corporations whose business is heavily dependent on water—such as semiconductors, food and beverage and pharmaceuticals industries—are becoming more active in the clean water business, just as the financial sector is becoming more inclined to fund new opportunities (e.g. see IBM’s water tech threefold effect, and PepsiCo to Reduce Water, Energy Use 20% by 2015.)
Together, this sounds good for entrepreneurs: financiers’ attention to the sector is going up, and large corporations, as well as societies across the world, are in need of new solutions.
The Summit report identifies hot areas of investment within the sector as being in:
- Conservation and Efficiency (especially in the context of agriculture which accounts for 70% of water use)
- Recycling and Re-using
- Residential Water Consumption (tap water quality is a rising concern)
- Technological Solutions (e.g. to enhance monitoring and tracking)
However, as in every trade, there are also challenges. The water industry has been heavily consolidated and for the most part lies in the public sector. In the U.S., almost 90 percent of the population is served by municipally-owned and operated utility districts or government agencies.
This poses a challenge for new entrants in the market. And as a result, the use of private capital in public water projects, as well as outsourcing, remains controversial.
The report concludes by asserting the water sector has proven to be a recession-proof business, with success for many private equity and venture investments in water equipment in the past few years.
Browse the Cleantech Group’s recent news coverage of the water sector here.
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