Monday, September 8, 2014

A Look at the World's First Water-focused Hedge Fund

Since the first Earth Day in April 1970 and more importantly since the establishment of the EPA in December of that year, folks have been trying to make money out of water in the U.S..
Put simply, the returns have not been market-beating.

Because so much of the opportunity was my-little-crony stuff, at the whim of politicians, there was no consistency of growth at a time when other portfolio investments offered very competitive comparisons.
The alternative was to own the cash flow, private equity style, but unless one felt a passion for grit chambers and sludge pans it was pretty pedestrian, utility type ROI.

In fact the most reliable water investment in the U.S. has probably been York Water Company of York PA.
They've been paying dividends for 199 consecutive years and just announced their 575th divi.
The announcement carries the boilerplate "This release contains forward-looking statements".

Anyhoo, here's a piece we've been sitting on since January, from Mother Jones:
...The following was published by arrangement with The Penguin Press, a member of Penguin Group (USA) LLC, a Penguin Random House Company. Copyright McKenzie Funk, 2014.
Where water Runs when it runs out
The offices of the world's first water-focused hedge fund overlook a parking lot in a subdivided landscape developers call the Golden Triangle. The neighborhood gets its water from the Alvarado Water Treatment Plant, run by San Diego's Public Utilities Department, which gets its water from the San Diego County Water Authority, which gets its water from the larger Los Angeles–dominated Metropolitan Water District, which gets much of its water—in greater proportions during California's droughts—from the 242-mile Colorado River Aqueduct, which gets its water from a reservoir straddling the Arizona border, Lake Havasu, which gets its water from the 1,400-mile Colorado River, which gets its dwindling water from thousands of streams, snowfields, lakes, and springs in a drainage basin covering nearly 250,000 square miles across seven western states. Without imported water, the 2.7-million-person San Diego metropolis, like much of Southern California, would be no more capable of supporting people than the coastal desert it once was. During my visit, at the height of a hot summer in 2010, I got my water one morning from a secretary, who handed me a tiny plastic bottle—Poland Spring, was it?—from the fridge.

The man I'd come to meet was John Dickerson, the founder and CEO of Summit Global Management, a former CIA analyst, and the buyer of billions of gallons of water in two vital, desiccating river systems: the Colorado and Australia's Murray-Darling. Both systems had recently experienced severe droughts that scientists tied to climate change. Financial managers like Dickerson, meanwhile, had experienced the opposite: a flood of money. Summit had launched its first water fund in 1999, but "for a long time," he told me, "I was a voice in the wilderness. We couldn't get anybody to buy our fund. Then came Al Gore and his stuff, the whole global-warming thing, droughts. Water became the go-to idea."

For the climate investor, water was the obvious thing. Carbon emissions are invisible. But melting ice, empty reservoirs, and torrential rainstorms are tangible—the face of climate change. Water made it real. After An Inconvenient Truth, during 2007's record melt in the Arctic, at least 15 water mutual funds launched globally; in two years, the amount of money under management ballooned tenfold to $13 billion. Credit Suisse, UBS, and Goldman Sachs hired water analysts, the latter calling water "the petroleum of the next century"—"At the risk of being alarmist," Goldman said in a 2008 report, "we see parallels with Malthusian economics."

Dickerson, in his late 60s, sat in a leather chair, and I sat across his desk from him. His bookshelf had three copies of An Inconvenient Truth and two of Cadillac Desert, Marc Reisner's seminal 1986 book on water and political power in the American West. "It's the most necessary of all commodities," Dickerson told me. "There's no substitute for it at any price. And we cannot make water. Did you ever think about that, really? Hydrogen and oxygen. You can't grow it."

Already, global warming was creating shortages as the ratio of saltwater to freshwater increased. "The maldistribution of freshwater is getting much more severe," Dickerson said. The supply/demand imbalance—fueled by population growth, accelerated by carbon emissions—was growing. It was a situation ripe for speculation, except there was no easy way for investors to get in. Summit's first water fund, with $600 million under management, had navigated this roadblock by picking stocks within the $400 billion "hydrocommerce" sector—the business of storing, treating, and delivering water for use in households, manufacturing, and agriculture.

But Dickerson had decided that hydrocommerce wasn't enough. He wanted actual "wet water"—the thing itself. In June 2008, he opened a second hedge fund, the Summit Water Development Group, to amass water rights in Australia and the American West. Already it had attracted hundreds of millions of dollars. "I've watched water rights go up and up," he told me, lifting a hand into the air. "Just tick, tick, tick, tick."
In the eastern United States, Dickerson explained, water could not be stripped from the land and sold as a separate commodity. The courts there followed English common law. "If you have 10 hectares of land, you get x liters from the Thames," he said. "If you have 100 hectares, you get 10 times x from the Thames."...MORE
Summit's last Form ADV showed $393.9 mil. AUM and the last 13F showed $53.8 mil. in U.S. traded assets.
Some previous posts on water:
Aug. 2012
It's So Hard to Find a Decent Bet on Water (investment vehicles)
Update below.
Original post:
Water has confounded smarter people than me.

Enron's adventure in H2O is a cautionary tale, they bought Wessex Water in England, bought water concessions in Argentina and had a long term contract in Cancun.
Enron partially spun out the water sub, Azurix at $19.00. Within 18 months it was trading at $3.50 where Enron tendered for the 34% of the company that the public owned.

Not a very sweet deal for anyone involved. Water is tough business.
And, of course, Enron being Enron, they bid 100% more than any one else in the business to get the Argentina deal to have some big pre-IPO news.
From FT Alphaville:
In search of liquid water (investment vehicles)
This guest post was submitted by Jason Abbruzzese of
A little more than a year ago, Citi chief economist Willem Buiter said water was on its way to becoming “the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals”.

While we’re not quite there yet...
May 2013
Swiss Private Bank Pictet Making Money in the Water Biz (XYL; DHR)
July 2013
"Can Powdered Water Cure Droughts?"
October 2010
Muni's: "Water Scarcity a Bond Risk, Study Warns"

And many more.