[00:00:00] Speaker A: The financial attention being directed towards water has grown a lot.
[00:00:10] Speaker B: You I am Reese Dizzle, and this is future water, which we talk about all the ways which companies, utilities and people are addressing the challenges and opportunities in water. This is episode 89, and increasingly, always it's going to be a good one. Is that. Well, I'm joined today by Bluefield analyst Christine Al to discuss her recent research on the role of private equity firms in the digital water segment. Once again, back to back, as we did last episode, we're going to take a little bit of a step back and sort of define some things. We're going to talk about how Bluefield defines digital water for listeners, just for clarity purposes. And then we're going to dig into some key market trends, including private equity investments, key players in the outlook for the rest of 2024 to the best that we can. Why are we talking about private equity in digital specifically? Well, private equity, the sector as a whole globally has grown thirteenfold since 2000. More importantly, it's wielding increasing influence over critical infrastructure sectors, including water wastewater. This includes everything from strategic investments into services including technology such as digital, but also into more tangible assets like utilities, desalination plants. And 2023 was not the best year for everything from PE transactions and m and a to even ipos. So it's been a little bit uncertain. But given the temperature of the market that we at Bluefield are feeling right now, private equity is pretty busy. It looks like there's a combination of investors looking for exits, but also they just have lots of available unused or unallocated capital at this point that they need to move on. So plenty of dry powder, as they say. So we talk a little bit about that and maybe what this portends for the rest of the year. Lots of good stuff. But before we do that, I thought I'd share some news that caught my attention this past week. Perhaps a perfect segue from the last Future Water podcast, episode 88, and the discussion with Charlie Seuss about private participation in the water sector. This is always something I get excited about. We've been looking at private water for a long time, and big deals always catch my eye, or in this case, a potential big deal.
In its earnings call last week, Eversource announced its plans or consideration of divesting its aquarian water business. Aquarian is an investor owned water utility in the US with positions in three states, Connecticut, Massachusetts, New Hampshire.
Eversource acquired, I think it was 2017. It acquired Aquarium for $1.7 billion, including debt. So there are a lot of reasons for this one, it sounds like Eversource needs to build up some cash and solidify its position. But more importantly, this signals to us and the markets that it's sort of getting back to its core business, which is gas, power distribution, retail business as opposed to generation. So what has happened? Alongside the aquarium announcement, the company has also been exiting its offshore wind business because it's taken it on the chin financially with some of those investments. The company reported a $440,000,000 loss this past year because of write offs and such. So it's been tough sledding for Eversource. And I think it sounds like the management team is basically saying, hey, let's get back to what we need to do, what we do. We don't need to be in the generation business on the power side and also the water business. They've become. While maybe good or bad, they've been a bit of a distraction. So why do we care, at least on the water side, for the private utility segment that is ious of the industry? This is a potentially a big deal. Deals of the size are few and far between. Querying is one of the, I'd say seven or 8th largest investor in utility in the US with approximately 235,000 customers. Its biggest position is in Connecticut, then Massachusetts and New Hampshire. It had a $1.3 billion rate base in 2023. So it's pretty significant. This is definitely a platform deal amidst all of this. Eversource or Aquarian is also in a regulatory battle with Connecticut, with the utilities regulator pura. It raises a lot of questions, including the role of ious in the state. The company is also this has been protracted and lots of back and forth.
Our team is closely also watching Connecticut water. They have a pending rate case in the state and we're looking to see how that unfolds in Q two compared to what's been going on with eversource. So it'll be interesting to see how that plays out because that may have some implication or some influence on any deals going forward. Like I said, Connecticut is Aquarium's biggest state. The regulator is doing a number of different things and eversource is getting out. And so I think one question is, does this reduce some exposure for Eversource Connecticut to follow up on that? Its regulators, similar actually to those in Hawaii, seem to be pushing more towards performance based rate measures than what we're seeing in other states. Whole nother discussion. But lastly, and maybe most importantly, this is a platform deal, as I mentioned, that strategics and outsiders looking into the water industry will see as a potential prize. Utility deals of the size, like I said, are not common. Outsiders looking in are often frustrated by the typical starting point for utility ownership in the US. I think as Charlie mentioned last or a couple of weeks ago on the future Water podcast, that the majority, I'd say 65 70% of utility acquisitions are small. And we've seen companies come in and try to pick off large deals. If you go to the large munis, it is a political cesspool of vitriol and public town hall meetings that drag out for a long time because of concerns about private ownership. So therefore the private side, and there are a number of them, and that's really where a lot of the stress is financially on these small systems. So it makes sense that ious are going after these smaller systems. So this is unique and something from which a new owner can build on, whether it be organically, but also through m and A, particularly in the New England region. So a number of large, the larger platform deals that we've seen in the past, just, you can almost put them on, count them on one hand. Eversource Aquarium, when they did that in 2017, as I mentioned, San Jose Water or SJW Group, they acquired Connecticut water several years ago. This past year, as Southwest Water and Corex merge came together, that was a relatively big deal.
Violia acquired Suez and that rolled up a number of Suez's utility positions in the US. And then also it's worth mentioning that the dutch pension fund PGGM bought 20% stake and 15 Suez utilities actually just subsequent to Suez acquiring GE Water. So those are a number of larger deals that we've seen and so this would definitely be a big one. So it's going to attract a number of key players, whether it be strategics. So there are a couple of strategics that have overlapping footprints in some of these states that may make it attractive. Like I mentioned, private equity.
They've got plenty of cash. They like the sector in some respects because it also falls in line with some of their clean tech investment strategies. Then outsiders looking in other critical infrastructure players. This could be a play for someone looking to get in at scale, which is hard to do. So, big news, I know we have some research coming out on it probably in the next week or so. I've already seen some drafts, some research on where eversource or in aquarium stack up against the peer group and who potential suitors might be. But also a little bit of discussion about what's happening in Connecticut that being said, if you're interested in any analysis on this or any data about our private water sector and analysis, reach out to us at water
[email protected]. So with that being said, let's get to it. Let's get Christine in on the conversation.
All right, so I'm joined here by Christine. Ow. Christine, how's it going? Long time no speak.
[00:09:05] Speaker A: Yeah, I'm doing well. Happy to be back on the podcast.
[00:09:08] Speaker B: Yeah. And actually, you just came back. This is your first week back from being in Singapore. Good trip overall.
[00:09:16] Speaker A: Yeah, it was nice to see family celebrated Lunar new year, so, yeah, very happy to be back in Boston and back in action.
[00:09:23] Speaker B: Nice. Well, so while you were away, right before you left, we published a report looking at the role of digital of private equity firms in the digital water space. And so now that you're back, clients have access to it. Thought I'd bring you on to have a quick discussion about sort of what we talked about and what we are finding as far as that subsegment of players goes within the digital water space. So let's step back, though. I think in the intro I'd mentioned last week or a couple of weeks ago, I had Charlie sous on, and we were talking about private water.
And the way we started was, let's define private water. I mean, I think digital water also know, the question comes up periodically to us at Bluefield from clients and prospects and people in the industry, like, what is digital water? It's pretty big, pretty broad. So why don't I just cut straight to the chase with you? And that is, when you see digital water, when you think about it, what is it and how do we at Bluefield define it?
[00:10:27] Speaker A: Yeah, the definition of digital water definitely varies depending on who you talk to, whether it's vendors or utilities. But we here at Bluefield, we take a relatively broad definition of digital water. To put it simply, we kind of define digital water as anything related to data in the water sector. So this includes technology to collect the data, such as the meters and monitors, transmit the data like IoT networks, as well as process and operationalize the data, such as those various asset management tools that we see out here in the industry. We also look at cutting edge stuff like AI that's becoming increasingly prevalent throughout the sector. Alongside these technologies, we also include relevant services into our definition, such as GIS and ScaDa, integration, meter installation, and even distribution as well.
[00:11:20] Speaker B: Yeah, I think it's interesting, digital water as a term. We obviously use it a lot. We have an insight service or subscription focused on this area back in 2017 2018. My memory is somewhat hazy now, but when we launched the digital water service prior to that, the discussion at the time was what do we name the service? And the time, it was more prevalent, I think, than it even is now. And that was smart water.
How do we make the network smart smarter? There are lots of discussion and sort of a little anecdote is the Europe team, quite honestly, was really pushing for the use of smartwater. It was more common on the US side. We were pushing more for digital. We thought it was more forward looking, kind know we were thinking about digital economies and digital transmission, to your point of data. But one of the reasons, at least one of the many reasons we went with digital as opposed to smart was when you do Google searches in the US, when you look up mean, if anybody has done it, the first person that comes up is Jennifer Aniston. And the smart water bottled.
You know, if you go to any airport in the US, it feels like they're selling smart water at every Starbucks. But the point being that for brand recognition, but also just even site engine optimization, if we put smartwater, we'd still be ten pages down in the list. So that was one of the reasons why we've gone with digital. So let's get to some nuts and bolts, right? Thanks for the definition. So you've recently done a deep dive into the role of private equity in water, as we mentioned. So even that begs the question, what was the impetus behind that analysis? Why did we do it and what was the drive? Particularly given what's been happening over the last year to year and a half with M a trends, overall venture, private equity investments, ipos, what was the driver?
[00:13:30] Speaker A: Yeah, I mean, there's definitely a couple of reasons why we decided to look at the role of private equity within the water sector. Firstly, there's just been an exponential rise in the amount of capital held by private equity firms. Yes, there's been a lot of variations in terms of how the market has been with m and a trends, VC trends, ipo trends. But as of 2022, private equity firms actually now manage over $7.6 trillion in global capital, which understandably is pretty significant. The role of private equity is growing in our everyday lives in various sectors, and it's something that we see talked about in the news every so often. What's interesting though, is that despite this amass of capital held by these firms, around $2.2 trillion was actually uninvested in 2022, which was an all time high. Looking at the water sector specifically, we have observed a growing interest from private equity firms looking to water as an opportunity for growth. There has been an emergence of firms specifically focused on investing in water, such as science symbiote Capital, XPV Water Partners. But there are also familiar names that we are seeing starting to get into the space, such as New Mountain Capital, Bain Capital, the Carlisle Group, Richwood, Blue Wolf, Middle Ground Capital, Golden Gate Capital, KKR, Blackrock. Honestly, it would take me three days just to finish that list. That is to say, the financial attention being directed towards water has grown a lot over the years. There are many reasons for this, including climate change and growing concern over water quality, as well as aging infrastructure assets in places like the US as well as Europe. Private equity firms are also increasingly establishing climate related investment themes, and there is an industry push, at least in the finance sector, towards ESG. Therefore, water is an opportunity for them. Private equity's growing interest in water makes a lot of sense, in my opinion, because for one, it's a relatively stable industry since it is highly regulated, which can help firms hedge against broader market volatility. Also, the water sector is highly fragmented, with a seemingly infinite number of privately owned and operated companies that are potentially attractive investments for private equity firms.
[00:15:59] Speaker B: Yeah, I mean, I think your last point, that's really the target for these firms, basically private owned firms. So that's interesting. I think also just the broader wave, I think water as a whole has been sort of, we've said this a number of times, out of sight, out of mind.
But given what's happening everywhere from Cape Town and day zeros to the Colorado river, to in lack of water because of drought, to also not to be overlooked, things like Flint, Michigan or Jackson, Mississippi, the list of calamities, so to speak, is immense. And quite honestly, the one thing that we can't live without is water. So demand will always be there, no matter what. The question is, can we either newly deliver in maybe emerging markets or select markets, or can we rehabilitate our mean? There's really no choice in that case. So next question for you is why digital water? Why the focus of PE firms in this space?
[00:17:09] Speaker A: Well, first off, I am the digital water analyst here at Bluefield. So naturally what I'm really looking at and interested in when it comes to our work are these market trends and evolving company strategies when it comes to digital water. At the same time, digital solutions are becoming increasingly prevalent and some might even argue that digital is essential for the water sector. So as demand for these solutions grow from municipalities and industry, private equity firms are responding and investing within the space. The rise of buzwords like clean tech and climate tech is also interesting to consider in terms of how it has influenced investment strategies from these firms. As I mentioned, many private equity firms are becoming more sustainability minded, but growing in parallel is a rising interest in innovative, cutting edge technologies. We live in a Chat GPT world now, so as private equity firms, they're not just investing in traditional water segments. In fact, from our research, we actually observed that firms are investing in digital companies with solutions applicable in water and adjacent industries like electricity and gas. But investing in digital water and water at large is not easy, and it's been a weird couple of years. The market has been rather soft lately due to economic uncertainty, geopolitical instability, rising interest rates, among a host of other reasons, Bluefield actually tracks global m and a deals across various segments, including digital water, and from our data, we see that private equity deal making in the digital water space has been slow since 2022. The digital water market will continue to grow. That is something that we're confident in, and therefore, for the most part, we expect to see more activity from PE firms as macroeconomic conditions continue to stabilize.
[00:19:06] Speaker B: Yeah, I think I said in the intro, I can't remember at this point, but basically that there's a lot of activity as far as temperature checks go on the Bluefield side, it feels like there's been opening of the floodgates, no pun intended, but useful as far as PE firms in there, and not just digital, but overall. But let's narrow the scope of this discussion even further. So as we work our way down the funnel, what about highlighting a couple of trends that you've seen in your analysis when it comes to sort of broader market trends specific to digital?
[00:19:44] Speaker A: Yeah, for sure. So between 2016 to 2023, Bluefield recorded 415 digital water m and a deals, of which almost 50 were made by private equity firms. Regarding how these firms are investing, most are targeted at companies addressing industry pain points like deep leak detection, asset management and cybersecurity. Companies offering work and asset management solutions and network and plant management solutions collectively account for around 70% of these private equity m and a deals. Looking at the product type of these targets, private equity firms skew in favor of technology pure plays, which account for just about half of the deals. Around 20% of deals are for these service focused firms. Given what we know about the water industry here at Bluefield, as well as some of the things that we've already discussed so far in this podcast, these findings definitely align with our expectations.
[00:20:43] Speaker B: Yeah, I think that's interesting.
Eric Bendler maybe even on this podcast, but also just in our quarterly reporting as far as digital investment or M and A activity, it really ramped up towards 2021. And then Covid related market conditions, macroeconomic related things did start to slow down as you mentioned. But of the firms you looked at and of the deal flow, any takeaways when you sort of narrow it a little bit further?
[00:21:15] Speaker A: Yeah. So as a part of our research Bluefield, we actually identified and profiled 28 key pe firms that are currently active in digital water. These firms range in size and industry focus from the large and highly diversified firms like EQT Partners and Vista Equity Partners, to smaller water pure plays like XPV and Symbria. As I had mentioned earlier, some interesting groupings actually emerge when we look at all of these firms together. As I mentioned, we have the water pure plays specialized in investing within the sector. There are also firms that specifically target companies that provide technology and software solutions such as Silverlake, Cell, KKR and Insight partners. For these players, understandably, their investments skew towards companies that provide unique software and technology solutions. A final group of firms I kind of want to highlight here are the infrastructure investors. For example, Audix private equity, Midwest mezzanine funds and industrial growth partners. For them, what was interesting is that they are largely investing in service type solutions such as ScaDA integration, condition assessment and cybersecurity. Of course, when we talk about private equity, we need to talk about value creation, and different types of firms have different strengths when it comes to this. A typical play out of the private equity handbook is buy and build, where portfolio companies expand their offerings and market footprint through acquisitions. There are also roll up acquisitions where a firm acquires several small companies and merge them to form a single, larger enterprise. Given the financial requirement behind these strategies, larger private equity firms are better equipped to execute them. Smaller firms, on the other hand, especially those with specialized industry knowledge, are able to provide more customized support, such as operational support to refine processes like HR and financial management, strategic hiring by identifying and attracting valuable talent to a company, and even market advisory, helping forge those valuable industry connections and partnerships. This variability was definitely very interesting to see through the course of this research.
[00:23:32] Speaker B: Yeah, I think one of the points you brought up that admittedly just came to mind know there are these firms that sort of, they acquire the know and I don't honestly, maybe, you know, but maybe it's worth another discussion, and that is I'm using new mountain capital. For example, they acquired Infamark several years ago, and they've made a number of different acquisitions, but now they've started, I think last year they started acquiring SCADA system integrators. Right. And that for us, that kind of falls into the digital water landscape. And with Infamark is really an O M utility, O M service provider primarily. They've moved, moving into industrial to some extent, but looking at SCADA systems because there is some synergies between those two businesses. But it is a bit of a digital play because they see efficiencies to be gained, not only operationally, but value add across a wider, I guess, broader footprint of clients and customers. So that's pretty interesting to see. So you pointed out, I think you brought it up a little while ago, and that is that the water sector, it's not for the meek, it's not an easy place in which to get in, and sometimes this may or may not be frustrating for private equity firms. Do you have any perspective on that?
[00:24:53] Speaker A: Yeah, definitely. The water sector can be tough to play in when it comes from the perspective of a financial player, but at least when it comes to digital water, it is a fast growing market, but it will come with its unique challenges. That in some part is due to the nature of the water sector. The industry is notoriously slow moving due to its risk averse nature. So investors can expect longer than average exit terms and slower end user sales cycles. The digital water market also has a very narrow, investable middle market, which is where private equity firms would usually play. Most firms are either still in the startup stage, making them more ideal for venture capital investments, which have a higher risk appetite, or they're on the other end of the spectrum and are very well capitalized incumbents. That wouldn't be a target for private equity firms. That is to say, when it comes to digital water, fortune will favor the patient as well as firms with a deep understanding of the water sector at large, so that they can adapt to how this industry continues to evolve from now into the future.
[00:26:04] Speaker B: Yeah, I think your last point is a really good one. Truly, patience is a virtue in the water sector. I speak the truth on that. I think also, depending on what the firm has traditionally looked at or been active in, there is this convergence as we talk about tech and or a mature, critical infrastructure segment, one of which is very mature, the other which is sort of high flying with high margins, high growth. So there has to be some reconciliation of the two in many cases. That being said, I think you mentioned this, while the water market as a whole is pretty stable, moves at a mature pace within that stack, digital or certain digital segments. And it also depends on where you are in the world, whether, say, Europe versus the US, what the focus or what the growth is that does make a difference. Like the US, for instance, is a very metering intensive market. It's a big metering market where Europe to a lesser extent is. So that's really interesting. There's some good analysis in here. I know for the listeners that we've been looking at this for a while. Over the course of 2023, we kind of looked at it and said, what's happening? The market slow?
It's a little sluggish as far as PE roles or activity in the space. Part of that was to kind of get to 2024. Like I said, there seems to be some unlocking of capital. I think, Christine, you mentioned it, there's sort of record numbers out there. There's so much available, or dry powder, as we've said in the past, available for investment. That plus whether it be ESG or sustainability or just more efficient operations, I mean, that's really in risk mitigation. That's really what we're talking about when we talk about ESG. There's opportunity out there and the need for capital. So there's a bit of rebalancing that's happened over the past couple of years. Well, Christine, thanks for jumping on. This is super helpful, quick and easy. So I appreciate that. But before I let you go, anything else you're working on now that you want to share with others?
[00:28:21] Speaker A: Yeah, for sure. So every quarter we here at Bluefield, we prepare a quarterly review, kind of giving a bird's eye view of some of the latest happenings within the market. So I'm in the process of preparing that for the digital water service. Also working on a client briefing about digital twin, which is very exciting. We know that's something that a lot of people are getting increasingly interested in, but with that also a lot of questions of what that means, what kind of technology is that? So having a great time digging into that information, and we're also working on updating a bunch of our dashboards. So, yeah, lots of things in the pipeline.
[00:28:53] Speaker B: Yeah. I mean, speaking of private equity, just recently, earlier in the year maybe it was end of 2023, we released vendor landscape across a digital space. So we've got what, 1500 to 2000 companies that we track.
And that's been useful for, quite honestly, private equity firms that are looking to make acquisitions and dig into sectors. It's basically a company list. What, where, when how and who and so on of these firms that is available on our data dashboard platform. But you did work on that, so super helpful. So look forward to this upcoming research and much appreciated for the time.
[00:29:34] Speaker A: Yeah, thank you for having me.
[00:29:36] Speaker B: All right, take it easy.
Okay. That was great to have Christine on. Super helpful, super knowledgeable, and glad I could pin her down after she just got back from Singapore. So if you're interested in our analysis of the role of private equity in digital water, you can go to ww bluefieldresearch.com. But before I sign off, if you're in Boston, Barcelona, or anywhere, just reach out and let us know. We're always happy to meet you. We've got a couple conferences coming up. Actually, I'm at the PVC Pipe association when this is being released. So I'll be in Costa Rica and then were at World Water Tech in London. We've got water reuse in Denver coming up. I'm going by memory now. So we just attended UMC where I think that was really positive for the Bluefield team and those that were there. And obviously coming down the pipe is our conferences like Ace even before then. I think in April I will be attending the NAWC National association of Water Companies president's meeting in Orlando. I think that's about April 9 ish, but you can find all of the stuff on our website. If you go to the top of the page of the banner, you'll find events somewhere in one of those drop downs. But give us a review. Be super helpful. We've gotten some positive feedback in recent weeks, and always a nice kudo goes a long way for the rest of our team. If you have questions or ideas for topic ideas, let us know. Send us a note at
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Because like I always say, we're doing this for you. And lastly, tell a friend about it. This podcast and these water industry insights have been brought to you by the one and only Bluefield research. To learn more about us, visit us once
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