Toronto water fund wants to deploy profitable solutions, expects interest from Chinese partners
Confronted with serious water scarcity and pollution, Chinese private sector demand for water technologies is increasing
XPV Water Partners, a private equity firm based in Toronto managing two water funds totalling US$400 million, believes institutional capital can be a sustainable solution towards tackling water pollution and scarcity, which affects a quarter of the world’s major cities.
Co-founder David Henderson said he anticipates that the number of Asian investors, particularly from China, will increase as the 12-year-old firm sees the potential for raising a third fund.
In China, some studies point to 12 provinces in the north suffering from water scarcity. Availability of less than 1,000 cubic metres per person per year is the internationally accepted measure of water scarcity. The country is also beset with water pollution challenges, after years of contamination from industrial and household waste.
Through its funds, XPV Water Partners’ team of 21 investment professionals are helping growth-stage water technology companies generate attractive returns to investors. These technologies are often demanded by governments and private sector globally, which are seeking improvements to environmental monitoring, treating waste and recycling water.
“If we can make investing in water companies profitable, that would attract more capital, with which we could then solve bigger water problems,” said Henderson. “Hence, we need to solve water issues and make profitable investment all at the same time. This is what makes for sustainable solutions, rather than solely relying on government grants and subsidies.”
The growing interest from potential Chinese partners is evident from his observation during a recent trip to Beijing and Shanghai earlier this month where he saw Chinese companies and state-owned entities increasingly deploying water technologies in environmental monitoring.
Compliance aside, Chinese businesses are also exploring water technologies such as water data monitoring, waste water treatment technologies due to a general awareness that good environmental policies translate into more loyal customers and less reputational risks.
“A lot of the [world’s largest companies ranked by revenue], including Chinese companies, have a stronger environmental and governance standards amid the ESG [environment, social and governance] movement. These companies are driven by the fact that consumers vote with their wallets; meanwhile, the younger people today are more environmentally conscious than the previous generations,” said Henderson.
About two-thirds of the capital in both funds, including a US$150 million fund I launched in 2010 and US$250 million fund II launched in 2015, have been deployed and invested across 13 companies, most of which are located in North America.
Market sources said XPV Water Partners is looking at a third fund in 2019.
Henderson refused to comment on the details, but added that the remaining one-third of the capital will be reserved for existing portfolio companies’ merger and acquisition needs. There will be “a handful more” companies that these two funds will invest into, he said.
“For our second fund we have deliberately sought out investors from Asia, because over the longer term we want to incorporate Asia as part of our investing and expansion strategies for our portfolio companies,” he said, adding that a Chinese partner who could help the fund’s portfolio companies to expand their services in the country would be an attractive investor.
XPV, which stands for Extended Partner Value, is probably one of the few dedicated water funds of such scale to have raised money from Asia.
Its founding partners also include John Coburn, former president of Zenon Environmental, an Ontario-based water treatment company he helped build which was subsequently acquired by a unit of General Electric in 2006 for US$640 million.
XPV Partners targets to invest US$10 billion in water companies by 2027.
