‘Impact Alpha’ Opportunities in Wastewater

“One of the largest opportunities we see right now is in the wastewater market, where a waste stream, such as cow manure, is converted into multiple revenue streams, including energy, fertilizer, animal bedding, water and renewable/tax credits. “


Ben Vitale, principal of Wastewater Capital Management, at Equilibrium Capital’s investor conference, June 2013.

We founded Equilibrium Capital five years ago on three insights:

  1. The single greatest macro trend shaping global capital markets in the next decades will be resource constraints driven by the economic shifts towards the developing countries and their growing middle class.
  2. Our financial markets face a long period of uncertainty and volatility with the potential for decade-long slow growth and inflation.
  3. These factors will drive a migration of portfolio allocations towards real asset strategies.

Market data reveals that mainstream institutional investors are beginning to recognize the magnitude of this shift in value and risk. Investors are looking at asset classes that generate long-term cash flows, provide an inflation hedge, dampen volatility, preserve capital and appreciate over long cycles. There is a significant shift towards real assets as the following chart illustrates.

Largest 200 U.S. Pension Funds

This growth is poised to continue, as major advisors and firms, such as NEPC and KKR, are recommending increasing levels of real assets exposure and allocation in financial portfolios.

Spotlight on Strategy

In our strategies, we tend to look for large niches. We avoid capital efficient markets like solar and wind. In our view, the greatest alpha opportunities lie outside solar and wind where financing from banks is not present. One of our current focuses is at the intersection of energy and water within the wastewater industry.

One of the largest opportunities we see right now is in the wastewater market, where a waste stream, such as cow manure, is converted into multiple revenue streams, including energy, fertilizer, animal bedding, water and renewable/tax credits. These outputs are secured via long-term, inflation-hedged contracts. The increased demand for sustainable solutions that address water accessibility, waste management problems and renewable energy mandates provides an attractive opportunity.

We have identified three primary types of projects within this opportunity set: agricultural waste, food waste and municipal wastewater sectors.

  • Agricultural waste projects typically are located on dairy, swine or livestock farms and include manure management, anaerobic digestion and renewable electricity or biogas generation.
  • Food waste projects typically include organic waste from food processing operations or pre- and post-consumer food wastes from municipalities that are fed into anaerobic digesters to generate renewable electricity or biogas.
  • Municipal wastewater projects typically involve retrofitting existing wastewater treatment plants by adding a biogas plant that generates renewable energy or biofuel from captured methane.

These targeted sectors comprise over 4,250 investable projects, representing $30.4 billion of project capital requirements in the next five years. This includes 2,550 agricultural waste projects ($12.8 billion), 1,550 food waste projects ($15.4 billion) and 150 municipal wastewater projects ($2.3 billion).

Why Real Assets?

Over the last three decades, more than four billion people in China, India and the former Eastern bloc have joined the global market economy. Economies in Latin America have turned more and more to market forms. That shift accelerates, and is in turn reinforced by, fundamental changes in the world economy.

The 1980-90’s were the information age. The 2000’s were about global mobility and connectivity. The decades of 2010-2020’s require “Basic Needs 3.0.” Increasingly affluent and growing populations demand more land, energy, food, water and housing.

Resulting stresses reveal themselves in climate change, ocean productivity loss, and soil and fresh water depletion, and drive change at every stage in value chains. Waste is evolving from a non-valued un-priced residual into the feedstock to produce traded commodities. Markets will increasingly price, and risk-manage, environmental externalities.

These macro trends will play out globally, reshaping and re-pricing basic industries and natural resources. In particular these trends will reshape core real assets sectors affecting basic human needs—land, water, energy, agriculture and real estate, which are our primary investment sectors.

The challenge for investors has been the limited availability of institutional scaled funds that give direct exposure to these resource constrained strategies while also ensuring long-term sustainability.

Stephanie Meade is research director and David Chen is co-founder and principal, of Equilibrium Capital. Reprinted with permission.)

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