That bottle of water you just bought in London may connect you to an investment in a startup providing drinking water in Uganda, Zambia or the Democratic Republic of Congo.
The corporate foundations of a handful of UK-based food and drinks retailers, including Co-op Group, Elior, Aqua Libra and Britvic, are providing grants that serve as first-loss capital in a water investment fund. The fund, Water Unite Impact, is looking to carve out a niche in the “missing middle” of emerging-market tech social enterprises with water quality and conservation solutions.
Co-op, the fund’s first corporate backer, contributes one British pence per every liter of bottled water it sells. Bottled water, of course, is itself implicated in privatization, groundwater depletion, plastic waste and other water challenges around the world.
The investment fund, Water Unite Impact, has raised $3 million in such first-loss capital, enabling a $7.5 million loan from the US International Development Finance Corp. In effect, corporate philanthropy is backstopping lending risks in order to bring in development finance institutions and other investors on more commercial terms.
The corporate philanthropy also funds technical assistance to boost the investability of early stage water companies. Whether that catalytic lever is enough to bring in commercial capital remains to be seen. The Water Unite Impact fund has received commitments from several family offices and high-net-worth investors, and is aiming for a $30 million first close by year’s end.
“The difficulty is that no one’s ever cracked the nut. How do you invest in water and make money?” says Neil Sandy of Wellers Impact, a UK-based impact investment firm that manages the Water Unite fund. Sandy discussed the fund’s innovative structure in an in-depth Q&A with ImpactAlpha.
Water Unite Impact is hoping to reach a $60 million final close sometime next year to provide scalable, growth capital to enterprises with solutions for expanding access to clean water and sanitation, wastewater and plastic waste circularity, and water preservation. Such small and medium-sized enterprises, or SMEs, often languish in the missing middle between small microfinance institutions and large commercial lenders
“There is a shortage of equity and loan capital available to fast-growing SMEs in the sector at fair terms,” Sandy says. “We seek to fill that gap.”
The UK retailers are major consumers of water and are using their corporate power to lower their wasted water footprint and increase their climate impact. Elior UK, a London-based contract food services company, also contributes to the fund’s first-loss and technical assistance stack per bottle of water sold. The company has donated over £100,000 (about $130,000) to Water Unite.
“Water is connected to everything we do as a business. It’s vital for food production and essential to our operations,” says Elior’s Charlotte Wright. Clients are seeking evidence of the company’s commitment to addressing climate change, reducing pollution, managing waste and alleviating water stress, she said. “It’s clear that demonstrating our dedication is crucial for strong client relationships,” Wright told ImpactAlpha.
Risk reduction
Water Unite was launched as a nonprofit in 2017 by Duncan Goose. Goose now leads several ventures including One Water, a UK-based bottled water and drinks brand that has raised and donated over £30 million to provide clean water access to five million people.
A small group of water leaders, with backing from Rockefeller Foundation and other foundations, came up with the idea to spin out the nonprofit into an investment fund in 2020.
Corporate participation in the fund is crucial. While it has been typical for corporate foundations to support technical assistance to help companies reach investability, more novel is the provision of catalytic first-loss capital to crowd in more commercial investors.
“Our corporate partners have been instrumental in catalyzing additional funding from more traditional investors into this underfunded area, helping us to accelerate our impact,” Malcolm Bruce, who chairs Water Unite, tells ImpactAlpha. Bruce was knighted by the late Queen Elizabeth II in 2012.
Water Unite ran a pilot in 2022 to source and finance a handful of water companies that fit its thesis. Among its five early investments is Uganda-based Jibu, which taps existing water sources and tests it, and then installs water filtration systems to purify the water. The enterprise bottle and distribute the water to 200 franchisees, who together have about 10,000 points of sale in Uganda, Kenya, Tanzania, the DRC, Burundi, Zambia and Ghana. Jibu has raised $2.5 million in an ongoing bridge round to expand in existing and new African countries.
“We have a long time relationship with Wellers and they actually participated in the bridge round that we’re in the middle of right now that’s preparing us for a more significant equity round next year” says Jibu’s Randy Welsch, who started the social enterprise with his son Galen in 2012. “They’ve been critical partners to us and really supported us,” Welsch tells ImpactAlpha.
Water Unite’s pilot produced a pipeline of 200 water companies, of which Sandy says only five percent are investable. Another five to 10% have potential to become investable with technical assistance. The Water Unite Impact Fund will reserve follow-on funding when it can “accelerate growth, apply project financing and provide further technical assistance,” he adds.
Water Unite Impact’s portfolio also includes Hong Kong-based GREE Energy, which works with food processors in emerging markets to convert industrial wastewater into biogas. Kenya-based Mr. Green Africa, the first recycling company in Africa to gain a B Corp certification, works with informal waste workers and micro entrepreneurs to collect and recycle plastic waste.
The first-loss reserves qualified Water Unite Impact for the $7.5 million debt facility from the US Development Finance Corp. In turn, that debt “is highly catalytic in that each dollar of loan capital deployed into invested companies will be accompanied by a dollar of equity in order to achieve scale,” says Sandy.
“We’re delighted that the US International Development Finance Corporation shares our vision and will be leveraging our funding,” Co-op’s Shirine Khoury-Haq said in a statement. “Their commitment provides significant validation to the early success and scalability of the WUI model.”
In recent years, corporations have turned to impact investments to drive long-term sustainable change, Sandy says. “If I give one grant today, that grant gets used up and then it’s zero tomorrow. If I make an investment today, I have maybe that tenfold change in the future because it gets invested. Hopefully it comes back, but it also encourages others to make a huge difference alongside me, too.”
Read on for the rest of ImpactAlpha’s conversation with Wellers Impact’s Neil Sandy.
ImpactAlpha: How did the Water Unite Impact fund come together?
Sandy: Water Unite is a nonprofit and as part of a major strategic review, it was clear that to make a sustainable long-term difference, impact investing was the way forward. After a process of discovery with Wellers Impact, an FCA regulated investment manager with emerging markets experience and supporting SMEs to grow new markets, the Water Unite Impact fund was created.
What was amazing about Water Unite as a nonprofit is they had significant corporate backing. And because there’s been a big shift in the way that corporates have looked at their CSR strategies in the last three to five years, there is a realization [that] to have long-term sustainable change, investing is the way forward for scale and long-lasting change. For example, you make one grant today, that grant gets used up and then it’s zero tomorrow. An investment may have a tenfold change in the future. That action encourages others to make a huge difference alongside us too.
And so at inception we have created a powerful investment committee: Usha Rao-Monari, who’s ex- Blackstone Infrastructure, UNDP; Martijin Proos, who works at a South African investment management company in infrastructure; and Marina Pannekeet, IKEA Foundation, both ex-FMO.
We’ve brought the Wellers Impact emerging markets and impact investment teams, which have deep understanding of the SME market in Africa and Asia in particular, and brought that together with Martijn, Marina and Usha, who have had this huge infrastructure and water focus for decades. So we sat down and said, “We can do this. We can do something which is long term and sustainable.”
ImpactAlpha: How did Water Unite get corporates to come aboard? How did it start investing?
Sandy: The exciting thing is that the corporates that are backing Water Unite are retailers. One of the biggest convenience stores in the UK, which has a great values system, is the Co-op Supermarket. Across the UK, you’ll see Co-op stores, and every time you buy a bottle of water or a bottle of other drink, a penny or two comes into our fund.
And so what got us all excited was sitting down with the corporates, the infrastructure people and the team at Wellers Impact, bringing together a proposition where we said, ‘at the moment, if you’re doing infrastructure, what’s your biggest challenge?’ And they said, ‘We just don’t have deal flow; we just don’t have enough coming through making a change in the world of water.’ It’s affecting agriculture and livelihoods.
So we started a pilot phase. We started off thinking, well, would there be a pipeline? People were saying, ‘we find it really hard to find opportunities.’ And so in a short space of time, by studying the sector carefully, we’ve gone from having a small pipeline to invest in, and we’ve now looked at over 200 opportunities. Our fund structure provides us with technical assistance capability too, be that finance, be that strategy, be that also about looking at intentionality of having an impact.
ImpactAlpha: Please tell us more about the kind of deals you’re looking for. Can you share any examples?
Sandy: We’re investing in talent and technology. Those two things combined are a rare thing and created a few lightbulb moments for us in terms of the scope of what we would look at. And so we discovered that the circular economy can bring about great business models, and if you can match that with technology and a great team and technical assistance, then we were starting to find a significant pipeline and one that is underserved. If you and I were running a tech business that was trying to improve agriculture, water usage, water drainage, plastics waste reduction, we would be struggling to find funders.
We’ve got this amazing corporate backing that’s given us a first-loss tranche. So for people bringing their senior capital in, who want to take a chance for the first time in investing in water — because it’s really difficult to find any alternative products out there to invest in water solutions — they have now got an opportunity to address this missing middle: all these SMEs [that] aren’t startups. We’re investing in Series A and upwards and we’re investing small amounts at the moment, about half a million dollars up to two to three million as the fund grows.
[Water] is an asset class which is new, which is really exciting. There is big infrastructure out there, and we’re not doing that. We’re doing the important bit in the middle. There are amazing technologies, which I think can really transform communities.
Water is also quite political in some respects. I think a lot of countries are looking to see how they can bring basic services to the poorest in society, because those poorest are voters as well. That’s important. That’s an interesting dynamic we’ve had some interesting insights into. But you can only make it work if you can invest in a business model where cleaning water or moving water or collecting data around water, if you use water to produce income.
An example would be in agriculture, where we’ve invested in a company called Seabex. That’s a relationship we’ve had for over a year. It’s a World Economic Forum voted top 10 startup. They use AI to help farmers work out how little water they need to use to keep the ideal yield. And all that data comes along in real time from the farmer, from the weather, and all that data goes back in to work out how little water that particular farmer can use.
The data it collects really democratizes the ability for those farmers and the cooperatives they work in to be better informed about what is working and what is not working. These technologies are not just being built and developed and proven across sub-Saharan Africa and Asia, but they’re also now coming into North America, Northern Europe and so on.
ImpactAlpha: What are the catalytic components of the fund? How much in first-loss capital have you raised and what will it enable you to do?
Sandy: At the moment, we have raised over $10m to the first loss tranche, and much of that is from retailers. Retailers also want us to use their contributions so that we can do technical assistance work. So what we’ve noticed is it opens up a conversation, but it also opens up the benefit of our due diligence processes, because sometimes we can start talking to a potential investee, and we can see that there are gaps and we can’t invest right now.
What we’re looking for is to demonstrate, especially with the DFC, we’re looking for that first-loss tranche to do its job, which is to encourage people who have not invested in water before, to do something which their investment committee previously perhaps would have thought was too risky or not in their mandate. So we’ve got both equity and debt to invest in those businesses, but later on, clearly as they scale up, we want to work with other investors who can learn and invest with us to get them to the next stage of their development.
ImpactAlpha: From an impact standpoint, why is it so critical to invest in water right now?
Sandy: Water flows through everything, and yet it is missing on the investment mandates of a lot of investors, it’s part of the climate transition piece. So what we want to do is invest in those early stages. We’ve got a great team of analysts that work through the details and tease out the business models that make a difference.
We’re seeing amazing opportunities across the 200 opportunities in our pipeline at the moment, five percent of which are investable and another 10% that could benefit from technical support, and we hope then for those to be in our fund. We are seeking investors who will go on this journey with us and gather great insights, impact and returns from this exciting new sector to invest in.
This Q&A has been lightly edited for clarity.