With the attractive and stable returns being generated by Water Companies its inevitable that more investment funds will seek to move into the water sector. Already a number of pension funds have significant investment in the water sector including for example, Canadian Pension Plan and Ontario Teachers Pension Fund.
The water utilities are very attractive to long term investors as they offer:
- Mature assets operating under a strict regulatory regime
- Limited demand risk due to the monopolistic position
- Revenues linked to inflation
- On going capital investment providing revenue growth
- Long term and predictable cash flows
- Being in Europe a stable political and legal environment further reducing risk
Returns to pension companies have been very attractive at around 11%. The big change in AMP5 is that whereas before all the water companies have made similar returns now with the new capital incentive scheme introduced by Ofwat and other changes in the periodic review the gap between the best and worst performing water companies is likely to increase significantly. This will put even more pressure on management teams to perform and means that the top performing water companies like Anglian, Yorkshire and Wessex will become even more attractive to investors.
Equally the move by the big infrastructure investment funds to invest in the water utilities should be good for the industry as they provide a very long term (40 year) stable presence and can consequently encourage water companies to take a long term view.
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