Some of the world's largest pension funds are calming investment volatility with water.
With stable cash flows that often shadow inflationary movements, water companies are attracting a host of institutional investors as the latest must-have infrastructure asset.
At a time when many pension funds in Australia, Canada and Europe are looking for efficient ways of better aligning assets with liabilities, certain infrastructure assets such as water companies present an intriguing low-risk alternative to inflation-linked bonds, said Shalin Bhagwan, London-based consultant for Mercer Investment Consulting.
Investment banks, including Merrill Lynch & Co. Inc., and Goldman Sachs & Co., both of New York, are also showing interest in such investments as part of their infrastructure funds.
U.S. pension funds have not taken the plunge to the extent of their international counterparts, but Deane Dray, a Goldman Sachs analyst who specializes in water-related utility companies, expects an increase in interest from U.S. institutional investors.
"What we're doing is following the events unfolding in Europe with regards to the whole investment cycle and determining what lessons we can learn about how the U.S. market may develop," Mr. Dray said.
In addition to long-term earnings that will likely stretch for at least 20 to 30 years, investments in infrastructure assets also bring a higher potential for returns compared to bonds, said Michael Carrick, London-based managing director and head of global infrastructure for Merrill Lynch.
"The monopolistic position, the low operating risk and the particularly attractive stable regulatory framework all contribute to make (water companies) highly desirable as an investment," Mr. Carrick said.
Those factors convinced two Dutch funds — the €194 billion ($246 billion) ABP, Heerlen, and the €74.5 billion PGGM, Zeist — to dip their toes in the water. Both are part of a consortium led by Australia's Macquarie Bank Ltd.'s European Infrastructure Funds that won a bidding war for RWE Thames Water Holdings, Swindon, England.
The final price tag for Thames Water was £8 billion, or double the amount that RWE AG, Essen, Germany, paid in 2000 for the company.