with ๐๏ธ Henry Cordes, Principal at Sciens Water
๐ง Sciens is a research-driven investment fund that identifies uncovered, under-researched, or misunderstood water sector opportunities that are undercapitalized.
What we covered:
๐ฐ How Private Capital can and should play a role in solving Americaโs water challenges
๐ธ How the American Water Market is a $100 Billion market opportunity, growing and attractive for private capital investment
3๏ธโฃ How both ends of the centralized/decentralized debates are a good investment opportunity and how they may be synergistic
๐๏ธ How private capital will also play a role in consolidating a highly scattered sector and why we shall all support that
๐ Being an impact investor, opening the way, educating investors and money holders, getting the ball rolling and the word outโฆ and more!
๐ฅ โฆ and of course, we concluded with the ๐ง๐๐ฅ๐๐ ๐๐๐ง๐ ๐ฆ๐ช๐๐จ๐ฉ๐๐ค๐ฃ๐จ ๐ฅ
Resources:
โก๏ธ Send your warm regards to Henry on LinkedIn.
โก๏ธ A big THANK YOU to Sciens Water for enabling this episode!
is on Linkedin โก๏ธ
Teaser โ How Bringing In Private Capital can change the path of Small Water Utilities
Full Video: My conversation with Henry Cordes
Table of contents
- What we covered:
- Resources:
- Teaser โ How Bringing In Private Capital can change the path of Small Water Utilities
- Full Video: My conversation with Henry Cordes
- Full Transcript:
- Private Capital can play a role in improving Americaโs water infrastructure
- The American Water Industry is a $100 Billion Market
- Both Centralized and Decentralized Water are interesting investment opportunities
- Can Private Capital help consolidate the scattered municipal water sector?
- Rapid Fire Questions
- Other Episodes:
Full Transcript:
These are computer-generated, so expect some typos ๐
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Antoine Walter: Hi, Henry. Welcome to the show. Iโm curious to get to understand a bit better why we are here at all.
Henry Cordes: Thatโs a very big question!
Antoine Walter: Youโre the right person to tell me a bit about that. So what is it that we have to rethink in water?
Henry Cordes: Thereโs a very long answer to that probably, but Iโll try to give you a shortened, condensed version of it.
Private Capital can play a role in improving Americaโs water infrastructure
Weโre here because we, as Sciens, Sciens is a private equity investor in the water sector in the US, believe thatโฆ We obviously recognize that thereโs a lot of problems with the water sector and, and challenges, but we think obviously private capital can be a, a major solution to those challenges. But we think that there needs to be a different mindset around how we think about improving our water infrastructure in this country.
Right now, you know, thereโs a lot of political, social, environmental considerations. I think we, we need to kind of take a little step back and, and say, what is it that weโre trying to achieve and how can we do that, with private capital? So part of this whole initiative is sort of bringing together as many different disparate, stakeholders as possible through this event and try to begin to have those conversations.
Because as we know, in, in the US 85% of the industry is publicly held. Utility companies weโre investing in a, primarily in the private piece of that. But we think that private capital has a role to play. Across the industry.
Investors like Sciens Water want to spread the Word
Antoine Walter: Why does Sciens water take that torch? Why is it your duty and your mission to do that?
Henry Cordes: First and , foremost, weโre investors, right? And weโve been investing in private equity for over 25 years. But what we saw with water is quite frankly, an opportunity for private capital that maybe is either, doesnโt exist in other areas because theyโre already very competitive. Thereโs a lot of capital going into them, or theyโre very well understood or other reasons that mean that we think that thereโs a real white space of private investors in this sector.
Those are not just sort of in because itโs in fashion, but rather are committed for the long term to be invested in the space. Itโs quite challenging to do that, especially at scale, which is what investors like, right? Because itโs the same amount of work to invest a hundred million in one transaction as it is to invest 1 million in the transaction.
So we think that thereโs, there doesnโt exist that private equity investor leader in the space , and we would like to play a role in that because we think, Frankly, that the investment is needed, but thereโs also obviously a huge sustainability and impact component to it. That is really everything in water. You have to come back to that.
You canโt invest in water without having an impact, and weโve invested in a lot of other sectors, but thatโs not the case in the past. And going forward, we think that thatโs where we wanna spend the next 20 years, 30 years of our careers is really building that.
It is possible to invest in Water as an investor
Antoine Walter: If I got it right, the event of today shall lead into the writing of a white paper.
Who do you intend to influence with these outcomes and bring the nuggets, which were shared today to a wider audience?
Henry Cordes: What weโre hoping to do with that is to tell people that it is possible to invest in water as an investor. Itโs obviously not without its challenges, but we think that thereโs an opportunity for a lot more private capital will be going into the, the sector.
We obviously want to be a leader in that, but we think that itโs beneficial to everyone to have that capital coming in and let us explain to you why thatโs the case and how can we do that? Leverage what weโve learned by being an investor in the sector to help people see that thereโs a role to play for private investors.
The American Water Industry is a $100 Billion Market
Antoine Walter: How is that beneficial to Sciens water if more people want to invest into that sector? Wonโr it raise the valuations and create more competition?
Henry Cordes: You know, itโs a hundred billion dollar industry in the US alone. We think thereโs plenty of room for investors to participate. And the more confused people are about water, the harder it is for them to invest in the first place.
If that remains the case, one, we donโt solve a lot of the big problems we have to solve. And two, it means that the opportunities for us are not as great. We think more capital coming in creates more opportunities for us, essentially.
And water isnโt seen as sort of some confusing niche sector, but rather part of the mainstream that everyone feels that they need to be investing in, and everyone can feel that they have an opportunity to make returns in otherwise without the opportunity for returns, thereโs no investment.
There is still education to make around the involvement of private capital in water
Antoine Walter: Do you ever face some backlash from people who donโt understand exactly what youโre doing in water?
People who are like, okay, youโre investing in water, but isnโt that supposed to be like air a common good? Iโm playing, delivers advocate, donโt get me wrong, butโฆ
Henry Cordes: Weโve spoken to hundreds investors over the years in raising capital and that is a commonly asked question for many people. Thatโs a view that they take because thatโs just sort of how itโs been viewed , in this country as water is a public good, therefore any private investment is seen skeptically!
In our view, obviously, that investment is needed, but the opportunity is really to invest that capital, to bring new ways of thinking, to improve the industry for all participants. And quite frankly, in this country, what youโve had is a situation where people havenโt properly valued water because itโs been heavily subsidized by various entities and no one really knows what the water costs, therefore they donโt value it properly.
Then you have problems that because of deferred maintenance, itโs very sort of challenging to change that mindset and say, this is a good, that is, is incredibly valuable. We should be treating it as such. We should be pricing it appropriately. And private capital has a role to play in sort of getting us to that point.
I think. I mean, weโve had that experience with some of our portfolio companies that once you can educate stakeholders, educate customers on what is the real value and what are the challenges that we face right now? If we do nothing or the status quo is kept, they start to understand that, and I think that that you can actually change peopleโs views and, and show that private investment is actually needed and beneficial.
Education starts with explaining everyone whatโs happening with their water
Antoine Walter: And how would you educate them?
Henry Cordes: Part of it is really just explain to them whatโs happening in their own community. Weโve invested, for example, in utilities where people in the community donโt even know where their utility plant is. It may be a small community, 200 people, 300 people, they donโt know where their wastewater treatment plant is.
Mm-hmm. , even if itโs just around the corner behind some trees. Part of it is that, and then once you show them actually thereโs real infrastructure, thereโs physical equipment in the ground that needs to be maintained and invested in, and then you can show them, actually, you donโt see it, but right around the corner is totally septic, wastewater treatment plant.
Then they start to realize! And I think itโs just through engagement messaging and continuing to kind of tell the story of the state of the water infrastructure in this country that you can kind of begin to change the minds , and people begin to really value the infrastructure.
Both Centralized and Decentralized Water are interesting investment opportunities
Antoine Walter: One of the red threats from all the conversations I had so far today is that maybe the future isnโt really for the centralized utility anymore, and itโs going much more in direction distributed.
Up to the point that we might be seeing like point of use, point of entry treatments. Isnโt that more difficult to grab as an investor? Because something central, thereโs one asset and you invest in that asset. When it becomes distributed, then you have like a multitude of assets which you could be investing in, following in. For you, does it make your work more complex?
Henry Cordes: I think there are opportunities to invest in both themes. Thereโs a role for centralizing regionalizing utility assets. Thereโs also an opportunity for decentralized assets that make a lot of sense. And we like to invest first and foremost in companies that can facilitate that investment.
One of the opportunities with decentralized infrastructure is the opportunity to actually, to achieve some significant scale and economies of scale through the deployment of decentralized assets. So I would say that they both present interesting, slightly different opportunities.
Sciens Waterโs investment thesis is not common
Antoine Walter: Sciens waterโs investment thesis is not that common.
If you look at the people investing in the water sphere, you have people investing in venture job and which go in the early stages of the companies, most of them being technology companies. And more and more people try to avoid hardware and really go into the software solutions, machine learning, ai, and theyโre incredible companies in that sphere, not judging at all.
What attracted you in that other sphere of hardcore hardware? Utilities, consolidation of utilities and building, from the grassroots.
Henry Cordes: Part of it is the limited competition for those opportunities, particularly sort of below a certain threshold. Thereโs a lot of capital looking for infrastructure.
Antoine Walter: No competition is not necessarily a good news.
Maybe itโs simply not interesting.
Sciens Water gets the ball rolling for larger investors to jump in later
Henry Cordes: Competition is really a function of scale more than anything. What we like to do is find those opportunities that maybe subscale for larger investors who, want core infrastructure assets, for example, but theyโre not gonna look at an opportunity thatโs below a hundred million, 200 million, okay?
Or even in many cases, much larger. But can we find opportunities where we can identifying really strong management teams aggregate some of those assets and those opportunities through a platform approach that can build something that is of interest and become scalable for those larger investors?
Thatโs a lot of work, right? So thereโs a reason that thereโs less competition. Is that it takes a long time patient capital and the right management team , and a lot of those things are particularly hard to find I think, in the water industry, just given some of the fragmentation and the lack of managerial capabilities.
It just comes with being a subscale business, so itโs not easy. The opportunities are not everywhere, but I think if youโre patient you can find them. And thatโs really what weโre trying to do across the portfolio, itโs build those platforms that then larger investors with potentially lower cost capital will find attractive as more core infrastructure type of investments.
Can Private Capital help consolidate the scattered municipal water sector?
Antoine Walter: Talking of this consolidation element this morning, during the keynote of Seth Siegel, he mentioned this, 52,000 utilities in the US. Itโs funny because I had a chance to read his book to see his conferences. So when that comes up, usually when you look at the people, they get really shocked. Like, what? So many, like really the word hasnโt spread that much yet.
And when I had the conversation with him on that microphone, he said that if you reduce it to 5,000 to 500, itโs might be more approachable, but, Probably still too much. So if we go into that consolidation of the sector, what is the role you can play as a strategic investor in that work of consolidation?
Henry Cordes: Weโre doing that right now with one of our, one of our portfolio companies, Central States Water Resources, which is acquiring small, privately owned utilities in need of capital improvements to meet regulatory requirements. We, right now play that role by bringing the capital, bringing the management team with the capabilities to run a scaled utility, even if itโs numerous disparate small systems.
And part of that is by leveraging a lot of the great technologies that are. Exist today as you ran for a lot of companies in both hardware and software that really make that possible.
Right now, thatโs the role that weโre playing. That role may evolve as the opportunities to evolve, as I expect it will and may become an opportunity to bring private capital to the municipal segment.
And that can take a number of different forms. Right now, that can be quite a challenging thing to do is I think, many of the investor and utilities find itโs a long process, but weโre hopeful that those opportunities may become more frequent and more efficient. We think itโs gonna evolve over time and weโre sort of just getting started.
What will generate the biggest impact?
Antoine Walter: And if you look into the future and into the next five, 10 years, what will tell you that you had a positive impact as Sciens water?
Henry Cordes: Itโs interesting, you bring that up because thatโs obviously something we spend a lot of time on is, and one of the things we really like about water is the impact is very measurable.
You can measure how much waterโs going in, whatโs in the water, how much waste water is coming out, whatโs the quality of that waste water? And then taking that information, which is fairly scientific and you could say, okay, we removed how many tons of ammonia, for example, and thatโs great.
What does that actually mean for the environment? What does that mean for people living in the community?
And so thatโs what weโre really working on as the next step of quantifying our impact is how can we measure the impact on the environment. From that removal of pollutants, how can we say, look at what was the community before we invested?
What was the state of the community after we invested? And thatโs not easy because often the data you need is sort of comparing before and after. Well, often you donโt have the data Before!
Josiah Cox, whoโs the CEO of Central States Water Resources, one of our portfolio companies mentioned one of the first utilities he bought was in a community of maybe 500 homes.
There was a moratorium on new building, because of the multi-week boil orders and the enforcement actions going on at that wastewater treatment plant. Since investing, that community has grown by 30% through new home building. Those are the kinds of impacts that weโre beginning, to look at and measure, and hopefully once weโve exited investment like that, we can.
Point to and say, here is the impact we had on the people living in these communities from the standpoint of health, the environment, economic growth, and start to quantify those. Thatโs gonna be how we try to do that.
To some extent, Sciens Water is an Impact Investor
Antoine Walter: So if youโre heading sustainability and impacts, does that mean that science water is an impact investor?
Henry Cordes: Impact investor can mean a lot of different things to a lot of different people. We donโt necessarily lead with that as a sort of organizing principle of how we invest, but it is something that we set out to do intentionally when we invest is. Portfolio companies that do have an impact and that we can measure however people want to define us, thatโs okay.
What is the impact gonna be of this investment opportunity? Does it meet the criteria that we have to invest and solve the big challenges? Thatโs sort of the primary mission of our fund, is solve the big challenges facing the US water sector.
Antoine Walter: I could keep that going for a while, but have to be cautious of your time as well, so I propose you to round it off with two rapid fire questions, if thatโs fine for you. Yeah.
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Rapid Fire Questions
the first is, whatโs your favorite project youโve been involved in and why?
Henry Cordes: I would say itโs our first investment in Central State Water resources, which Iโve mentioned. Many times already, because thatโs sort of what I spend much of my time on at uh, at Sciens.
What I think has been really exciting about that is the problems. People kind of know about the problems in the abstract, but when you are actually investing through a company like Central States, you can see them firsthand. You can see. Literally the visual of the, the wastewater treatment plan that is broken.
You can hear the actual stories within that small community and you can see before or after itโs very clear, you know that, that youโre actually making a difference by improving this infrastructure and just being able to invest alongside such a amazing management team to support them through their growth.
A company that when we first invested seven. Today, 55 people. And growing, being alongside them on that journey has just been incredibly exciting and continues to be. And, and weโre very excited for where, where that goes and, and the opportunity for years to come because I think itโs, theyโve done a lot, but itโs still sort of 1% of the available market to invest in.
And, and so we think thereโs long runway there.
Antoine Walter: And last question, what is the trend to watch out for in the water sector?
Henry Cordes: The aging workforce and lack of, um, workforce coming out behind the, on the operation. And I think that the trend is gonna be twofold. Itโs gonna be one is applying new technologies to, um, be able to do things more remotely.
And, and weโre, weโre doing that across our portfolio companies is how can we leverage digital technologies to make them simpler, easier to run, require less manpower. But I think itโs also gonna be a trend of seeing the water industry lead more with technology to get younger employees in a the new workforce.
Coming through more engaged and seeing water is somewhere that is exciting to work in as other fields.
Antoine Walter: Well, Henry, itโs been amazing to speak with you and I donโt want to prevent you from attending your own event, so, Thanks a lot and talk to you soon!
Henry Cordes: Thank you very much!
Other Episodes:
