The Asian Development Bank (ADB) is investing up to $20 million for its first-ever investment in a private equity fund solely focused on supporting the development of water-related infrastructure in the region.
ADB’s Board of Directors approved the equity investment in the Asia Water Fund which will invest in water and wastewater assets in the People’s Republic of China (PRC) and across Southeast Asia.
“By taking part in the fund, ADB will catalyze more private investment in mainstream water sector development in Asia, which in turn will help spur sustainable growth and improve living standards in the region,” said Robert van Zwieten, Director in ADB’s Private Sector Operations Department.
Fresh water stocks around the world are under siege from growing population, industrialization and urbanization, changing food consumption patterns, pollution and climate change. In Asia, about half a billion people still lack access to potable water and 1.8 billion are without access to decent sanitation. With global demand for water expected to double every 20 years, there is a critical need for new infrastructure. ADB has estimated that about $8 billion a year is needed to meet the target for safe drinking water in Asia and the Pacific over the next decade.
The fund, which will be owned by a subsidiary of the AmInvestment Group with a more than 24-year track record of private equity investment, is targeting investments in municipal, industrial and rural water and wastewater treatment plants, and water rehabilitation. About 70% of its portfolio will be in the PRC, and the rest in Southeast Asia.
The target fund size is $100 million, with an anticipated first closing of $40 million this year. It will inject around $5 million to $10 million per investment.
“The fund will aim to mitigate risks through geographic and sector portfolio diversification, by contracting reputable engineering groups, by investing in companies with high corporate governance and financial management standards, and by seeking a majority ownership stake in each investment,” said M. Shin Kim, Head of Private Equity in ADB’s Private Sector Operations Department.
It will seek out projects that engage engineering companies with strong proven track records in the sector and a willingness to invest their own equity, helping to generate both strong returns and greater private sector participation. The opportunity for increased private involvement in water has increased over the past 2 years with government finances strained by the global crisis, and the regulatory environment in Asia gradually moving towards full-cost recovery, making such investments more cost-effective.
“Private water investments which help alleviate Asia’s impending water crisis while making a sustainable return to investors create a win-win solution for all stakeholders,” Mr. Kim added.
ADB’s investment will be kept at a level which ensures it does not exceed a 25% stake in the fund, or become the largest stakeholder. The International Finance Corp. has also committed to invest up to $20 million. The fund will have a 10-year life, with two 1-year extensions for divestment.