The way of water: Why Aetos Capital bought WestWater

Sustainable water management, especially in regions battered by the effects of climate change, is drawing Aetos Capital, a New York private equity firm, to invest in the sector.

Earlier in March, Aetos Capital acquired WestWater Research, a consulting firm that provides advice on water entitlement valuation, trading and M&A. Clients include municipalities, agriculture participants and Native American tribes.

“The combination of climate change and population flows have made water a scarce resource in the western states, and there has been a dearth of principle capital invested in the space for quite some time,” Aetos CEO Chris Allwin told PE Hub in an interview. “Our strategy is focused around increasing supply, access and building out infrastructure that will allow for increased sustainability of water.”

To grow WestWater, Aetos is looking to add more consultants and break into new markets through M&A.

Aetos was established in 1999 by the current CEO’s father, the late James Allwin. Since its founding, Aetos’ mission has been to provide institutional investors with high-quality niche alternative investment opportunities and a robust operational infrastructure, Chris Allwin said. “Investing around climate change represents a new iteration of our firm’s long-term strategy. We believe there are massive opportunities to evaluate in water alone.”

With WestWater, Aetos identified three opportunities. The first focuses on agriculture to “create water as an asset, use less of it so that it can go back towards the municipality or irrigation district to benefit the overall supply picture.”

The second window of opportunity lies around building out the above ground and below ground storage capacity, for example, replenishing aquifers “which are at dangerously low capacity.” Aquifers refer to a body of rock and/or sediment that holds groundwater. The infrastructure around replenishment of aquifers in the western states has been under-invested in, Allwin added.

The third strategy involves the monetization of underutilized water entitlements – for example, tapping into water sources in mining or energy infrastructure that are no longer in use but have high-value access to water. The opportunity to analyze those water sources and sell them back to clients, such as those in irrigation districts, appeals to Aetos.

Aetos plans to launch an investment fund focused on water assets in markets throughout the western US. The fund will focus on developing and financing projects that provide reliable and sustainable water supplies to the region, creating value for both the region and the fund.

“The economic environment of higher prices has created both an emphasis on the consulting firms to source the lower-cost water but also for the investment firms to build out infrastructure to provide increased supply of water,” Allwin said. “A lot of the folks who are harmed by a lack of access and an increased cost of water are low-income communities, and so I am thrilled at the opportunity to increase capacity.”