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Several investors in Britain’s Thames Water Utilities cut their investments last year.
According to information released in December 2023, Church Water Investments, part of the UK’s largest private pension fund, the University Pension Scheme, has lost 62% of the value of its holdings as of March 2023. Reduced.
Thames Water is a private sector utility that provides water services to 16 million people in Greater London.
Thames Water’s USS shares were valued at: It totaled £364.4 million ($464.65 million), up from £955.8 million ($1.218 billion) last year. Church Water Investments is currently Thames Water’s second largest shareholder, with a 20% stake in the water utility’s parent company, Kemble Water Holdings.
The company’s largest shareholder, the Ontario Municipal Employees’ Retirement System, will write down the value of its investment by 30% in 2022, including Japan’s GPIF on whether to invest more money in the struggling utility company. We were in discussions with institutional investors. OMER declined to comment on the recent devaluation by his USS.
“The challenges facing the Thames are the manifestation of decades of historic underinvestment and, more recently, the significant financial impact of rising energy prices and other inflationary cost pressures,” a USS spokesperson said. officials said in a statement to the CIO. “However, we support Thames Water’s latest business plan.”
The University Superannuation Scheme manages the retirement benefits of current and retired teaching staff at UK universities.managed by the fund As of March 31, 2023, it has a value of 75.5 billion pounds ($95.87 billion) and more than 500,000 members.
Red flags and other Thames problems
in “low tideIn a report by EDHEC Business School’s Infrastructure and Private Assets Institute, the institute identified three red flags about investing in Thames Water.
- “Utilities should not have been expected to behave ‘normally’ because their incentives are distorted by extremely low regulatory weighted average cost of capital (WACC), and logically they should not be able to achieve profit levels. This is because they have no choice but to take excessive risks in order to do so.” This is what the market demands. While this is true across sectors, the difference between Thames Water’s market WACC and its regulated version is the widest among its peers. ”
- “In response, Thames Water’s investors created a structure to extract the maximum amount of cash as quickly as possible, which resulted in a huge debt build-up and a need to conserve capital. 2016 It should have been clear since then that there was no possibility of further payments for many years to come.”
- “Thames Water is exposed to significant market price risk factors, which have been high and rising for a significant period of time. This has resulted in an increasingly high market risk premium. Therefore, the discount rate increases and the potential for loss of value increases.”Unrecognized for years. ”
EDHEC and other reports say many of Thames Water’s problems are due to aging infrastructure.
“In some ways, the UK water sector is hostage to Victorian-era infrastructure,” Tom Atkinson, equity portfolio manager at AXA Investment Managers, said in a Morningstar report. “Its age, outdated design, and struggle to accommodate a growing population have led to two major problems in particular, leakage and contamination, which have now attracted widespread public attention.”
What does the future hold for infrastructure investment?
Infrastructure investments are popular with income investors. Morningstar says these investments have the potential to perform well because they typically provide cash dividends to investors and interest rates are likely to rise and fall in the future.
Thames Water’s problems may be unique to the company, making such a utility a poor investment for pension investors, who hold a large proportion of Thames ownership.
“The Thames fiasco was question of “This type of private market investment is appropriate for pension funds,” Keith Ambackshear, director emeritus of the International Center for Pension Management, said in an op-ed in Canadian newspaper The Globe and Mail.. “In principle, as an asset that secures future pension payment obligations., infrastructure It is necessary to realize the ideal pension fund investment.. However, the Thames example shows that this is not necessarily the case. ”
Another problem with Thames Water is that the company has not paid a dividend since 2017, and there are concerns among some investors about investing in aging infrastructure. Some of London’s water pipes are over 150 years old.
Morningstar’s Atkinson says there are other opportunities for investing in water infrastructure. Atkinson’s ideas include companies that provide water testing and treatment, irrigation and land reclamation services.
The 2024 outlook from Thames Water’s former owner, Macquarie Asset Management, states that “infrastructure has an established and attractive risk-return profile, as well as strong protective properties. This is a characteristic that is likely to benefit the asset.”
Mr Macquarie also pointed out the similarities between infrastructure investment and the energy transition, with the latter driving the former.
Despite ongoing problems with Thames Water, USS has announced its commitment to further investment in the struggling water service.
A USS spokesperson told CIO: “As long-term investors, we can patiently provide capital and be active and responsible stewards of the company.” “Whilst the value we place on our Thames investment may go up or down as part of periodic reassessments, we consider this a long-term investment, in line with the long-term needs of the scheme. We continue to believe that this is the case. We therefore stood ready to inject additional capital into the business in March 2023 and have indicated an appetite for further capital in the future.”
EDHEC said in its report that the income granted to Thames Waters was too low, halting dividend payments and increasing the utility’s exposure to negative risk factors. The report claimed investors were not comparing Thames Water to its peers. If so, the company’s flaws will be exposed.
Related article:
EDHEC Institute warns UK pensions against infrastructure investment
UK pension giant USS proposes lower contribution rates due to improved funding
UK pension moves $6.7 billion away from polluters
Tags: Church Water Investments, Infrastructure, Keith Ambachshear, Omers, Thames Water, Tom Atkinson, University Superannuation Scheme, USS
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