David Henderson is an “angel” investor who focuses on one very specific sector. His Toronto-based investment firm XPV Capital Corp. puts money into companies that are developing leading-edge technologies involving water. He, and the institutional investors who provide the funds, are convinced this crucial and growing domain is going to provide excellent returns while also helping to solve many of the planet’s environmental concerns.
Why did you decide to focus on investing in companies related to water?
With population growth, urbanization and industrialization, and emerging economies going through an industrial revolution, there are tremendous demands on fresh water resources. There are not too many places now where a human can take a straw and put it in a fresh water source and drink it and not get sick. Then on the supply side you’ve got a huge infrastructure challenge.
How do you translate those trends into individual investments?
Just because there are these mega-trends, doesn’t mean there are great investments out there to be made. We did a lot of analysis to understand how water plays a role in the input and output of [industrial] processes. What you soon discover is that at every level of the value chain water is mission critical. If you don’t have the right quantity at the right quality at the right time at the right place, those processes fail, or become very economically challenged. There are all sorts of amazing companies with innovative technologies. And those [technologies] result in a positive impact on the environment, as well as providing a business opportunity.
Why do you focus on early stage pre-public companies?
The challenge in the public arena is that it is dominated by big multinationals. These groups have only a portion of their revenue in water, so you don’t get direct exposure. What a lot of investors want now is pure play exposure, and all of that is now sitting in the private sector.
Where are the exciting technologies out there now?
The first area is what we call demand destruction. Can you cut the use of energy, chemicals, or water itself, in mission-critical processes? How do you make them more efficient?
The second theme involves finding value in waste water. For example, you can extract nutrients and produce fertilizers from that waste. Filtration technologies are getting sophisticated enough that you can filter out various chemicals and things used in industrial processes.
The third area is reuse. The economics of using the same drop of water in the same location over and over again is going to win, ultimately, everywhere. If you don’t have to treat and pump water, it saves an incredible amount of energy.
The fourth area is infrastructure renewal. It is going to cost trillions of dollars to maintain and upgrade water and waste water infrastructure, and governments don’t have that capital. There are lots of technologies now where we can go in and reline a pipe without digging a hole. There are detection technologies that can tell us exactly where a leak is going to break, and then we only have to dig in that one spot. There is also a big decentralization happening with infrastructure. You can put a waste water plant in a container now and ship it anywhere in the world. That suddenly changes the whole dynamic. A lot of emerging economies are going straight to this model.
The final theme is desalination. We don’t have a shortage of water on this planet, we just have a shortage of the water we need. Today it is an energy problem, because the incumbent technologies that we use to produce desalinated water are very energy intensive. We think you are going to see a breakthrough in that area.
Would cheap desalination solve most of the world’s water problems?
Desalination is an important technology, but it is not a silver bullet. People forget that a lot of that desalinated water is not sitting beside the place where it will be used. You still have to pump it and move it. So the economics, even on cheap, low energy desalination are going to become a challenge, once you start adding in all those costs.
Is Canada on top of the game in water technology?
Canada is actually one of the global leaders in water and waste water innovation. So far, one-third of our investments are in Canada. [One reason why Canada is a leader] is that our GDP is dependent on the most water intensive industries on the planet: agriculture, mining, oil and gas, food and beverage. When water protection laws came in, it put a lot of focus on innovation to make those processes more efficient and more sustainable. What came out of that was research that ended up creating these game-changing companies.
Where else is water technology strong?
When you go to places like Norway and Denmark, you see a lot of really innovative technology. Singapore is another hub of innovative thinking. Israel and other middle eastern countries are also doing some pretty innovative things around water reuse. We have come to the conclusion that there are two areas that are rich in water innovation: Countries that have no water, and countries that have too much water. The countries that have too much water tend to have a lot of water-intensive industries, and they are being pro-active in how they manage that resource.
Do you have one company that you are most excited about?
Our companies are like our children. We love them all. The reality is, some are going to grow up and become doctors, while some may be a little more challenged.
You have young kids. Do they know what you do?
One of the proudest moments I’ve had so far was when I went and observed one of [my eight-year-old daughter’s] classes. My daughter got up and said: “I’d like to introduce my Daddy who is saving the world’s water.” I was like, ‘Wow.’
The renewable energy industry has had a tough time lately. Is that worrying for water investors?
Investors’ interest in illiquid long-term investing is certainly in a challenging state today. But our investors are all in for the long-term, so they understand this is a 50 year challenge. If anything, we are seeing the interest in our area grow because, unlike renewable energy, water has no substitute. Everything on this planet needs it to live. That is a subtle difference, but it is an important difference.
What the state of “angel” investing in Canada?
There is lots of capital, but the challenge is connecting the entrepreneur with that capital. Frankly, I think one of the true tests of an entrepreneur is to be able to find capital and get that capital into their business. I have yet to see any really fantastic companies collapse because of a lack of capital.
We are going to see a different kind of capital challenge. The banks are retrenching pretty hard. So suddenly, small and medium-sized businesses and entrepreneurs are finding it harder to get a loan. That, I would argue, is a bigger challenge than accessing venture capital.
What advice do you have for Canadian managers and entrepreneurs?
We have to start thinking much more globally. Start looking east north and west, as much as we are looking south. South is still going to be very important, but I think companies that will be successful in the future, are going to balance that much better.