Background and challenge
Water is an essential and non-substitutable asset used in countless applications, ranging from drinking to farming to manufacturing. Water is also an increasingly scarce asset. So, making money in the water industry should be easy, right? Unfortunately, it is quite complicated, especially for new entrants. The market is served by a variety of established players and is often governed by regulations and, just as important, water is often not priced at its true value.
This is why a leading private equity firm enlisted L.E.K. Consulting when it was considering an investment in a startup water asset financing business. The startup had identified numerous potential water segments in which to participate, including water rights, water treatment, agriculture and aquaculture, and water utilities and infrastructure. While the majority of the water segments represented sizeable opportunities, the challenge was to identify how a relatively small and new entrant could access and succeed within each market, and which opportunities to prioritize.
Approach and recommendations
We took a complex set of diverse markets and evaluated each across a unified set of criteria related to both market attractiveness and, more importantly, market accessibility.
- Annual financed market size
- Total addressable market (based on installed base of assets)
- Expected market growth
- Degree of end-customer concentration
- Expected returns
- Ease of access to customers
- Share of market that is currently financed
- Degree of financing gaps/unmet needs
- Degree of competitive threats
Assessments were used to identify both the absolute and relative attractiveness of each potential investment area. While a few segments were deprioritized due to market fundamentals, the key determining factors were the degree of unmet need/funding gaps, availability of attractive returns, and the ability for the startup to effectively access customers.
We identified the highest-priority opportunities and developed a strategic roadmap for the startup to access each opportunity, including which customer segments to target first, how to position its financing options and the critical success factors in each market.
Following our assessment, the private equity firm moved forward with its investment. L.E.K. shared the strategic insights developed during the project with the management team, helping to guide the strategic priorities of its newly funded business.