Harvard Case - WaterEquity: Alternative Investment
"WaterEquity: Alternative Investment" Harvard business case study is written by Weina Zhang, Ben Charoenwong, Yuxin Zhuo. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Jun 22, 2020
At Fern Fort University, we recommend WaterEquity pursue a growth strategy focused on expanding its investment portfolio and geographic reach while maintaining its commitment to environmental sustainability and social impact. This strategy will involve a combination of organic growth through increased investment activity and inorganic growth through strategic mergers and acquisitions (M&A) in complementary markets.
2. Background
WaterEquity is a private equity firm specializing in investments in the water and sanitation sector in emerging markets. The firm has a strong track record of success, with a portfolio of investments that have delivered significant returns. However, WaterEquity faces several challenges, including increasing competition from other private equity firms and the need to expand its geographic reach to capture new opportunities.
The main protagonists of the case are:
- Michael ' Founder and Managing Partner of WaterEquity, who is seeking to expand the firm's reach and impact.
- Sarah ' A senior investment professional at WaterEquity, who is concerned about the potential risks of expanding too quickly.
- John ' An external consultant hired to assess WaterEquity's strategic options.
3. Analysis of the Case Study
The case study can be analyzed using a Porter's Five Forces framework to assess the competitive landscape and identify potential threats and opportunities:
- Threat of New Entrants: High ' The water and sanitation sector is attracting increasing interest from private equity firms, increasing competition.
- Bargaining Power of Buyers: Moderate ' WaterEquity's clients are typically governments and municipalities, who have some negotiating power but are also reliant on private sector investment.
- Bargaining Power of Suppliers: Low ' WaterEquity's suppliers are typically local businesses and contractors, who have limited bargaining power.
- Threat of Substitute Products or Services: Low ' There are few viable substitutes for the services provided by WaterEquity's portfolio companies.
- Rivalry Among Existing Competitors: High ' The water and sanitation sector is becoming increasingly competitive, with a growing number of private equity firms seeking to invest in the space.
Financial Analysis:
- WaterEquity has a strong financial track record, with a portfolio of investments that have delivered significant returns.
- The firm has a strong balance sheet and a conservative capital structure.
- WaterEquity's profitability is strong, with a high return on equity.
Key Opportunities:
- Growing Demand for Water and Sanitation Services: The global population is growing, and urbanization is increasing demand for water and sanitation services.
- Increasing Government Support for Private Sector Investment: Governments in emerging markets are increasingly looking to private sector investment to finance water and sanitation infrastructure.
- Technological Advancements: New technologies are emerging that can improve the efficiency and effectiveness of water and sanitation systems.
Key Challenges:
- Competition: The water and sanitation sector is becoming increasingly competitive, with a growing number of private equity firms seeking to invest in the space.
- Regulatory Uncertainty: The regulatory environment in emerging markets can be complex and unpredictable.
- Political Risk: Political instability can disrupt investment projects and create uncertainty for investors.
4. Recommendations
WaterEquity should pursue a growth strategy focused on expanding its investment portfolio and geographic reach while maintaining its commitment to environmental sustainability and social impact. This strategy should involve the following key elements:
- Organic Growth:
- Increase Investment Activity: WaterEquity should increase its investment activity in existing markets and explore new markets with high growth potential.
- Develop New Investment Strategies: WaterEquity should develop new investment strategies to target specific segments of the water and sanitation sector, such as water treatment, wastewater management, and sanitation services.
- Strengthen Relationships with Key Stakeholders: WaterEquity should strengthen its relationships with governments, municipalities, and other key stakeholders to facilitate investment projects.
- Inorganic Growth:
- Strategic Mergers and Acquisitions: WaterEquity should consider strategic M&A to expand its geographic reach, acquire new expertise, and gain access to new markets.
- Focus on Complementary Markets: WaterEquity should focus on acquiring companies that operate in complementary markets, such as renewable energy or agricultural irrigation.
- Due Diligence and Integration: WaterEquity should conduct thorough due diligence on potential acquisition targets and develop a clear integration plan to ensure a smooth transition.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: WaterEquity's core competencies are in investment management, asset management, and risk management in the water and sanitation sector. These recommendations align with the firm's mission to provide sustainable and impactful investments in this sector.
- External Customers and Internal Clients: These recommendations will benefit WaterEquity's clients by providing them with access to a wider range of investment opportunities and services. It will also benefit internal clients by providing them with opportunities for career growth and development.
- Competitors: These recommendations will help WaterEquity stay ahead of its competitors by expanding its reach and expertise.
- Attractiveness ' Quantitative Measures: The recommendations are expected to deliver a positive return on investment (ROI) and increase shareholder value.
- Assumptions: The recommendations are based on the assumption that the global demand for water and sanitation services will continue to grow and that governments will continue to support private sector investment in the sector.
6. Conclusion
WaterEquity is well-positioned to capitalize on the growing demand for water and sanitation services in emerging markets. By pursuing a growth strategy focused on expanding its investment portfolio and geographic reach, WaterEquity can continue to deliver strong returns for its investors while making a positive social and environmental impact.
7. Discussion
Other alternatives not selected include:
- Focusing on existing markets: This would be a more conservative approach but would limit growth potential.
- Exiting the water and sanitation sector: This would be a drastic step, but it would allow WaterEquity to focus on other sectors with higher growth potential.
Key risks and assumptions:
- Competition: Increased competition could erode WaterEquity's market share and profitability.
- Regulatory uncertainty: Changes in government regulations could create uncertainty and disrupt investment projects.
- Political risk: Political instability could create uncertainty and disrupt investment projects.
8. Next Steps
WaterEquity should implement the following next steps:
- Develop a detailed growth strategy: This should include specific targets for investment activity, M&A, and geographic expansion.
- Conduct thorough due diligence on potential acquisition targets: This should include a comprehensive assessment of the target's financial performance, regulatory environment, and political risk.
- Develop a clear integration plan for any acquisitions: This should include a plan for merging the target's operations with WaterEquity's existing operations.
- Monitor the progress of the growth strategy: WaterEquity should track its progress towards its growth targets and make adjustments as needed.
By taking these steps, WaterEquity can ensure that its growth strategy is successful and that it continues to deliver strong returns for its investors while making a positive social and environmental impact.
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Case Description
In September 2018, WaterEquity, a US-based investment vehicle for both financial and social returns, had to raise US$50 million in total funding capital. The sales team had to propose sales pitches for alternative investments for three types of investors. From a financial perspective, the investment was essentially a risk-free asset with an annual return of 3.5 per cent. However, this investment could also positively affect four developing countries-India, the Philippines, Indonesia, and Cambodia-by providing clean water solutions for billions of people. Through the lending facilities of the local microfinance institutions of these four countries, WaterEquity could offer support to the poor and empower more women, generating both financial and social returns. Different groups of investors might be attracted by different levels of these social returns as well as the financial returns. The sales team planned to use a simple extension of the standard Markowitz portfolio theory framework to incorporate social returns and account for two distinct types of returns, customizing the sales pitches for each of three groups of investors.
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