5 questions with David Henderson

About 75% percent of Earth may be covered by it. But as a venture investment, water companies haven’t historically attracted the funding levels of other cleantech sectors, such as solar or biofuels.

XPV Capital is looking to change that. In a discussion with PE Week Senior Editor Joanna Glasner, XPV Managing Director David Henderson recently detailed why the Toronto firm is making water-related investments the top priority for its new cleantech fund.

Q: How much are you investing in water-related businesses?

A: We currently have $25 million under management, and three out of five investments are water-related. The current fund is predominantly our own money plus a group of local high-net worth individuals and families that we have been managing since 2003. We are setting up a more traditional cleantech VC fund which would focus primarily on water opportunities. We expect the majority of our deals going forward to be in that sector.

Q: What’s the competition like to fund companies in the water space?

A: Rounds are getting more competitive, with fundable companies often receiving multiple term sheets, as was the case in EnviroTower (which develops cooling tower water treatment technology) and Pionetics (which makes a system for purifying water using electricity), two of our portfolio companies. With more news reports of water shortages and contamination issues, conglomerates such as General Electric and Siemens are increasing their exposure to the water industry through acquisitions. It was to be expected that VCs would attempt to participate in the sector’s growth and that competition for good deals would increase.

Q: How does the water business compare to other sectors of cleantech?

A: Water companies, with a few exceptions, tend to be less capital intensive at the early stages of their development than cleantech companies operating in solar, wind or alternative fuels. We don’t see many early stage water companies raising $25-million-plus rounds, so while deal count is lower in the water sector than other sectors, looking at dollar figures does not give you a full picture.

Q: How do you see water shaping up as an area of focus for VCs?

A: We see a very bright future for water as a venture investment sector. We’re seeing a lot of technologies that should be ready to take to market within 18 months, and also quite a few innovations that will be ready within five years. We also forecast a healthy exit environment. The strength of M&A activity over the past five years—with such companies as GE, Siemens and Pentair—lead us to believe that innovative water companies will be in high demand.

Q: You recently returned from a trip to China. What kinds of water investment opportunities do you see there and in other emerging economies?

A: The growing imbalance between water supply and water consumption, further complicated by significant contamination issues, will drive growth within the water industry in China and other developing nations.

We are seeing tremendous opportunities for decentralized water treatment, a relatively new concept in the water industry. Considering that up to 90% of surface water in China is deemed contaminated, and that an estimated two-thirds of the population has no centralized sewage treatment facilities, there is a need for technologies that can treat water where it is consumed (referred to as Point of Use water treatment, or POU). We believe that China will leapfrog in water treatment technology, meaning that instead of waiting for proper infrastructure to be put in place, middle class families will take matters into their own hands and install POU water treatment systems in their homes.