Water reuse is an increasingly important measure for industries, cities, and societies at large to secure a continuous supply of water. This provides a solid and expanding market for wastewater treatment technology companies. QStone Capital acts as a long-term finance partner to provide these companies with growth capital in the format of corporate finance as well as project finance. We interview its Founder and Managing Partner Jeroen M. Tielman, to learn about the work his firm is engaged in and how it can contribute to achieving the Sustainable Development Goals.
Question: Firstly, we would like to know briefly your career path and your current role in QStone capital.
Answer: I worked with ABN AMRO Bank in Amsterdam and New York during the first 14 years of my career covering capital markets, corporate finance M&A and asset management. Next, in 2000 I founded and ran FundPartners, which designed and developed (pension) investment solutions and was backed by PGGM as a financier and launching customer. After this company was acquired by NIBC, I joined the management board of a pension asset manager, which later was taken over by APG. Subsequently, I founded and ran IMQubator, a hedge (and private equity) seeding fund, and backed with €250mln by APG for a 7-year term. In 2016 I founded QStone Capital, which develops and manages SDG 6 water re-use investment projects and converts selected innovative water re-use technologies into cost savings for project owners (mainly in India and Europe) and attractive returns for investors.
"Of the global asset management market of US$80 trillion, about $30 trillion is managed according to some form of sustainable standards"
Q.- QStone capital connects investors with wastewater treatment technology companies and projects, which deliver on SDG 6. To what extent is there an appetite for investment opportunities that are SDG compliant?
A.- There is a clear momentum with institutional investors embracing sustainability not only as one of their main criteria for investing but increasingly also for performance measurement. The belief that adopting sustainability would reduce financial return is mostly behind us and is being replaced by a belief that the combination of solid financial and sustainable performance is mutually reinforcing as a consequence of common re-pricing of investments associated with environmental risks. Out of the total global asset management market of US$ 80 trillion, about US$ 30 trillion is managed according to some form of sustainable standards. However, sustainable investing is a broadly used term in the investment management industry and it often is limited to the exclusion of companies which are being considered as clearly in conflict with generally accepted Environmental (e.g. no coal mining industry), Social (e.g. no child labour) and/or Governance norms, together referred as “ESG”. Targeted investments specifically addressing the UN defined Sustainable Development Goals (“SDGs”) are a still relatively small – but strongly growing – part within the overall area of sustainability investing. These investments specifically addressing one or more SDGs are referred to as “impact investments”. However not all SDGs provide an attractive risk/return profile. Most of the ‘bankable’ SDGs however can be implemented via private capital investments as opposed to mainstream public equity and bond markets. Some professional investors however lack the skills to allocate private capital (sometimes related to special project companies only) and allocate through specialized asset managers. Investing directly in projects allows investors to provide the most impact while enabling them to control risks and returns in a more controlled fashion. Finally, we see a tremendous opportunity for asset managers and other professional investors to co-develop scalable SDG projects. Again, this requires the commitment and determination of investors to develop both the skills and the network required to implement this. It is the clear belief of QStone Capital that SDG 6 (clean water and sanitation) provides a scalable and rewarding investment opportunity for investors willing to have an active role in actively guiding innovative water tech companies in co-developing water re-use projects.
"The current health crisis underlines that individual basic health is even more important than before to increase one’s resilience"
Q.- You consider the SDGs an opportunity to identify technology-driven investment proposals, such as in the area of wastewater processing. What do you think will be the future in this area in developing and developed countries?
A.- Treating waste water for re-use in some cases in combination with the “mining” of specific ‘pollutants’ for re-use, provide a deep and widely replicable investment opportunity for professional investors. We put a clear emphasis on connecting innovative (but commercially proven) water ‘re-use’ technologies developed by SME’s within selected water re-use themes, sometimes serving other themes as well like for example clean energy. Obviously growing economies where growth goes hand in hand with increased water demand - and water stress - is an area of interest to apply innovative water re-use technologies. This is especially the case when it is accompanied with increased environmental scrutiny and supervision. One example is the textile industry in India where a tightened regulatory regime requires zero liquid discharge and hence closed-loop water re-use cycles as the overall norm. Investing in technologies that enable ZLD would make these investments fully SDG compliant. QStone has recently co-founded a JV in India with local production of water treatment installations based on Dutch technology combined with local sales. At the same time, we observed that regulations and supervision on the discharge of wastewater produced by a specialty textile producer in a European country were less strict than in India. Another example is the decentralized treatment of sewage water into re-usable water for industries like for example the construction (for concrete) or power industry (cooling water). Water re-use here has a two-sided economic base: avoiding costs of expanding infrastructure for traditional end-of-pipe STP’s and generating revenues of selling water to third parties. Depending on the technology used, the integrated costs per M3 water treated are considerably less than the sum of pollution charges & revenues of water sales. We are currently developing and comparing business cases of a few different technologies. The business case depends on several local factors, where for example the reliability of the technology in providing an uninterrupted provision of re-usable water has value as well. A third example we are exploring is a combination of two technologies to treat sewage sludge in subsequent steps into forms of bio-fuel. This business case in Europe depends to a large extent on local CO2 emission charges or ‘gate fees’ for discharging sewage sludge, which vary from country to country in the EU. Furthermore, the business case can be expanded to include the avoidance of early closure of modern coal fired power plants where even the current use of the controversial use of biomass can be replaced by CO2 neutral ‘bio-coal’ produced from sewage sludge. The latter is often being disposed via waste incinerators most of which are already operating at maximum capacity.
"Treating wastewater for reuse and mining specific ‘pollutants’ for reuse provide an investment opportunity for professional investors"
Q.- Governments and development organisations have identified the need to engage the private sector to embrace sustainability. What is needed to create enabling environments for SDG compliant investments?
A.- Governments and development organisations seem to think on quite an abstract level and might apply different criteria based on political objectives. At QStone Capital we only apply two criteria when assessing water-related investment opportunities at the grass-root level: risk-return and unambiguous SDG 6 compliance. Here the financial merits in itself already should be able to justify an investment, with on top of that an undisputed ‘impact’. We have been confronted with quite some red tape, lengthy engagement processes with development agencies without much result. Also, we noticed that some of the development agencies look at projects from a traditional banking loan point of view with an overall emphasis that risks are to be minimized. We think that more risk-bearing investment capital should be available for the development stage of an investable project as a kind of seed capital. This seed capital can be paid back with a premium to the development agency if and when the project gets into the next “capital acceleration phase”, i.e. when receiving capital from private investors.
Q.- What do you see as the role of PPP business models in achieving SDG 6?
A.- We argue that water projects need to have a strong economic base enabling it to pay market-rate returns to investors. Public entities can provide guarantees on risks that cannot be hedged in private markets at reasonable rates like off-take risks and political risks. Projects with long pay-back periods are obviously more in need of getting these guarantees. Other than that, public entities could provide seed capital for developing water projects with solid economics partly based on the use of innovative and efficient technologies. Other than this, public entities could provide ‘first-loss capital’ to accommodate private capital for projects with a less solid business case.
Q.- Do you think the water sector could harness a larger share of financing targeted for climate adaptation and mitigation?
A.- Yes, I certainly do. For this to materialize we need both active development of investable projects and we need to identify specific ‘water & climate’ themes to be addressed with climate-related financing. Two main chapters could be distinguished for climate adaptation and mitigation: a) protection against flooding and b) protection against water stress. At QStone we have a focus on the latter, where scalable innovative technology for re-use (i.e. circular economy) is key.
"We only apply two criteria when assessing investment opportunities at grass-root level: risk-return and unambiguous SDG6 compliance"
Q.- How do you think the current global health crisis might affect investments in wastewater treatment solutions?
A.- The current health crisis underlines that individual basic health is even more important than before to increase one’s resilience. The availability of clean water and good sanitation is an important element for this. According to the WHO more than 800,000 people in low to middle-income countries die each year as a consequence of inadequate water and sanitation. In addition to possible food shortages in low-income countries because of disrupted supply lines, the need for waste water treatment solutions to reduce health hazards will increase.
Q.- What is the most effective way to scale new water treatment technologies?
A.- It starts with identifying scalable water re-use themes preferably related to industrial parties. This could be for example either an internal re-use of water at a textile plant confronted with ZLD requirements or for example a power plant taking in sewage water to convert it into cooling water and using the sludge for additional energy production. Second, for each theme innovative (but proven) technologies would need to be identified not only based on their technical merits but also based on their cost-effectiveness. Thirdly, we need more seed capital to translate these technologies into concrete economic and impact merits. Fourth, early interaction with capital providers should result in an optimal finance structure where capital would be used to finance one or more of the different elements of what is commonly referred to as a ‘Build Own Operate Transfer’ (BOOT) structure. Finally, all of the above require active involvement of private capital right from the beginning. This should be provided by investors willing to redefine their role from being a ‘selector’ of investment opportunities developed by others, towards being a ‘producer’ of their own investments delivering premium returns and solid impact.