In Conversation with Reinhard Huebner, Investment Manager at SKion

As part of the World Water-Tech Innovation Summit in London this year, The Water Network had the pleasure of interviewing Reinhard Huebner , Investment Manager of SKion.

Dr. Reinhard Hübner serves as an Investment Manager of SKion GmbH. At SKion, Dr. Hübner is responsible for technology-driven investments of which water sector investments are a relevant part. On behalf of SKion, he is also Chief Executive Officer or board member of several of SKion’s water portfolio companies.
 

Q1. Thank you for taking the time to talk to us, Reinhard. Would you please tell us about your professional background?

My academic and original professional background actually is in Manufacturing and Logistics. For my PhD I developed a mathematical model to optimize the design of specialty chemicals production networks.

I worked at McKinsey for eight years mostly doing operational projects in the areas of production and supply chain management. I got into the investment side of water by two coincidences.

The first one was that at McKinsey I got the chance to work on several operational projects for water utilities in the UK, the US and Australia. I found people in the industry to be exceptionally nice and liked their intrinsic motivation. Also for myself, dealing with water challenges was more rewarding than increasing the efficiency of a “random” manufacturing process.

The second coincidence was that in 2010, I got asked whether I would be interested in building up a portfolio of water investments at SKion. The chance to do this starting with a blank piece of paper and taking a very long-term entrepreneurial perspective was a once in a lifetime opportunity. And I still enjoy my job at SKion very much every day. 

Q2. Could you shortly explain the current situation of investments in the water sector?

In my personal view, the water sector is a bit hyped at the moment. With valuations reaching ranges of 12-15 x EBITDA at a time of above-average profits, there is a real risk that this is a bubble. There is a lot of money chasing and very few targets. In addition, family offices, VC/PE investors are trying to enter the water sector. If they do not know the long-term nature of the industry well enough, there is a good chance that their expectations will be disappointed at some point in time even if there is no major cyclical downturn. Many of the business plans we see show growth rates and profitability levels that are completely unrealistic.

In addition, there are not many mid-sized targets left. There has been a lot of consolidation in North America over the last decade so most companies in the 50 - 150 million revenues range have disappeared. The targets remaining in most countries tend to be in the 5-20 million revenue range. Not even within the industry are they necessarily well known. But many of them are good, privately-owned companies and quite a few of them struggle with the succession planning. So, there are targets but doing deals is more difficult with these small companies and the emotions of the owners involved. In many cases, this is no PE/VC play and also not a play for the large corporates.

Q3. What percentage of your investments are in the water sector?

SKion’s overall portfolio is much broader than water. Our largest investment is specialty chemicals company, Altana, which has roughly 2.5bn USD in revenue and is 100% owned by SKion. Our smallest investment is a 1million USD investment into a start-up in the water sector.

Over the last few years, water has been the area with the largest number of transactions for SKion. The main reason for this, however, is the fragmentation of the water industry. It is simply not possible to do one or two large investments but instead, we have to follow a buy and build a strategy that leads to a relatively large number of mid-sized transactions. 

Q4. What is your process for selecting investments in the water sector?

Our focus so far has been on companies that provide their solutions directly to the end user be it industrial or municipal customers. Hence, our targets can probably best be described as solution providers or system integrators. The direct end-user contact is important to us because it allows us to better understand our customer’s needs. We have the ambition to support novel, innovative solutions and in order to be able to do so, we need this feedback from the end user and also the ability to deliver such solutions to the customers directly. Within this subset of the industry, we are looking for companies that either have unique solutions or very strong customer relationships / market access.

Q5. What are your environmental and social goals and metrics when choosing the investments?

It is difficult to come up with a standard set of KPIs to use when assessing an investment target in the water industry as the diversity is so high. Some of the themes we focus on are energy efficiency, resource recovery, water use efficiency and decentral treatment or re-use. Whenever we look at a target, we assess the fit it has with the investment themes we care about.

A nice example is our investment into the German start-up Pyreg. It has developed a technology for thermal sludge treatment that achieves phosphorous recovery at the same time. As land application of sludge will be banned in Germany, this was important to us. We then combined this technology with a low-temperature sludge dryer that can run on waste heat from CHP engines and that our portfolio company ELIQUO has developed. This way, we are able to provide customers with a solution that thermally treats sludge without requiring an external heat source. The end product can directly be used as a fertilizer.

Another example is our investment into the Turkish company Miranda. It offers a modular and packaged system for decentral waste water treatment and re-use. It has sold systems to many countries and event to us as it’s particularly valuable that these include countries such as Rwanda, Uganda or South Africa. These sales show that the Miracell product is an attractive decentral sanitation solution. 

Q6. Do you pick investments with strong risk-adjusted returns?

I guess everybody wants strong risk-adjusted returns. Given our long-term strategy, the teams and products and solutions we invest into are more important than short term profits.

Within the water industry many component suppliers have a better risk-return profile than the system integrators or solution providers that “deal” with the end users and carry project execution risks. However, if you want to make a difference to the water sector, this is part of the industry that we believe you must be engaged in. We believe in the long-term value creation potential of this approach.

But to avoid misunderstandings: our portfolio companies show good profitability, and this is also important to us. If your customers are not willing to pay you enough for you to make a profit with the solutions and products you provide them with, then there is a good chance that there is a problem with your product offering. 

Q7. How have rapid urbanization and climate change drifted the investments in the water sector in the past couple of decades?

Both urbanization and climate change create new challenges for the water sector. Water infrastructure is built with a horizon of 100 years or more. Hence, many cities today are struggling with population growth because their infrastructure was built for a much smaller population. If you now add more extreme weather events such as strong rainfalls to the picture, the challenges get even bigger.

To deal with these challenges, on the one hand old-fashioned infrastructure investment is needed. The Tideway Tunnel in London is a great example of the kind of investments needed to deal with storm water events.

On the other hand, digitalization allows the industry to make better use of existing infrastructure. For example, there are digital solutions available today to make better use of the storm water retention capacity available in a network, avoid pump blockages or to better control and reduce non-revenue water.

From an investor point of view, this implies that software, sensors, etc. become a much more important part of the industry and hence are also an attractive field to invest into.

Q8. Do you have a special focus on any of the emerging markets in the water sector? If yes – why, if not – why?

Across our portfolio, today already we are active in many parts of the world. With respect to emerging markets, Southeast Asia, Africa and obviously India are important. Which region to focus on also depends on what part of the water value chain you are looking at.

For example, in Southeast Asia our focus currently is on growing our industrial process water treatment and waste water business via our local portfolio company MattenPlant. Recently, it has done a lot of work for clients in the food and beverage space. But it has also served clients in industries such as oil and gas, mining or power. In India, our portfolio company Paques, is very active in industrial wastewater treatment. Miranda has been active in a number of countries in Africa selling its decentral waste water treatment solution Miracell.

Our strategy with respect to these markets will be adapted to changing market requirements but also to new solutions that we may add to our portfolio going forward. 

Q9. It would be great to hear about some of tthe successful investment stories. Could you share your favourite?

The answer to this question depends very much on how you define success. If you look at successful PE or venture like water technology investments, there are not that many great success cases.

Recent successful exits that come to my mind, for example, are NanoH2O being acquired by LG Chem, JWC Environmental being acquired by Sulzer, the privatization of Pure or the recent listing of Evoqua.

Personally, I care much more about those cases where a company has made a fundamental difference to how we do things in the water industry. In this context, companies like Cambi or Trojan UV but also our portfolio company Paques comes to mind. 

Q10.  Finally, what would be your advice for impact to fund managers?

The water sector is not an easy sector to invest into because of the high fragmentation of the industry and the very long-term time horizons that people (have to) take. So, while water obviously lends itself very much to impact investments, the viability very much depends on the time horizon a fund can take. If the time horizon is 3-6 years, it will not be easy to generate the returns a fund needs to cover both its costs and provide the investors with an attractive return. This, in particular, holds for investing into (early-stage) water technology companies.

Another challenge is that the willingness to pay the true costs for water or sanitation in many parts of the world is much smaller than the willingness to do so for services such as mobile phones or internet. But there have been real success stories based on micro-credit programs but also based on providing services such as water kiosks or communal sanitation facilities.  

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