Brennan Investment Partners Slide Deck Final 2009 (3)
1. Brennan Investment Partners LLC-Investing in Global Water Stocks
William S. Brennan, Portfolio Manager
October 2009
The Case for Water Investing
FOR FINANCIAL PROFESSIONAL USE ONLY
2. Disclaimer
•The Case For Water
NO ECONOMIC SUBSTITUTE
LOW CORRELATION TO THE MARKET
SCARCEST COMMODITY – REMAINS ABSURDLY UNDERVALUED
SUPPLY/DEMAND –NOT AVAILABLE WHERE IT IS NEEDED MOST
MOST CRITICAL INDUSTRIAL INPUT TO THE WORLD’S ECONOMY
FUNDAMENTAL DISCONNECT BETWEEN WATER PRICES AND THE TRUE COST OF WATER
You should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. Visit our website at www.brennaninvestment.com or call 610-727-
6828.
Past performance does not guarantee future results. In addition, investing in foreign securities involves more risk than just U.S. investments, including the risk of currency fluctuations, political and
economic instability and differences in financial reporting standards. There may also be heightened risks investing in noninvestment grade debt securities and the use of options, there are also
risks associated with investing in small and medium sized companies. Non-investment grade debt securities, i.e., junk bonds, are subject to greater credit risk, price volatility and risk of loss than
investment grade securities. Options contain special risks including the imperfect correlation between the value of the option and the value of the underlying asset. An investor cannot invest directly
in an index. This material has been prepared for a private presentation. It is for informational purposes only, is not for distribution to investors and does not constitute investment advice or public
or private offering or recommendation of any kind. This document and its content are the property of Brennan Investment Partners LLC (BIP) and cannot be reproduced or transmitted to any
person in any form or by any means in whole or part without prior written consent from BIP. Portfolios are subject to stock market risks and significant fluctuations in value. The Investment Adviser
may not be able to sell portfolio securities at an optimal time or price. Concentrated portfolios that invest a substantial portion of their assets in a particular industry carry a risk that a group of
industry-related stocks will decline in price due to industry specific developments. Companies in the same or similar industries may share common characteristics and are more likely to react
comparably to industry specific market or economic developments. The Portfolio may invest in the equity securities of small and medium size companies. Small and medium-size companies often
have narrower markets and more limited managerial and financial resources than do larger, more established companies. As a result, their performance can be more volatile and they face a
greater risk of business failure, which could increase the volatility of the Portfolio’s assets. The Portfolio may invest in foreign securities, which can carry higher returns but involve more risks than
those associated with U.S. investments. Additional risks associated with investment in foreign securities include currency fluctuations, political and economic instability, differences in financial 2
reporting standards and less stringent regulation of securities markets. In a non-diversified Portfolio, more of the Portfolio’s assets may be concentrated in the common stock of any single issuer,
3. •Introduction to Brennan Investment Partners
Value-based investment firm targeting clients with two portfolios in the water and water related industries:
Global Water Solutions composite uses a multi-cap value investment strategy to invest exclusively in
companies offering water and water-based environmental and ―green‖ solutions.
Global Water Relative Yield Portfolio; a concentrated global portfolio with an emphasis on yield.
Founded in 2008, our long bias investment approach utilizes both qualitative and quantitative methods to
manage the portfolios.
Investment team has an average of 18+ years of experience in the water field.
Team culture and investment philosophy provide research synergies and a collegial environment, seeking to
generate returns and manage risk.
Aims for annualized absolute return that outpaces the market over full market cycles.
Client base comprised of high net worth individuals, family offices and institutions.
Headquartered in Pennsylvania.
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4. Investing in Global Water Infrastructure
Industry Overview Global Water Infrastructure Snapshot
• $700 Billion industry comprised of 550+ publicly traded Industry Size ($Billion) $600-700
companies
Publicly Traded Water 550+
• Global industry growth rate: 6-8% Developed countries / 10- Companies
15% emerging countries Aggregate Market Capitalization $2 Trillion
• Stimulus spending in U.S., EU and China is accelerating Developed Country Growth 6 – 10%
present growth rates. Rates
Emerging Market Growth Rates 15%
The Case for Investment
Chinese Growth Rate 15 – 20%
• Water is a unique commodity with no substitute or alternative
and high future demand. Since 1989, water prices have risen
faster than oil with minimal volatility Water Oil
• Global water infrastructure suffers from under-investment— Annual Price 6.3% 6.2%
although global spending in the space has tripled since 2004. Increase 1989 –
US and China account for 50% of global water spending. 2008
Annual Price 4.2% 42.9%
• Asia and emerging markets infrastructure build out/ U.S. water Volatility
infrastructure replacement representative of global water
spending activities. 4
5. Investment Themes
Water Overview - Market Size & Profile of Companies
Water Subsectors within the Portfolio
Subsector Revenues ($B)
• Industrials – Approximately 52.1%
US Global
• Membranes Utilities 27 325
Treatment 24 125
• Filters
Industrial treatment 22 70
• Desalination Infrastructure 12 30
Valves 8 35
• Chemicals
Filtration 12 25
• Pumps/motors/valves Pumps 5 25
• Emerging technologies Other equipment 24 58
Total 134 693
• Water Utilities-Approximately 42.5%
• Water Dependent Themes – Approximately 5.4%
• Agriculture, Hydroelectric
• Source: Brennan Investment Partners LLC 5
6. The Investment Thesis For Water-Utilities and Industrials
Returns of U.S. Water Utility and Water Industrial Stocks vs. Major
Water Utilities and Industrials Overview Indices
Water Utilities and Water Industrials have outperformed in each period
with no negative returns
• Low correlation investment that has
outperformed the broader indices 1989 – 1993 – 1998 – 2003 – 1989 –
Sector/Index
1993^ 1998 2003 2008 2008^
• US water rates are projected to increase 2-5x
over the next five years Water Utility Stocks 14.78% 18.51% 6.36% 6.36% 796.91%
• Water Utilities are the hub of most water Water Industrial
infrastructure spending 18.02% 16.09% 9.38% 7.25% 751.84%
Stocks
S&P 500 Energy
• Increased utility spending equals increased 6.85% 16.60% 6.56% 13.43% 625.82%
Index
revenues for water industrials
S&P 500 Health
8.53% 35.04% .14% -.73% 505.55%
Care Index
• As water utilities increase spending, water rates
rise DJIA 15.44% 22.28% 4.55% -1.12% 401.17%
S&P 500 14.54% 24.05% -057% -2.19% 282.92%
• Increased capital spending justifies higher rates
and higher returns for the utilities S&P 500 Financial
12.64% 27.09% 5.91% -12.48% 265.38%
Index
NASDAQ Composite 15.28% 23.47% -1.45% -3.95% 272.45%
Data Source: Bloomberg. All returns are with dividends reinvested
*Equally weighted list of all publicly traded U.S. water utility stocks that existed throughout 1989 – 2008
^4 year and 19 year periods due to limitations in Bloomberg pricing history
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7. Where We Invest
Regions where we invest
• US
Water
• Asia Region Country subsector &
opportunity
• Canada
• South America
• European Union
• Middle East
Country specific • China
• U.K. • Hong Kong
• Water is Life
• Switzerland • Japan
•50% of hospital beds globally occupied by
• France • Philippines
people suffering from water borne illness
• Italy • Singapore
• Greece • Thailand 14% of U.S. healthcare costs are related to
• Germany • Brazil water borne illness (John Hopkins) 7
8. Los Angeles 9/09 Bethesda, MD 12/08
In 2009, the American Society of Civil Engineers rated US water infrastructure as D-…At
the current rate of replacement, it would take 900 years to upgrade the US system.
Harimann, TN 12/08 New York City, 7/07 8
9. The Investment Thesis For Water – U.S. Drivers
Underinvestment in Infrastructure OVERVIEW OF U.S. WATER ASSETS
•Drinking Water: 53,000 water facilities for public drinking water.
• The U.S. is $600 Billion behind in spending on Received a D- grade from the American Society of Civil
drinking and waste water systems - this expected to Engineers in 2009
pass $1trillion by 2020
•Opportunity: Publicly held operators will acquire smaller
• Much infrastructure is over 100 years old and in municipal utilities
disrepair - 30% of water wasted through leakage •Waste Water: 16,000 treatment plants. Received a D- grade
from the American Society of Civil Engineers in 2009. Sewer
overflows discharge 850 billion gallons of contaminated
Population Growth & Increased Usage
water per year
• U.S. water demand has tripled in 30 years while the •Opportunity: Water utilities will “Upgrade & Build” - The
population has only grown 50% estimates (in 2000 dollars) of U.S. clean water needs for building
new and updating existing wastewater treatment plants, sewer
• Inelastic Demand: Usage continues to increase as maintenance/construction, and combined sewer overflow
reuse and reclamation technology has limited corrections were $57.2, $67.9, and $50.6 billion, respectively
availability •Pipes: 2 million miles of drinking and waste water pipes. >60%
are beyond their intended lifespan at the end of 2010. U.S. pipes
Regulation experience 30% leakage rates on average—wasting 7 billion
gallons of clean drinking water each day.
• EPA will become more active in water regulations in •Opportunity: Replacement is inevitable - Next generation
next 12 months since there have been no significant replacement pipe will have leak monitoring/energy recovery built in
changes to the Federal water regulations in over 20 place
years 9
10. The Investment Thesis For Water - US Drivers
•Forecast of Capital Expenditure in US Water and Wastewater Infrastructure 2007 - 2016
• Source: Global Water Intelligence 10
11. The Investment Thesis For Water - US Drivers
Economic drivers
• Growth in demand, caused by massive industrial
expansion and population growth
• Population growth is occurring in the nation’s most
water stressed areas
• Water quality continues to deteriorate at an alarming
rate
• Lack of water availability could produce slower
economic development for certain water constrained •Demand for Water in the US is Growing the Fastest
markets such as California and the U.S. Southwest Where it is Least Available
Social Awareness
• Increased public awareness of water related
problems – frequency of media coverage has
dramatically increased in last three years alone
• The price of water does not reflect its true value or
intrinsic worth to residential, commercial and
industrial users - resource is significantly sub-valued 11
.
12. The Global Investment Thesis For Water
•44% (2.8 billion) of the worlds population lives in areas of severe water stress
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13. The Global Investment Thesis For Water
Emerging Markets •Global average of virtual water content of
selected products (per unit of product)
• Population rates, resources, lack of availability, Water Content
agriculture and wastewater are key industry drivers Product
(gallons)
• Asia accounts for 60% of world’s population and 1 glass of beer 20
36% of world’s resources – highest water stress 1 glass of milk 53
area 1 cup of coffee 37
1 slice of bread 11
• 70% of all water used on a daily basis is
agriculture related. Food price volatility will be a 1 slice of bread w/cheese 24
continued to escalate. 1 apple 18
1 cotton T-shirt 528
• As emerging markets develop, dietary habits 1 glass of wine 32
change, food consumption increases …water
usage increases accordingly. 1 glass of apple juice 50
1 glass of orange juice 45
• Food demand is projected to grown 70-90% by 1 egg 36
2050 1 hamburger 634
• Water is a major economic constraint for many 1 orange 13
parts of the world, namely China 1 pair of leather shoes 2114
13
14. Investment Themes– BRIC Drivers
Population growth rates and sizes, power generation, and wastewater treatment drive demand.
• 12% Population Growth Rate
• Asia and Latin America match world’s
population growth rate through 2015.
• India and China account for 40% of world’s
population.
• Less than 20% of Latin America’s and Asia’s
populations is served by private sector water
companies.
• 32% of Global Water Consumption
• India’s hydroelectric power generation
contribution is targeted to increase from 25% in
2008 to 40% of total energy output.
• China’s discharge of industrial and non-
industrial wastewater increased 30% from
1999 – 2005.
• China’s municipal wastewater treatment rate is
targeted to increase from 52% in 2005 to 70%
in 2010.
Source: “Water Worries” by Citi (2008)
“Water, Water Everywhere, but Not a Drop to Drink” by RBC (2008) 14
15. Snapshot - China Water Sector Fundamentals
China Overview
• China plans to invest US $128 billion in water related projects
through 2010 – Water trails only the military complex in
capital expenditure in China
• 60% of China’s cities suffer water shortages
• 50% of China’s cities lack wastewater treatment centers.
The Yangtze River absorbs nearly half of the country’s
wastewater (almost entirely untreated)
• China is acquiring agriculture land in Southern Africa as
government policy will allocate less water to agriculture and
more to industrial and energy requirements
• Investment will continue to increase as policy makers
recognize that inadequate water infrastructure will curb
economic growth
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16. Industry Trends
•Expenditure forecast on desalination and water reuse 2007-2016
• Desalination will emerge as a viable option (U.S.)
for water stressed areas worldwide. America
is the second largest market after Saudi
Arabia. Solution Provider: Veolia, Doosan
Heavy, IDE, Suez, Acciona
• More small communities with restricted
access to capital will ―Outsource‖ their utility
and wastewater operations. Only 17% in
U.S. and 45% in EU are privately owned.
Solution Provider: United Utilities, Severn
Trent ,Veolia, Suez Environmental.
• Wastewater reuse is becoming more
prevalent as treatment allows it to emerge as
drinking water quality, creating real value to
the community. Solution Provider: Veolia,
Suez Environmental , CK Infrastructure,
American Water, Aqua America, Severn
Trent
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17. Industry Trends
Water equipment market forecast 2007-2016
• Water distribution pipes that are over
100 years old are experiencing alarming
failures and leaks. With leakage rates
between 20-35% in the U.S. and much
higher in Europe, ―the perfect storm‖ is
approaching with 70% of all water pipes
going beyond their useful life by 2012.
New pipes will have leak monitoring and
energy recovery built in beginning in
2010. Solution Provider: Ameron,
Northwest Pipe, Sinopipe, Corinth Pipe
• Water Meters are presently used in only
25% of U.S. homes. They are the primary
means to regulate water usage and
manage consumption behavior. With next
generation meters employing
nanotechnology and composite materials,
this sector is embracing and deploying
new technology. .Solution Provider:
Badger Meter, Itron, Esco, Roper 17
18. Industry Trends
• Water technologies such membrane •Expenditure forecast for water technology 2007-2016 (U.S.)
technologies, UV and ozone are projected to
experience strong growth rates though
2016. The water business has been slow to
adopt technologies and private equity has
not significantly participated relative to the
cleantech sector over last three years. This
trend is changing as nanotechnology and
materials lead the way. Solution Provider:
AECOM, Flowserve, Tetra Tech, ITT
• For much of the world, water has been
underpriced, leading to overuse and
waste. This will not be the case in the
future. Massive investments will be
deployed to ensure that nations can
sustain growth without water
bankruptcy.
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20. •The Offerings
Our Global Water Solutions composite uses a multi-cap value investment strategy to invest exclusively in companies offering
water and water-based environmental and ―green‖ solutions. The composite portfolio addresses solutions such as
desalination, membrane technology, wastewater treatment, water utilities, water management, and other market segments
such as timber, hydroelectric, security and agriculture which directly tackle some of societies’ biggest water related challenges.
The composite may invest a portion of assets in international markets and typically focuses on small and mid-sized companies
between $250M and $25B+ in market capitalization. Its benchmark is the S&P 500.
•Approximately 30 positions
•· 7% position limit (4% at purchase)
•· 1.25% minimum position
•· Turnover 70% - 100%
•· Sector limits - water infrastructure / water-related activity (minimum 30% revenue generated from water)
Our Global Water Relative Yield Strategy composite offers a concentrated portfolio of primarily global water utilities. The
composite consists typically of 15 companies that provide a total return primarily through investment in equity and equity
related securities of water utility companies which the manager believes offer attractive yields and sustainable dividend
payments.
•Approximately 15-20 positions
•· 8% position limit (5% at purchase)
•· 2.5% minimum position
•· Turnover 40% - 70%
•· Sector limits - mainly global water utilities and pipe manufacturers
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21. •Idea Generation
•Idea Generation – Water Solutions Universe
•# of Companies
Eliminate deep cyclical businesses 500
•Approximately 9 sub-sectors
•1
•Require 12% earnings growth over 280
•next 3–5 years per annum
130
•Minimum market capitalization of
•$150 million
•2
80
•Define businesses in universe
•Perform fundamental analysis to 50
•3
•confirm quality standards
•4 •Target Portfolio (30 companies) 30
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22. •Investment Process
•Investment Process-Water Solutions Universe
•# of Companies
•Financial Model Strength
•Growing cash flow/internal financing
•13,000
500
•1
•High / rising profit margins
•Low debt
•5,900
280
•Market Leading Position
•Competitive Advantage •2,100
130
•Consistent Growth
•2
•Unit volume increase •316
•Fee based business model 80
•Recurring revenue
•120
•3
•Management Style 50
•Cash flow management •30
•Process
•4 •Responsive 30
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23. •Idea Generation
•Idea Generation – Global Water Relative Yield
•# of Companies
•Evaluate global water utilities and pipe
•110
• manufactures
•1
•Require 12% earnings growth over •50
•next 3–5 years per annum
•45
•Minimum market capitalization of
•$150 million
•2
•30
•Identify highest yield businesses in
universe
•3
•Perform fundamental analysis to •30
•confirm quality standards
•4 •Target Portfolio (15-20 companies) •15
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24. Trade Discipline
Evaluate Re-assess
•If one or more of the following occurs, •then…
Stock down relative to
• industry peers
2 consecutive quarters of •Upgrade
• earnings disappointment
•or
Major change in
• Company or Industry
• Fundamentals
•Buy
•or
Stock grossly overvalued
•Sell
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25. •Investor Communication & Frequency
Sales Channels
Flash Commentaries Monthly (5th Business Day)
Final Commentaries Monthly (20th Calendar Day)
Detailed Portfolio Reports Quarterly
Conference Calls with Prospects Monthly or Quarterly
Small Group Training Sessions As Needed
One-on-One Meetings As Needed
Attending Events (e.g., Investment Summits, etc.) As Needed
Investors
Commentaries Monthly
Client-Specific Portfolio Reports Monthly
Performance Review Meetings Quarterly or Semi-Annually
Telephone Calls As Needed
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26. Biography
William S. Brennan, Portfolio Manager
William S. Brennan serves as the Portfolio Manager of The Kinetics Water Infrastructure Fund. He is the founder, President, and
Portfolio Manager of Brennan Investment partners LLC, a registered investment advisor that focuses on water, infrastructure and
sustainability He previously was the founder and President of Aqua Terra Asset Management, a subsidiary of Boenning & Scattergood.
Mr. Brennan joined Boenning & Scattergood in 2004 as Director of Equities and served as the President & Managing Director,
overseeing Aqua Terra’s investments. Mr. Brennan was responsible for creating the firm’s water investment management presence and
also served as the Portfolio Manager of the Praetor Global Water Equities Fund in Luxemburg through August 2008. He was also
responsible for the portfolio selection for the Claymore Global and Domestic Water UITs, the first water investment products launched in
the US.
Mr. Brennan served as a Portfolio Advisor / Analyst to Summit Water Partner, a San Diego based global water hedge fund from
inception through February 2006 as well as the co- Portfolio Manager of the Praetor Water Fund with John Dickerson, the hedge fund
portfolio manager until September 1, 2005.
Mr. Brennan began his investment career with Pacific Growth Equities in San Francisco, where he ran the Environmental Services,
Aviation Security and Special Situation groups for six years.
Mr. Brennan was a director with Law Environmental / Law International, an international engineering and design company based in
Atlanta.
Mr. Brennan is a graduate of Lehigh University with a BS in Mechanical Engineering / Biology, where he was a distinguished graduate of
the Air Force ROTC program and a starter on both the varsity football and baseball teams, an MS in Biomedical Engineering from
Colorado State University, and an MBA from Villanova University, where he is and has been an adjunct professor in the graduate MBA
program for the past ten years.
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