Richard LoureyCauseway Asset Management has recruited an expert in tradable water rights and launched a dedicated Australian water fund, which will look to invest up to $300 million in the asset class.

The Australian market for water rights, worth about $40 billion, has developed rapidly in the last few years due to the growing realisation of water’s long-term monetary value, not to mention necessity. Some overseas specialist funds, such as the San Diego-based Summit, have already entered the Australian market to buy water rights.

Richard Lourey, who established the fund-of-funds water rights fund at the former MFS in 2007, has now set up the Causeway Water Fund, which will invest directly in Australian water rights and water-related assets. In Australia, most of the rights market relates to the Murray-Darling basin, where allocations to farmers have been excessive since World War II, until recently. The price of water has consistently risen for most of the past 50 years.

The MFS fund-of-funds (which also had some direct investments) performed strongly in its two years to June 2009, given it was a long-only equity-biased fund. The units, which had an initial price of 96.5c in July 2007, were redeemable at 92c in June this year, compared with the large declines in all other equity market segments.

Lourey said the asset class was very similar to infrastructure, paying a yield over a long term. As an example, UniSuper recently purchased a stake in the proposed Victorian desalination plant, regarding the investment alongside other infrastructure assets.

“There will not be any new water rights issued,” Lourey said. “The (State and Federal) governments are buying back rights to get more water back into the system. It’s a very sensitive issue. The Federal Government has had a couple of vain attempts to centralise decision making… There’s a massive supply/demand imbalance.”

He said the Causeway fund could “easily” invest $300 million over the next 12-18 months. As the price of water continues to rise, so the investment opportunity set can be expected to increase.

“If water is considered ‘free’ you won’t get $3 billion desalination plants,” Lourey said.

The fund targets a running yield of 4-6 per cent plus capital growth of 12-15 per cent for a total target pre-tax return of 16-21 per cent a year.

The fees are slightly lower than the historical average for infrastructure, involving a management fee of 1.25 per cent plus a performance fee as carried interest at 20 per cent of excess over the benchmark return of 8 per cent upon realisation.
Causeway is owned by the management, including founders Mike Davis and Tim Martin. It currently has a private debt opportunities fund, which operates in the medium-sized corporate debt market.

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