Low Tide: When a Water Giant Went From “Stable” to “Oops!”
EDHEC’s Infrastructure & Private Assets Research Institute just dropped a buzzing paper titled Low Tide. It asks a simple yet sobering question: What would Thames Water’s investors have known about the risks and real market value of their stakes had they compared the water company to the overall market and its peers?
Why the Loss was a Shockwave
For a long time, Thames Water looked like a classic utility—steady cash flow, low volatility, the kind of asset that makes pension funds grin. Yet, when the company’s market value was knocked down by almost 30% in December, investors (including UK, Japanese and Canadian pension plans) were hit with a surprisingly heavy loss of about £1.5 billion.
Only nine months earlier, back in March 2022, some investors were still raising valuations. The rapid tumble suggests the water giant had been mis‑priced for several years.
Three Red Flags That Should Have Shouted “Red Alert”
- Red flag #1: The regulator imposed an unnaturally low weighted average cost of capital, creating “twisted” incentives that pushed the company to take on excessive risk.
- Red flag #2: From 2016 onward, Thames Water built a structure that funneled quick cash but stacked a huge debt pile, implying no dividends for years to come.
- Red flag #3: The company’s exposure to core risk factors was always higher than its peers—and it climbed over time. That meant a higher discount rate and a lower valuation than reported, until the brutal 30% hit hit home.
Benchmarking Should Have Been the Compass
By lining up Thames Water against a set of comparable firms—those with similar risk profiles, duration and dividend prospects—the authors show the likely loss of 30% to 50% of its value over the last decade. In essence, the research underscores that a relative or comparative benchmark is essential when judging the worth and risk of infrastructure assets.
Key Takeaway from the Research Director
Tim Whittaker, RD at EDHEC Infrastructure Institute and head of data collection, summed it up: “This case study shows the power of a comparative lens. Investors focusing solely on their own assets missed crucial red flags. A broader view—looking at peers—would have revealed the deeper risks earlier.”
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