Targeted Review on Investor Motives and Behaviours: Drivers and Implications

This targeted review will need to provide an overview of how equity investment in water (including wastewater) companies can contribute to the delivery of the proper carrying out of companies' functions, including how equity investment can align with the interests of customers. Our regulatory strategy and approach to economic regulation aligns interests of investors and management with customers. The purpose of this study is provide insight into equity investors and the role that they play and how this is linked to behaviour and actions of management and the implications for customers. Specifically we would like the following Key Questions answered:

How can equity investment in the water sector contribute to the delivery of the functions of water and wastewater companies? In particular, how can equity best (1) drive the correct management behaviours; (2) ensure that businesses can withstand shocks; (3) contribute any other elements to the delivery of a resilient water business?

What are the characteristics of equity that shape these key contributions? For example, how are the outcomes for the business affected by the size of the equity piece; the diversity of equity investors; different types of equity investors (nature of funds, focus of overall portfolio, etc.), and any other relevant characteristics?

In practice, what factors (including capital/ownership structure) hinder or improve the functions of equity and the outcomes for customers?

Recommendations for any amendment to these Questions should aim to enhance Ofwat's understanding of investment motivations and likely behaviours in the infrastructure space. Costings should be provided separately for additional queries, if appropriate.

Scope of Work

The scope of this work includes assessing academic and other literature on investors' motivations and behaviours with a particular focus on regulated utilities particularly water and wastewater companies. The scope also includes an analysis of the theory translates into practice and the real world challenges the theory confronts.

The targeted review needs to consider and report on the specific questions set out in this ITT under section 3 - Objectives, relating to equity investor behaviours, motivations and how this impacts on companies' financial resilience and managements actions.