Regulatory stability returns: M&A next?

(by Verity Mitchell)

In our review of the White Paper (The end of the beginning for investors, The UK Water Report, February 2026), we noted that there have already been inflows of equity and debt to support transformational investment in AMP8. With the Government taking responsibility for the water sector and ending the blame game, might new capital providers emerge?

The growing reputational stability of the sector is likely to attract new private capital market investors. These may be private equity investors, private credit lenders or focused infrastructure investors. The private capital market has grown exponentially. Moody’s sees assets under management (AUM) exceeding $2tn in 2026 and approaching $4tn by 2030*. New investors may look to buy stakes, rather than acquire the whole capital of water companies.

The White Paper states that the Government “….will create a regulatory system that supports owners with long-term business models and prevents the inappropriate financial engineering of companies in the past.”

This desire for a long investment time frame does not match the aspirations of many private capital investors, including many of the current owners of stakes in the English water companies. These investors generally look for a limited time frame of investment, with scope to exit in the short to medium term. They are institutional investors or high-net-worth individuals that look to extract value, whether in dividends or through a premium-priced sale. Stakes can be on sold into a range of smaller funds, diluting ownership even further. Importantly, these private capital flows do not have the same regulatory and market scrutiny as listed funds.

Infrastructure investment is an attractive market for private capital. English water companies offer growing infrastructure and dividends, both indexed to inflation. Some companies have performed poorly compared to peers and would benefit from better quality management to create further value. Private capital investors have demonstrated the ability to extract value by improving the operations of companies, not just through financial engineering. For companies that have failed to improve over the last regulatory cycle, fresh management impetus could improve customers’ experiences. Operational improvement and increased profitability through delivering against regulatory targets could make a company a more attractive investment and could eventually lead to a stock market listing through an IPO. This has been mooted by the Thames’ creditors as a medium term option.

The Government is already facing an ownership and aspiration challenge with Thames Water. The most significant negotiators are the private capital market investors. They will neither commit to a long-term investment or promise to abstain from any type of financial engineering. They are however willing to commit equity to recapitalising Thames on their own terms.

The Government rejected the advances of CKI as a bidder for Thames in favour of KKR. Following KKR’s withdrawal, the Government chose to negotiate with the debt providers. A market solution, rather than the rigours of entering SAR, meant engaging with the private capital market investors.

In the White Paper, the Government says: “We are also committed to pursuing further transparency in ownership, having recently consulted on adding the water sector to the existing 17 areas of the economy subject to mandatory notification under the National Security and Investment Act. This would place a legal requirement on acquirers to inform the Government of planned changes in company control. The government response to this consultation will set out our approach to taking this forward.”

Will the conclusions of the consultation successfully limit the scope of private capital market investors to extract value at the expense of customers, as it failed to do in the past? There may already be spreadsheet-wielding private capital market investors looking to buy stakes in English companies and extract value from them. 

* Moody’s report Private Credit – Global 2026 Outlook - Growth to accelerate, along with complexity and liquidity risks