Brookfield Infrastructure Partners L.P. (NYSE:BIP) likes to buy assets that generate steady cash flow because that gives it the money to support its generous 3.9%-yielding distribution to investors. That approach often leads it to acquire utility-like businesses such as power lines, ports, and pipelines since these assets generate relatively stable cash flow backed by consistent volume or contractual obligations. 

That said, the company's aim isn't to pay a bond-like yield. Instead, its target is to increase the payout at a 5% to 9% annual rate. That leads it to buy assets that have upside potential. Water is one area it believes has untapped upside, which is why it's currently scouring the globe in search of investment opportunities to add some water infrastructure businesses to its portfolio. 

A twenty dollar bill splashing into the water.

Image source: Getty Images.

Why water?

Brookfield initially decided to expand into water infrastructure three years ago, but it hasn't made that much progress up to this point. However, that's about to change since the company has several strategic initiatives underway to expand into water infrastructure. 

Several factors drive Brookfield's desire to dive into the water business. First, the company noted in a recent letter to investors, "Our interest in water infrastructure exists because it provides arguably the most essential of services -- the provision of clean, fresh water for consumption and irrigation -- and is a critical input for many industrial processes." 

Additionally, the company pointed out, "Water assets generally benefit from both scarcity and high barriers to entry, frequently producing stable, inflation-linked cash flows that are underpinned by either regulatory frameworks or long-term supply relationships with strong counterparties, such as municipal governments and industrial customers."

In other words, water-focused assets have the potential to generate a rising cash flow stream that would help support Brookfield's dividend growth plan. 

Finally, water represents a breathtakingly massive opportunity, with the company noting that the gap between expected government spending on water infrastructure and the required investment level needed to meet global demand could reach a staggering $6.7 trillion by 2050. That shortfall should open up opportunities for Brookfield to invest in critical water infrastructure assets.

A water treatment plant at sunset.

Image source: Getty Images.

Dipping its toe in the water

Brookfield has identified three opportunity sets in water infrastructure that fit its business model:

  • Water supply (refurbishment of aging infrastructure and desalination)
  • Water transportation (irrigation)
  • Recycling ("graywater" water purification)

While the company has yet to make a big splash in water infrastructure, it did recently agree to invest $15 million into a Peruvian water irrigation system. While small in size, the company noted that it could collect a steady cash flow stream on that investment, thanks to the "take-or-pay" agreements underpinning the assets. Furthermore, the acquisition will give the company a platform that it can expand with future deals.

As that transaction value shows, Brookfield Infrastructure Partners isn't necessarily concerned with the size of a water business. Instead, it wants to buy the right assets that will provide it with steadily growing streams of cash flow to support distribution increases. Furthermore, the company has a history of starting out small and then rolling up assets around the globe as it builds out a platform. That's how it turned district energy into a $2 billion enterprise in just a few short years, and that's likely the route it will take in building a meaningful water business.

It's all about the cash flow

Brookfield Infrastructure Partners sees a massive opportunity in water because governments just don't have the money to invest in meeting the growing need for water-related infrastructure. Because of that, the company believes it can pour capital into the sector over the coming years and collect lucrative long-term cash flow streams in return. That would give it another platform to support distribution growth and push its already high yield even higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.