Its shares jumped 18% in early trading to reach a record high before falling back to close up 13.8%.
The investors include a Canadian infrastructure company and the Kuwaiti government investment fund.
Severn Trent supplies water to about 7.7 million people in Wales and the Midlands.
The firm confirmed that it had received the bid approach, but said it was “at a very early stage” and there was no certainty that an offer would be made.
The consortium of potential bidders consists of Canada’s Borealis Infrastructure, the Kuwait Investment Office, and Universities Superannuation Scheme – a UK pension fund.
The Kuwait Investment Office is the UK branch of the Kuwait Investment Authority, which manages funds on behalf of the Kuwaiti state.
Severn Trent said the consortium had not made a takeover proposal yet. “There can be no certainty that an offer will be made or as to the terms of any such offer, should one be forthcoming,” it said.
But an earlier report carried by the Dow Jones-owned newspaper Financial News suggested a bid could be worth £5.3bn ($8.1bn).
The surge in the share price has valued the company’s equity at slightly below that figure.
UK takeover rules mean the consortium must now decide whether or not to submit a formal bid for Severn Trent by 11 June.
Severn Trent was formed following the privatisation of UK water authorities in 1989.
It is one of only three UK water companies still listed on the stock market.
The other two are United Utilities and Pennon, and both saw their shares rise by more than 4%.
UK utility companies have proved to be popular investments for international investment firms looking for steady returns.
In 2006, Thames Water was bought by a consortium led by Australian investment group Macquarie and a Chinese sovereign wealth fund.
Yorkshire Water was bought in 2007 by a consortium including Citigroup and HSBC, along with Singapore sovereign wealth fund GIC.
Canada’s Borealis already owns stakes in UK utility and infrastructure companies, including Associated British Ports and gas provider Scotia Gas Networks.