Financing aquaculture: The cash is there, but information is lacking
Finance can “drive change on the water,” according to Neil Sims at Kampachi Worldwide Holdings. But for aquaculture projects, it’s still hard to come by.
Speaking at the SeaWeb Seafood Summit in Barcelona, Spain in June, Sims told the story of his company. He said it took 10 years to raise enough funds to initiate his marine aquaculture project in Hawaii. There was a temptation to put one pen out while he raised the rest of the cash.
“But that would be throwing money down the rat hole,” he said. “In mariculture you need scale, you need to have the cash together.”
There’s plenty of money waiting to invest in aquaculture, according to Trip O’Shea, vice president at New York, U.S.A.-based investment house Encourage Capital. But first the sector needs to offer would-be investors data and models to profitability.
“There are several pillars of sustainable development but where is financial sustainability on the list? Otherwise how do we get it off the ground?” he said. “We need a set of principles for aquaculture investment, so that investors can quickly understand what to benchmark to. Right now there are so many metrics quoted. We have to compare apples to apples.”
O’Shea cited feed conversion ratios as an example.
“If your feed is algae, then increasing the volume [of such feed] is a significant consideration,” he said.
Investors are interested in the sector, O’Shea said, but “aquaculture projects need to be de-risked.”
“We need financial products to decrease volatility. You don’t have hedging mechanisms. There is no way to lock in price controls such as you’d have with a power plant,” he said. “Also, the insurance space needs developing.”
Mike Velings, founder and managing partner at Aqua-Spark agreed that, “As of now, there are very few investors active in aquaculture who can show the way for the others.”
However, Velings said his firm sees an ultimate return of 22 percent from its investments in aquaculture.
“The view that aquaculture is not profitable is as false as it gets,” he said.
A shortage of information rather than money is the problem, Velings said. There is a “massive amount of capital out there” in family offices – private wealth management advisory firms that serve ultra-high net worth investors – looking at aquaculture.
“Also, disrupters like Google are looking at aquaculture, though they haven’t invested yet,” he said. “There is big interest but no comparables, and little understanding. Family office investors tend to focus on one technology, or one species... It will take time. What’s needed is publicly available information on financial data and what an aquaculture investment should look like.”
According to Velings, investors are drawn to aquaculture because food production is predicted to increase by 60 percent in the next three decades.
“Aquaculture is more efficient compared to other forms of animal agriculture,” he said. “There is a massive increase in opportunities because aquaculture has to triple in scale over the next decade.”
However, aquaculture is a long-term, capital-intense investment.
“A sea bass farm, for example, requires USD 20 million [EUR 17.2 million] over 10 years,” Velings said. “There is land-based and offshore aquaculture, there is room for everything. But even if aquaculture is now the size of the beef industry in output, it’s not a comparable player in financial terms.”
A skills shortage is another factor that makes would-be investors hesitate, according to O’Shea.
“Finding new management teams for RAS [recirculating aquaculture systems] remains a challenge,” O’Shea said. “We looked at several RAS deals…but there are only 25 people in the world really know how to build and operate RAS. You do it wrong and you could lose your shirt – a USD 10,000 [EUR 8,575] per ton investment is required.”
As for investment in branding and marketing of new aquaculture produce, O’Shea said differentiation is key, but difficult to accomplish.
“We see it as a commodity business,” O’Shea said. “Everyone should want to do it, but how many brands can you have of the same fish? You have to differentiate your product from some fish. The holy grail is the direct-to-consumer model.”
Many investors looking at seafood targets seek out performing assets, O’Shea said. Investors can be limiting themselves to a certain industry type and may be scared of new, untested species and products.
“It’s very scary for an investor to invest in a product that no one wants. You have marketing and product technical risks. Creating a whole new market is very tough; we have to respond to market demand,” he said.
Risk reduction is already happening in aquaculture, says Neil Sims. He tells investors to look to the profitability of the salmon industry and further expansion of pens signalled by Norway. He also tells them to look to aquaculture certification schemes like the ASC which are “very vigorous” in guaranteeing standards. Information will draw investment, believes Mike Velings. “We are seeing more and more big players are looking and caring about future food system but don’t know how to invest.”
Aquaculture practitioners looking for cash should try to think like investors, O’Shea said.
“A venture capital firm or hedge fund in New York has a very fixed view of the world and shies from ‘sustainability,’” O’Shea said. “And nobody has defined what sustainability is. Decisions are based on the likely profitability as well as the risk and the hold period. Investors – even when presented with a potential return of 23 percent – often shy because there’s too much risk and they don’t understand it.”
However, despite the barriers, there is still broad interest in certain segments of aquaculture as an investment target, Velings said. Seaweed is the number one and offshore aquaculture number two on Velings list of targets. Genetics is another big potential target for future investment, Velings said. He added his opinion that the industry needs to decide whether to proceed along the lines of the chicken or pig breeding sector “by focusing on three out of 700 species.”
Seaweed as an input for feed is one of the best future investments, according to Velings.
“We see exciting opportunities across the value chain…Feed innovation doesn’t mean it’s the easiest [investment target,” he said. “We have made first investment in algae, we have scouted seaweed companies, as of now most of seaweed is in low value applications.”
Large corporations like Cargill are all interested.
“They are all asking what is the future carrying capacity and how that will impact their business,” Sims said. “Feed ratios are very important. We don’t see replacement by algae in the next three decades. Microbial meal investment [is happening] now, with big players like Cargill and Tamasek on board with a USD 700 million [EUR 600 million] plant up and running.”
Photo courtesy of TED