The global shrimp industry has been struggling with downward trade, price, and consumption trends, but there are still plenty of positive supply chain patterns and opportunities to attract crucial investments in the sector, finance experts told the 2024 Global Shrimp Forum (GSF).
Speaking at the GSF’s “Finance and Investment Summit,” Rabobank Managing Director of Corporate Finance Reinier Henneman said though the sector’s merger and acquisition (M&A) landscape can be volatile, it’s an industry that has a “fantastic long-term growth trajectory.”
Getting an M&A deal over the line in the current market, however, requires companies to come to the table with ambple preparation and effective insights, as well as understanding possible cultural differences, Henneman said. Due to stubbornly low prices amid weak demand for seafood, many companies and leaders have to outline their unique story and articulate it elegantly if they want to grow, he said.
“Don't assume that the entire world knows your company. It's quite the opposite,” he said.
Although there are pockets of growth available, Henneman acknowledged the industry still faces an “unprecedented market environment,” due to the aftereffects of the Covid-19 pandemic, the conflict between Russia and Ukraine, and rising interest rates, which are affecting capital, investment, financing, and commodity prices.
“This is affecting risk appetite,” he said. “This is affecting the cost structure of companies, the growth of companies, and the business of companies.”
Conceding his analysis offers a “really mixed background,” Henneman said long-term growth is still within reach for some aquaculture sectors, with shrimp in particular emerging as an essential protein for major global markets.
Aqua-Spark Chief Portfolio Officer Maria Velkova told GSF the strategy companies take in strong and weak markets should remain the same: finding solutions to global issues.
“We're looking for solutions that are going to be innovative, that are going to be scalable, and that are going to be translatable to markets,” she said. “Yes, the macroenvironment is not great at the moment, but we understand that the shrimp market is volatile, it's cyclical, but it fits in with our strategy because we're a long-term investor. Our open-ended structure allows us to invest; we don't have to invest or exit at a particular point in time.”
For ambitious and forward-thinking investors, a weak market actually presents opportunities that don’t come around too often, according to Velkova.
“From a very pure financial point of view, that having a weak market always presents an opportunity to make an investment on more favorable terms,” she said. “If you have a long-term strategy and if you're a long-term investor, it’s an opportunity, not necessarily anything negative.”
Like Aqua-Spark, Chicago, Illinois, U.S.A.-based S2G Ventures is an early-stage investment firm, and Mike Gilkes, the firm’s vice president for oceans, said that in a weak market, investors quickly learn a lot about a business’s potential for longevity, particularly how management handles and adapts to pressure. They also get to better understand buyer behavior, he said.
“Do sales cycles become longer? Is there less enterprise spend? Are you burning more cash over that period of time because you're not able to drive revenue the same way you were previously? I think looking at a down market now, or looking at the last down market, reveals a lot from the investor perspective,” he said. “The other thing that's interesting is that businesses that are resilient and have resilient business models are continuing to grow during this period of time. I think we can all agree that it’s been a very challenging last four years for many businesses, but those that can still grow, those that can still scale, they're still commanding a premium valuation, which is something that I think we've seen since 2020 and are still seeing.”
With Aqua-Spark trying to build an “ecosystem of companies” that support one another, Velkova said a down market also helps ensure that companies within the firm’s network are willing to collaborate with other portfolio companies and with the industry as a whole.
“The first thing we look at, and for us [this] is actually a dealbreaker, is if [the company has] a leadership team who shares our view and our mission in transforming the industry. We're also looking for teams who know and understand their markets inside and out – entrepreneurs who understand the problem and are focused on [it]. You see very early on if they really have focus on what the problem is they want to solve. [The companies we work with] understand the pain points, can articulate them, and they have solutions,” she said. “As a long-term investor, you're going to be spending [a lot of time] working with these people – for decades, maybe even more – and you want to have the feeling that you're on the same page, that you're going to be fighting the same battles at the same time.”
For investors like S2G that are in the business of developing exit strategies, shaping and preparing companies for sale begins almost immediately, with the due diligence team looking ahead to what the situation could look like in five or years or so and what each company and investor needs to accomplish together in that time, Gilkes said.
“What can the investor bring to that relationship? What can the company or that management team bring to the relationship? What is the path and what needs to change over time?” he said. “You might look at it and say, ‘For us to get to where we want to be on the exit, we need to have this team in place. These are the key pieces we don't really have or the management team we think will drive scale, value, and growth.’ You're going to have a handful of different KPIs that are going to be important.”
Concerning potential future investments, Velkova said Aqua-Spark has invested widely up and down the shrimp value chain, including feeds, alternative ingredients, and aquaculture technology platforms. However, one of its ongoing aims is to contribute to changing the agriculture space by achieving more value for smallholder farmers, initially in both Indonesia and Vietnam, where the firm has been looking to increase invest in companies pushing forward ideas that feature innovation and transparency.
S2G’s position is similar, Gilkes said. At the start of this year, for example, it invested in Aquaconnect, a full-stack aquaculture technology platform that’s helping bring greater access, transparency, and predictability to India’s aquaculture value chain by leveraging artificial intelligence and other technologies.
“What we saw specifically in India was this ecosystem of smallholder farmers, and we thought there could be a flywheel that would be able to drive broader growth across that ecosystem,” he said. “Part of that flywheel was driven by access to financing – the ability to pair the working capital needs of farmers with financing to allow them to procure the right inputs to be able to drive more output and, ultimately, fuel the supply chain. It’s something that’s got us pretty excited.”
