AQUACULTURE - FUNDING (TOPIC)

As the fastest growing food production sector in the world, aquaculture accounts for 50 percent of the world’s fish consumption. According to a recent analysis, the aquaculture market was valued at $176 billion in 2017, with an annual growth of 5.8 percent. Meanwhile, the commercial fishing industry was sized at $241 billion in 2017, having expanded by 2.3 percent from the previous year. If these growth rates continue, then the aquaculture industry is set to surpass commercial fishing by 2026.

The rise of aquaculture may hold promise to mitigate the environmental pressures of over fishing wild populations, and the food scarcity issues resulting from the rising global consumption of fish. However, to achieve these benefits, the aquaculture industry’s growth must be coupled with an increase in sustainable practices.

Investors have a vital role to play through their power to reallocate funds away from unsustainable forms of aquaculture. This means avoiding businesses who are using fish meal from juvenile fish or illegal by-catch, making heavy use of antibiotics in their fish stocks or creating significant wastewater discharges that threaten biodiversity.

Finance for aquaculture growth is a major problem globally since the industry is regarded by most as high risk and capital intensive with long payback periods.

The following summaries the main sources of aquaculture finance:

Venture Capital

Venture capital firms finance innovation using funds largely from capital-rich institutions such as superannuation funds. These risk-taking sources of capital seek very high financial rewards of at least 20% annual returns, need to exit their investments in five to eight years and exercise a high degree of management control to assure that their firms’ investment objectives are met.

This is expensive capital that often comes with onerous terms and personal risks for entrepreneurs. Venture capital investment criteria do not fit aquaculture. Furthermore, most venture capital firms narrowly focus upon a few fields, such as information technology, biomedical, social networks and similar fast-moving industries. Few venture capitalists know much about aquaculture, nor do they want to learn. The frontiers of food production, including aquaculture, do not appeal in spite of the enormous and growing market for farmed fish, shellfish and aquatic plants. This results in the diversion of capital away from financing small-scale aquaculture firms – especially start-ups.

Private Equity

Private equity firms usually make large investments in established companies seeking very profitable, short-term opportunities with rapid turnaround. Although a handful of such firms are making aquaculture investments, the amount of capital they have to invest is very small relative to the global needs of aquaculture. Private equity usually seeks to invest in large, mature companies in need of new management with new strategic direction. Most private equity activity is in the United States and the EU, not developing countries.

Major Corporations

In the history of modern aquaculture, a number of large corporations have sunk large amounts of capital into innovative aquaculture ventures, only to lose their investments. Based upon this unfortunate past history, there appear to be few corporate investors in aquaculture today. This is in spite of the fact that many well-managed corporations set aside large pools of capital to invest in innovative ventures outside their core businesses. As with venture capital and private equity sources, aquaculture is not on their radar screens.

This unfavorable situation will probably not change soon. The expansion of innovative aquaculture will be financed by other than venture capitalists, private equity investors and large corporations.

Individual Private Investors

That leaves the old-fashioned way – obtaining financing for early-stage innovative aquaculture ventures from private individual investors. Once successful, expansion to larger scale is often financed with borrowing based upon proven and sustainable cash flows.

Satisfying Social Needs

It is easily observed that, globally, aquaculture becomes established only in those places where the industry promises to satisfy strong and overwhelming societal needs. Governments support the institutions necessary for aquaculture to thrive and then get out of the way. Without favorable government policies and institutions, it is a hard, uphill battle. To some degree countries suffers from a poor public perception of the industry and there is no strong perception in society that the country needs aquaculture. This is a major problem for aquaculture in preventing both investment and access to suitable areas for aquaculture.

Banks and Finance Providers

Education of bankers is often an important task for aquaculture lending to flow into a country or region. On-going dialogue between bankers and industry bodies is a key learning from aquaculturists. Engaging bankers in industry gatherings and conferences and having them tell their story to industry is also important.

Bankers are “risk averse” so unless you fulfil 4-5 of the "5 C's of lending"criteria you will be unlikely to obtain a loan for an aquaculture venture.

It is fundamental that prospective borrowers present a well-considered business case to bankers.