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 overfishing 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 fishmeal from juvenile fish or illegal by-catch, making heavy use of antibiotics in their fish stocks or creating significant wastewater discharges that threaten biodiversity.
To finance the sustainable aquaculture revolution, investors must be able to define sustainability in aquaculture, address current barriers to investment and identify impactful investment opportunities. Key players who are making this possible by providing solutions to support and scale sustainable aquaculture include Hatch, Alimentos Ventures, Aqua-Spark and Coastal Enterprises, Inc. (CEI).
Dr. Carsten Krome is the CEO and co-founder of Hatch, the world’s first accelerator program focused on the aquaculture industry. He also heads Alimentos Ventures, a venture capital firm based in Germany that invests in innovation in aquaculture feed, health, genetics and technology—with a focus on early- and pre-seed stage companies.
According to Krome, the concept of sustainability in aquaculture “is problematic, as people assume because we are in aquaculture we are already sustainable.” Indeed, many parts of the aquaculture supply chain are prone to detrimental health and environmental impacts if managers don’t prioritize sustainable practices. Excessive antibiotic use in farmed fish could affect human health, for instance, and uncontrolled waste generation can damage surrounding ecosystems.
Thus, investors looking to make a positive or net-zero impact must consider the intricacies of the aquaculture supply chain.
Mike Velings is founder and managing partner at Aqua-Spark, a global investment fund based in the Netherlands. The group seeks to invest in sustainable aquaculture businesses that generate returns alongside positive social and environmental impacts.
For Aqua-Spark, the sustainability criteria vary for every element in the supply chain. “If we talk about farming, we look at species that are resource efficient,” said Velings, particularly those with “disease resistance and very high feed efficiency.” After all, “farming always has a footprint, but that footprint needs to be minimized.”
Nick Branchina is the associate director of fisheries and aquaculture at CEI, which provides advisory services and financing to fisheries and aquaculture businesses in Maine. Branchina highlighted how certain species naturally offer broader environmental benefits that garner them greater support among sustainability advocates.
“The biological nature of shellfish allows them to be an asset to the environment because they are filter feeders,” said Branchina. This trait allows them to improve water quality. With such businesses, environmental sustainability “isn’t necessarily a factor” in lending decisions, “but definitely an asset to the appeal of shellfish farming,” he said.
On the other hand, farming operations for fin fish (as opposed to shellfish) raise more sustainability concerns.
“Exceptional densities of salmon are often raised in net-pens. They produce waste in the process which collects at the bottom. So there has to be strict diligence in monitoring that,” said Branchina. This monitoring is important because net-pens allow open exchange of waste with the ocean, which when not properly managed can have negative impacts on biological diversity around the seabed.
Barriers to Investment
In addition to incorporating sustainable practices, aquaculture businesses face the added challenge of attracting investments into a relatively young sector.
“If you have something that people don’t quite understand, the barrier to entry is larger,” said Velings. While Aqua-Spark continues to grow (they currently have over 80 million Euros under management), the fact that this type of fund has “no comparables” can make new investors “a little hesitant,” he said.
Krome from Hatch and Alimentos Ventures points to a lack of investor education as an obstacle to attracting more investment. The aquaculture industry as an asset class is “new, and that always scares most people,” he said. In addition, the industry is fragmented, with many smallholders, making it difficult to attract investors and scale.
While the entire sustainable aquaculture supply chain needs increased investment capital, certain aspects of the industry require even more resources. More information transparency across the supply chain would enable investors to better identify sustainable interventions and avoid supply-demand mismatches.
“The amount of capital going into sustainable feed ingredients needs to increase substantially,” said Velings. “We need billions if not trillions from a global perspective, more innovation, and decades of work.”
These investments in innovative forms of non-fish-based feed and plant proteins are key to moving away from unsustainable reliance on bycatch in feed.
Some of the same concerns facing investors are also deterring banks from financing small-scale or early-stage aquaculture companies. This is where CEI—the Maine-based firm—steps in, financing companies that have been declined commercial finance due to credit or collateral challenges. Often, these businesses have yet to achieve the scale and financial viability necessary to attract traditional modes of finance from typically risk-averse sources of capital. Unlike commercial banks, CEI operates as a non-profit organization and generally has the ability to take on more risk because they can lend capital from federal or state funds. The group provides vital capital required by young companies to commercialize their business.
Specific financing challenges faced by aquaculture businesses vary at different stages of growth. With oyster farms, for example, Branchina from CEI noted that “the entry to start a small farm is generally very minimal in terms of capital start-up costs, compared to say, mussels, which require far more equipment and output to be scalable and profitable. So very often we see [companies in] the oyster business finance themselves.”
If a business is successful in their harvest, they may “look for expansion in their equipment, infrastructure or working capital, and therefore may require tens of thousands of dollars in capital raise,” said Branchina.
Since shellfish take about two years to mature, often companies pursue secondary activities to compensate for a lack of revenue during this grow-out period. Some businesses require further capital for transportation to support product distribution, facilities and processing equipment.
Indeed, the role of investment intermediaries is vital for moving this sector forward. By matching the varying capital needs of aquaculture businesses with the risk tolerance of investors, intermediaries can ensure that sustainable businesses receive the necessary financing to achieve scale.
Aquaculture comes with a unique set of risks, mainly stemming from its capital-intensive nature and the possibility of disease wiping out farmed fish populations. As such, risk mitigation efforts are key to boosting investor comfort and interest.
CEI exemplifies one such effort. Their funding from the federal Economic Development Administration’s Revolving Fisheries Fund is earmarked for community and economic development investments specific to Maine’s commercial fishing and aquaculture sectors. As such, CEI can view such investments with a larger relative appetite for risk-taking.
There may be an increasing role for government to support sustainable aquaculture, enabling its growth while dissipating risk perceptions. This is because government support often validates young industries as credible investment opportunities and encourages co-investment from the private sector.
“Aquaculture has the potential to be the best food system available to mankind,” said Aqua-Spark’s Velings. This vision defines Aqua-Spark’s fund management strategy. “What we are trying to do is build a large, global, public example of how you can be sustainable, healthy and affordable, with financial returns that are at least the same as when you do it in a more traditional way,” he said.
Krome of Hatch and Alimentos Ventures hopes we will see more specialized aquaculture funds coming up and more institutional investors securing deals in the next two to three years. What would be nice, Krome said, “is a really successful exit, which is usually the barrier breaker to getting new investors into the field that haven’t really looked at aquaculture.”
Turning Innovations into Investment Opportunities
Aquaculture sustainability innovations on the horizon include alternative feed ingredients that move away from bycatch and juvenile fish, a focus on natural remedies rather than antibiotics and new technologies that are less energy or water intensive. The combination of these changes is making aquaculture more attractive to investors, Velings thinks.
Velings notes the beauty of the aquaculture investment ecosystem, where “there is something for everybody.” For instance, strong investor demand exists for feed ingredients because they have “the potential to spill over to other sectors beyond fish,” including feed for terrestrial animals. Investors interested in long-term investments are particularly keen on larger, more stable businesses related to farming and operations. Meanwhile, “investors from Silicon Valley are attracted to the artificial-intelligence and technology aspects of aquaculture,” said Velings. He suggested that the processing of fish into by-products is less saturated with investor interest given generally lower margins and high risk.
Krome highlighted recirculating aquaculture systems (RAS) as a promising technology. RAS filters water in a tank so that it can be reused, thereby reducing water intensity and wastewater volume, while improving habitat conditions and maximizing production efficiency. Yet he notes that any capital raise for RAS facilities needs to be substantial as they “constitute an entirely different type of operation than anything based in coastal waters,” using more complex equipment.
“RAS businesses will be seeking far more equity and I think there will be a market reaction to provide that,” said Branchina. Equity investments are apt for such land-based operations because of the capital-intensive nature of infrastructure needs on land as well as the additional technology required to raise suitable species.
Ultimately, Velings noted, “there is no silver bullet solution” in aquaculture, but rather a range of small innovations paving the way towards sustainability. While abiding by best practices in sustainability is important, Krome added that capturing investor interest may require going even beyond with disruptive business models in aquaculture.