By Tom Frese

July 13, 2012.

Aquaculture is a great way for qualified investors who are not risk averse to diversify part of their portfolios away from traditional investments.  Aquaculture is considered a non-traditional investment with a low beta correlation to publicly traded stocks and bonds.  

The potential for excellent rates of return on investment are present; internal rates of return of 20-30% over a ten year timeframe are achievable in well-managed projects and companies.

While investing in aquaculture can be a tricky business, sophisticated investors who take the time to learn the business and the potential pitfalls may be well rewarded.  While fish farming or aquaculture may appear highly technical to many qualified investors, it’s still a business at its core and from this perspective it’s really no different from any other alternative investment that may be under consideration.  By performing some basic due diligence, an astute investor can easily eliminate half of the prospects on his own right out of the gate.  When it’s time to get serious, an accredited investor should absolutely hire an aquaculture expert to perform a technical due diligence on the most promising aquaculture investment opportunity or opportunities.

Based on our experience advising both private and institutional investors, here are some of our keys to successful investing in aquaculture.

  1. Top management is key – as with all investments, finding a strong management team that has a solid mix of technical expertise and aquaculture business management skills is critical to success.  An inexperienced, unbalanced, or incomplete team could be a recipe for disaster. Invest in people you believe in, replace or fill-in the weak or missing links with key hires, give management the tools and resources they need to succeed, and let them do their job.
     
    And above all, avoid the con men or what industry insiders not so affectionately refer to as “aquashysters.”  If the overly aggressive promoters and manufactured business plans are promising hard-to-believe returns exceeding 40-50%, or profits in the first year of operations, run the other way.  These aquashysters are thankfully less prevalent today as the industry has come a long way, but they are still around.
     
  2. Location, location, location – superior sites yield superior biological results and when it comes to aquaculture, an abundant supply of high quality water, the right climate, and where appropriate, good soil quality with ideal texture for fish pond construction, are all key ingredients.  Proximity to traditional infrastructure, aquaculture infrastructure, and strong markets for the farm-raised products are all important ingredients for success.  If you are considering a new project, have an expert perform a site analysis.  It’s an investment that will easily pay for itself. 
     
  3. Minimize risk – let’s be honest, investing in aquaculture is risky, but there are many ways to reduce this risk.  A good start is an honest assessment of a qualified investor’s tolerance for risk.  Seed and early stage aquaculture development companies are always more risky and this is especially true in aquaculture.  While seed stage investments in aquaculture offer ground floor opportunities and higher levels of ownership for a given level of investment, investing in more mature and profitable aquaculture companies should be the first choice for the more risk adverse investor.  Picking the right segment of the industry for a particular investor’s profile is also an excellent way to reduce risk, while still maintaining the desired exposure to the aquaculture industry.  For example, investing in an aquaculture feed company, a new aquaculture technology with wide ranging application, or even an established aquaculture equipment manufacturer are all ways to reduce exposure to farming-specific risks like disease yet still achieve the desired industry exposure.  For more risk tolerant investors who prefer to be involved in the production end of the industry, selecting the right species is one way to mitigate some of the risk associated with growing live animals.  Farm-raised species like salmon, shrimp, and tilapia all have well established farming methods in place and markets for these species are well established, all of which serves to lower overall risks.  Conversely, the farming methods for relatively new aquaculture species like amberjacks, groupers, snappers, and tunas are still being refined and subsequently carry greater investment risks but potentially higher returns on investment are achievable for successful first movers in these farm-raised fish.
     
  4. Economic sustainability – one of the most common causes of failure in the aquaculture industry is a lack of capital to see the project through the early development and first years’ operational phases.  Prospective investors are well advised to use conservative projections and be prepared to inject cash into the actual aquaculture operations for at least the first year and most likely longer depending on the type of species and details of the expansion plan.  Cash reserves should always be set aside for unexpected events such as disease, seasonal contractions in wholesale prices, early year expansion plans, unanticipated delays in full payment of accounts receivable, and more.  Never put the project or your investment in jeopardy by having insufficient cash to feed the fish, make timely loan payments, and pay the company’s employees.  These are the lifeblood of the operation.
     
  5. Maximize returns – while not required for profitability, the greatest returns on investment in the aquaculture industry are achieved by maximizing economies of scale and internally controlling all the major components that go into producing the final form of the farm-raised product being grown.  At each level, incremental higher returns are achieved by investing in research and development, hatcheries, aquaculture feeds, growout operations, processing plant operations, seafood sales, marketing, and distribution.  Fully integrated companies that control all phases of aquaculture operations are well positioned to return the greatest profits.  Investments in fully integrated aquaculture operations are not insignificant and can easily exceed USD 50 million.  Most qualified investors start with much smaller and more conservative investments and initially focus on one particular segment of the industry.  We advise our qualified clients to consider investments of no less than USD 1 million in new or existing projects and preferably in the range of USD 10-12 million for important new commercial projects.