(The following is a Q&A written for Undercurrent News by Onno Musch, director of international relations at Norwegian advisory firm INAQ, working on business development for the seafood industry including advisory services for investment firms looking to fund aquaculture enterprises. He has over a decade's experience as a consultant within the sector.)

In recent weeks, we have seen some major new investments into the land-based aquaculture space for salmonids from players such as Aquaterra, EMK Capital and Mitsubishi Group. This is an interesting development, particularly when we see 'new' actors entering the market, giving confidence to a further development of the segment.

Onno Musch, director of international relations at INAQ. Credit: INAQ

These recent investments have taken place in Norway, Denmark and Finland, not necessarily closer to any key markets, but rather in locations where competence and experience within the field of aquaculture of salmonids is well-established. This begs the question of what investors are looking for in this space and how they reflect on the balance between risk and reward.

Over the past 24 years, INAQ has worked with many investors from all over the world, both within the traditional sea-based aquaculture space, as well as investments in suppliers and new technologies -- especially land-based salmonid aquaculture.

This new frontier is a capital-intensive market space, requiring large infrastructure investments with relatively long timelines to reach steady state production and positive cash flow. This is particularly when compared to the capital and time required for traditional sea-based aquaculture locations -- where investments are limited to relatively cheap equipment and the setup, once permitted, requires weeks to months rather than the multiple years needed for land-based enterprises.

However, due to issues with fish welfare and mortality in open cages as well as high prices for new licenses for growth at sea, land-based grow-out has gained traction and is seen as a viable alternative for the future. Recirculating aquaculture grow-out systems (RAS) also promise to open up new geographies and possibilities of production near major markets that seem attractive from a business case perspective.

The space is developing quickly, and we wanted to gauge how investors look at the recent developments and how the sector is evolving. The key question: how do we attract even more investors to look into this segment, and what type of investors should we be looking at? What is important for investors and what should the industry be focusing on to attract capital?

We spoke to our network of investors and asked them some of these central questions, including:

• Muxia Ma, investment director, and Fuad Yusibov, senior investment manager, at Foresight Group. Foresight manages infrastructure funds and invested in Norway's Hima Seafood back in 2022, a RAS farm targeting 8,000 metric tons of trout annually.
• Alexandre van der Wees, founder of investment firm Aquaterra and previously investment director at Creadev. Van der Wees was among early investors in The Kingfish Company and Spain's Noray Seafood, before investing in Danish veteran land-based farmer AquaPri in October.
• Anna Reindl, director of investments at Germany's Schorghuber Group, a family-run business with exposure to salmon farming through ownership of traditional Chilean salmon producer Ventisqueros.
• Other investors who spoke on condition of anonymity but whose inputs and answers are covered in the article.

How and why did you get involved in the land-based aquaculture space?

The general consensus is that the new land-based sector promises to address two key criteria for investors: megatrends and mega markets.

The megatrends referred to here are sustainable and healthy food supplies for a growing population, as well as alleviating the pressure on the oceans. Proteins from seafood are a clear favorite with regards to CO2 output per kg produced and should, therefore, be increasingly important as we progress to a more sustainable food economy.

Seafood is clearly a mega market with global reach, but also with huge potential for growth, as it today still is only a fraction of the size of the total meat and protein market worldwide.

Land-based systems are particularly attractive as they can propel the industry's further growth and expansion. Van der Wees believes: "In RAS, if done well, we should be able to control the fish welfare and reduce mortality. By focusing on improving the sustainability of feed sourcing and reducing mortality we can really achieve a more sustainable production of proteins from fish."

Photo: The Kingfish Company

How do you regard the recent development in the segment?

Although the industry has had some significant setbacks for early movers such as Atlantic Sapphire in Florida over the past five to 10 years, land-based grow-out production in pilot facilities has now been shown to work over time and at scales of several thousand metric tons annually.

Van der Wees commented that "where initially project plans were huge, the industry should look to develop plans in steps and smaller modules, allowing for management and staff to gain experience as they grow. This will reduce the risk."

Leading the pack at present is Norway's Salmon Evolution, with stable production of over 17 batches to date with low mortality rates, reportedly good fish welfare and a high proportion of superior-grade fish, giving the industry new credibility and contributing to growing interest. Salmon Evolution uses hybrid flow-through technology where up to 60% of the water is recirculated without requiring the degree of complexity of water treatment as full RAS systems where up to 99% of the water is recirculated.

Salmon Evolution's plant. Credit: Cflow

But while hybrid technology is seeing increasing confidence from the market, RAS technology and facilities are still looking for a clear frontrunner showcasing stable production over time with high-quality production of significant volumes.

In general, the industry seems to be struggling with a lack of consolidation and 'silo’-development with a low degree of coordination and cooperation. This results in a cacophony of small to medium-sized players trying out their own version of 'the holy grail,' making for a hard-to-navigate landscape for potential investors and a need to use considerable resources to gain adequate insight.

When we add the dimension of low levels of consolidation within the processing and sales segments of this market, it becomes a rather muddled picture for external parties looking in, excluding a significant number of possible investors from entering the space.

Anna Reindl commented that "land-based seems to be a capital-intensive industry with a relatively high degree of uncertainty. There are many different technologies and small suppliers, and the industry is missing a standard or a clear 'state of the art' for new facilities."

That said, she also noted that "smaller niche producers, however, seem to be well received."

What are your reflections regarding local competence vs local customers?

We have seen some facilities being developed near major markets such as Japan, China and mainland Europe, but we can now see a clear trend where investors are leaning towards developments in locations where experience and competence within the production of salmonids is fully established.

Foresight's investment in Hima Seafood depended on several key de-risking parameters, such as established competence and experience within all segments of production in the team, a well-established value chain from the roe coming into the facility and all the way up to value-added processing, logistics and sales to the end-customer.

Experienced suppliers and contractors also play a key role in de-risking the enterprise. Yusibov mentioned, "for the first land-based aquaculture facility, we need to be where people know what they are doing. Once you get to grips with the operations and risks, you can consider taking steps out to other markets."

As far as investors are concerned, in a capital-intensive segment with complex risk, competence is king!

From a sustainability perspective, production close to major markets and in the backyard of the end customer may be positive, seeing as it will reduce the carbon footprint from transportation. However, here all investors were clear: the key parameters should be fish welfare and low mortality rates, which will also have the largest impact on the total sustainability of the end product.

Land-based Proximar Seafood has started shipping Japan’s first domestically grown Atlantic salmon under Fuji Atlantic Salmon brand. Credit: Proximar Seafood

What do various investor profiles see as being most important?

Whereas private equity (PE) investors, in general, can accept a somewhat higher risk profile, they will also require a higher return on investment (ROI). Generally speaking, PE will have a shorter time span to a potential exit (five to seven years is common). For PE investors in the land-based aquaculture space, it is of key importance to achieve premium prices in order to achieve the desired ROI, through targeted branding and sales to specific markets with low price sensitivity.

Due to the shorter time frame, PE investors will require relatively bullish business plans with early cash flow generation and a clear exit strategy. PE investors are, therefore, dependent on land-based aquaculture enterprises being realized on time and on budget and excelling in some of the key KPIs of a farming operation, such as fish welfare, product quality, mortality, and production efficiency.

Due to the short timeframe, operations need to perform optimally from day one without hiccups, requiring experienced teams and suppliers.

Hima Seafood exhibiting at SEG 2024 with Blue Resource Group. Credit: UCN/ Neil Ramsden

On the other end of the scale, we see infrastructure funds with a significantly longer time frame (up to 30 years is not uncommon) and somewhat lower expected ROI. Infrastructure funds look at the salmon market as a commodity, where any premium price through land-based operations is a bonus, but the key interest is in a product with a stable and growing demand in an established value chain.

For infrastructure funds the key factors are the stability and solidity of agreements and contracts at all levels, from Capex to Opex and to the off-take agreements with end-customers. According to Ma from Foresight, "the case needs to make sense from a commodity perspective. This needs to be stressed by the founders, the infrastructure nature of the investment opportunity."

The commodity-based business case will put an extra stress on the costs of production, with for example, high water or energy costs quickly becoming a barrier to achieving a stable cash flow. For infrastructure funds the most important element is the de-risking of the entire business case over time. A key factor for the investment in land-based trout in Norway was "access to an established sales apparatus giving confidence regarding off-take for the end-product," Ma said.

What type of investor should the industry be looking for?

In the current phase of development of land-based aquaculture of salmonids, we would argue that the industry requires patient investors with the ability to stick with the projects for the time required to reach a positive cash flow.

Van der Wees said that where "initially the land-based space was boasting huge projects and plans, now we are seeing a shift to realism and gradual growth plans in phases and modules. We need long-term investors looking to build up slowly."

The common consensus from investors seems to be that family offices with clear long-term goals, as well as infrastructure funds and industry investors, may be the most desirable investor-mix for the space at this time.

Some alternative or 'special purpose' PE funds with mandates allowing them to investigate new complex markets and hold on to targets for longer than the usual five to seven years may also be potential capital partners for the industry.

Credit: Andfjord Salmon's flow-through farm on Andoya, in Norway

How will the land-based aquaculture space develop over the coming years?

Van der Wees highlighted the importance for the sector to "improve the impact sustainability dialogue and particularly the reduced mortality communications with end-customers."

The importance of improved communications with the market, but also with potential new investors, was reiterated by Reidl, while Fuad and Muxin highlight the need for the land-based industry to de-risk the enterprises through "contracts, contracts, contracts."

They believe that "issues with traditional aquaculture will increase the demand from land-based initiatives and lead to more stable offtake agreements. Large infrastructure funds will come into the space if the infrastructure case is emphasized more clearly."

All investors were clear that the space needs frontrunners that can demonstrate positive results over time and any major setbacks will affect the attractiveness of the entire industry. Therefore, it is of critical importance that the industry improves on the level of cooperation and standardisation. We need to make it easier to understand the space and the opportunities for an investor.

As it stands today, many land-based aquaculture enterprises risk falling between two brackets, not quite fitting in the box of PE investors but also currently lacking the stability and solidity of agreements and contracts at all levels from construction to off-take, making them unattractive for infrastructure funds.

That leaves only industry investors and some specific family offices or impact capital, seriously limiting the supply of capital to the market space and the potential for growth. To avoid this, enterprises need to be clear about the profile they represent and communicate the message outward.

From an investor standpoint, the segment is clearly moving in the right direction, gaining credibility and confidence. Driven by megatrends and a growing demand for salmonids around the world, land-based aquaculture is bound to become a significant market with attractive investment potential. Focus on de-risking, quality and stability—investor interest will follow.

Nordic Aqua Partners Ningbo facility. Source: NAP Q4 report