An Impact-oriented Search Fund Focused on Aquaculture in Thailand

Resonance is supporting the development of Aquafund, an impact-oriented search fund focused on the aquaculture industry in Thailand. Aquafund is the first of its kind: a search fund designed to identify, acquire, and create triple bottom line (social, environmental, and financial) value in a targeted industry. The fund must navigate the challenges associated with unique investment structures as well as those related to social enterprises. This concept note presents a detailed description of the challenges in aquaculture, as well as how these problems could be addressed through a search fund approach.

Aquaculture and Its Sustainability Challenges

Seafood is produced in one of two main ways: capture fisheries (also known as wild-caught) and aquaculture, which is the practice of farming aquatic plants and animals. To date, more than 300+ aquatic species have been successfully farmed through aquaculture, though a much smaller number make up the bulk of production. Culture systems (e.g., extensive vs. intensive, monoculture vs. polyculture), practices (e.g., ponds, cages, rafts), and environments (e.g., freshwater, saltwater) vary considerably from region to region. These variables are selected to yield maximum production value of the final product, taking into consideration the individual species produced and the environment in which they are grown.

According to the United Nation’s Food and Agriculture Organization (FAO), aquaculture already provides the majority of all the seafood consumed in the world today. Overfishing is rapidly depleting fisheries, so aquaculture has been the answer to increasing seafood production in a world with an ever increasing demand. Much like other technology-aided industrialization, aquaculture has its good, bad, and ugly sides.

The issues around aquaculture include:

  • Financial issues related to disease outbreaks caused by over intensification, monoculture practices and limited genetic diversity in broodstock;
  • Consumer health issues resulting from the use of chemicals, antibiotics, and other inputs to accelerate growth, ward off disease, and increase production yields;
  • Environmental issues related to the effluent runoff from production farms;
  • Social issues related to the lack of transparency in the supply chain that leads to illegal, unreported, and unregulated (IUU) fishing concerns, as well as forced and/or unsafe or unethical labor practices.

These issues go beyond aquaculture and directly impact capture fisheries through the use of trash fish, fish meal and fish oil in aquaculture feed and for broodstock.  The most popular species on the market today, such as salmon and shrimp, are carnivorous and consume multiples of their own body weight in other marine-based protein to reach marketable size.

Many frameworks exist for assessing and addressing the many environmental and social issues involved in aquaculture production. Certification, standards and rating systems of different types serve as the most common proxy for assessing, addressing, and marketing responsibly produced seafood. Each certification is made up of numerous factors in broad categories such as the environment, social welfare, food safety, and animal welfare, among others. Each standard bearer chooses the factors they incorporate into their label or ratings and how the selected factors are benchmarked and rated. In addition, the chosen factors depend on the entity that develops them and, ultimately, the issues that entity seeks to address.

Two of the better-known eco-certification programs for aquaculture today dare Global Aquaculture Alliance’s  Best Aquaculture Practices (BAP) and the Aquaculture Stewardship Council (ASC) standards, both of which are based on the FAO aquaculture certification guidelines and address issues specifically related to farmed fish. Due to the specificity of each standard, they can and do vary across different species, so standards must be tailored accordingly. ASC, for example, has separate standards available for shrimp, tilapia, and salmon, and currently offers a total of eight different versions that cover a wide range of farmed aquatic species with at least five more versions in active development. Seafood ratings programs are also increasingly used by consumers and buyers in making sustainable seafood choices, for example the Monterey Bay Aquarium Seafood Watch® Program assesses over 80 % of the seafood in the US market.

Certifications and ratings systems can be useful marketing mechanisms to signal to consumers that the product they are choosing meets a minimum level of quality, sustainability and responsibility. This, in turn, leads to improved market access. It is investments like these, combined with streamlined operations while prioritizing additional financial, environmental, and social improvements, that can generate significant value by maximizing the potential of the existing assets on the farms today and provide an incentive for farmers to sustain the improvements.  We believe that a search fund approach could be a viable way of channeling the necessary financial and human capital to achieve this vision. In our preliminary study of the aquaculture sector in Thailand, we encountered several interesting opportunities that would be ripe for an impact-oriented search fund, one of which we present below in detail.

The Aquaculture Stewardship Council label on signifies the consumer product meets the prescribed level of quality and responsibility – leading to improved market access and corresponding price premiums.

The Business Today (Target Acquisition)

The business today is a semi-intensive, monoculture shrimp farm located in the Surat Thani province of Thailand that sits on 50 hectares of land and currently produces 50–100 tons of shrimp annually. Currently, 80 percent of the production is shipped live to China, while the remaining 20 percent is sold to domestic processors who turn it into a variety of ready-to-eat products such as shrimp cake and shrimp balls. The farm has been owned and operated by a single principal over the past 25 years. However, the principal is keen to retire and is currently seeking an exit that will allow him to remain strategically involved yet out of daily operations. This business has a solid foundation, and under the right circumstances with the right leadership, a fresh infusion of capital, and a reasonable sale price, it has significant potential to scale in a meaningful way.

The Business That Could Be

The business could be a semi-intensive, polyculture farm using a semi-flock system that produces premium, sustainably-raised shrimp, green caviar, and tilapia. Investments in modernizing and expanding the production system would allow the farm to meet the most stringent BAP/ASC certifications and Seafood Watch Best Choice standards. Improving their marketing collateral, building their brand, and developing sales and distribution channels will help elevate the farm’s products to a whole new level.  The farm also offers tours to the public, providing customers an opportunity to learn first-hand about the sustainable operations. Longer term, once the farm management practices are well established and rigorously tested, they could be bundled into a fully-wrapped service and then offered and competitively priced to similar farms across the country. Farmers could arrange to participate in an annual management fee or profit-sharing arrangement. An additional round of capital would be raised to finance the expansion and provide liquidity to existing shareholders.

Semi-intensive polyculture farm, utilizing a semi-flock system.

Potential triple bottom line value drivers for this business include:

  • Create and demonstrate demand in the premium market for sustainably produced, tastier shrimp, stratifying what is currently a commodity market. Higher margins counter the pressure for farmers to be in a race to the bottom.
  • Reduce feed input requirements, alleviating pressure from IUU and overfishing concerns related to collapsing wild fisheries. One system’s waste becomes another’s inputs, reducing costs related to feed, which can constitute up to 60 percent of operating expenses.
  • Complete supply chain transparency provides end-to-end visibility and ensures that all inputs are sustainably sourced, traceable, and accounted for.
  • Bio-filter approach to water management leverages natural systems to clean water and eliminates the need for chemical additives and other treatments.
  • Partnerships with local NGOs to empower and provide better work for migrant labor at company facilities.
  • Mangroves planted in the corridor provide a barrier between the water resource and production ponds, preventing soil erosion and reducing environmental impact; additional restoration projects in the community would also be supported.

These initiatives rely on the acquisition of an existing, productive asset, and then leveraging that asset to improve financial, social, and environmental impacts of the business over time. Other acquisition opportunities with similar characteristics could also be well suited for the impact-oriented search fund approach. We believe this approach could be effective in sectors where achieving impact through an acquisition is a more effective and less costly alternative to building a greenfield endeavor.