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Investors see sea of opportunity in agriculture

What’s less probable: Atlantic salmon raised in Florida or fish farms backed by infrastructure funds?

Indoor fish farming group Atlantic Sapphire is already raising salmon in tanks an hour south of Miami and hopes to be in a position soon to explore partnering with an infrastructure investor to help fund its ambitious growth plans. 

The company is one of several startups in the agriculture industry that are embracing technology to grow food in highly controlled settings to deliver what they believe is a superior product at a lower environmental cost than traditional food production methods.

The shift has caught the attention of infrastructure investors that are interested in backing firms involved in agriculture through the direct production of food, transportation, storage and energy.

In recent deals, Instar Asset Management acquired mushroom producer Windmill Farms and Ares Asset Management’s infrastructure opportunities strategies invested in a USD 310m capital raise by urban greenhouse operator Gotham Greens. Others, such as H.I.G. Infrastructure, are supporting developers that build facilities that turn farm waste into biogas.

“The intriguing thing for investors like us is that this is an area where the United States has long had and continues to have a comparative advantage,” said Ed Pallesen, co-lead of H.I.G. Infrastructure. “It’s a robust part of the US economic scene. And secondly, … although you can have commodity price swings, the demand for food tends to be pretty stable.”

Instar partner Steve Simpson said the agriculture industry has seen decades of underinvestment, providing an opportunity for infrastructure investors to support companies — many of whom are family owned and have limited resources.

“How can we help essential businesses to modernize equipment and optimize operations through automation and technology?” Simpson said.

The question for funds is how to get involved in a sector that has traditionally been viewed as out of bounds, thanks to volatile commodity prices and production subject to the whims of mother nature.

“It can’t be a case of this is a new sector and now everything is viewed as infrastructure,” said Simon Soder, a partner at Antin Infrastructure Partners, which has invested in the aquaculture industry. “You need to identify assets and structure deals that have infrastructure characteristics.”

Profitable fish

Atlantic Sapphire has spent more than a decade developing technology to raise salmon on land, a method that promises to eliminate threats of disease, pollution and weather that plague sea-based fish farms.

Its first facility, capable of producing 10,000 tons of salmon a year, is already online and a second with 15,000 tons of capacity is under construction. The company has financed hundreds of millions of dollars of capex through bank loans and equity sales via its listing on a Norwegian stock exchange.

Once the company becomes profitable — a milestone it hopes to hit later this year — CFO Karl Øystein Øyehaug believes it will be able to explore working with infrastructure investors. Funding could come in the form of debt, equity or project financing.

“The type of infrastructure we build should in theory be perfectly suited for infrastructure investment,” Øyehaug said.

Core to the company’s facilities is water treatment — a frequent investment target for infrastructure funds — but the end user is fish, not humans, Øyehaug said.

Atlantic Sapphire is building in South Florida to take advantage of the region’s abundant water supply and the ability to dispose of wastewater deep underground. Øyehaug said this geography gives Atlantic Sapphire an advantage over rivals that have struggled to secure operating permits.

At the same time, Atlantic Sapphire does not use long-term contracts to sell its branded fish to supermarkets and restaurants.

Instead, the company is betting consumers will pay a premium for its higher-quality product and that demand for salmon will continue to outstrip supply.

By some estimates, global demand for seafood may jump almost 80% by the middle of the century, according to a study by Stanford professor Rosamond Naylor. Land-based farming will be key to meeting the demand to prevent overexploitation of wild fish, according to other research.

The pandemic demonstrated the resilience of the seafood industry as demand for fish held up even given the temporary closure of restaurants, according to Roy Høiås, CEO of Lighthouse Finance, a seafood industry financial advisor.

New investors, including infrastructure funds, have also started to show interest in aquaculture after the pandemic — attracted by themes including sustainability, local food production and new technology that allows saltwater fish to be raised on land, Høiås said.

Picking spot on value chain

Infrastructure investors have employed different approaches to making investments in niche agriculture sectors that lack long-term pricing contracts for the underlying commodities.

Instar’s Simpson said that his fund conducted considerable research before investing in Windmill Farms to ensure that the food mushroom industry has a stable balance between supply and demand.

The company enjoys decades-long relationships with many of its customers and is typically able to pass on increased costs through annual negotiations with clients, Simpson said. Its indoor, automated facilities produce consistent quality and ensure weather conditions don’t interrupt supply.

France’s Antin Infrastructure Partners entered the aquaculture industry in 2018 with a deal to buy a Norwegian company that swims midstream in the salmon supply chain.

The business, Sølvtrans, owns and operates a fleet of specialized boats that service ocean-based salmon farms, transporting smolt from freshwater tanks to the ocean and later harvesting mature salmon.

Sølvtrans has fixed contracts with farmers and its revenue is not based on the volume of fish harvested or the market price for salmon.

H.I.G. Infrastructure, meanwhile, is investing in the waste side of agriculture.

Last September, the middle market-focused investor backed Northern Biogas, a West Virginia company that partners with dairies and landfills to turn waste into renewable natural gas. The process creates better environmental conditions on farms and meets growing demand from utilities and companies for renewable fuels.

Investment across the wider biogas industry from infrastructure, private equity and strategics has soared in the past two years with 22 greenfield and M&A transactions across North America closing in 2022 compared to 15 in 2021 and just one in 2020, according to Infralogic data. Disclosed deal values hit just under USD 6bn last year.

Northern Biogas faces risk on the supply side at farms and on the demand side for RNG pricing.

To address this, Northern Biogas carefully assesses the financial health of potential partner farms and their track records operating across different cycles, said George Watts, a managing director at H.I.G. Large farms near existing natural gas pipelines are particularly attractive, he said.

On the demand side, Northern Biogas sells its RNG into multiple markets: physical molecules pumped into pipelines and credits from federal and California programs intended to promote renewable fuels.

The company contracts with offtakers for the RNG and credits its facilities' produce, though pricing is based on market rates. Markets for RNG and credits are historically uncorrelated, providing a degree of stabilization.

Since H.I.G.’s investment, Northern Biogas says it has more than doubled the number of projects it is developing.

While dairy farmers were initially reluctant to allow firms such as Northern Biogas to install plants on their farms, Watts said the industry is becoming more open to partnerships.

“As they’ve come to see [projects] and witness that it's pretty non-invasive and that it actually has a whole bunch of knock-on effects that are to the benefit of them in addition to another revenue stream, the acceptance is definitely picking up,” Watts said.