What a hatchery is worth

Most capital entering aquaculture buys grow-out. Cages, pens and ponds are countable, insurable and comparable, and a buyer can value them against a harvest schedule. The hatchery upstream is a smaller asset with a stranger balance sheet: a building, a water treatment plant, a broodstock population and a set of production protocols that took a decade to write. It rarely appears in a sale process on its own. When it does, generalist buyers price it as a facility, which is the wrong unit.

A hatchery is worth what its juveniles do in someone else's water. Survival to harvest, growth rate and disease resistance are properties of the genetics and the early rearing, and they appear in the grow-out operator's feed figures twelve to thirty months later. Our diligence therefore runs backwards from customer performance data rather than forwards from hatchery capacity. Two hatcheries of identical size can differ by several percentage points of survival, and several points of survival is the whole margin of a grow-out business.

Supply concentration follows from biology. Broodstock programmes take eight to twelve generations to establish, and a generation is a year or more in most farmed species. That timetable cannot be shortened with capital. In the species our desk covers, juvenile supply is usually held by three to six programmes per region, and grow-out operators sign multi-year offtake because switching supplier means accepting an unknown survival profile over a full cycle. Concentration of that kind is structural under the first of the four tests.

The licence position is different upstream. A hatchery draws and discharges water under a permit with conditions on volume, temperature and treatment, and it holds health status certification allowing its juveniles to move across borders. That certification is the asset most often mispriced. A hatchery able to ship to four jurisdictions is not one and a third times a hatchery that can ship to three. It is the only supplier available when disease closes a border, and it prices accordingly in exactly the years the market is worst.

Capital intensity is modest and operating leverage is high, which suits a holding rather than a lending relationship. A regional hatchery serving fifteen thousand tonnes of annual grow-out will carry a replacement cost in the low tens of millions of dollars and generate cash through cycles that flatten the operators it supplies. The firm's Private Equity division has treated that profile as its preferred entry point into marine positions since 2019, ahead of the larger and more visible farms.

Conversion is the harder half. A hatchery sells to a buyer who wants supply security rather than a financial return, which usually means a grow-out group, a feed producer or a genetics business. Those buyers are patient and few. We therefore underwrite marine positions on the assumption of a trade sale to a customer, and we hold the position long enough for the customer to conclude that the supply is worth owning. That judgement is the second of the four tests, and it governs the hold.

Published 2021-03-17 by the Private Equity division. Research is prepared for eligible counterparties and does not constitute advice.