The U.S. Federal Reserve raising interest rates has caused banks to pull back on financing, and that means merger and acquisition activity will slow in the coming quarters, according to a panel of financial experts, speaking during Seafood Expo North America.

The panel, on 14 March at SENA in Boston, Massachusetts, agreed higher interest rates and an uncertain economic situation will lead banks to be much more selective about lending than they were during the post-Covid recovery period when financing was cheap. However, Jason Brantly, a senior vice president and senior relationship manager at Bank of America, said banks will still want to help make deals if the numbers make sense.

“The pendulum has definitely swung from really aggressive lending and obviously cheaper lending rates, but banks are still eager to lend,” Brantly said.

The failure of Silicon Valley Bank on 10 March, and the subsequent failure of Signature Bank, were two of the three largest bank failures in U.S. history, but a lot of the money that was taken out of those banks didn’t just disappear, and Brantly said both Bank of America and fellow panel member John Doucette’sinstitution – M&T Bank – are likely going to see large deposits in the near future as people look for more-stable institutions. That means banks will have more money to reinvest in customers.

However, signs are pointing to banks paring back the amount of lending they do. The leverage B loan market pulled back in January and February as banks decided against loans with slightly higher risk, Brantly said.

“2022 was one of the lowest years in more than a decade, and we’re well below that pace,” he said. “I think what’s happened in the bank market in the last week will probably continue to make it where there is not going to be a lot of folks wanting to go to that market and access capital.”

A court decision finding fishing permits are a revocable privilege, rather than a compensable property, will also impact valuations for seafood companies with wild-catch operations. Depending on how the ruling gets interpreted, that may make it more difficult for companies with fishing vessels to access financing.

“If that becomes a precedent, that will have a substantial impact for those kinds of companies and their ability to access capital markets,” Brantly said. “We depend on that quota as collateral.”

More-expensive financing, coupled with an increasing reluctance from banks to lend to businesses, doesn’t mean merger-and-acquisition activity is off the table – as evidenced by the announcement that Cooke was acquiring Slade Gorton just hours after the panel took place.

“I think the appetite is still there. We’re certainly still interested in lending,” Brantly said.

Doucette said for many transactions requiring large amounts of financing, senior lending institutions aren’t the way to go.

“It’s very easy when rates are low to sit back and say, ‘Get everything you can out of that senior lender,’” he said. “But that term B stuff has just gone away, so now it’s time for the private-equity folks, the family offices. We’ve seen a lot of international activity in the [U.S.] Northeast coming in.”

Term A loans are amortized evenly over five to seven years, while term B loans have nominal amortization over the first five to eight years of the loan and then a large payment in the final year, making it less costly for the company getting the loan, but riskier for the bank in the long run.

Brantly said term B acquisitions are more difficult, but a creative business deal can still be struck – it just takes work and sound advice from advisors. The community development groups in Alaska that partnered with Maruha Nichiro to purchase nine pollock vessels, he said, are one example of groups coming together to make creative deals with unique structures that still accomplish merger and acquisition goals.

Softness creeping into the global economy will also more than likely force some businesses that fall into difficulty to pursue a sale.

“That’s what it’s going to take, is more folks either going together splitting up the deal, or coming together to hold assets in that kind of creative way,” Brantlysaid.

Antarctica Advisors Managing Partner Ignacio Kleiman said that those companies in tight spots should not wait to get in touch with an advisor if the predicted recession makes things difficult for them.

“Don’t wait to call somebody,” he said. “We have worked with many companies in the sector that went through financial difficulties. The smartest ones, they realize it right away, and they would call us or some other advisor.”

Getting ahead of liquidity problems early, and getting in touch with commercial banks early, can help stave off a bigger problem down the road.

“The main thing they are looking for is, do you have a plan?” Kleiman said. “They don’t want to take over your company. They don’t want to liquidate you. They like their clients, and we have done a number of transactions where we work collaboratively. But they want to see that you’re taking your situation seriously.”

 

Photo by Chris Chase/SeafoodSource

 With plenty of ‘dry powder’ to detonate, private equity funds are competing with each other and the seafood industry itself for deals. 

 A growing number of the world’s investors are waking up to something only a small group of private equity funds, trade buyers, venture capitalists and M&A advisors have known for years: there’s big money to be made in seafood. 

 The race is on, and the accelerating rate at which private equity firms in particular are investing in the seafood sector shows that fund managers recognize the industry — processing, fisheries, aquaculture and equipment — has all the right drivers. 

Simply put, there is a lot of demand for capital in the seafood industry, and private equity funds have more cash to deploy than ever. 

Private equity firms are benefiting from market tailwinds triggered by historically low interest rates and record fundraising. 

 In the US alone, private equity “dry powder” — the amount of money funds have to invest — is at an estimated $150.1 billion (€132 billion), according to PWC’s Private Equity 2021 Mid- Year Outlook. 

And that dry powder is being put to use. Private equity-backed M&A deals more than doubled to a record $818.4 billion (€722 billion) in the first nine months of 2021, up from $315.2 billion (€278 billion) last year, according to Reuters. 

 Birgir Brynjolfsson, a partner at Antarctica Advisors, a boutique M&A specialist focused on the seafood sector, said the trend in private equity is coinciding with a growing need for investment in everything from new technology to new vessels, facility upgrades and consolidation. 

With underlying assets that appreciate in value — plants, vessels, fishing quotas and licenses — and a growing demand for its products, the seafood industry has become “very attractive” to the sector, Brynjolfsson said. 

Getting more aggressive 

Ten years ago, Antarctica Advisors was knocking on the doors of private equity funds trying to introduce them to seafood as an investment opportunity. It took a lot of time, effort and salesmanship, and for the most part few funds took the plunge. 

“Today we are in a position where we are getting the phone calls from the different private equity funds asking us for opportunities,” said Brynjolfsson.

While big names have invested in the sector in the past — Altor, Bain, Permira and Carlyle to name a few — the trend has accelerated over the last few years. 

In October, the $6 billion US private equity fund ACON snapped up US scallop supplier Northern Wind plus two small Canadian lobster companies in a deal advised by Antarctica. 

Last month, private equity group Paine Schwartz, the former owner of Alaska processor Icicle Seafoods, acquired a 50 percent stake in Hendrix Genetics, the owner of shrimp and salmon egg, smolt and broodstock suppliers, including Kona Bay, Troutlodge and Landcatch. 

There is no single reason that could be considered a turning point for the uptick in interest, but rather there are a combination of factors, Brynjolfsson said. 

With more capital being allocated to private equity, these funds have to look further afield for interesting opportunities, and seafood is, to many of them, new territory. 

In addition, some segments of seafood are now emerging as a potential fit for funds investing in sustainability focused companies. 

And most importantly, seafood consumption — the No. 1 driver of the sector — is growing and shows no sign of declining. 

The typical lifespan 

Typical private equity funds have a limited life cycle, and look to deliver a return to investors and sell off their stake in a company within 5-7 years. 

Whether the limited life cycle of a private equity fund is long enough for it to make a significant difference depends on where it invests in the sector and value chain, however, and some investors have paid significantly for not understanding the subtle nuances of the sector. 

“In some case 5-7 years is an acceptable period, but in other cases you may not achieve what you wanted to achieve in that period because of external factors out of your control,” said Brynjolfsson.

Magnus Bjarnason, managing partner at Iceland-based advisory firm Mar Advisors, noted that the sometimes unpredictable nature of some segments of the seafood industry, especially fisheries and aquaculture, can make private equity’s timeline too short. 

“Seafood is a tremendously profitable sector, but it is also cyclical … and these cycles make it difficult for private equity to get used to,” Bjarnason told IntraFish. 

While Bjarnason does see private equity activity picking up, he sees equally strong growth in institutional capital and pension and family funds, whose longer horizons are sometimes a better fit. 

Part of private equity’s challenge is that shaking loose owners from their stakes can be difficult in the seafood industry, where private ownership is higher than in most other sectors, and founding families and their descendants can be strongly committed to their businesses, Bjarnason noted. 

That is giving rise to a hybrid model where investors essentially partner with private owners, with both bringing assets the other party doesn’t have: money, and expertise. 

A battle for buys 

While private equity funds increase their activity in seafood, existing large seafood companies with the means to acquire and consolidate have been more passive of late. 

Ignacio Kleiman, managing partner at Antarctica, said the pandemic forced many potential trade buyers to look inwards and handle the challenges of day-to-day operations, which for some companies was the right move. 

“There was a lot of organic growth, and good margin expansion because demand was strong, so I think that made them happy,” Kleiman told IntraFish. 

The year prior, when the reality of the pandemic first set in, the economic uncertainty and inability to travel had a chilling effect on industry consolidation. 

“A lot of deals were put on hold, or they slowed down, or they died because of the inability to travel,” said Kleiman. 

“It is very difficult to make a large investment decision if you are not able to thoroughly kick the tires in person. That affected volume in 2021 [and] I think in 2022 the picture is going to be substantially different.” 

Private equity tends to follow the deals, and move into sectors where competing funds are active. 

Additionally, when funds buy into a company, the strategy is often to grow that company both organically and through add-on acquisitions, so it stands to reason more deals will be forthcoming. 

“This is definitely the beginning of something more that is coming, no doubt about that,” said Antarctica’s Brynjolfsson. “We’ve never been busier.” 

October 14th, 2021 – Antarctica Advisors LLC, the leading Seafood Industry-focused M&A advisory firm, acted as the exclusive investment banking advisor to Northern Wind Inc. (“Northern Wind”), one of the leading scallop processors in the US, in its sale to ACON Investments LLC (“ACON”), a Washington, DC private equity fund with global presence and over $6.0 billion in raised capital. The acquisition of Northern Wind is an integral part of ACON’s strategy to build a newly minted North American sustainable seafood processor and distributor, Atlantic Sustainable Catch (“ASC”).

Northern Wind is a leading producer of scallops and other premium seafood, serving some of North America’s largest retailers. Ken Melanson and Mike Fernandes founded the company in 1987 and continue to oversee the business’s operations today. Northern Wind has 150 employees across three locations in New Bedford, Massachusetts.

As part of the transaction, existing owners and the management team will continue to provide leadership at ASC and will be meaningful shareholders and partners alongside ACON.

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The global COVID-19 pandemic has been a mixed bag for the seafood industry, with retailers notching record seafood sales and the category as a whole seeing gains, even as the foodservice industry virtually collapsed.

That downturn is expected to change direction this year, with foodservice operators optimistic about 2021. Seafood company CEOs and advisors, speaking during the National Fisheries lnstitute’s Global Seafood Market Conference’s economic outlook panel, also expressed optimism about the industry’s recovery. While in the short-term the rebound may be slight, as trend experts have predicted, once relative normalcy returns demand could see a big boost.

“I think the euphoria of people once we get through this is going to be incredible [and] we’re going to see a fast and quick recovery,” Cooke Aquaculture CEO Glenn Cooke said during the panel.

Due to travel restrictions, office closures, and lockdowns, most people haven’t been able to enjoy the restaurant experiences they’re familiar with for months. Cooke and other panel members predicted that will cause a sharp rebound once things reopen.

“As soon as they are vaccinated or in some cases earlier, as the warm weather comes, people are going to escape the cage,” Antarctica Advisors LLC Managing Partner Ignacio Kleiman said.

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