KKR makes $90m China fish food investment - update

As the second-largest shareholder in the business - a 20-year-old company that made the transition from state to private ownership a decade ago - KKR will support geographic and category expansion. This means moving from Guangdong into other coastal provinces as well as serving the growing number of fish farms inland. Yuehai will also diversify its output from mainly shrimp feed to cover other types.

The PE firm's previous investments in the space have focused on farm operators. KKR and CDH Investments backed China Modern Dairy in 2008 and they followed up with a greenfield dairy farming venture in 2014. In the hog farming sector, KKR and three other PE firms took a majority stake in COFCO Meat, also in 2014, and the following year it backed poultry producer Fujian Sunner Development.

Julian Wolhardt, partner and regional leader of China at KKR, explained that fish farming is a highly fragmented and doesn't offer the same economies of scale as chicken and pork. It also highly penetrated, with 75% of the fish in China now farmed industrially.

However, having developed an understanding of breeding in other protein groups, KKR decided to look into what other kinds of proteins are significantly impacted by what an animal eats. "We wanted to find a feed that is truly differentiated," Wolhardt explained. "With pigs, there are basically three types of feed so it is very difficult. With aqua, each specie eats a different type of feed so it is easier to be differentiated from other suppliers."

Yuehai is the largest player in China's shrimp feed space with an 18% market share. It also provides seawater fish feed. Expansion into the freshwater feed segment requires additional industry expertise and improved technology. There is a demand and a regulatory rationale to this development.

Consumption of aquatic products in China is growing faster than for other types of protein, according to the UN Food & Agriculture Organization, as rising disposable incomes mean consumers are willing to pay a premium for high quality and safe products. However, annual per capita consumption is still just 35 kilograms, compared to more than 50 kg in Japan and South Korea, according to a release.

On the regulatory side, food safety and environmental legislation came into effect in China this year. This is expected to have a ripple effect on all protein types as the government pushes for greater industrialization, reduced pollution, and tighter food safety risk oversight.

For aquatic feed suppliers in particular, there will be an enforced reduction in the use of raw frozen fish as feed, greater oversight of antibiotics used in feed, and requirements to introduce more environmentally friendly equipment and production practices. Increased consolidation is seen as the likely result, with bigger groups such as Yuehai set to benefit.

"Part of the reason we find this sector interesting is that larger players are going to benefit from regulatory change. In order to stay competitive, smaller players will have to upgrade their equipment and get recertified," Wolhardt added.

The PE firm invested through its China growth fund, which closed at $1 billion in 2010.

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• Topics
• Greater China
• Expansion
• Consumer
• Growth capital
• China
• KKR
• Consumer