In 1997, just a few weeks after my 21 st birthday, something terrible happened to me in Reno, Nevada: The very first time I sat down to play a hand of blackjack, I won $500. Over the course of three hours, nearly every hit got me the exact card I needed; every hold put a bust card right on the dealer’s hand. It was exhilarating: So this is why people gamble.
Since that night, I have never stepped away from a blackjack table with more money than I walked into the casino with. Not once.
Any first-year psychology student could diagnose what happened: I fell victim to the tyranny of high expectations. I’ve been chasing the sweet, sweet high of that first night.
I’m not alone in this unconscious bias, and, in fact, dozens of studies have shown that it’s even worse when you’re playing with other people’s money. One might think if you were managing the Kentucky teacher’s pension fund you’d be a bit risk averse.
But that’s not really how the private equity industry functions, or at least that’s now how it has functioned over the past few decades. Instead, managers have put their chips on all kinds of numbers in the value chain.
If it seems like the number of deals has picked up, that’s because it has. Just like me, all it takes is one or two big wins to set the standard, and then the fear of missing out on phenomenon takes over.
Chasing the unicorns
One standout was private equity firms Altor and Bain’s stunning flip of Norwegian State-owned Cermaq’s feed division Ewos. When the PE pair purchased the group in 2013, it was valued at NOK 6.5 billion (€708.6 million/$781.9 million at the time). When they offloaded the group to Cargill, it was worth €1.35 billion ($1.47 billion) .
Fish health group Pharmaq was even more eye-popping. PE firm Permira (whose ownership of Birds Eye-Iglo was hardly a success, incidentally), purchased the aquaculture health group in 2013 for €250 million ($274 million) and sold it for $765 million (€693.6 million at the time) two years later to pharmaceutical giant Zoetis, a tidy 300 percent return.
The losing bets, though, are much higher in number. From Lion’s ill-fated and ill-timed Young’s and Bumble Bee acquisitions (costing £1.1 billion (€1.2 billion/$1.3 billion) and $980 million (€894 million), respectively), to Paine Schwartz’s bumpy Icicle Seafoods ride and its continued struggle to sell off Norwegian byproducts group Scanbio, the list is lengthy. Many had incredibly unrealistic views on what their return might be. Lion, for example, expected to more than quadruple its investment off of the Bumble Bee deal. The company remains unsold despite a series of failed attempts.
Many of the PE firms would just as soon forget their seafood adventure, while others have an incredibly short memory when there’s money to be made. So the list of losers will get longer and longer, particularly with bright shiny objects such as land-based aquaculture coming out of the woodwork.
It’s worth questioning what role private equity should play in such incredibly cyclical industries as fisheries and aquaculture. That doesn’t really matter, though. Private equity is only going to get bigger and bigger in this sector, as fund managers sniff out potential opportunities in seafood and take a look back at jackpot deals.
In large part, that’s because the money needs a place to live. An Ernst & Young report found that through the first half of 2019, some $732 billion (€668 billion) is available to invest (which the industry refers to as “dry powder”).
Nearly 3,000 transactions were conducted in the private equity space in 2018, and a not insignificant number of those were in seafood (in the first half alone).
With all the companies rooting around this sector, prepare yourself for more news, and more gamblers at the table. And just like all gamblers, private equity funds too often will look at the winning hands, not the losing ones.