Private equity eyes coral opportunity
Stocks. Gold. Real estate. These are typical targets for financial professionals seeking a return on investment. But for Dale Galvin, a veteran private equity investor with millions of dollars at his disposal, the next big opportunity isn’t mainstream. It’s coral reefs.
Coral reefs provide food, work and coastal protection for an estimated one billion people. They also support economic activity worth trillions of dollars a year, including US$36 billion (NZ$61b) in tourism, according to a study by the Global Coral Reef Monitoring Network.
All of that is under threat as high ocean temperatures plunge the world’s corals into crisis. Last month, the US National Oceanic and Atmospheric Administration declared the second global coral bleaching event in a decade, with bleaching in every major ocean basin across 54 countries and territories. Deprived of nutrition, bleached corals can turn white and die.
The Global Fund for Coral Reefs (GFCR) – a coalition established in 2020 by the United Nations, government agencies, financial institutions and philanthropies – has raised US$250 million to support activities aimed at protecting and restoring reefs, and aims to raise another US$500m.
Two-thirds of that US$750m total is earmarked for a private equity fund run by Pegasus Capital Advisors and managed by Galvin. (The rest will go towards a UN-managed grant.)
Galvin, 54, sees it as an opportunity for the planet and investors alike: The fund aims to earn a 20% return on investment.
This isn’t Galvin’s first foray into mixing oceans and investment. In 2017, he launched the Meloy Fund, an impact investment vehicle that specialises in empowering sustainable fisheries and aquaculture in Southeast Asia.
The fund has since made 13 investments and achieved four exits, Galvin says, with a gross internal rate of return ranging from 10% to 36%.
Bloomberg Green spoke with Galvin about what it means to be a reef-focused investor and how to turn an environmental fix into a financial opportunity.
How does private equity invest in coral reefs?
You don’t invest in a coral reef. Except for a few occasions where you can back coral-restoration technologies, you invest in enabling reef-related ecosystems to thrive.
Coral can recover from bleaching. But the more threats there are, the less likely it is to bounce back. The big three are: overfishing and destructive fishing; pollution and waste and nutrient runoff from agriculture and plastics: and unfettered coastal development and tourism.
We invest in those sectors. By reducing those threats, the reefs have a better chance of surviving in a world of rising ocean temperatures and climate change.
Has reef protection received the resources needed?
It is tremendously underinvested, undermanaged. The ocean is fundamental for supporting all life on Earth and requires urgent investment to curb rising threats such as the climate crisis, pollution and unsustainable fishing.
$175 billion a year is needed to achieve the UN’s Sustainable Development Goal 14 (SDG14) by 2030, and yet, between 2015 and 2019, just under US$10b in total was invested. Of the 17 SDGs outlined by the UN 2030 Agenda, the ocean goal is the least funded. It’s been a gap for a long time.
[Sustainable Development Goals, or SDGs, refers to 17 goals that make up a blueprint adapted by the UN in 2015 to end hunger, protect the planet and ensure a better life for all by 2030.]
Why has there been such a big funding gap?
The latest number for climate finance as a whole is something like US$1.1 trillion, which is a huge increase from prior years, but 95% of that is for mitigation and only 5% for adaptation. [How to deal with] the impact of climate change on the oceans and coastal communities is an adaptation issue.
Even within all of philanthropy, conservation is a very small sliver of that and the oceans is a very small sliver of conservation. Most of conservation historically has been focused on terrestrial causes, and oceans have been left behind.
That’s changing. Attention on the “blue economy” is increasing as rising ocean temperatures hit records and sea levels rise. It becomes an economic issue and then it becomes on the radar.
The GFCR as a coalition is composed of two main funding vehicles: a UN-managed grant programme; and a private equity fund managed by Pegasus Capital.
The two vehicles have a combined fundraising target of US$750m, of which US$250m is the target of the UN-managed grant and US$500m is our target. It’s not fully been raised. About US$250m has been committed in the coalition so far, and we hope to have all of it committed by next year.
We can’t specify the breakdown, but the bigger portion of the committed funding is for the private equity vehicle.
How easy is it to invest in coral reef protection? Can private investors make money doing this?
It’s not easy at all, but there certainly are opportunities. It is a new focus area or a new mandate for institutional investors and impact investors, but it’s not a new sector. The seafood and aquaculture sector is about US$1t. The waste [management] sector is more than US$1t, as is the tourism sector. There’s lots of businesses.
You have to be creative and entrepreneurial and sometimes package things in a way that will be impactful for coastal habitats and communities.
For example, there’s a brown algae called Sargassum that is a natural occurrence in the Atlantic but has been blooming out of control in recent years. This algae blocks a lot of sunlight, suffocates reefs, harms coastal fisheries and then winds up on the shore, where it emits methane, arsenic and acids as it decomposes.
We’ve invested in a company called Carbonwave that has figured out a proprietary way to collect the seaweed and process that into products for agricultural stimulants, cosmetics and bio-leather.
Since we closed the first deal in 2022, we have made three investments so far and have two more in advanced stages. We’re looking at a more than 20% return target over the course of 12 years, which is in line with what we would look for from a top private equity investment anywhere.
Why aren’t more private investors in this space?
It’s incredibly new. Even that word “blue economy” is pretty new. It’s not been an investor focus until relatively recently.
Many investors we talked to have to spend a year or two just deciding how to invest in it, what is the risk-return relationship and so on. Many of the growth funds are focused on opportunities in the West, whereas we’re focused on where the biodiversity is, and where the biggest impacts are on people and nature, and that’s in the Global South. That’s a new idea. It’s a process.
It’s definitely gaining momentum. There wasn’t anyone that talked about this kind of investing five or six years ago. Now, there’s quite a bit. But the market needs to catch up and we need to demonstrate that there are opportunities to earn a return.
You started early when it comes to investing in coral reef protection. What’s the biggest takeaway from your previous investment?
You need to connect the dots between the investment and the management of the natural resource. If you’re a farmer, you can decide to go organic. But the oceans are a shared resource.
Just because you as a company want to behave differently while [another company] doesn’t, it’s still a problem. You can do whatever you want, but if some trawler comes through a reef and cleans up all the fish, then it doesn’t matter.
So it’s really a combination of investing and working with other stakeholders to make this work. It’s hard to see how you would invest in oceans without that kind of co-ordination. – Bloomberg
This conversation has been edited and condensed for clarity.