With growing global challenges in the food industry and calls for sustainable business models, food technology innovations are rising. So-called high-tech food is experiencing an unrestrained demand in society and politics while, correspondingly, the liquidity needs of young companies in the global high-tech food industry are growing. Access to capital via traditional sources of debt financing or complex venture capital fund structures is contrasted by innovative models that are equally attractive to professional investors. Chartered Investment facilitates such models in which venture capital investments in high-tech food and cleantech startups become bankable and sustainable assets.
The Rise of High-Tech Food
The link between food, industrialization, and technology is not a new trend. Its origins date back to 1752 with Nicolas Appert's pioneering invention of heat treatment of food for preservation purposes, which would lay the foundation for the canning industry in the early 19th century. This industrial and technological progress in permanent food preservation was driven by wars, famine, and food shortages, among other factors.
High-tech food as the superlative of technological advance in the food industry is likely to be associated, for example, with the meals pressed into small cubes by astronaut Yuri Gagarin, who made the first manned space flight in 1961 with the Vostok 1. The long-lasting astronaut food, on the other hand, was not able to cope with earthly concerns. The challenges facing the food industry in the 21st century are different and way more complex: scientists at the Institute Pasteur in Paris predict that the world's population and global demand for meat are likely to increase by 60 and 70 percent, respectively, by 2050, multiplying the environmental impact of livestock farming (see Garcia, High-tech food (piplettes-pasteur.com)). It is already largely undisputed that the mass production of meat is a major contributor to global warming.
High-tech food addresses this alarming development and aims to proactively contribute to a more sustainable food industry. Among the numerous startups in the High-Tech Food industry, several important companies are based in the innovation hub of Israel. These include, for example, Supermeat, Amai Proteins and Remilk. Such clean- and food-tech startups have in common that they want to use sustainable technologies to conserve important resources, curb the global climate crisis and create scalability in staple foods. The crowdfunded company Supermeat is developing ready-to-eat chicken products produced under sustainable conditions using cell cultures – without animal slaughter or genetic manipulation. Amai Proteins is an award-winning startup that develops so-called designer proteins, sweeteners made from 100% protein. This sugar substitute can not only curb widespread diseases, but also and most importantly avoid significant environmental impact from conventional sugar production. Based on the process of microbial fermentation, the cleantech startup Remilk has for the first time developed an industrial-grade milk protein that can be used in food production like cow's milk, completely independent of animal milk production. Remilk just started to build the world’s biggest precision fermentation plant and attracted numerous large and global investors
Getting Involved in High-Tech Food Startups
Traditionally, investors can participate in such ventures in two ways: venture capital or venture debt. Venture capital investments, i.e., equity investments, regularly aim at taking an active investor role in a startup. Venture debt investment, meanwhile, comes closest to typical loan financing via credit institutions. Both forms of investment have in common that investors regularly evaluate a venture intensively and directly hold the risk of the (equity or debt) investment.
In addition to these direct investments, indirect investments offer the advantage of diversification and broader participation in the performance of startups without having to exert influence or any other sort of activism by the relevant investor. The most common form of indirect investment in startups is probably still the subscription of shares in venture capital funds. In Europe, such VC funds are regularly launched as so-called alternative investment funds (AIFs) in accordance with the AIFMD (Directive 2011/61/EU) or their national transposition laws (e.g., the German Kapitalanlagegesetzbuch (KAGB) or the Luxembourg Law of 12 July 2013 on Alternative Investment Fund Managers), respectively. AIFs are collective investment undertakings that collect capital from a number of investors in order to invest it in accordance with a defined investment strategy for the benefit of such investors and are not licensed as undertakings for collective investments in transferable securities (UCITS) pursuant to the UCITSD (Directive 2009/65/EC). With the enactment of the AIFMD in 2013, the European legislator simultaneously enacted the “add-on” for venture capital funds: pursuant to this regime, AIFs for venture capital investments may also be offered in the form of qualified venture capital funds or European Venture Capital Fund (EuVECA), respectively. With such an “add-on” to the AIFMD, the European legislator targeted the liberalization and promotion of the market for venture capital investments in Europe. However, of the more than 65,000 AIFs registered with the European Securities and Markets Authority (ESMA), only around 600 are EuVECAs - in this respect, the qualified venture capital fund is proving to be a rather moderate success story.
Nevertheless, venture capital (as well as private equity) in a fund has always been the most widespread and conventional form of investment in venture capital. The advantages of fund investments have been discussed in many different ways. Disadvantages are likewise to be considered. Often, fund investments in startups, usually structured in a closed-ended form, are not very liquid. Closed-end funds have limited redemption rights and long maturities. For institutional investors, such as investors whose investments are regulated under the German Investment Ordinance for Insurance Companies and pensions funds, venture capital funds rarely offer suitable investment opportunities. Among different reasons, a core hindrance concerns the limited legal options for allocating such capital investments to the respective investment quotas, apart from the basic regulatory hurdles imposed by the principles of regulated investments.
Making Alternatives Investable: High-Tech Food Basket with Opus – Chartered Issuances
An alternative to traditional investments in VC funds, which enables participation in the performance of several startups – such as the high-tech food startups mentioned above – is offered, for example, by securitization according to Luxembourg standards. Securitization, i.e., the repackaging of assets into liquid financial instruments accessible to clearing, has a long and sophisticated tradition in Luxembourg. Since 2004, the law on securitization of the Grand Duchy of Luxembourg has provided a flexible legal framework for securitizing asset-independent transactions in securities. In particular, the legal framework is constantly adapted to the needs of practice. The starting point for such a structure is the securitization vehicle. The law distinguishes between a securitization fund (fonds de titrisation) and a securitization company (société de titrisation), both of which can also be regulated and supervised by the Luxembourg financial market supervisory authority CSSF for the public offering of securities. In the form of so-called multi-issuer vehicles, such as the structure of Opus – Chartered Issuances S.A., individual insolvency-remote compartments with liability segregation (compartiments) can be established at the securitization company level for each transaction. These compartments securitize the assets of an index or basket, such as a portfolio of investments in cleantech startups. From the issuance of the compartment, investors acquire a bankable certificate and the cleantech startups are provided with capital (e.g., via a loan that the Compartment extends to the respective company based on the investors' investments). To the extent that the structured securities are issued by way of a private placement, additional liquidity through transferability by purchase and sale between investors can significantly increase fungibility, as this is a custodial solution due to the global custody at Clearstream. Listing of the structured securities is also possible at certain trading venues for venture securitizations depending on the structure. Overall, the structuring of the transaction in the compartment can be customized and tailored to the needs of the initiators, investors or even beneficiaries – such as cleantech startups. Due to the flexible, transparent, and established legal framework, there are virtually no dedicated limits to an investment solution.
Sustainable investment models
If the securitized assets concern shareholdings in high-tech food companies or corresponding loans to these startups, the transaction can also be designed as a sustainable investment on the basis of the relevant framework conditions. High-tech food securitizations can, for example, be issued as green bonds using the Green Bond Principles of the International Capital Market Association (ICMA). High-tech food as the underlying of a certificate fulfills several categories of suitable green projects from the Green Bond Principles: the technologies improve energy efficiency, their use contributes to pollution prevention and control, and high-tech food realizes environmentally sustainable management of natural resources and land use. If the issuer also follows a dedicated ESG strategy and takes into account the otherwise applicable sustainability regulatory requirements at both the corporate and product levels, securitizations of cleantech startups can be made sustainable investments overall.
The incentives and, above all, the benefits are thus twofold: the increasing demand from investors for sustainable investments is met equally as the further development of sustainable production processes in the food industry.