Private Equity and the shipping industry is a widely discussed topic. Geetika Sharma gives an overview about initial expectations, problematic developments and tries to answer if PE is going to exit the sector
Should we welcome Private Equity (PE) in shipping or not? This is a question that was raised a few years[ds_preview] ago. Many shipowners then supported te participation of PE funds especially during the financial crisis when banks were failing and many shipping companies were at the stage of bankruptcy. Shipowners realised several benefits from taking on private equity partners. The main upside was of course a ready and available source of funding when banks were not willing to lend. But in addition, shipowners obtained better access to financial, commercial and related markets by using the base of funds provided by these PE firms. One big advantage of these PE firms was – since they are less regulated than banks – they were able to offer flexible lending solutions.
From PE perspective it was the right time to enter the maritime sector. Even though they started as minor contributors, their stake percentage changed very quickly during the past five to ten years. The basic aim of all PE firm is usually to buy a company or enter a sector at the time of distress, to stay for few years and then sell the company at a profitable price. Shipowners believed that these PE firms would invest largely in second-hand vessels from distressed owners. What went wrong then?
A different objective
PE firms enter this sector with different goals, to be precise: short-term goals. The majority of the capital invested by them was used to order new vessels at cut rates from desperate shipyards, rather than buying existing vessels from shipowners. So on a short-term basis what looked like a solution to many shipowners changed quickly when they started to see the bigger picture. The chief executive officer of Tsakos Energy Navigation said in an interview »We welcome PE in our business but now there are 10,000 second-hand ships with no one interested in buying them. For their own good, it would be better if they invested in second-hand ships rather than destroying the market.«
Where this was the view of shipowners PE firms found themselves in deep trouble, too. The changing trend and the downturn in shipping clearly started showing warning signs for PE’s bet. Private equity firms sometimes go for the risky bets and invest in an industry that won’t end up providing the profits the firms were looking for. This view is supported by available financial data regarding the percentage dip in the investments from PE in shipping. Private equity investment in shipping plunged 55% in 2015 from a record 7.5 bn $ in 2013.
There are few examples which in the past showed that the estimate by these private equity firms subsequently went incorrect for them. LL Ross & Co, Oaktree Capital Group LLC and other private equity firms which bought vessels at nearly record low prices since 2010, planning to ride the global recovery wave. Instead they were unable to judge the downturn the shipping industry was about to face in the near future, enabling them to stick with such big capital investment. What made the situation worse were the declining freight rates. This is just to give an example for many cases of private equity firms investing a total of around 32 bn $ in shipping between January 2012 and January 2014. This number was estimated by maritime fund management firm Tufton Oceanic Estimated. Weaker Chinese demand, oversupply of ships were among the major causes leading to decreasing freight charges. This resulted in firms idling vessels and in some cases filing for bankruptcy. By that time it was clear that there were far too many ships in the water chasing diminishing cargoes. Most of these ships were ordered and built without any contractual commitments from interested parties to use them.
Changing interest of PE firms
In the market there are some indicators pointing to what PE firms might plan for the future. Singapore Miclyn Express Offshore, owned by Australian Champ Private Equity and Hong Kong’s Headland Capital Partners, is eyeing an initial public offering (IPO) in the near future. After investing in the maritime sector for a significant period of time, PE Firms stayed away from further involvements. Analysts and industries worldwide saw that as message that PE companies did not believe the fortune would change much for the current grim situation.
One of the biggest PE firms in India, Infrastructure Development Finance Company (IDFC) Private Equity, is one of the investors in the shipping sector from the pre-crisis period. In 2007, PE firms invested 257mill. $ in the maritime sector, confirming their optimism towards the domestic shipping industry.
»PE firms are not in a position to take cyclical bets and hence shipping is off investment,« said M. K. Sinha, Managing partner and CEO of IDFC. He added, »The BDI having fallen below 300 level is not expected to pick up in a big way going ahead as trade volumes across the glove have diminished.«
Has the time arrived to exit?
One of the major financial institutions pinpointed their view on the investment taking a drastic down-turn in the maritime sector. The head of JP Morgan Asset Management’s Global Maritime business, Andrian Dacy, said »Private equity is turning its back on shipping after a glut of funding over the last five years contributed to overcapacity in the industry«. When and how to stay or to leave is the thought process which every PE firm in the shipping sector is going through right now. The most frequently adopted way of exit is by IPO or merger. According to analysts, five major shipping businesses backed by PE are considering an IPO. Harold Malone, managing director of Maritime Investment Banking at investment bank Jefferies, believes private equity exits will speed up during 2016.
According to market information and sources backed by Apollo Global Management, Principal Maritime Tankers Corp is among the companies seeking for an IPO. If the sources are to be believed, the list of the PE firms looking to exit the business include Miclyn Express Offshore and Costamare Partners LP which are aiming for an IPO within the next five years. Even though it seems that IPO is the option which most PE firms are considering, analysts think that many may find it difficult to make a profit with that strategy in the current market. Few analysts believe that mergers and acquisitions can be considered wise decisions for smaller firms. This M&A might also bring about more consolidation in the industry. Most recent mergers include Excel Maritime Carriers selling ships to Star Bulk Carriers. The investment firm Oaktree Capital Management happened to be the major shareholder of both companies.
While shipping firms and PE firms together are trying to survive this major downturn in the industry, there also have been companies which had to file for bankruptcy. The level of fear within the PE community of facing losses can become a key factor in deciding on the right time to exist. While most plan to leave, there are few players who would rather like to take the wait-and-see approach.
Geetika Sharma
