With the banks having limited lending capacity for new shipping business, for the most part, shipowners have been ‘forced’ to look elsewhere for capital for the last several years now. While leasing and export credit may be capable addressing certain types of new projects on selective basis or for selected credit, when one is looking for substantial financing, either in the public markets or private terms, there are more credible choices.
Neither the public markets nor Private Equity (PE) are for the light-hearted as their prerequisites, modus operandi and future expectations are distinctly different than traditional shipping financing such as bank lending. There is no doubt that in a post-Lehman world and with Basel III regulations surely ahead, even shipping debt financing will be much more ‘complicated’ and ‘structured’ and ‘disciplined’ in the future than many owners had been used to so far; however, capital markets and PE have already been trying to impose their ‘complicated’ and ‘structured’ and ‘disciplined’ approach to shipping and its way of doing business.
While the capital markets for equity have been taking a breather, PE funds have been on the prowl for shipping investments. A lot has been said about PE funds and high expectations have been placed on them, even some parties have wondered whether PE funding can substitute bank lending. In our estimates, more than twenty billion dollars have been invested in shipping by PE funds in the last three years (one can assume forty billion in total investments when leverage is considered); not a negligible number by any standards, but definitely still a very small fraction of the capital needs of shipping; one may consider that debt in shipping used to stand at about five hundred billion dollars at the top of the market.
There is no lack of appetite or equity, in absolute terms, to be invested by PE funds into shipping; in our opinion, the five hundred billion check of the banks could easily be supplemented by the PE funds. Would the PE funds provide the same terms like the banks for substituting capital in shipping investments? The short and the long answers to this question are an emphatic ‘No!’ First, by definition, PE funds usually provide equity investments that, by definition, have to have higher hurdles for return expectations. Even for credit investments, PE funds expect a substantially higher return than the bank’s ‘traditional’ spread on lending. Then, PE funds, expect to invest or co-invest along efficient and transparent platforms, platforms that are best prepared to fully benefit from market exposure. Banks would not care particular about transparent or efficient platforms since their primary consideration was principal repayment and interest payment; when freight rates were going through the roof, such hurdles were ridiculously easy to meet, and thus, never a serious concern for the banks which allowed to the extremes for ‘name lending’ and other lax arrangements. PE funds have not only to be positioned for sharing the maximum return by optimizing the cost structure among other considerations, but they also have their limited partners (LPs), often sophisticated investors themselves, to satisfy and report to and potentially explain –and they may also have legal exposure, for any shortfalls in transparency, due diligence and optimizing efficiencies.
In our experience and in our business practice, we have seen or have been engaged by several PE funds working on Joint Venture (JV) structures with shipowners, whether publicly traded or privately held. Frankly, most of the discussions and adventures ended in disappointment. It took a special approach by – usually smaller and nimbler and why not, owners in greater need of financing to be willing to work along the PE’s requirements. There has been greater success also with German owners or funds; some of such German owners have been familiar working with outside investors under their KG system; other German owners or KG houses may have been in great need to capitulate the accept the terms of PE.
Despite all the noise about PE, and yes fanfare on occasion, they provide a valuable tool and the capital means for companies with ‘legacy issues’ to restructure and survive the cycle, but more importantly, they can make good partners for qualified shipowners; yes, they are equity and not debt investors, and accordingly will seek for more demanding terms of providing financing, but they can provide, besides the capital, the motivation for transparency and setting up the right corporate processes and procedures, and they can bring a strategic and disciplined approach to investing and growing a business. At the end of the day, in about four-five years’ time, the PE will be heading for the exit either by selling or liquidating the JV or preparing for an IPO. After all, shipping is heading toward a more systematic, disciplined and corporate way of doing things. For better or worse, it seems that our shipping world is slowly moving toward a more ‘solid’ state despite its ‘watery’ nature…
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