Swashbuckling, Shipping and Superyachts

By Clive Dixon

Posted: 23rd July 2013 10:43

Historically what did private equity and traditional Shipping have in common? The answer is: almost nothing.  But wait, private equity just might be the surprising next big source of capital for the world’s ship owners and operators.
 
And while we’re on the subject of mismatches, how about superyachts, what do they have to do with private equity either?  Well it might surprise you but ironically superyachts have more to do with private equity than commercial shipping.
 
To begin with, private equity’s hundreds of billions in unallocated funds could make very strange bedfellows.
 
“Generally, most private equity funds are not keen on asset plays in highly cyclical markets traditionally preferring steadier income streams, so shipping has not even been on their list,” says Phil Cowan partner and head of Corporate Finance at Moore Stephens London. “However in its current state, shipping is attracting interest, generally in the form of distressed asset and recovery players.”
 
Moore Stephens is known to be an authority on superyachts, commercial shipping and private equity, as well as a related but very different sector - shipping services.  As one of the biggest players within the broad spectrum of the global superyacht industry, Moore Stephens Isle of Man publishes the Yachting VAT Note and is more widely known internationally as an authority on global commercial shipping.
 
On the shipping side, because investing in distressed enterprises is one of the most common private equity strategies, some ship owners see private equity as the silver bullet for the very real crisis of a funding meltdown, as record levels of new ships ordered three or four years ago, float out of their builders’ yards.  This results in over capacity, as more ships chase fewer goods in the current global malaise and has depressed prices or “rates”, as they are known.  All that confusion has that special group of banks who understand the intricacies of shipping focusing on existing problems rather than new lending or even worse, exiting shipping altogether.
 
If private equity avoids the pitfalls and persists, it might indicate a sea change as notoriously “swashbuckling” ship owners in a traditionally fragmented industry surrender to a culture of larger corporate entities and sophisticated financing.
 
Moore Stephens publishes the Shipping Confidence Survey www.moorestephens.co.uk and most recently polled 500 respondents, including owners/operators and managers as well as brokers and professional advisors. And the good news is that the latest score of 5.9 measured on a scale of 1.0 to 10.0, is the third quarterly increase in a row.
 
“Admittedly a modest increase,” observes Phil Cowan, “but very welcome within an encouraging trend from an all-time low in August 2012.”  Compared with last quarter, respondents were generally more positive about making a significant investment in the next 12 months; however among owners themselves, there was a fall in confidence.
 
“One possible conclusion is that the market is beginning to polarise between those with cash and confidence and those without one or both,” said Phil.
 
The shipping industry is projecting long-term growth.
 
It’s not surprising that some private equity funds have bought distressed ship owners’ debt as a route to control the respective company’s equity.  Fund managers see opportunities to optimise in shipping while ship owners facing tight credit markets and some of the worst trading conditions in history, sense private equity might be a novel source of capital.  As long as alternative funding markets are virtually closed, private equity’s participation in shipping could be set to rise exponentially.
 
Fund Managers beware.
 
One of the first surprises greeting private equity is that the shipping business of ships is like no other.  Indeed, shipping has never been for the faint hearted - having one’s name associated with a damaged tanker trailing miles of oil slick, with the inevitable and pitiful pictures of seabirds covered in crude, is a most unpleasant prospect.  So a useful rule is; if you don’t understand shipping you’d be wise to employ the services of someone who does.
 
One ironic surprise that has tripped up ship owners, sometimes spectacularly, as they have dipped their toes in the glamorous business of superyachts, is even though they float on the same sea, superyachts and commercial ships are very different – and it’s not just the paint job.
 
CLUE: Nobody really needs a superyacht.
 
Besides new sources of capital, and ship spotters look away, perhaps ironically the surest way to higher rates and relative nirvana in shipping in the current economic sea state, is to scrap ships.  In the last month the youngest merchant ship, Ocean Producer, a 13-year-old feeder container ship was sold for scrap.
 
For those who get queasy with flamboyancy, oil spills and high amplitude volatility, there are opportunities in shipping services.  Private equity funds are demonstrating a great interest in this segment perceiving it as business services or outsourcing, attracting less risky and very interesting valuation multiples and metrics.
 
For example in 2011 V Ships was acquired by Canadian pension fund investor OMERS and at the smaller end of the market Garrets International was acquired by GCP in 2012.
 
Phil Cowan was directly involved in V.Ships.
 
“Private equity views shipping services very differently from shipping asset investment,” he observes. “Asset light, the service nature of this business with often annuity like income streams is in stark contrast to the cyclical, commodity-driven income streams associated with shipping assets.”
Phil Cowan points out that over a long period the V.Ships story is an interesting one. “A series of three private equity players were involved - increasing enterprise value over an eight year period is a testament to the robust nature of this business model in the midst of very difficult market conditions both within shipping and the global markets generally,” he said.
 
How private equity will ultimately fare in its shipping experience will depend on what a normally straight-laced industry learns about an industry that has taken great pride on being decidedly less so.
If it all goes wrong, it’s not the first in recent times.
 
“At its peak the German KG market provided over €3 billion to the shipping market, mainly but not exclusively in the container segment, powering German shipping to its then heights” says Phil.  This market is unlikely to recover in the short or even the medium term but it is interesting to note very recently, that new investors have invested in Koenig & Cie, one of the best known KG issuing houses in the shipping market, so let's see.”
 
What about that global cottage industry of superyachts?
 
Well, when it comes to commercial shipping, except the unforgiving laws of Archimedes and VHF radio hailing frequency Channel 16, where the two are forced to meet, yachts and commercial ships have surprisingly little in common.
 
During the chaos in shipping, prices for these luxurious and very conspicuous confirmations of their owners’ success and good taste dropped at least 25%.  Another challenged industry? Perhaps.
An investment for private equity? Probably not. There are fewer than 5,000 superyachts in the world compared to their 50,000 or 60,000 commercial cousins.
 
Moore Stephens Isle of Man’s senior partner Clive Dixon points out: “Behind every one of these very special vessels is a very wealthy and sophisticated owner and often a family office as well - it’s no secret that as other pools of capital dry up we see family offices topping up the gaps via private equity, directly or through funds.”
 
They just need to remember that superyachts and commercial shipping are very different businesses.  That’s another story.
 
Moore Stephens is regarded as one of the world’s leading accounting and consulting associations with more than 624 offices in some 101 countries. 

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