As a capital-intensive business with significant asset exposure and cyclical earnings, shipping might not seem to have too many obvious attractions for the private equity market, writes shipping analyst Moore Stephens.
And yet private equity has made a significant move into shipping over the past two-to-three years, and seems likely to continue to do so, at least in the short term.
There are a number of reasons for this, not least the fact that a lack of opportunity in other sectors has driven private equity investment into 'real' assets such as shipping. Also, shipping has been languishing at the bottom of the cycle, so investors can reasonably expect rates to rise and asset values to recover, producing above long-term average returns in the next few years.
Furthermore, shipowners are more willing to enter into joint ventures with providers of private equity finance which allow the investor a greater say in the management of the business. And shipbuilders are attracting new investors by offering new vessel designs which promise operating cost advantages.
By shipping industry standards, the involvement of private equity in specific projects is expected to be short-term in nature. Indeed, as the incipient upturn in the shipping industry takes a stronger hold, we may well see a wave of investment exits, with the result that shipowners will be called upon to buy out equity partners and to restructure vessel ownership. There will also be the usual issues regarding valuation of the private equity holding in vessel-owning companies.
But, given the major fall-off in more traditional sources of finance over the past few years, private equity funding has provided the shipping industry with some welcome relief from the banking crisis.
Over the next twelve months, assuming the fortunes of the industry continue to improve, we may have a situation where ongoing private equity investment and a renewed willingness on the part of the banks to underwrite shipping ventures will provide shipping with its most promising finance scenario for some years.
Source: Moore Stephens