1 18 June 2015
Private Equity Scorecard: Whats Been Working 18 June 2015 1 - - PowerPoint PPT Presentation
Private Equity Scorecard: Whats Been Working 18 June 2015 1 - - PowerPoint PPT Presentation
28 th Annual Marine Money Week New York City Private Equity Scorecard: Whats Been Working 18 June 2015 1 Private Equity in the Shipping Industry: Myths vs. Reality Pirates at the helm? Private Equity Funds have undoubtedly been a hot
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Private Equity in the Shipping Industry: Myths vs. Reality
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Pirates at the helm?
- Private Equity Funds have undoubtedly been a hot topic since they first entered shipping a few
years ago
- Recently, they have drawn heated attention and are being blamed for a number of the market’s
shortcomings:
- Private Equity firms have deployed enormous amounts of capital
- Private Equity firms have killed the Dry Bulk market
- Private Equity firms have gone on an Ordering Spree
- Time for some Myths vs. Reality assessment
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Banks 68% Private Equity 3% Other 29%
Myth No 1: Size of Private Equity Investments in Shipping
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Source: Marine Money
The total PE money invested question: What is the truth about the amounts invested by PE funds so far – Is PE money flooding the market?
- Private equity financing, while non-existent back in 2007, has gradually increased in recent years, reaching a
peak in 2013. Nevertheless it still accounts for a small portion of the equity pool
2008-2014 Sources of capital in shipping
$535 billion
Sources of capital – shipping ($bn) 2007 & 2014 Bank Debt vs. PE investments in shipping ($bn)
99 45 22 20 40 60 80 100 120 2007 Banks 2014 Banks 2008-2014 PE
- 55%
Over the same period, approx. $22bn of PE money has been invested Banks annual lending contribution has been reduced by half or by $54bn
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Myth No 2: The Dry Question?
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Source: Marine Money Note: 1. Includes investments in the dry bulk and tanker segments. Excludes loan portfolio acquisitions
The dry question: Are the PE funds to blame for the collapse of the Dry Bulk market?
- A lot of talk on the street about the PE funds’ role in destroying the dry market – are PE funds really to blame
for the current state of the dry market?
- If so, why haven’t we seen that happening with the wet space as well?
An interesting example…
Same Operator / Same model, very different outcome Both companies backed by PE Investors
Share Price Performance Delta: 71%
25 50 75 100 125 Tanker Company Dry Bulk Company
2008-14 Cumulative PE Investments Dry vs. Wet
$9.9 billion(1)
Dry 37% Wet 63%
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Source: Clarksons
The ordering spree question: Are the PE funds behind the recent wave of NBs and to what extent are they responsible for the continuing market malaise and anemic recovery prospects?
Myth No 3: Ordering Spree – Who’s to blame?
459 296 100 200 300 400 500 2007-2008 2013-2014
Contracting Volumes 2007-08 vs. 2013-14 (mDWT) World Orderbook (mDWT)
- 35%
0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 Traditional ship
- wners ordering
vessels PE funds joining the
- rdering activity
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Source: Marine Money
Private Equity: An alternative financing source Following the 2008 global financial crisis, private equity emerged as an alternative financing provider for shipping companies to partially fill the gap left by the traditional sources of ship finance
- Current state of the shipping market can be attractive to PE investors (financing need, distressed
sectors/players, fragmented market, etc.)
Private Equity: What works…what doesn’t?
1.1 0.6 2.1 4.3 2.9 7.5 3.4 10 20 30 40 0.0 2.0 4.0 6.0 8.0 2008 2009 2010 2011 2012 2013 2014 Deals Value (€bn)
- No. of Deals (#)
4 4 11 15 17 33 26
Total No of Deals
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- We have established by now that since the beginning of the shipping crisis, few topics have
drawn more attention than private equity funds interested to invest in shipping
- What are the features to look for in a successful private equity investment in shipping:
- Timing of Investment
- Appetite for Duration
- Structure / Chemistry
- Size Does Matter
- Timing of Exit
Private Equity: What works…what doesn’t?
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30 60 90 120 150 180 Jun-85 Jun-87 Jun-89 Jun-91 Jun-93 Jun-95 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 5yr old VLCC ($m) 5yr old Capesize ($m)
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Source: Clarksons
Timing of Investment: Timing is the single most important element in shipping investments
- Shipping is one of the most cyclical sectors creating tremendous opportunities but also bearing
significant risks
- Historically 2/3 of returns have stemmed from asset play, 1/3 from operation – take out the cycle
effect and you are left with single digit returns
Private Equity: What works…what doesn’t?
- In order to generate excess returns, one
should carefully analyze the market and identify the right point in the cycle
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Appetite for Duration: Long term investors enjoy a clear advantage over shorter term investors
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- Shipping cycle favors investors who can take a longer view of the market over investors with short
term investment strategies
- Private equity typically expects to exit in 3-5 years (sometimes this can be longer), but the
shipping cycle is largely unpredictable and its timing may not coincide at all to the PE’s exit strategy
- Trends need to be analyzed carefully and investors should be prepared and have the flexibility to
stay in longer
- If IPO is end game, window has to open even sooner as it takes a long time to fully exit
Private Equity: What works…what doesn’t?
Year 1
Year 2
Year 3
Year 4 Year 5
Year 6
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Structure / Chemistry: True alignment of interests of the PE investor and the shipping company is a prerequisite for any successful deal – Chemistry is also key
- Mutuality of contract – documentation to fit
business model
- Mutuality of risks – skin in the game
- Pre-defined investment vision / philosophy
- Decision making strategy pre-agreed
Private Equity: What works…what doesn’t?
Structure Chemistry
- The chemistry must be right to increase
chances of success
- Partnerships that have been hastily built
can face great challenges and prove precarious when put to the test
- JV should be a true partnership based on a
coherent, and well shaped business plan with clear goals for both parties
- Communication is key
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Size Does Matter: Size does matter as it offers financial options, economies of scale and market credibility
- Size increases options and offers flexibility (services to clients, economies of scale, efficient
structure to pursue options, etc.)
- Liquidity, access to more diverse financial options
- Lower cost of capital
- More sizeable/stable companies enjoy stronger bargaining position with suppliers
Private Equity: What works…what doesn’t?
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Timing of Exit: Private Equity exit strategy alternatives include: IPO, refinancing, trade sale, M&A, liquidation and asset sale
- IPO: can only succeed on the back of proper structure / approach / timing
- Refinancing: buying-out more expensive capital during improving markets is an attractive option
but in a period where banks are deleveraging the potential for refinancing remains limited
- M&A: as long as the industry remains fragmented (more pronounced in the dry and wet sectors)
the consolidation potential would offer an attractive getaway for PE firms looking to exit the industry
- Trade Sale: a sale of assets can be effective exit strategy but requires advance planning and
aligned interests
Private Equity: What works…what doesn’t work?
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- Since the beginning of the shipping crisis, the role of private equity funds in shipping has
attracted a lot of attention. Some myths have emerged and have been perpetuated, albeit unsupported by empirical evidence
- The involvement of PE in shipping is still at its early stages
- Evidence so far cannot categorically determine what works and what doesn’t with respect to
the involvement of PE in shipping. Like with everything else in life, good planning and structuring substantially enhances probability of success
- At the end of the day, it is the markets that will dictate success. PE is only a small part of the
- equation. Banks, private owners, demand, ordering spree, oil prices are just a few of the
determining factors at play
Private Equity in Shipping: Key Takeaway Messages
Thank You!
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