Private Equity Scorecard: Whats Been Working 18 June 2015 1 - - PowerPoint PPT Presentation

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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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1 18 June 2015

28th Annual Marine Money Week – New York City Private Equity Scorecard: What’s Been Working

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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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