28 th Annual Marine Money Week – New York City Private Equity Scorecard: What’s 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 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 2 2
Myth No 1: Size of Private Equity Investments in Shipping 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 2007 & 2014 Bank Debt vs. PE investments in shipping ($bn) Sources of capital – shipping ($bn) Banks annual lending contribution has Over the same Banks been reduced by half or by $54bn period, approx. 68% $22bn of PE money 120 has been invested 99 Private Equity 100 3% -55% 80 60 45 40 22 Other 20 29% $535 billion 0 2007 Banks 2014 Banks 2008-2014 PE Source: Marine Money 3 3
Myth No 2: The Dry Question? 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? 2008-14 Cumulative PE Investments An interesting example… Dry vs. Wet Same Operator / Same model, very different outcome Both companies backed by PE Investors Share Price Performance Dry 125 37% 100 Wet 75 63% Tanker Company Delta: 71% 50 Dry Bulk Company 25 0 $9.9 billion (1) Source: Marine Money Note: 4 4 1. Includes investments in the dry bulk and tanker segments. Excludes loan portfolio acquisitions
Myth No 3: Ordering Spree – Who’s to blame? 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? Contracting Volumes 2007-08 vs. 2013-14 (mDWT) World Orderbook (mDWT) 500 700.0 Traditional ship 459 owners ordering -35% 600.0 vessels 400 500.0 296 400.0 300 300.0 200 PE funds joining the 200.0 ordering activity 100.0 100 0.0 0 2007-2008 2013-2014 Source: Clarksons 5 5
Private Equity: What works…what doesn’t? 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.) Total No of 4 4 11 15 17 33 26 Deals 8.0 40 7.5 Deals Value ( € bn) No. of Deals (#) 6.0 30 4.3 4.0 20 3.4 2.9 2.1 2.0 10 1.1 0.6 0.0 0 2008 2009 2010 2011 2012 2013 2014 Source: Marine Money 6 6
Private Equity: What works…what doesn’t? 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 7 7
Private Equity: What works…what doesn’t? 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 180 5yr old VLCC ($m) In order to generate excess returns, one 150 5yr old Capesize ($m) should carefully analyze the market and identify the right point in the cycle 120 90 60 30 0 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 Source: Clarksons 8 8
Private Equity: What works…what doesn’t? Year 4 Year 3 Appetite for Duration: Year 1 Year 5 Long term investors enjoy a clear advantage over shorter term investors Year 6 Year 2 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 9 9
Private Equity: What works…what doesn’t? 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 Structure Chemistry Mutuality of contract – documentation to fit The chemistry must be right to increase business model chances of success Partnerships that have been hastily built Mutuality of risks – skin in the game can face great challenges and prove precarious when put to the test Pre-defined investment vision / philosophy JV should be a true partnership based on a Decision making strategy pre-agreed coherent, and well shaped business plan with clear goals for both parties Communication is key 10 10
Private Equity: What works…what doesn’t? 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 11 11
Private Equity: What works…what doesn’t work? 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 12 12
Private Equity in Shipping: Key Takeaway Messages 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 Thank You! 13 13
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