Private equity pursues more targeted shipping approach
This story originally published on Fairplay.IHS.com.
Private equity (PE) groups may be much less interested in taking shipping equity stakes than they were several years ago, but they have not disappeared. "They're still coming in, but it's very selective, because they've seen a lot of their compadres getting their fingers burnt, so I think there's a lot of caution, a lot of 'smaller bites'," said AMA Capital Partners managing director Peter Shaerf in an interview with Fairplay.
US-listed Genco, Eagle Bulk, and Star Bulk have all obtained new PE infusions in the past several months, including investments from Senator Investments, Caspian Capital, GoldenTree, Neuberger Berman, Oaktree, Centerbridge, Strategic Value Partners, and Apollo.
"Eagle and Genco are the poster children of distressed companies raising fresh money, and where Eagle and Genco have gone, I can tell you that other private companies have been successful too," said Shaerf, who added that private placement investors "are pushing for some aggressive terms for new money".
Mark Whatley, senior managing director at investment bank Evercore, cited contrasting rationales for recent PE investments. "If you look at Oaktree's investment in Star Bulk, it is effectively paying to keep its option alive and bridge itself to a better market. If you look at what GoldenTree is doing in Eagle Bulk, it is building a platform around a high-quality CEO [Gary Vogel] that is looking to be opportunistic and to acquire tonnage at a very attractive point in the cycle. Those are two very different situations and two very different investment strategies," Whatley told Fairplay.
Scorpio Bulkers president Robert Bugbee recently confirmed that his company has also been approached by PE. On his latest conference call, he revealed, "We've spent the last two months having lots of approaches by good potential shareholders offering us PIPEs [private investment in public equity], indicating that they'd like to invest in the dry cargo space in an open offering, and lots of investment banks visiting us and saying that they have capacity and we can do it. But all of these have been very politely declined. It would have been pretty dilutive [to existing shareholders] to have accepted any of those."
PE flooded into shipping in 2011-15 with a heavy emphasis on newbuilds. Today's PE investments are drastically reduced versus those earlier levels. "I would say that anybody [in PE] that had invested up to this point isn't necessarily interested in increasing their exposure, because you'd be hard-pressed to find an example of private equity being successful investing in shipping," said Whatley.
According to Karatzas Marine Advisors founder Basil Karatzas, "From the funds' point of view, five years ago they invested equity, typically 80% from the funds and 20% from the owner/operator, and the market didn't play out as expected. Guess who took most of the losses? The funds."
According to Whatley, PE funds that are still in shipping from earlier investment decisions and have yet to exit "are more focused on trying to find a soft landing or a path to liquidity". The problem these PE players face is that the shipping investments they are stuck in are impairing their internal rate of return (IRR) over time. "Most of the PE guys have had these shipping investments in their portfolios longer than they ever intended and they are holding these investments at values below what they intended, and one issue with holding things longer and at low values is that it doesn't make for a great IRR, because time works against you and lower values work against you," explained Whatley.
This negative dynamic should "mitigate [PE] capital flowing to the market and allow the market to heal", Whatley added. Ridgebury Tankers CEO Bob Burke made the same point at the Norwegian-American/Hellenic-American Chambers shipping conference in New York on 9 February. "The days of private equity ordering 10 option 10 [10 firm newbuilds plus 10 options] are over. Private equity has been educated," said Burke, whose company is backed by private equity. "Private equity is still out there to do smaller transactions or to back specific owners on the slow build-ups of their fleets, but overall, the market is down drastically, which is healthy for our industry right now."
According to Whatley, "There are always going to be people who aren't burdened by history and we do hear talk from time to time of those who say, 'Alright, everybody has taken their lumps. Now is probably the opportunity to invest.' Our only hope is that these folks will invest in existing platforms, not newbuild tonnage."
The current trend among PE appears to be to focus more on credit products for shipping, i.e., providing high-interest debt, as opposed to investing in equity or assets. Nevertheless, New York maritime attorneys speaking to Fairplay voiced optimism that PE will re-enter the shipping equity market.
"I think there are still some potential investors on the sidelines who are looking for a new bottom and potential upside in shipping in the future, because that always happens," said Seward & Kissel partner Bruce Paulsen. "I think there will be new entrants into the market, whether they're private equity funds or others."
Global law firm Norton Rose Fulbright is particularly focused on PE, and partners there remain confident on PE's future shipping footprint. According to Norton Rose Fulbright head of shipping for the Americas Brad Berman, "Not all the private equity people are still doing it [shipping]. Some got out of it, who tended to be smaller. Some never did it because they were smaller. A lot of people tried to do - especially in Connecticut, where you had a dozen guys related to Greek and Norwegian families and who all worked for somebody and now they don't. But the largest ones [private equity groups] are doing it. The largest ones have become a piece of the shipping finance package."
Norton Rose Fulbright's head of transport for the Americas, Brian Devine, believes the current wave of restructuring means that "assets are going to have to be sold at below-market levels, and there will be people with a lot of money that will come in and capitalise on that. There are still opportunistic people out there", maintained Devine. "I'm confident there will be another wave of private equity coming in. By no stretch of the imagination do I think private equity is done with shipping - quite the opposite.
"I think there's a lot of educated money now, whereas perhaps there wasn't four or five years ago in the first wave. Private equity groups have now seen the cycle, they're a bit more comfortable with the industry, they know it, and I think certain circumstances are going to arise where they're going to make opportunistic plays," said Devine. "Within 10 blocks of where we are [in midtown Manhattan], there are groups sitting on gobs and gobs of money, which for a mid-market industry like shipping could be a real game-changer. A few billion dollars is still considered real money in this industry."