Shotgun marriage of shipping and private equity stumbles on
Funds have been selling out of the likes of Genco and Star Bulk, but new deals are still being done, sources indicate
‘There is a lot of talk about get in and get out in five years, and hard deadlines for exit for the funds. It turns out five years isn’t a hard deadline,’ says law firm partner
That was a pretty good play on words just days before the country of his birth voted to leave the European Union. But for some, the neologism may have carried an unmistakable note of Schadenfreude.
The middle years of the 2010s saw PE get into shipping in a big way in the wake of the global financial crisis, generating a certain degree of friction in the process.
Grateful as owners were for the money, badly needed as bank after bank left them in the lurch, many detected an element of condescension on the part of their new investors.
After all, Ivy League MBAs are all very well, but the quiddities of our industry are some of the things they don’t teach you at Harvard Business School.
The stereotype was that the PE boys considered some shipowners functional morons, and arrogantly assumed they would be able to come in, kick some backsides, and get out again in five years with shedloads of essentially looted cash.
After recent PE divestments from both Genco and Star Bulk, the question being asked is, is the rush for the door now actually happening?
It is true that the intervening period has seen some PE outfits pull out of shipping investments. It is also true that new investments have been entered into.
But with details of many deals — or even the fact they happened — not in the public domain, it is impossible to reach a definitive conclusion on where the balance lies.
There have been highly publicised instances of private equity losing money hand over fist. But in other cases, it seems to have done pretty well.
Lloyd’s List spoke to two partners from the New York office of law firm Watson Farley & Williams, Will Vogel and Steven Hollander, who said their firm impression is that the exit is starting to happen. But things have not panned out in the way many initially anticipated.
“Some of these funds have been in these investments for seven or eight years, which is a lifetime,” said Mr Vogel.
However, there are still obstacles to making exits happen. These include insufficient liquidity in shipping stocks for those seeking to sell into public markets.
“If there’s not enough liquidity in the stocks, you have trouble attracting institutional investors, and that in turn is helping to depress the share price. That is part of the explanation for why shipping stocks trade below net asset value.
“That is why these recent sales are a bit of a breaking of the dam, and it will be interesting to see where it goes.”
Mr Hollander said that the key to whether or not deals had made money was precise timing. Probably the best year to have first become involved was 2013.
Even then, it will have been necessary to show patience, a quality not typically associated with PE.
Those who went in with overoptimistic expectations of easy pickings in 2010 and 2011 are more likely to have taken a bath.
“When you are in a private equity fund’s position, you buy at the low end and you hope for the rise. Some of them thought they were buying at the low end and the stock price dipped lower.”
That said, Mr Hollander said he was aware of profitable private transactions that could not be divulged on grounds of client confidentiality.
Many of the current sell-offs are in dry bulk, a sector that has seen a spike after generally calamitous times in recent years.
“It is having a bit of a run now, and it is not surprising that [firms] are going to sell into rising prices and take the opportunity now that it has finally presented itself.”
Mr Vogel said: “There is a lot of talk about get in and get out in five years, and hard deadlines for exit for the funds. It turns out five years isn’t a hard deadline. The private equity funds that are getting out now have been in longer than five years.”
Even the likes of Oaktree Capital are only taking some of their money off the table and are keeping an eye on how things are going.
If dividend payments and asset sales are sufficient, some investments will pay off overall, even if the final exit is not as spectacularly profitable as had been hoped.
In some cases, PE has effectively become a long-term shareholder, and has even been involved in governance. Neither of those things is supposed to happen. Isn’t this rewriting private equity 101?
“There is private equity that invested in public shipping companies and private equity that invested in private shipping companies where the stocks aren’t trading publicly,” said Mr Vogel.
Private companies, particularly those under family, can act in their own long-term best interests, even if they clash with short-term interests. Public companies are obliged to act in the shareholder interest.
“Private equity is still out there with private fleets and their exodus is yet to come, whether it is going to come in mergers and acquisitions, an IPO or just an asset sale. In dry bulk, forward freight agreements indicate an improving market and the question is whether they are going to stay in or just get out.”
Funds also have to reckon with opportunity costs. Even if they made money from a dalliance with shipping company X, it may have been that they could have made more money with tech start-up Y or mining house Z.
Mr Vogel and Mr Hollander conclude that we are seeing an increase in exits, and the trend is likely to be ongoing, especially given the prospect that most shipping segments will do well out of the predicted post-pandemic upturn in world trade.
“It will be interesting to see to what extent we have got a reshuffling of the deck, but it is too early to tell,” said Mr Vogel. “Are there going to be significant institutional shareholders coming in to replace private equity that has been in there, or is there going to be a more broad-based shareholding?
“It looks like it’s going to be the latter, and that changes the characteristics of these companies quite a bit.”