Ever since the Baltic Dry
Index (BDI) took a vertical dive from the top of ca. 12,000 points at the end
of May 2008 to the well below 1,000 in a matter of seven short months and its sideways
movement ever since around the 1,000 mark, lots of resources have been expended
on the market recovery and the best strategy to exploit such recovery.
Such drastic change in
the index, and by default in freight rates and shipping asset prices, caught
the attention of not only the typical market players like shipowners and the
shipping banks, but also the attention from players and investors outside the
industry such as institutional investors and private equity funds who never
before analyzed the shipping industry seriously.
While the highly-wished
vessel auctions on industrial scale and sale of distressed assets never
materialized in any meaningful way, at least on a scale to satisfy the
multi-billion appetite of private equity funds, few projects took place at
market related pricing; but still, there are billions and billions and billions
of dollars that are on the sidelines or have been committed to be invested in
shipping assets; the success rate of converting funds to investments has been disappointing,
which begs the question: if there are funds and a tremendous appetite to invest
in the shipping industry, and shipping is going though one of its worst troughs
ever, what is holding back the investment process?
Unlike other asset-heavy
and capital intense industries, shipping is rather fragmented and opaque and
based on operational expertise and niche industry knowledge; the execution risk
of actually investing in ‘cheap ships’ is tremendous, since buying a vessel is
only the first step of crucial decisions: who will be the commercial manager
and what will be the vessel employment strategy, how do you select a manager
and a partner in shipping, who will be the technical manager of the vessel, how
one qualifies such a manager when maintenance standards vary widely across
asset classes and local markets, how one evaluates the credit worthiness of a
private charterer based across the globe, etc.
The execution risk of actually investing in shipping is tremendous; one
could be 100% correct on the asset class to invest in and get a great price by
buying a vessel at a rock-bottom price, but still there many ways one can lose
money on the actual execution.
So, what gives? Reputable
publicly traded companies may provide an alternative platform for investing in
shipping by taking out of the investment all operational risk; a competent
management can take a lot of the guesswork out of selecting asset classes, and
prices, and managers, and commercial strategies. Plus, they have the added advantage that they
provide a platform with plenty of liquidity. A notable example in 2013 of a
shipping company that has convinced Wall Street that can properly manage
execution risk is Scorpio Tankers (STNG) by coming up with a business model
based on ‘eco design’ products tankers at competitive asset pricing based on
their first mover advantage in the market that has been experiencing positive
structural changes; year-to-date in 2013, Scorpio raised in four attempts about
US$ 950 million in the public equity markets and an oversubscribed debt
commitment of US$ 520 million. Although
we are aware of several private equity funds having raised or committed
hundreds of millions to be invested in shipping assets, we have not seen any of
them deploying funds so easily or convincingly. In our experience working with
funds and institutional investors, the fact that Scorpio is taking the sting of
the operational risk away is a great investment catalyst.
© 2013 Basil M Karatzas,
All Rights Reserved
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