Furthermore, investors can tap into three fundamental sub-sectors – dry cargo, tankers and container ships – each driven by different macroeconomic fundamentals. Dry cargo is heavily dependent on China and global infrastructure growth; the tanker market is driven by crude oil production and demand; while the container market is a play on the macro-economic growth and consumer story.
Mercer’s Bisch describes shipping as a “private equity-like” asset class from a risk/return returns perspective, suitable for investors looking to deploy capital over a longer period of time with an expected return “somewhere in the mid to high teens”.
Sciens Alternative Investments launched a private equity shipping fund in March in partnership with Greek shipping firm Golden Union which manages a fleet of over 50 dry bulk vessels including capsize and ice class vessels. The fund has a five-year term but, as Sciens Alternative Investments chief executive Stavros Siokos explains, it targets an internal rate of return of 20% and while the firm would not be drawn on fees, it did say “typical fees” would be 1.5-2% management fee, 20% carry and 8% hurdle rate.
Siokos believes success lies in choosing a partner with the right shipping experience and, critically, a lack of legacy leverage, adding Golden Union has never had a day without being chartered. In addition, he cites purchasing ships less than five years old or still in production as integral to mitigating residual risk from deterioration. The fund also focuses on “safer” shipping routes between China, India, Brazil, Asia, Northern Europe and Australia, avoiding Africa and the infamous coast of Somalia.
Another option is investing in a company that owns ships directly. Marine Capital runs two such funds, one of which owns a fleet of seven bulk carriers and the second, currently in the fundraising stage, invests primarily in newbuilds and modern existing ships.
Foster believes direct ownership avoids the overreliance private equity firms have on partners for their shipping expertise and has lower fee structures. He says often in private equity models partners take commission on ships sold and on chartering, as well as fees for financing. He also believes partners are conflicted by having to juggle their day job as shipping operators on one hand with serving their private equity partners on the other.
“Private equity firms in principle don’t know anything about shipping, so why would you want to invest in shipping through a private equity firm?” he says. “We have seen levels that equate to more than three-times our fees [1.5% on drawn equity] and you are not getting direct into the market.”
Merseyside’s Wallach says: “Part of the appeal was the fact they were operators as well as being financial investors in ships. Shipping is a huge universe with liquidity and the ability to be opportunistic and value-add opportunities. The fund they proposed has a medium-term life with a sensible fee structure that aligned investors and the managers over the medium term. I have been pleased with the returns we have achieved since investing.”
Investors like Merseyside could be swayed by the merits of shipping, whether it’s the 20%-plus returns of the private equity approach or owning ships directly. But as with all asset classes, understanding the nuts and bolts of what you are investing in is crucial, as of course is winning over the consultants. As Foster says: “We need them on board, but no one is there yet.”
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