Long voyage ahead

Despite its reputation as a perennially distressed industry, shipping has caught the attention of private equity. Professionals operating in the space say they see long-term value in both dry and wet shipping as well as shipping services companies, but add that investors will have to be patient.

The start of 2015 was especially interesting for the sector. Tankers and container ships have witnessed the first true recovery since the financial crisis. Falling oil prices have induced countries such as China to increase strategic oil reserves on the cheap, which has beefed up interest in tanker shipping.

When OPEC signalled it would not be cutting production in the second half of last year, it created a bright, demand-driven picture for tankers heading into 2015. After a long wait, product shipping is on the mend as well.

Regg Jones, managing partner and co-founder of Greenbriar Equity Group, a private equity shop focused on transportation, owns a majority interest in publicly traded Ardmore Shipping, which was recently raised to a ‘buy’ among sell-side analysts. Jones told Private Equity International that the strength of Ardmore was a long time coming to fruition.

“We’ve built that company over several years. We now have 25 ships but we did it by doing onesie and twosie acquisitions. We think that’s the best way to approach a market like this.

“It’s very easy to end up in a bad spot trying to go in and do too much too fast because everything is demand driven. That’s a different approach and a different type of holding than you’re going to see traditionally from private equity.”

For players looking at the space, things may appear appealing, but sources say GPs may have missed the window when it comes to the tanker story – at least for the time being.
Eftychis Gregos-Mourginakis of maritime financial advisory firm Day and Partners explains: “If you bought a tanker seven to 10 years ago, you’re making money on that now. If you bought after that, you’re going to have to hold out. But it’s possible you could see people pushing the idea of scale or M&A so they can make those more recent purchases look better on paper. You really have to time the market well in shipping and that’s not always something private equity is geared up for.”

On the dry bulk side, the opportunity may be yet to come. Dry bulk rates started the year more depressed than many expected, according to Jeffrey Pribor, global head of maritime investment banking at Jefferies. Pribor is one of the most high-profile investment bankers in the sector, and his team has advised on the majority of transactions that have taken place. “I don’t think people were prepared for how weak the dry bulk market has been, but given the cyclical nature of the sector, eventually the market will start to normalise.”

“The focus in dry bulk is Chinese imports, and even with slowing Chinese economic growth there is still expected to be rising demand. That’s different from no demand growth. However, some supply moderation may also be needed to balance the market, so people will have to be patient and wait for that to work through.”

WHERE’S THE EXIT?

Still, there may be pockets of opportunity. “We think there is a strong case for more M&A activity in this space, as well as potentially IPOs. I think private equity looks to the IPO market as a key exit alternative for this space. Owners are paying close attention to the possibility of a 2015 IPO window for tankers and potentially containers. You are more likely to see recapitalisations or deleveraging in dry bulk in 2015 than IPOs,” Pribor adds.

This activity is likely to be driven by funds that are already in the market rather than new distress-focused firms coming in. This view is echoed by distressed player Z Capital. “We don’t think valuations are where they should be and we see a lot of capital chasing assets but the thesis isn’t clear to us,” says James Zenni, president and chief executive officer of Z Capital Partners.
In the future, the likelihood is that sponsors will need to be prepared to accept extended holding periods.

“Most people are optimistic about the tanker market for this year and going into next year. For dry bulk, people view 2015 as a year to wait out, but many are more optimistic about the markets going into ’16 and ’17. The market needs time for the supply/demand balance to normalise, which happens through limited new building, and scrapping older assets or repurposing them in some way,” says Hal Malone, managing director of maritime investment banking at investment bank Jefferies.

He adds: “On the dry bulk side, this isn’t a market where you can sell six, eight, 10 ships at a time without meaningfully impacting price. But there remains an active market for selling one or two quality ships at a time.” ?