Where Have All the Cowboys Gone?

By Siri Wennevik and June Ho of Wikborg Rein, Singapore

Some 12 - 18 months ago, the suggestion of private equity funds (PE funds) sauntering into the world of shipping was met with widespread disdain. They didn’t know “the business”, "it’s not done like that in these parts”. They were the proverbial cattle rustlers looking for a quick hit. They, undoubtedly, wore black hats.  

However, the expectant wave of private equity flowing into shipping never really materialised on a larger scale and the once-feared “outsiders” are now seen as a mythical saviour. A view fuelled by a financial environment where banks no longer have the lending capacity or appetite for such perceived high-risk lending.

This was about a year ago. Since then, the shipping/offshore markets have taken yet another nosedive, plumbing new depths due to a variety of factors, most notoriously the continued drop in oil prices. To date, this has not improved and naysayers abound in the market. Where do we go from here – what do we do? Who will be lenders to the shipping/offshore companies going forward?

BANKS VERSUS PE FUNDS

In today’s market, banks are still willing to lend, but only if you are a top tier ship/offshore owner. If not, you have to look elsewhere for funding. PE funds have been mostly counter-cyclical by rule, and used to be actively accumulating shipping debt. However, we are seeing even this business line slowing down and, more or less, a general reluctance for any form of PE financing into the depressed offshore sector. 

UNMET EXPECTATIONS

Some PE funds that have entered the shipping/offshore sector have realised that their returns did not materialize as expected. To make matters worse, exit options are limited, and it takes longer than expected before investments mature. For these reasons, PE fund managers are understandably more wary of pursuing similar shipping and offshore investments. Asset valuations and projections of shipping/ offshore projects may also be more difficult than initially envisaged, and it is now clear they require specialised sector knowledge which most PE funds have not yet mastered. 

That said, owners are also not making themselves attractive enough for PE funds to invest in or lend to. More needs to be done by the owners, if they are proactively looking for funding: think big changes, for example identifying synergies of consolidation/joint venture opportunities with other owners which PE funds could look to invest. PE funds are like any other stakeholders…they need to see a company as a viable option and a good investment. 

SHOULD I STAY OR SHOULD I GO? 

If markets do not turn in the near future there may be a real risk that the PE funds who have entered the shipping markets will not stick around to support shipping/offshore owners. The PE funds’ strategic financing view is generally more short term – buy in quickly and exit as soon as returns are made or, in a bleak economy, exit before more losses are incurred. This does not sit well with the shipping/offshore cycle which typically takes far longer before any recovery and returns can be made. Also, limited exit options (or in certain cases no exit option) may mean that fewer PE funds will be looking to making any new investments in the shipping/offshore market. The risk is just too high.

However, there may be a silver lining….. If, and when, prices of shipping/offshore assets (or shipping/offshore loans) hit rock bottom, and the entry ticket can be bought at a low enough price, investments in shipping/offshore may become acceptably attractive to PE funds. At this point they will not need much of an upside before they make some good money on their investment. The timeframe may also be at a more “PE fund friendly” investment tenure. 

POP THE QUESTION?

So, the billion dollar question is – has the market hit rock bottom yet? Is the current market a true reflection of asset and company values in the shipping/offshore industry? 

Many owners have been kept artificially afloat by lenders who are not ready - yet - to cut their losses. This ‘wait and hope’ strategy has kept these zombie-companies alive, and stopped healthy consolidation actions which may be what is needed to bring about the overdue market readjustment.

Even with the recent lack of PE investments in the shipping/offshore sector, it is probably premature to write-off PE funds as an alternative, and much needed, source of financing to shipping/offshore companies. It is a question of timing – because the cavalry is always meant to arrive just in time.