Private Equity Investment in Global Shipping Industry

Posted on by Alexander Graham

Over 90% of world trade activity depends on the shipping industry and a global fleet of 58,000 ships.1 Shipping has traditionally been controlled by wealthy families that have been in the business for a very long time, some for centuries.2 However, shipping has changed and has become an asset for investors.3

Shipping is a cyclical industry and from 1990 to 2000 world seaborne trade increased by nearly 50%.4 By 2003, demand from emerging economies like China pushed global seaborne trade even higher and from 2003 to 2008, over $800 billion worth of new ships were ordered.5 This glut of new vessels financed at the peak of the market boom became a major liability when global markets plummeted in 2008.  As a result of the global recession and financial crisis of 2008, demand for goods fell, causing shipping rates and, ultimately, ship values and the values of shipping companies to fall accordingly.6 Most ship financing had been provided by European banks, however, following the 2008 crises these banks began pulling out or greatly reducing their lending to the shipping industry – creating a $249 billion funding gap.7 Private equity has sought to fill the space and be in position to cash in on the upside potential of a strengthening market. Private equity funds, and hedge funds, are rapidly accumulating shipping debt, with about $5 billion in shipping debt changing hands during the past year.8 Unlike the banks exiting the market, which prefer to just sell the debt, private equity firms are willing to take ownership of the assets (i.e. ships), put them to work, and wait for the market to appreciate before selling them – even having approached ship management companies about hiring them to run acquired fleets.9

Private equity funds typically invest in companies that are not traded on a stock exchange and investment in distressed industries is among the most common investment strategies for private equity funds.10 Accordingly, the shipping industry’s devaluation and structure make it attractive to private equity, as most ships are owned by independent private companies.11

Tight credit and historically low ship values have therefore created an opportunity that private equity is taking advantage of.12 In 2011 and 2012, private equity funds closed 22 shipping transactions worth more than $6.4 billion in total.13 Ideally, private equity investors hope to invest now, while ship values are low, inject capital to facilitate the continued operations or expansion of the target company, and liquidate their investment in the coming years when the market rebounds with the global recovery from the financial meltdown.

Shipping is unique.  It is certainly a mature industry, yet incredible opportunity for growth remains.  Increasing globalization and international trade will continue to drive shipping demand, and fleet growth is poised to accelerate going forward.14 Other factors are in play too.  The future expansion of the Panama Canal will mean larger ships will be able to navigate the crossing between the Pacific and Atlantic. Not only does this influence demand for mega-sized New Panamax cargo ships, it has huge implications for the ports where these giant ships will load and unload their cargo. Investment in sea port upgrades and expansions potentially presents a great opportunity for private equity funds to seek high returns if they are willing to double-down on shipping.

  1. Sai S. Devabhaktuni & Gregory Kennedy, Global Shipping: Any Port in a Storm?, PIMCO (May 2012), http://www.pimco.com/EN/Insights/Pages/Devabhaktuni-and-Kennedy-on-Global-Shipping.aspx. ↩

  2. Arleen Jacobius, Money Managers Investing on the High Seas, Pensions & Investments (Oct. 15, 2012), http://www.pionline.com/article/20121015/PRINT/310159977/money-managers-investing-on-the-high-seas. ↩

  3. Barry Parker, Shipping Families, Private Equity and the Future, Seatrade Global (Feb. 7, 2014, 9:08 AM), http://www.seatrade-global.com/news/americas/shipping-families-private-equity-and-the-future.html. ↩

  4. Sai S. Devabhaktuni & Gregory Kennedy, Global Shipping: Any Port in a Storm?, PIMCO (May 2012), http://www.pimco.com/EN/Insights/Pages/Devabhaktuni-and-Kennedy-on-Global-Shipping.aspx. ↩

  5. Id. ↩

  6. Private Equity Investments in Ships and Shipping Companies, Watson, Farley & Williams (Feb. 2013), http://www.wfw.com/Publications/Publication1209/$File/WFW-Maritime-PrivateEquityGetsInterested.pdf. ↩

  7. Nicklas Magnusson, Banks Retreat on Shipping Seen Filledby Private Equity: Freight, Bloomberg (May 22, 2012, 6:00PM), http://www.bloomberg.com/news/2012-05-22/bank-retreat-on-shipping-seen-filled-by-private-equity-freight.html. ↩

  8. Isaac Arnsdorf & Nicholas Brautlecht, Private-Equity Funds Bet $5 Billion on Shipping Rebound, Bloomberg (Feb. 18, 2014, 6:59 AM), http://www.bloomberg.com/news/2014-02-18/private-equity-funds-bet-5-billion-on-shipping-rebound-freight.html. ↩

  9. Isaac Arnsdorf & Nicholas Brautlecht, Private-Equity Funds Bet $5 Billion on Shipping Rebound, Bloomberg (Feb. 18, 2014, 6:59 AM), http://www.bloomberg.com/news/2014-02-18/private-equity-funds-bet-5-billion-on-shipping-rebound-freight.html. ↩

  10. Brad L. Berman & Ruth L. Lansner, The Distressed Shipping Market Attracts Private Equity, LJN Equipment Leasing Newsletter (July 2012), http://www.hklaw.com/files/Publication/b14b440d-7b1d-42fc-a640-ae5b816265c3/Presentation/PublicationAttachment/b8f3b3d6-e081-4b12-8243-b40f897b768e/The%20Distressed%20Shipping%20Market%20Attracts%20Private%20Equity.pdf. ↩

  11. Brad L. Berman & Ruth L. Lansner, The Distressed Shipping Market Attracts Private Equity, LJN Equipment Leasing Newsletter (July 2012), http://www.hklaw.com/files/Publication/b14b440d-7b1d-42fc-a640-ae5b816265c3/Presentation/PublicationAttachment/b8f3b3d6-e081-4b12-8243-b40f897b768e/The%20Distressed%20Shipping%20Market%20Attracts%20Private%20Equity.pdf. ↩

  12. Private Equity Investments in Ships and Shipping Companies, Watson, Farley & Williams (Feb. 2013), http://www.wfw.com/Publications/Publication1209/$File/WFW-Maritime-PrivateEquityGetsInterested.pdf. ↩

  13. Private Equity Investments in Ships and Shipping Companies, Watson, Farley & Williams (Feb. 2013), http://www.wfw.com/Publications/Publication1209/$File/WFW-Maritime-PrivateEquityGetsInterested.pdf. ↩

  14. Isaac Arnsdorf & Nicholas Brautlecht, Private-Equity Funds Bet $5 Billion on Shipping Rebound, Bloomberg (Feb. 18, 2014, 6:59 AM), http://www.bloomberg.com/news/2014-02-18/private-equity-funds-bet-5-billion-on-shipping-rebound-freight.html. ↩

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