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Private equity and shipping: the end of the honeymoon

Private equity and shipping: the end of the honeymoon
As private equity becomes a more established part of the shipping industry's financing mix, its judgement by industry leaders has moved to something more substantial than the "wait and see" of just a couple of years ago.

However, there is certainly still plenty of cynicism about it. "What's the difference between private equity and the boy scouts? The scouts have adult leadership," was one of the most memorable lines from last week's Marine Money conference in London, the gag offered by Paddy Rodgers, ceo of Euronav.
 
Jokes aside, Rodgers and other speakers at the event had plenty to say on private equity companies and the role they have, do and will play in financing the shipping industry.
 
"A lot of that private equity has bought into newbuildings, which is essentially guaranteed low return." Rodgers told delegates. "They've boughtiin with best-in-class operators as they perceived them, but found in fact they were in a private joint venture, or they found they were in a company that didn't have a future to go public.
 
"They thought they could sell the ships easily, but found there's little liquidity in the sale and purchase market. So we now have private equity come in and its learned one of the rules of shipping. It's very easy to become as shipowner, it's very difficult to stop being a shipowner, and not always because it's such good fun."
 
The consensus within the room seemed to be that private equity played a major role in fattening the orderbook for dry bulk vessels over the past few years, and that this was to blame for the very low rates experienced in the sector today.
 
Symeon Pariaros, chief administrative officer at Euroseas addressed the fear that private equity might move to other sectors, with the tacit implication of breaking the supply/demand balance when ship deliveries begin. "I feel that this will happen again in the tanker markets. We saw that in 2013 when dry bulk fundamentals were looking positive. We are already seeing a lot of enquiries for 2017 slots onwards, it only takes a few months of a good market for discipline to disappear."
 
Pariaros later said that he believes asset prices are currently keeping private equity firms out of the market, as ships are priced above their recent lows, and not distressed enough to appeal to PE. "I hope that this time investors will be more cautious, but it doesn't look like it so far," he warned.
 
Private equity firms have yet to be through the worst shipping has to offer, and that makes their position in the funding equation difficult to establish for the long term, Rodgers suggested. "What I'd say about them is that most people I met there were clever, insightful and they get it. But what they get is volatility. What excites them and draws them to shipping is the fact that it goes up and down, not that we're going to smooth it out into a long-term yield play. But what they've still got to live through it when its down, the cash has run out, the portfolio manager is on their back... that's the point we haven't reached, that's the point where we see if private equity is sustainable in the way that it's filling the [funding] gap.

"When it comes to ordering vessels and growing fleets, Pariaros was clear in his belief that some private equity firms had crossed a line, and their role is not to dictate fleet growth or order ships.

"Going six months back, many of those VLCCs and LR2s, those ships that are on order, are back by private equity. I could understand this whole situation if you said there's a private equity firm who really believes in some people and wants to support them for strategic reasons, but sometimes you just see private equity directly ordering from yards.

"What business do you have as a private equity firm ordering ships directly?" Pariaros continued. "You should be supporting businesses, supporting growth, supporting restructuring, supporting great owners who were caught out by the collapse in 2008, and there are many of those. Good operators, great technical management, oil majors love them, however, those guys need assistance, need to keep going, need to maintain market share.

"PE should not be putting themselves in a position where they see a fleet of 1,000 ships and decide it needs to be 1,100, it's none of your business, it shouldn't be."

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