The Gulf Times website reported over this past weekend that the global private equity (PE) marketplace has boosted the shipping industry to the tune of $32billion in recent times, based on an estimate provided by Tufton Oceanic.
While most industries would welcome such a huge cash injection from any source, the spending of this money is starting to raise fears that the industry could once more be on a dangerous course and heading for a severe downturn. These fears have emerged due to shipping companies generally spending the money on ordering new ships.
This is a logical step for a shipping company that is looking to grow to take, however because it is happening industry-wide, the dynamic of supply & demand is likely to be severely disrupted in years to come as the industry (and the sea) becomes more congested and competition for contracts becomes more fierce.
The Gulf Times gave 2016 as the year when demand is most likely to outstrip supply. The consequence of this could be that PE firms looking to exit at or beyond this point could easily find themselves exiting with lower profits than projected or expected, and in some cases even nursing losses. The website carried quotes from a number of prominent industry figures and experts, all of whom were sounding notes of caution in relation to what is happening, with some even being very scathing of the PE industry.
Jan Engelhardtsen of Stolt Nielsen, a Norwegian tanker and terminals company, said, “Shipping is not a get-rich-quick business. By virtue of the capital that the private equity funds are pumping into shipping, they are in effect destroying the very prospects that they are chasing. “Because the investment horizon for private equity is short-term and shipping is fundamentally long-term in nature, private equity’s entry into shipping in most cases is never going to end well.”
Engelhardtsen’s thoughts were initially carried by Reuters, who reported the same story as The Gulf Times here. Other commentators, while acknowledging that PE houses had to take their share of responsibility for the potential upcoming problems, preferred to focus on the industry itself, which after all has presented itself as an attractive investment proposition to the PE marketplace in recent years.
Albert Stein, of London’s AlixPartners, said to The Gulf Times, “You can’t blame private equity alone. Who sold them the idea that the market’s going to expand?” PE firms that invested in the shipping industry during the early stages of the global financial crisis can expect to enjoy healthier returns in comparison to those who were later to the party.
Beyond this, the PE marketplace could well become exposed to the changing dynamics of the industry, and any firms that have entered shipping in the last 24 months may well have to face that their own objectives will be on loss limitation rather than realising high returns.
The Gulf Times also stated that a number of IPOs had been postponed by shipping companies owing to uncertainty among public investor groups, meaning PE houses are likely to be left with assets they do not want, in many cases.