Private equity firms sometimes go for the risky bets and invest in an industry that won’t end up providing the profits the firms were looking for. The global shipping industry looks to be one of the riskier bets, as reports on Wednesday suggest big private equity firms are looking for an exit from the sector.
The global shipping industry is currently going through the biggest downturn in 30 years and this has caused many private equity firms, which invested in the sector after the financial crash in 2008, to rethink their strategy. The weak demand from China combined with oversupply of vessels has cut freight rates and even caused some firms to file bankruptcy.
Tufton Oceanic, maritime fund management firm, believes private equity invested approximately $32 billion in the sector during its heyday from January 2012 to January 2014. But it now looks like most firms are hoping to find lucrative exit strategies.
Eyeing for Initial Public Offering
According to Reuters, five shipping businesses backed by private equity are considering initial public offering (IPO). In the Reuters article, Harold Malone, managing director of maritime investment banking at investment bank Jefferies, believes private equity exits will speed up in 2015 and 2016.
Sources close to the matter have said, Apollo Global Management-backed Principal Maritime Tankers Corp is among the companies seeking for an IPO. The company is hoping to raise up to $100 million. In addition, private equity backed companies, Miclyn Express Offshore and Costamara Partners LP are both considering an IPO within the next few years.
But the fear for many analysts is that private equity firms may find it difficult to make a profit with IPOs in the current market.
In addition, some analysts believe mergers and acquisitions might also bring about more consolidation in the industry. This is a real option for the industry, as there are plenty of businesses owning less than 50 vessels worldwide. This makes the sector one of the most scattered in the world.
Randee Day, president and chief executive of Day and Partners, told Reuters, “Private equity is forcing and supporting mergers and acquisition deals to do (fleet) roll-ups or listing as a way to exit their positions”. Most recent mergers include Excel Maritime Carriers selling ships to Star Bulk Carriers. The investment firm Oaktree Capital Management happened to be the major shareholder of both these companies. DHT Holdings, with private equity funds acting as major shareholders, acquired Samco Shipholding, the Singaporean tanker company, last year.
There have unfortunately also been a number of bankruptcy filings in the past few months. Three known shipping companies filed bankruptcy in February, with China’s Winland Ocean Shipping being the most notable.
But much of the downturn in the industry has been generated by the large investments by private equity firms. Many companies simply used private equity backing to buy too many new ships. As the economy slowed down, companies were left with a glut of shipping capacity, but not enough cargo to transport. It remains to be seen whether private equity firms make any profit from their looming exits from the industry. Head down to DealMarket, if you want to find the latest private equity deals.