PE opportunities in mid-tier shipping exist; investment firms short on understanding sector - analysis04 December 2006

Private equity players could find opportunities in mid-tier shipping companies, but shipping companies are still unsure of private equity interest, industry sources said.
Private equity is new to shipping, former CEO of shipping firm ISEC, Bob Burke, said as he opened his presentation at the 2006 Mare Forum Conference in New York. “Private equity misunderstands shipping like shipping misunderstands private equity.” He explained that there are very few private equity funds that know the industry well, citing Jefferies Capital Partners as one exception.
Shipping, Burke said, is a relationship-driven business focused on asset and residual value, while PE’s attention is devoted to EBITDA.
But private equity firms can also help shield shipping companies from unwanted takeovers. Burke noted that takeover threats are diminished if the shipping company is part of a PE portfolio. The investment firms should also be looked at as a source of growth capital, he said.
Private equity and hedge funds have re-discovered shipping. Peter Shaerf, managing director at New York-based AMA Capital Partners, a shipping banking firm, said that private equity got its “appetite [for shipping companies] during the high yield crash” of the late 90s. “Shipping was off the radar until ’97, ’98,” he said. He explained that the industry “began its slow comeback when dot-com’s were crashing,” adding that “shipping is a solid business. It is an infrastructure that has been around forever.”
Asked how private equity viewed the shipping industry, Shaerf said “they like the infrastructure and the old business.” If private equity can get comfortable with the cyclicality of shipping, he added, there can be many successful unions.
Private equity interest in shipping companies continues to increase, Shaerf noted. “There are a lot of private equity firms that are interested in the market. I see a ton of calls.” He explained that their interest lies first in the public sector, and then the private. “Bigger fleets interest them; bigger transactions. They are looking at a lot of opportunities, hawking a lot of product,” he said.
Asked the size of the private equity funds that are and could be interested in the shipping sector, Shaerf said “it is not necessarily the big guys. [It is the] people that want to understand the business.” He did not elaborate on which smaller firms are showing interest.
George Gourdomichalis, chairman and president of Greece-based FreeSeas, said that he did not see PE investment in shipping companies as a “big wave.” “It will take a while,” he said, to see a surge of investment.
Gourdomichalis explained that it is hard for PE firms to deal with the fact that the managers of shipping companies, based onshore, are thousands of miles away from their assets, which are at sea. This distance, he said, involves a significant amount of risk that PE firms have not fully accepted.
George Economou, CEO of DryShips, said that PE could take interest in mid-tier shipping companies. Asked if he expects to see an increase, he said, “not substantially, but yes.”
The average return beginning in about 1973 and driving into the 1990s was 6%, Economou said. He noted the multitude of bankruptcies, and said that as a result, there was much underinvestment in the sector. Now, he explained, there is a different freight environment, with better financial performance, and more than a 10% return.
Quintana Maritime CEO, Stamatis Molaris, said PE firms are interested in investing in mid-tier shipping companies because they are looking for good returns.
He added that in the last five years shipping companies have performed well. PE firms also see shipping assets as very liquid, Molaris said, as it is not difficult to sell ships or to establish a market price.

by Claudia Montoto

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