Private Equity & Shipping: Sustainable Partnership?

IMIF BUFFET LUNCHEON

Date: Friday 7th October 2016

Venue: Ince & Co LLP, Aldgate Tower, 2 Leman Street, London.  E1

Host: Renaud Barbier-Emery, Partner Ince & Co LLP

Speaker:  Christoph Toepfer, Borealis Maritime Ltd

Subject: Private Equity & Shipping: Sustainable Partnership?

Report by James Brewer

For the first time, members gathering for an IMIF event ascended to the 15th floor of Ince & Co’s new, towering UK and international headquarters.  The 35,000 sq ft office, home to the law firm since March 2016, affords spectacular views of the City and far beyond. The question of the hour was: how far-sighted in terms of adapting rewarding financial structures are the shipping industry, its clients and investors?

The thorny topic was addressed by Christoph Toepfer, who with his business partner Frederik Rye-Florentz established Borealis Maritime in London in 2010 after the global financial crisis. “I did not expect that six years later we should still be in the crisis.”

Borealis now controls a mixed fleet of 73 chemical tankers and feeder container ships, in what is said to be one of the most successful shipping enterprises in the UK over recent years. Of the vessels, 14 are in joint ventures. A total of 49 originated from banks. The company has full commercial and technical responsibility for 59 vessels. Assets under management total $700m.

“We are not a normal shipping company. We focus very much on working with investors,” declared Mr Toepfer.

”We combine investment and structured finance skills with comprehensive experience in the commercial and technical management of maritime assets,” he continued. The partners undertake opportunistic investments across all shipping segments, with a particular focus on investing capital (debt and equity) in conjunction with debt restructurings and distressed situations in sectors with short-to-medium term recovery potential.

Borealis is backed by capital raised from equity, and family offices. There is a total of 28 staff in London, Hamburg, Rotterdam and Istanbul.

Mr Toepfer pointed out that the shipping sector was heavily dependent on bank lending. In 2013 more than $7bn in private equity was raised, but: “Was private equity lending just a blip in 2013/14?” He listed some of the early movers in that timeframe. Since 2012 what was available had changed. Many sources of capital were now generally unavailable in 2016, and even private equity was limited. Public equity and bond markets, KG structures and mezzanine financing were off the table.

Challenges facing most private equity ventures were that exit was very tough; “timing is not important; timing is everything;” size mattered; possible conflict of interest between management and capital; almost  no [ship] operational improvements were possible; valuations below net asset value; and transparency in cost structure.

He instanced some problematic and failed private equity ventures to date. Problems in those operations included insolvency, fraud, stock plunges since initial public offerings, need to write down investments to zero, large-scale ordering of tonnage, need for extra capital injection, unsuccessful debt purchase. On the other hand, there were success stories including “tanker plays.”

Is private equity here to stay?  Mr Toepfer listed pros and cons.

On the positive side, a lack of other investment opportunities and low yields where they did exist continued to make shipping an attractive target. Maritime assets could provide an attractive yield.. Distress situations seen by owners, bankers and charterers provided “deep value entry points.” Withdrawal of banks from lending opened new debt opportunities. Another advantage was the tremendous build-up of knowledge about the maritime sector.  He believed some of the ventures that were looking bad right now would eventually recover.

Against the private equity strategy: billions of dollars of losses had left a life-time scar. “Even when in the money, exit is difficult. Many have not yet appreciated how difficult the exit could be for them.” Volatility shocks made timing very tough. Some had bought debt, converted it into equity, the market went down and suddenly the money was gone. The industry had done much worse than everybody expected, and 2015/16 had surprised a lot of people. He reiterated that there was a lack of opportunity to introduce operational changes to improve earnings. Further, there was an inability to rely on future cash flow projections. Some ventures might be caught in misalignment with partners.

During questions, Mr Toepfer said: “I think that what is happening now is necessary to wash out some of the problems.” He said that shipping was such a hugely capital intensive industry, that there would be a significant reduction in the role of the private shipowner, and the industry “will go more for a private environment.” The charterers would be turning much more on professional organisations.”

Mr Toepfrer advised: “Keep your options open. You do not want to lock yourself into which way to go.” Reviewing the strategy was a constant process – “we are thinking every day about what can we do, what shall we do.” He added of his own enterprise: “We may merge with someone at some stage.”

Ince & Co partner Beatrice Russ welcomed IMIF guests, adding that the dramatic views from Aldgate Tower might well compensate for the loss of the views of Tower Bridge and St Katharine Dock which were a feature of the firm’s previous London home, International House.

Alan McCarthy, who chaired the meeting in “this splendid new premises,” thanked the principal hosts, Renaud Barbier-Emery and Ms Russ. He noted that IMIF was established nearly 40 years ago at a time of great turmoil in the shipping industry. “Now we are in a similar situation, with increased regulation, much more environmental awareness, incredible developments in things like artificial intelligence and computer-powered robots. Everybody in this room would be able to take out of their pockets[a smart-phone with] more computing power than allowed man to land on the moon.”

IMIF brought together global ideas, global processes and perhaps global solutions. A group of members had been considering the way forward for IMIF and planned to detail their proposals at the time of the annual dinner on November 2nd.