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Shipping and private equity

Anders, Sven; Sanchez, Aaron
Master thesis
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URI
http://hdl.handle.net/11250/2403854
Date
2016-09-02
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  • Master Thesis [4657]
Abstract
In the aftermath of the financial crisis of 2007-2008 many shipping companies had to find new

sources of financing since traditional bank lending, historically shipping’s most important form of

financing, had dried out. International trade decreased significantly and banks were unwilling to

give out substantial loans. Private equity investors and hedge funds filled part of the gap by using

their excess funds to inject both equity and debt into the shipping industry. They primarily

intended to take advantage of record low asset prices and profit from improving macroeconomic

conditions while increasing efficiency on company level. This thesis discusses to what extent

shipping is a suitable industry to invest in for private equity funds. One of the most important

factors for private equity investors is cash flow stability. In theory, cash flows in shipping are very

unpredictable due to their dependence on shipping rates, thus making it difficult for private

equity to invest. However, the correct estimation and timing of the shipping cycle can provide

certain stability to ship owners. Therefore, private equity firms have to rely heavily on proven

management teams as they lack significant sector experience and hence forecasting ability. The

asset intensive nature of the business provides some downside protection for invested funds.

The case study conducted in this thesis has found that traditional private equity methods worked

in the tanker business even though those methods are not very different from traditional ship

management practices. Out of the three levers that private equity usually applies, the financial

lever, the tax lever and the legal lever, none of those is exclusively used by private equity owners

in the shipping sector. Shipping companies traditionally use a high leverage, operate from tax

subsidized headquarters and are often private, not facing the scrutiny of public shareholders. In

shipping, private equity funds become more passive investors than they have proven to be in

other sectors. The authors present two major findings from their investigation of shipping sector

investments. The first finding is that private equity will not be able to generate large abnormal

returns on a risk-return basis in shipping since their approach is very similar to that of traditional

ship owners. The second finding is that in order to fulfill their return targets, private equity funds

have taken on increased beta risk with their shipping investments as traditionally average returns

in the shipping industry are rather low.

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