Private equity has been a major player in shipping for some years, and the size of the collective sums invested in shipping shows that this continues to be the case, with between $7bn and $12bn invested last year.
As with any shipping investment private equity plays are cyclical and as one private equity party divests, others invest and any purchaser has to ask serious technical questions surrounding their investments. Braemar SA have recently begun to offer a technical due diligence service to these clients and their stakeholders, which can mean providing technical support to the investors in a new build program, the purchase of single ships or small groups of ships for trading through to the purchase of complete fleets and management organisations.
Jeff Wilson, Director of Marine Consulting (Europe), said “we identified this service as part of our review of our overall consulting offer around this time last year. We have always provided technical advice and expert opinion to P&I Clubs and lawyers in addition to the H&M insurance markets and they continue to be the main drivers of our business, and we continue to build those business and recruit skilled and experienced people into those parts of the offering, but we recognised that there was a further market for our technical skills within the private equity and lending community and that led to the launch of this part of the business.”
Private equity players are exceptionally skilled at devising financial models and structuring deals, now supported by Braemar SA who provide advice to private equity purchasers on all technical matters relating to the vessels, fleets or companies that they are considering as part of a deal. “Any private equity investor wants someone who understands the hardware they are investing in and who can give a valued opinion on that hardware and, in the case of a fleet purchase with Third Party management, an opinion on the effectiveness of the fleet’s management is just as important as an opinion on the technical aspects of the vessels. We are regularly asked to give an opinion on how the vessel or whole fleet is being managed or how effectively CapEx and OpEx has been set and benchmarked.
Shipbrokers do a brilliant job valuing vessels but they don’t necessarily have the skills to give an opinion on the condition of the ship or fleet, the effectiveness of its management or an opinion on its OpEx and CapEx budgets and their underpinning assumptions. That’s a niche service and only something that people who have been in ship management can provide,” said Jeff, “and our links with the other providers of due diligence, such as lawyers, insurance providersand brokers, give us an almost unique position within this network of services.”
“If a PE group are buying a ship they want to know what the capital expenditure on equipment is going to be over the next five years so if the ship manager has not looked into ballast water management systems or considered other upcoming developments in environmental compliance, it is going to be expensive and the purchaser needs to be aware of the risk at the outset. He may only just have taken on a ship to discover there are some technical issues that need to be quickly resolved.”
“We support the private equity purchaser by guiding them on these technical issues and ensuring that they are equipped with enough support and expertise to make a fully informed decision about their investment. We also provide the same support when the private equity owner comes to consider sale of the asset and they are preparing their prospectus, whether it’s a ship or a whole fleet. It is all about knowing the connectivity between the commercial realities of running a ship and the technical know how of how you run ships, plus an awareness of private equity’s commercial needs once they take on the ship as a going concern; that is where we are perfectly placed to support these clients.”
What is clear is that there is no room for mistakes when it comes to taking on a vessel or a company as an investment. If you take on a ship for twenty five years as a long term investment you have the time to deal with a lot of issues but if you are only taking on a ship as an asset to earn income for a closed ended fund or as part of a shorter term play, a detailed understanding of forthcoming exposure is needed. “If during that time you have spent two or three years installing equipment or dealing with things which should have been dealt with before, or which weren’t fully apparent at the start of the deal, then it is too late. An additional service we provide is to support the upgrading and maintenance of ships after the purchase, and to continue to advise the private equity owners on maintenance plans and execution in addition to monitoring of budgets, if that is requested. We can also assist with recommendation to clients for transaction lawyers and other professionals who form part of the due diligence team.
As Jeff stressed, what is different about private equity is that they have proper exposure in a way that banks have not. The bank works on the principal of lending money and receiving interest on the money lent but not actually owning the asset. Private equity has an owners’ interest in how that ship is run.
“Our job is not to tell them how to make an investment, but there is an understanding that they have risks they want to manage and our expertise is helping them understand the technical risk of acquiring either a ship or a whole fleet of ships. When PE is into something it has a finite life, and the knowledge that the investment has a finite life means that there is a shorter timescale to recoup any unexpected exposure and costs.
“We have always provided accurate and timely technical knowledge to stakeholders in the marine industry, especially professionals who either need technical support or who expect advice to interpret technical information relating to ships and new builds. But the entry of private equity groups into shipping has seen us match those skills much more directly with finance providers so that they are supported all the way through their investment decision making processes and afterwards as owners of vessels and shipping companies.