Long-term uncertainty in the shipping industry has made banks reluctant to extend loans to ship owners as they no longer have the appetite for such high-risk capital asset investments. By no means this should be taken as a no-go for traditional shipping banks, however unless a top-tier ship owner with all-clean balance sheet shows up, lending institutions are never eager to push for a deal.

Download IPFA Shipping Project Finace: A Quick Word on Shipping Private Equities

In the light of this situation one thing is important to have in mind however: private equity could be a useful, if not vital, source of financing for ship owners, especially where there is little choice as to the availability of other sources of financing in the industry.

Since 2008 the reduction in the traditional source of finance has opened the door for waves of private equity money flowing into the industry. Private equity funds are collective investment schemes used for making investments in various equity (and to a lesser extent debt) securities, according to specific investment strategies. There are several ways in which private equity funds can make investments within the shipping sector, including entering into joint ventures with ship owners, taking direct ownership stakes in vessels, acting as mezzanine lenders, or purchasing existing debt from banks.

“Fund managers already in the sector include J.P. Morgan Asset Management (JPM), Oaktree Capital Management (OAK) LP (OAK), Carlyle Group, Blackstone Group LP, Apollo Global Management LLC and WL Ross & Co. LLC.”

As private equity funds increasingly become a major source of finance for shipping companies, ship owners are able to extract benefits from this type of finance. The obvious benefit is a ready and available source of funding when banks are not willing to lend anymore. Industry insiders estimate roughly $100 billion has been invested globally in the sector since 2008. However, there are other benefits as well, including the access to financial markets, gained through the funds’ broad investor base and more flexible lending solutions, since private equity funds are less regulated than traditional banks.

Download IPFA Shipping Project Finance: A Quick Word on Shipping Private Equities

Unlike traditional shipping banks, private equity funds do not have any pre-existing relationship with the ship owners seeking funding.

“This is because private equity funds are schemes seeking high investment returns over a fixed term.”

The difficulty this strategy might entail in the shipping industry is that the private equity funds do not share the same long-term interest and goals that the ship owners have. The funds’ views on financing strategies are generally more short-termed – buy in quickly when the market is on the down cycle and exit as soon as the light starts to shine. They are not like the traditional shipping banks that are expected to ride the down cycles together with the ship owners, in a highly cyclical shipping industry.