Money managers investing on the high seas

For alternative investment managers, it's full-steam ahead into maritime investments, for everything from shipping companies to port development.

The moves are being made to take advantage of a shipbuilding industry that is near the bottom of its economic cycle and a switch to private financing from municipal bonds to modify ports for the new, larger ships expected to be delivered in the next 18 months.

Shipping is not your average business. It's akin to the early Wild West days of the real estate industry. Shipping is still mainly controlled by wealthy families that have been in the business for a very long time — some for centuries. The market moves from white-hot to stone cold very quickly. Traditionally, it has been highly leveraged and capital intensive.

But unlike real estate — in which leases are fixed — ship charters are constantly re-set and the revenues generated can be highly erratic, said Marcel C. Saucy, senior partner in Zurich-based Fincor Finance SA, a corporate finance and asset management firm that has been involved with shipping since the 1970s.

Money managers say this is the right moment to “institutionalize” the shipping business. Private equity, real estate and infrastructure managers are rushing into shipping and port investments, committing billions of dollars to the strategy.

Andy Dacy, portfolio manager for the maritime strategy at New York-based J.P. Morgan Asset Management, said: “History has provided two favorable entry avenues into shipping. Many ship owners made their fortunes during ... the recent boom in China growth. Meanwhile, others have entered after an asset price collapse typically driven by over-ordering, such as in the early "80s and today.” J.P. Morgan recently closed a $750 million fund to invest in the strategy.

And the firm is not alone. Managers and institutional investors with recent investments in shipping include Oaktree Capital Group LLC; Invesco Ltd.'s distressed private equity arm; WL Ross & Co. LLC; Carlyle Group LP; Blackstone Group LP; Apollo Global Management; and the C$117.1 billion (US$119.5 billion) Ontario Teachers' Pension Plan. All are investing in ailing ship companies.

Wilbur Ross, CEO of WL Ross, New York, said that when it comes to shipping, timing is paramount. Billions of dollars are going into selective investment opportunities in shipping, investments that “have unique features that make now a sensible time” to invest, he said.

It all goes back to the excesses of the last shipping boom of 2007, when a record-breaking number of new vessels were ordered and charter rates for those ships were high. A combination of over-ordering new vessels, oversupply and a relatively weak world economy has pushed charter rates down 80% to 90% from their highs, Mr. Ross said.

This has led to a massive amount of pain in the shipping industry, exhibited by rampant bankruptcies and loan defaults, Mr. Ross said.

For large ships, for example, charter rates are not enough to offset the direct operating cost of the vessel, Mr. Ross said. Because of those problems, lenders — mostly banks and insurance companies — are exiting the industry.

WL Ross made two investments within the last 18 months. In one, the firm was part of a group that invested a total of $600 million in ships for shipping company Diamond S Shipping from a distressed seller that had charter contracts with unsustainable high rates, Mr. Ross said. The investor group also included First Reserve Corp., China Investment Corp., Fairfax Financial Holdings Ltd., Morgan Creek Capital Management and PPM America Capital Partners.

The second investment was in Navigator Holdings Ltd., a shipping company in a “very specialized sector that has not had the degree of overcapacity” seen in the rest of the industry, Mr. Ross said. Navigator hauls liquefied gas products to emerging markets. Relatively few small vessels able to navigate the shallower ports of emerging markets countries are on order to be built. The ones that have been ordered are not scheduled to be delivered until 2014, and most of those were ordered by Navigator, he said.

A much larger general investment opportunity in shipping, amounting to hundreds of billions of dollars, won't materialize for another 12 to 18 months, Mr. Ross said. The large number of ships ordered in the boom timesare scheduled to be delivered, and they will be difficult to absorb in the sluggish world economy, he said.

Private equity investment in shipping en masse is relatively new, Mr. Saucy said.

“The private equity firms seem to be targeting the same type of ships, so they've targeted a niche that looked interesting because of the demand-supply imbalance,” Mr. Saucy said. But the shipping companies have also ordered new ships, which “will destroy their own market” because it will lead to an oversupply that will exceed demand, he said.

The increased ship numbers might make private equity investing tricky, but it should be great for investors in ports and real estate related to ports, Mr. Ross said.

Real estate and infrastructure managers are taking advantage of the new larger, energy-efficient ships. They are racing to make their investments in time for the 2015 opening of the newly widened Panama Canal.

Among investors aiming at the real estate end of shipping is the $245.3 billion California Public Employees' Retirement System, Sacramento, through its investment with CenterPoint Properties.

There is a shift to larger vessels, creating a lot of investment in ports, said John Carver, director of the ports, airports and global infrastructure group at Jones Lang LaSalle. “It requires a deep harbor and cranes and births. The private sector is coming into play in part,” said Mr. Carver, who is based in Miami.

Institutional investors now are supplying much of the capital that used to come from the sale of municipal bonds, Mr. Carver said.

In a recent white paper, Jones Lang LaSalle executives estimated that about $13 billion of public investment is earmarked for port development in the next decade. The American Association of Port Authorities in July projected $27.6 billion of private investment in seaports over the next five years. Much of that development includes upgrades to make ports deep enough for larger ships and the construction of larger warehouses.

New facilities are being built at so-called inland ports that take advantage of cheaper real estate in a central location. These ports are built 10 to 200 miles from the coast and “get cargo to an area with lower land cost that is connected by rail,” Mr. Carver said.

Private capital has been rushing to invest. Carlyle Group, Brookfield Infrastructure Partners LP and RREEF, Deutsche Bank's real asset investment arm, have been making these investments.

What's different today is that many new warehouses are not for a specific company but instead are being built on speculation, Mr. Carver said.