The last year has been a challenging one for the world's shipping industry. The global financial crisis, the sudden change in attitude of lenders and the fall in shipping freight rates (and corresponding decline in ship values) has made it more difficult for participants in the shipping markets to obtain the finance and capital needed to operate their business. As the availability of traditional sources of finance has dried up, attention has started to shift again towards investment funds, private equity and alternative sources of funding to help fill the gaps.
The story of the shipping markets over the last five years has been a remarkable one. The prolonged period of boom, combined with readily available debt finance at relatively low cost, attracted investors new to the industry with limited experience of its cyclical nature. The buoyant credit markets supported the idea that owning a ship with a long term charter was, to an extent, a means of replicating a fixed income investment with a capital gain on sale at the end of the investment period. These new investors fuelled the upswing even further.
This pattern changed drastically when the global financial crisis hit. International trade weakened as the volumes of cargo to be transported fell, causing many ships to sit idle, unable to generate income. As charterers walked away from or defaulted on charters and financing became less easy to obtain, it has been important to have a competent manager able to adapt quickly to these changes and to formulate new and viable investment strategies in order to survive any prolonged downturn. The sudden change in the shipping industry's fortunes affected investments dramatically and emphasised the importance of having experienced investment managers who understand the shipping industry and its cycles.
Today, while capital and investment are harder to obtain, opportunities exist and current commitments must still be financed. This has led to a wave of new initiatives and innovative approaches in financing.
Generally, the structure of a shipping investment fund is not too different from that of an investment fund for another asset class. Typically, it takes the legal form of an offshore corporate vehicle (or limited liability partnership) to maximise the efficiency of any capital invested from a regulatory, taxation and risk perspective.
Such investment funds can be "open-ended" or "close-ended". Factors such as the liquidity of the investments, interest from investors and regulatory and set-up costs must be considered. Practically, investment managers must attract not only the requisite investment, but also a minimum period of commitment to enable them to invest in accordance with their prescribed strategy and to manage the funding risk. The appropriateness of a lock-in period can be difficult to gauge, particularly as in this economic climate the focus of investors is on the exit strategy. This is especially so if substantial assets are to be purchased, the income from those assets is uncertain, or they may be difficult to realise.
Shipping funds will continue to evolve with global markets. Different market and trading conditions will, no doubt, give rise to investment strategies tailored according to risk appetites.
In the current climate, factors such as the lock-in period, expected returns and exit strategy are likely to be important to investors. The experience and reputation of the investment manager will also play a greater part in an investor's decision and investment strategies will come under closer scrutiny.
As shipping funds become more mainstream and their structure more broadly accepted within the industry, the focus within the funds will shift from how they are structured to issues such as corporate governance, independence, control, disclosure and conflicts of interest. This shift has only just begun, but has already gained significant momentum. This kind of evolution is desirable if it allows shipowners and participants access to a new spectrum of financing and liquidity, but the shipping investment fund of the future may be very different from its ancestor of five years ago.
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