Global Investing

Not so rough waters?

August 26, 2010

Given high volatility in global financial markets, the waters appear to be less rough in the shipping industry — which generates annual global revenue of over $600 billion.

The industry, which transports almost 90 percent of global trade, has gone through a choppy ride after the credit crisis as a slowdown in global trade hit charter rates  and vessel values, aggressive use of leverage for new ship building led to bloated order books and maritime lending markets were dysfunctional.

For example, spot market charter rates for some bulk carriers fell by 99 percent after the crisis.

However, the contraction in 2008 is opening up investment opportunities in what is a niche alternative asset class, for some institutional investors  looking for a private equity-like return profile in the niche market.

“The opportunity exists for new purchasers to buy vessels with lower valuations that reflect lower charter rates. This provides investment managers with the ability to earn a profit and significant cash yield on the ship’s operations while they wait for valuations to improve,” U.S. consulting firm Mercer says in its latest report.

Mercer says net internal rate of return of 18-25+ percent can be achieved, although the investment thesis is opportunistic and high returns are dependent on partial recovery in underlying vessel asset prices. Most shipping funds, according to Mercer, are structured with 2-3 year investment periods.

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