Capital scarcity, brought on by the slow down in global trade following the financial crisis, has created attractive investment opportunities in the shipping industry, according to advisory Mercer.
The firm part of the Marsh McLennan group said high charter levels in thepre-crisis era drove vessel prices up significantly. However, once the financial crisis hit, charter rates collapsed and many shipping asset owners are now running vessels that cannot generate the previously expected returns.
A new paper “Investment Case: Shipping” produced by the firm outlines how an opportunity may now exist for institutional investors to commit assets to specialist funds investing in shipping.
“Through opportunistic investment in vessels at low prices fund managers can earn a significant cash yield on ships’ operations and potentially also benefit from vessel values returning to historical levels,” it said.
Ryan Bisch, Manager Researcher in Mercer's Alternatives Boutique commented: “The investment opportunity in shipping comes as a result of capital scarcity in the industry. Lending opportunities through the traditional channels such as shipping-focused commercial banks or direct ship owner equity has dried up and capital is very scarce.
“As with the majority of investments there are risks attached and investors need to be aware that the shipping market is not homogenous and each different market segment, such as dry cargo and tankers, might be operating at different stages in the cycle.
Mr Bisch concluded: “Shipping can be an attractive opportunistic investment option for investors with an appetite for private equity-like risk and ability to invest in illiquid assets. However it is important to note that it should form part of a diversified alternatives investment portfolio and that the success of this opportunity relies on the ongoing recovery of the global economy."
However the rosy investment outlook flies in the face of the insurance market which has been blighted by falling trade and premium levels and face fears of a rise in claims costs as the shipping market recovers and vessels which have been laid up for many months are re-commissioned.
“Any investment would be welcomed as it would drive the level of business and with it the need for risk mitigation,” said one underwriter. “However competition continues to pressure rates and it would take a major uplift to provide the dynamics for meaningful rate increases.