Whilst in Hong Kong I met a friend of mine, and one of the top ship finance experts in Asia. I have known him for more than 7 years. We collaborated on a public ship fund concept in 2007/2008 and he has been involved in the shipping industry for 20 years. He formed a new ship investment management firm about 2 years ago and successfully bought 3 container ships. The reader of this article may want to keep in mind that the shipping market in the past 2 years has not just seen turbulent times but potentially the worst downturn there has ever been. Charter rates did collapse by 60%.
At the same time a new type of vessel has been designed, which uses 60% less oil! Can you imagine, 60%? This is an unbelievable number. The financial savings for the charterer are tremendous. However as it is with the shipping market - due to the long construction periods - the supply of those vessels is limited. My friend bought options for 4 of those ships about 2 years ago at a strike price of USD31m. Today’s market price is around USD34-35m. For two of the vessels he raised the required equity from a family office and a very well known global investment management firm but for the other two vessels he didn’t succeed. So we spoke about helping him with his efforts.
When I assist an investment manager with raising capital, I look at a number of characteristics. Obviously I start with their experience and track record but I also look at the sustainability of their operation. In this case the investment manager has kept a moderate profile over the years. Moderate in terms of his aggressiveness towards other market participants but also his business growth ambitions. The dealings with other market participants are always important to me. Does someone play fair or unfair. Whilst I personally rather make aggressive growth plans, he prefers continuos growth. His income sources are diversified, not purely based on fees based on assets under management. He offers finance brokerage, fleet consulting (he currently has a government mandate for that) and he has a good knowledge and network for mergers and acquisitions in the industry. For me, this expertise ticked a number of boxes: credibility, expertise, success,..
Also the deal on hand was very simple. No long term portfolio building ambitions but simply to ship investments, identical to those already invested in. As detailed in the numbers above, investors would be in the money straight away and if short term gains was the objective, these vessels could be resold on the open market within a 18 month period and a return in excess of 30% p.a. However, due do the novelty of the environmentally friendly oil consumption of the vessels, a short term gain was not the ambition. So, all seemed fine until I heard about the required time frame to raise the capital.
We spoke on the 17th of July about it, but seriously just on the 22nd. The options on the vessels were about to expire on the 31st of August. And let me add we were talking about 2014 - not 2015! So by the time we would have found an agreement we would have had about 4-5 weeks to raise ca. USD20m. I’m not saying that this can’t be done. I checked within my network for additional resources to help run a campaign and a small team was available. The shorter the time period to raise capital the more resources you have to pull together. But it would have been very stressful and in the end we decided against it. The chance of succeeding within such a short time period are low simply because most investors require longer periods to run a due diligence on the investment manager and the offer on hand.
Even though it often prevents business from happening, I feel I have to be frank about the success of a campaign and clear up unrealistic expectations if the case. Even if I call an investor who has invested previously with me, it’s a new relationship. Whenever I introduce a new investment manager, I am half a stranger to the investor as I require a commitment to different terms. I’m very aware of that as I have experienced it many times before. So sadly no deal in this case. I hope my friend will manage to raise the capital himself. We’ll both find out in September.
If you want to raise capital, make it a strategic part of your business. I always suggest to start a campaign 9 month before you need the money. However I know that isn’t always possible as opportunities often arise on the short term. For me, anything less than 3 months is critical and in most cases I (have to) deny the opportunity. The quality of the communication with the investor is very important. Investors expect me to offer them pre-screened investments. That’s how I build my reputation with them and that’s what I need to protect.
If you have any questions on capital raising feel free to get in touch.