London-based shipping-focused hedge fund M2M Management is launching a $400 million distressed vessel acquisition fund, Global Maritime Assets (GMA).
GMA will be M2M’s first private equity fund in the shipping sector. Previously, the firm launched two hedge funds that arbitrage different aspects of the global shipping market and have achieved annualized returns of 25 percent, according to Tim Coffin, an investment manager at M2M.
Vessels: cheaper of late
“The private equity type of structure suits this business model better than the hedge fund type because in shipping the cycles are long,” Coffin said. “Shipping cycles generally last about 10 years.”
GMA will have a 10-year life and will seek to purchase and operate vessels sold by owners, lenders and shipyards worldwide who have suffered as a result of the severe decline in the shipping market.
Generally speaking, freight rates are down 90 percent.
“In 2003 and 2004, freight rates started climbing and they climbed to a degree that is still unprecedented. Then in the third quarter of last year it all came tumbling down. Generally speaking, freight rates are down 90 percent,” Coffin said.
The Baltic Dry Index, a measure of demand for shipping capacity published by the London-based Baltic Exchange, tumbled 92 percent between July 2008 and January 2009.
Prices of vessels are generally tied to their productive capacity, so the decline in freight rates spilled over into the vessel market. Coffin estimates that vessel prices have come down 70 percent overall and are likely to lose more value in the near term. In the long-term, though, be believes that today’s prices represent an attractive buying opportunity.
“Given that we are investing at the bottom of the market, it is likely that the disposal values of the vessels will be higher than they are today and market rates will be higher throughout the course of the life of the fund,” Coffin said.
Aside from disposing of vessels when prices recover, GMA will also make money from chartering the boats it purchases either on a spot market or a long-term contracted basis, Coffin said.
The fund will target pre-leverage, after-fee returns of 20 percent on its investments. In the near-term, it will fund its acquisitions on an all-equity basis but may employ leverage to increase its asset pool to more than $1 billion.
To date, GMA has received a pledge of $50 million from an existing M2M investor, but no capital commitments. M2M plans to start trading vessels in the second quarter of 2009.
M2M was founded in 2006 by joint managing directors Steve Rodley and Stuart Rae in 2006. Both led careers in shipbroking prior to founding the firm.