M2M Management, a specialist asset manager operating in the shipping market, is launching a private equity style investment fund to take advantage of ship price declines of 60 to 80 percent.
M2M Management, a specialist asset manager operating in the shipping market, is launching a private equity style investment fund to take advantage of ship price declines of 60 to 80 percent. Tim Coffin, who will manage the new fund, Global Maritime Assets, said that he believed asset values still have a bit further to fall, with freight rates down about 90 percent. Ship values are effectively a derivative of the freight income, so prices are being driven down as freight rates tumble. The group would consider closing the GMA fund to new investors once it has raised more than $250 million (175.5 million pounds), with a launch seen by the end of the second quarter.
The fund will have an operating term of up to 10 years. The strategy is to buy ships and operate them on a low-risk strategy of long-term leases or time charters.
"There isn't a whole lot of value in the market right now but we are approaching values that are interesting," said Coffin. "With the credit and freight markets in disarray it's likely that asset values will have to come down further, as a lot of the global fleet has to be refinanced at some point in the next six months, and that won't be easy for a lot of owners."
M2M is seeing some opportunities opening up in bulk carriers although there have been few forced sales as of yet.
"We have seen voluntary sales where owners are anticipating a major problem - they are selling whilst they can rather than being forced into selling," Coffin said.
The Baltic Dry Index, which reflects daily freight rates for bulk carriers, is down 93 percent since its high in May 2008, due to the rapid decline in the demand for commodities, particularly from China.
Bulk carriers transport raw materials such as iron ore, coal, grains, cocoa and timber, and so have been hit hard by the global decline in world trade. Container ships, which carry finished goods, have also been laid up. It is estimated that up to 30 percent of the global fleet of larger ships are laid up, or left idle.
The fund will make its return by identifying any mispricing between the asset value of a ship today and the long-term cash flow potential.
"We have target acquisition values which we won't pay more than," said Coffin. "At the moment prices aren't quite where they need to be to make acquisitions attractive."
In selecting investments, Coffin said he was not looking at anything that would return less than 20 percent.
Stuart Rae, director of M2M Management, which has $608 million under management, said the new fund will hedge out some of the risk by using forward freight agreements. These are freight derivatives allowing managers to buy or sell a certain amount of cargo on a specific route at a future date to lock in freight costs or revenues.
M2M currently offers the Global Maritime Investments Fund, which trades in physical and futures bulk shipping and the Global Futures Fund, which focuses on dry bulk derivatives. GMI returned 17.4 percent in 2008.