No deals in shipping, port for two years

Private equity (PE) firms have stayed away from investing in shipping, ports and logistics for two years in a row. This shows they don't believe the fortunes will change much from the current grim situation.

"PEs have stopped coming into the sector and there is no easy money for the shipping business," G Shivakumar, chief financial officer at Great Eastern Shipping, said in the third quarter earnings conference call. The company, like its peers, has given a negative outlook for the dry bulk trade division and did not provide valuations for the offshore business.

The recent move by shipping and logistics company, Mercator, also speaks volumes about the grim situation. Mercator not only decided to exit the weak dry bulk business held via its Singapore subsidiary but also sold it to three PE companies for a token amount of three Singaporean dollars. The dry bulk trade across globe has virtually come to a standstill. This is evident from the level of Baltic Dry Index (BDI), the benchmark for dry bulk shipping freight, which has dropped to 200 from the all-time high of 11,000-mark in 2008.

"PE firms are not in a position to take cyclical bets and hence shipping (since it is a cyclical business) is off investment," M K Sinha, managing partner and chief executive officer of private-equity firm IDFC, said. "The Baltic having fallen below 300-level is not expected to pick up in a big way going ahead as trade volumes across globe have diminished," he added. IDFC private equity is one of the investors in the shipping sector from the pre-crisis period. In 2007 alone, the pre-crisis period, PE firms invested $257 million in the shipping sector, confirming their optimism towards the domestic shipping industry.

The rising BDI, which was nearing the 11,000-mark it hit in May 2008, also allowed several domestic shipping companies to expand from a long-term perspective.

In the past 10 years, PE firms have invested $519 million in the domestic shipping industry, of which 77 per cent ($402 million) managed to make an exit. The highest flush out took place in 2010, as $306 million worth of funds exited from the sector. The remaining funds are struggling to wriggle out.

"In a downcycle, the wise thing to do is to hope that the business cycle turns. Firms will have to remain in a wait-and-watch mode," said Sinha of IDFC. "There is no other option," he added.

London-based equity firm 3i Group Plc, which has a nine percent stake in Krishnapatnam port, has exited all investments in India but has not been able to make much headway in terms of its exit plans from the port. For most PE firms, a common exit route is listing of the entity. However, Krishnapatnam has no such plans.

"There are no plans of an initial public offering (IPO) as of now. We are only focusing on increased cargo volumes going ahead," C Sasidhar, managing director of Krishnapatnam port, told Business Standard.

Krishnapatnam Port in Andhra Pradesh handled 40.7 million tonne cargo in 2014-15, using 57 per cent of its capacity. Indian ports are currently under pressure because of tepid economic growth. Due to this, port authorities are exploring different ways of reviving business.

The PE firms are, however, optimistic about the ports and logistics sector, which has seen an investment of $833 million between 2005 and 2015. "PEs are looking at more secular trade growths and to that extent ports and logistics are safer bets compared with shipping," said Sinha.

Of the total $833 million invested by these firms in the ports and logistics segment, 42 per cent of the funds made an exit in the last ten years. Though this segment too has not seen any investment in the last two years, the inflow of funds in the prior period has certainly been stronger than that of the shipping sector.