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adverse market conditions, private
equity firms inject more capital to pay
off a company’s debts and finance
expansion to take advantage of suitable
investment opportunities. One example
is US Private Equity firm Oaktree,
which now controls a series of shipping
companies including Genco Shipping
and Trading Ltd, a Dry Bulk shipping
company
75
.
This explains the massive influx of
private equity money into the shipping
sector in the last two to three years.
In 2013/2014, Bloomberg estimated
$5 billion and rising being invested in
that year alone by private equity and
hedge funds
76
. It is not surprising that
those with the cash are keen to take
the private equity route, as growing
evidence exists to suggest that private
equity outperforms the public stock
market over time; over the decade to
2013, its member funds generated an
annual return rate of 15.7%, compared
to 8.8% for the FTSE All-Share index.
77
In addition, the regulatory protection
of the FCA is available with private
equity as all private equity and venture
capital firms in the UK are regulated by
the Financial Conduct Authority (FCA)
and therefore the Financial Services
Compensation Scheme (FSCS) applies
78
.
However, entry levels are unlikely to be
within the reach of ordinary investors;
£200,000 or more, is a realistic figure
79
,
fees are high at around 2% annual
management charge levied on the
assets under management plus 20% of
the fund’s profits
77
and with no public
market, it is an illiquid investment
sector.
That said, whereas traditional ship
owners tend to hold vessels for at least
20 years, private equity groups hope to
turn a quick profit by listing companies
or selling their vessels once charter
rates and ship valuations recover
94
. The
usual exit target is three to seven years.
HEDGE FUNDS
Like private equity firms, hedge funds
have recently seen the value in investing
in the shipping market and they are
generally inaccessible to ordinary
investors. Typically institutions, such as
pension funds, university endowments
and foundations, or high net worth
individuals are the permitted investors,
with the significant resources required to
enter the market by this method.
Fees are similar to those in private
equity, however, hedge funds generally
invest in relatively liquid assets,
purchase minority positions in company
stocks and bonds for both long and
short term investment purposes and
have much greater liquidity than
the standard private equity route of
purchasing entire companies.
One of the most popular current
methods of hedge fund shipping
investment is purchasing the debt of
distressed companies, for example,
in August 2015, Reuters reported that
“Some of the U.S. hedge funds, often
described as “vulture funds” as they buy
assets cheaply before selling them on in
a rising market, are eyeing portions of
the 373 million euro ($406 million) debt
of shipping firm Premuda.”
80
ENTERPRISE INVESTMENT
SCHEMES
Government backed schemes such
as Enterprise Investment Scheme
(EIS) are vehicles for much smaller
levels of investment than that which
is available through private equity,
institutional or corporate players.
The generous tax reliefs for investors,
which were introduced to provide
incentives for investment in small
unquoted companies, with a perception
of higher-risk, are very attractive.
There is, however, a three-year period
during which investors must hold their
shares to access the tax benefits, which
effectively constitutes a lock- in.
An individual company can apply for EIS
status and investors are then invited
to acquire shares in it, thereby taking
some security over the assets of the
company. A UK company can qualify for
EIS status as long as it does not carry
out certain restricted activities (whilst
leasing or letting assets on hire is a
restricted trade, certain ship-chartering
activities are allowed) and meets other
criteria to ensure that its size is limited.
“Some of the U.S. hedge funds, often described as “vulture funds” as they buy assets cheaply before
selling them on in a rising market, are eyeing portions of the €373 million ($406 million) debt of
shipping firm Premuda”
Reuters
The minimum investment is £500 worth
of shares in any one company in any
one tax year, although in practice, this
minimum is set by the EIS itself and
might typically be £5,000 to £10,000.
Returns can vary considerably, with
targets often high, taking into account
the potential for small and sometimes
young companies, to grow rapidly.
Exit from EIS is variable and is likely
to be by way of sale of the underlying
investee company(ies) or their unlisted
shares after the three year holding
period has elapsed and sometimes
longer, depending on the optimum time
to sell and interest of buyers.
All types of government sponsored
investment schemes are vulnerable to
changes in legislation and in last quarter
of 2015, EIS underwent rule changes in
order to comply with European State
aid rules. As a result, EIS now has a
ten year sunset clause, so it will be
reviewed again in 2025 and this gives
the important advantage of giving the
sector a decade of stability.
ANNUAL MAX.
INVESTMENT
£1 million
TAX
RELIEF
30%
HOLDING
PERIOD
3 Years
ONE YEAR
CARRY BACK
Yes
DIVIDENDS
Taxable
CAPITAL GAINS
TAX
Gains exempt
after 3 years
CAPITAL GAINS
DEFERRAL
RELIEF
Yes
CAPITAL GAINS
TAX HOLIDAYS
No
INHERITANCE
TAX
EXEMPTION
BPR available
after 2 years
for qualifying
investments
82
EIS TAX RELIEFS
81
(2015/2016)