Joint Ventures Between

Private Equity Funds And

Shipping Companies –
Current Structures And
Exit Scenarios
By Nicolaus Ascherfeld and Max Landshut, Allen & Overy LLP,
London/Hamburg

1. Private ping expertise of their partners ventures, the vast majority of majority of the funding and
Equity Entered both in terms of identifying the joint ventures are formed standard equity ratios between
The Shipping attractive opportunities by on the basis of a mutual corpo- private equity fund and ship-
Industry leveraging on the shipping rate vehicle. A purely contrac- ping company are approxi-
Private equity funds have been companies’ network and their tual joint venture means that mately 90%:10% or 80%:20%,
around in the shipping industry capability to efficiently manage parties do not jointly own a but in some cases parties also
for a couple of years now. the vessel investments. corporate entity, but would agree to equal funding. Interest-
Attracted by vessel values only be bound by contractual ingly, although the private
trading at (historically) low Against this background, it does arrangements. Such an equity fund typically owns the
levels following the outbreak of not come as a surprise that joint approach would be more majority of the equity and the
the shipping crisis in 2008 and venture co-operations seem to typical where the investment is voting rights, it does not neces-
fostered by banks that have be the most favoured type of made solely for the account of sarily control the joint venture.
traditionally lent money to investment private equity made the private equity fund and the Quite typically, parties agree to
O finance the acquisition of into shipping. Given the short- shipping company is only joint control, because the
c vessels pulling out of ship and medium-term investment offering its market expertise private equity fund acknowl-
t finance, private equity funds horizon of private equity, these and management services for a edges that the shipping know-
o have commonly teamed up joint venture co-operations were fee without contributing any how rests with the shipping
b
with shipping companies to typically designed for a period of funds for the vessel acquisition. company and agrees to imple-
e
r form joint ventures to exploit three to seven years and the time More commonly, the parties ment corporate governance
/ investment opportunities. is about to come where private agree to a corporate joint ensuring that key commercial
n equity funds will actively seek to venture, meaning they are decisions cannot be passed
o The fundamental principle of manage their exit. setting up a joint holding against the vote of the shipping
v these co-operations is as simple company which will then company. Technically, such
e
m
as that: shipping companies 2. Forms Of wholly own several single joint control is ensured through
b struggling to obtain finance for Co-Operations purpose companies, each unanimity requirements in the
e vessel acquisitions were While co-operations between holding a vessel. Such holding shareholders’ meeting and equal
r welcoming capital provided by private equity funds and ship- company will typically be representation of both partners
private equity funds which, in ping companies could be set up majority owned by the private in the board. Domicile for the
2 turn, benefitted from the ship- as mere contractual joint equity fund providing for the holding company (and the
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vessel-holding SPVs) will cally chosen its shipping partner ments in securities that are how this can be controlled in
mostly follow tax considera- for its expertise in a certain secured by target vessels, invest- practice require further
tions. Accordingly, Marshall segment. ments in (listed) shipping thoughts having regard to the
Islands or Luxembourg are companies or their debt or individual case and there is no
obvious choices. Joint ventures The specifications of the vessels opportunities presented by the one-fits-all solution.
domiciled in other jurisdiction, that the partners intend to shipping company that the
such as, for example, Germany, acquire through the joint private equity fund is already 4.2 Related party disputes
will need to pay close attention venture will need to be carefully independently aware of. As the service agreements are
that the corporate set-up of the defined. The reason for this is commonly entered into by the
joint venture does not jeopar- that commonly the target vessel 4. Com m e r c i a l joint venture vehicle and the
dise tonnage tax benefits in the criteria are also authoritative for Agreements shipping company, any legal
respective flag jurisdiction. the scope of the right of first In most of the co-operations, measures adverse to the ship
refusal and exclusivity which the the shipping company under- manager will need to be exer-
Some further, less common joint venture enjoys. The part- takes to perform the technical cised by the joint venture
forms of joint ventures contem- ners may not invest in any and commercial management vehicle. The private equity fund
plate that the shipping vessels that meet the defined as well as portfolio manage- will be interested in excluding
company would contribute part target criteria, unless they have ment services towards the any blocking power the ship-
of its own vessels or new-build first offered such opportunity to private equity fund and the ping company may have in the
orders into the joint venture. the joint venture, and they are joint venture vehicle. Issues to internal governance process at
Mostly, the goal in those cases contractually prohibited from be considered in such circum- the joint venture level and regu-
would be to achieve (together establishing co-operations with stances comprise, among larly related party disputes are
with the new acquisitions of the subject to lengthy discussions
joint venture) critical mass to between the partners. Not least,
pursue an IPO or other forms
It is thus crucial to appropriately tailor the scope this is because, for the shipping
of disposal that the shipping of the intended co-operation to ensure that it does company, performance of the
company could not pursue on not conflict with other existing co-operations or services to and the equity
its own. Other joint venture co- constrains the possibility to team up with other participation in the joint
operations are more limited in partners for similar investments. venture are intrinsically linked
scope and are established for with each other. The latter
the sole purpose of acquiring connection may be reflected in
certain pre-agreed vessels other potential partners within others, the following aspects. a put option in favour of the
(mostly new-build orders) and the realm of the target vessels. It shipping company and a corre-
are not intended to grow any is thus crucial to appropriately 4.1 Equal treatment sponding call option by the
further. tailor the scope of the intended Normally, the shipping private equity fund in respect of O
co-operation to ensure that it company is managing other the shipping company’s partici- c
t
3. Investment does not conflict with other vessels beyond the vessels of the pation in the event the manage-
o
Targets And existing co-operations or joint venture and in many cases ment services are terminated. b
Exclusivity constrains the possibility to this may also include vessels e
The scope of investment targets team up with other partners for actually owned by the shipping 5. DISTRIBU- r
varies: some joint ventures are similar investments. company. It is therefore impor- TIONS /
targeting new-build vessels only, tant for the private equity fund While distributions are of a n
o
while others are solely focusing Private equity funds typically to safeguard that the vessels predominantly commercial
v
on second-hand tonnage. In any request certain exceptions to belonging to the joint venture nature, specific attention e
event, the scope is mostly the exclusivity. Classic examples are treated at least equally to all should be paid to ensure that m
restricted to certain types of of investment types that are other vessels under manage- the commercial agreement is b
vessels (such as container ships typically exempt from exclu- ment of the shipping company. properly translated into the e
or bulkers) and a specific size sivity (even if they indirectly While such principle should be joint venture documentation. r
range. This follows the fact that include target vessels) are loan agreeable to the shipping Having regard to its internal
2
the private equity fund has typi- portfolio transactions, invest- company in general, details of return requirements, private 0
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 equity funds may seek to agree to require the shipping or more profoundly in the joint any impact on the underlying
on a (upfront) preference company to sell its participa- venture documentation. The joint venture documentation or
within the distribution water- tion alongside the private devil lies in the detail here and, operations of the business.
fall up until it has reached a equity fund (so-called drag- depending on the parties’ will-
certain IRR threshold. along right). Both are designed ingness to provide for a set of 6.4 Securitisation
Reversely, to incentivise the to ensure that the private equity more comprehensive regula- Securitisation is not the obvious
ship and portfolio manager, fund can exit the joint venture tions, the following aspects may and clearly not a “mainstream”
disproportional distributions at its free discretion by forcing a be worth addressing: (i) unilat- exit strategy for joint ventures
for the benefit of the shipping trade sale of the fleet or the eral right of the private equity established between private
company may be agreed that joint venture itself. At the same fund to force an IPO; (ii) regis- equity and shipping companies,
gradually increase at certain time, the drag-along right may tration rights (demand or but it may provide opportuni-
(higher) IRR levels. contrast with the shipping piggyback rights) and guide- ties for the joint venture part-
company’s interest in lines on their exercise; and (iii) ners that are worth considering
Depending on the private preventing a forced sale if it treatment of a management in each individual case. Gener-
equity fund’s internal require- believes that such sale would incentive in an IPO (including ally, securitisations of shipping
ments, it may be necessary to assets are still rare in the
provide for a right of the private market. While there have
equity fund to require the sale
In contrast to the lock-in period applicable to the recently been a few securitisa-
of a vessel to generate distrib- shipping company, the private equity fund will tions of shipping loan portfo-
utable cash in case of a liquidity likely ask for free transferability in respect of its lios originated by shipping
event that forces the private participation and the possibility to require the banks, a securitisation exit in
equity fund to repay funds to its shipping company to sell its participation along- the context of shipping joint
investors on short notice. side the private equity fund (so-called drag- ventures would, rather, have to
be structured as a kind of
along right).
6. EXIT “corporate” securitisation
While private equity typically involving the sale of the vessels
seeks to prevent a scenario destroy values. Contrary to the related valuation issues to calcu- or the vessel-owning entities to
where the shipping company drag-along right, the shipping late the amount of the manage- a special purpose securitisation
may pull out of the joint company will request a tag- ment incentive). vehicle which refinances the
venture for an initial period of along right, i.e. the right to acquisition of the assets by
time (so-called lock-in period), request the private equity 6.3 Private Placement issuing debt and/or equity
evidently, exit scenarios are of investor to co-sell the shipping As an alternative to an IPO, the capital instruments. In our
significant importance to company’s stake, also, in the private equity fund may pursue experience, such transactions
O private equity given its short- event of its exit. a private placement to sell are innovative and complex in
c and medium-term investment down its stake in the joint that they require “bespoke”
t
o
horizon. The following exit 6.2 IPO venture by bringing in addi- solutions to be tailored to each
b scenarios should therefore typi- While it remains to be seen how tional financial investors. As individual case. Particular
e cally be discussed and consid- many of the joint ventures such, financial investors typi- opportunities may arise if the
r ered in the context of the co- established between private cally sign up for small equity securitisation exit can be struc-
/ operation. equity and shipping companies tickets; however, the private tured such that the instruments
n will actually achieve a critical equity fund would generally have the benefit of a credit
o
v
6.1 Trade Sale mass including building up a retain a controlling stake in the rating, thereby broadening the
e In contrast to the lock-in period sufficient independent business joint venture. Typically, such investor base and attracting
m applicable to the shipping case to appeal to public market new financial investors would new investors that might other-
b company, the private equity investors, many of the joint be expected to take on a passive wise not be willing or able to
e fund will likely ask for free venture co-operations have role with limited control rights, invest in shipping assets.
r transferability in respect of its contemplated such an exit and the initial joint venture
participation and the possibility scenario either in a generic way partners would seek to limit
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