Shipping Funds A Watery Grave for Billions of Euros

Nowhere have investors poured as much money into closed-end shipping funds as Germany. But many have sunk, taking billions of euros to a watery grave.
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It is a mecca of the shipbuilding industry: the time-honored “Hansa-Forum” in Hamburg, the premiere gathering of container ship investors.

For years, the proud German companies who created and sold closed-end shipping funds dominated the annual meeting. They were the motor of the global container shipbuilding industry, collecting billions of euros from investors to finance the growing cargo business on the world’s oceans.

Most of the investors came from Germany. The classic closed-end shipping fund, promoted for tax reasons, was more popular in Europe’s largest economy than anywhere else. Germans invested a good €30 billion ($37.3 billion) in these vehicles in pursuit of generous yields. In doing so, Germans invested in half of the world's container fleets.

But these maritime glory days are now part of the distant past: The industry meeting at the end of last week in Hamburg took place without the participation of investment fund houses. The dominance of shipping funds in the form of limited partnerships “is over,” said Torsten Westphal from Arkon Shipping.

About 450 shipping funds are insolvent, said shipping expert Jürgen Dobert, and that is not the end of it.

Mr. Dobert estimates losses for investors at €10 billion. The lucrative financing model, which promised investors annual yields of 8 percent, was sunk by greed.

With the gigantic investment boom came excess capacity, which accelerated price declines in the shipping industry. Aggravating matters were technological advances: The biggest cargo ships today can transport 10,000 containers. Smaller ships that are only a couple of years old have been squeezed out. With transport revenues continuing to drop further, the funds could no longer honor their loan commitments from the banks, with which they had leveraged their clout.

Last year, just €22 million of customer money flowed into new funds.

In 2007, the figure was 150 times that.

“There is no one in the industry who expects a popular shipping fund in the next few years,” said Torsten Teichert, the chief executive of Lloyd Fonds, an issuing house specializing in shipping funds. His company’s stock price is currently at €1.37. In 2007, it was €55 and higher.

As an emergency measure, the industry is following a new model: Publicly listed companies that are no longer financed through the gray capital market, but instead by the stock exchange. The providers hope that this will at least consolidate the cargo shipping market at a low level.


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But experts also consider this plan to be a bet on an uncertain future.

The collapsed market for closed shipping funds has left only losers in its wake. The investors lost their money, shipping firms hit troubled waters, and the banks are sitting on non-performing loans. And anyone investing not in the funds but instead in their issuing houses have nothings to laugh about either: Shareholders buying into MPC, HCI or Lloyd Fonds back in 2006 have lost almost all their capital.

The only winners are the lawyers representing investors. Since they can’t get anything from the issuing houses, they are suing the brokers of the funds for their clients. Their charge: false advice. They would prefer to pull the banks into court because if they were successful, that would allow them to collect the most money.

The shipping companies, which are in the middle of a hard-fought price battle and would like to save fuel, are backing newer, bigger ships.

It has been six years since the global economic crisis spread to the container ship market. Today there is still €17.5 billion in investor money in German shipping funds, according to the industry’s association, BSI. Cargo ships worth €50 billion were bought with German and foreign capital.

Even if the cargo market consolidated at a low level, as the price index for standard routes on the world’s oceans – the so-called charter rates – shows, this money is also not safe. Because no one in the industry expects rates to climb much – not for container ships, and not for bulk carriers, which transport ore, coal and grains.

The prospects for tankers are also dismal. North America has become more independent of oil supplies from the Middle East, which has had a negative effect on tanker demand.


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And although demand is stagnating, transport capacities on the high seas might increase. The shipping companies, which are in the middle of a hard-fought price battle and would like to save fuel, are backing newer, bigger ships. The shipping funds, though, which want to rent out or sell old cargo ships from the boom years of 2004 to 2007, are being left high and dry.

At the same time, German shipping financiers are looking on in distress at the future of the business model. One option would be listing shipping companies on a stock exchange. “It’s incomprehensible why we in Germany have no publicly listed shipping companies,” said Torsten Teichert, the chief executive of the Lloyd Fond issuing house, which specializes in shipping. He thinks that in three to four years several ship operators will be on the stock market.

Mr. Teichert is aware that German shareholders would first have to accept the volatility of such shares. But that could be difficult, because the closed funds debacle has likely scared many investors from the watery graveyard left in its wake.


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And the issuing houses for the funds have certainly not had any resounding success so far. Following the model of publicly traded real estate companies, they tried to establish similar investment vehicles with shipping portfolios. But the banks did not play along. And the financial investors, who dared take part, are unhappy. “We underestimated the length of the crisis,” said Christoph Toepfer, CEO of Borealis, who works with the money from the U.S. private equity platform KKR. In hindsight, he admits that they got in too quickly and at too high a price.

A second option could be pooling several shipping funds and listing them on the stock market as a shipping corporation. And there is also a template here from the real estate world, albeit a less successful one: Prime Office was developed out of several closed office property funds, and was taken over by a subsidiary of the financial investor Oaktree. It is still around today in Deutsche Office AG.


Reiner Reichel covers investment funds for Handelsblatt. To contact the author: [email protected]