Alterna Capital: “Volatility will create attractive exit opportunities”

Wilton: In the news this week once again is Alterna Capital Partners. The US private equity firm was revealed as the firm behind an order for six 25,000 dwt chemical tankers at Hyundai Mipo in South Korea.

Alterna has been very active in the market, tying up with a number of shipowners. It has a joint venture with Norway’s Western Bulk owning three 2011-built supramax bulk carriers as well as three other companies. Mid Ocean Tanker Company acquired a partially completed Jones Act product tanker at auction. Mid Ocean managed the completion of that project  – delivered in 2012 – and has arranged employment for the vessel through August 2020. Then, there is Sterling Ocean which ordered a total of seven product tankers, three of which delivered from Korea’s STX last year, while another four are under construction at Hyundai Mipo. Finally, there’s Steelships which is a handymax bulker play, now with five ships in the water.

Unlike many of his peers, Jim Furnivall, managing partner at Alterna, says his private equity firm is very much in shipping for the long term.

On product tankers, Furnivall admits there are too many ships at the moment, but demand growth for products should outpace supply growth over the next three years.

“As such the market should come into balance during that time and we will see rates return to historical averages, maybe with some premium,” he says.

Furnivall’s commitment to hang on in shipping is not matched by many others in private equity, something he acknowledges.

“For the time being I think that hedge funds and probably private equity are likely to focus elsewhere than on shipping. The returns on the capital that has been deployed will have the major impact on whether this is a sector of permanent interest,” he says.

In terms of what sectors he now sees as hot within shipping, Furnivall is quick to put the spotlight on LNG and LPG carriers.

“The recent huge increase in shale gas production, the regional price differences in gas and expected future growth have gotten a lot of owners and investors very excited about this area,” he says.

As to when Alterna will cash out, Furnivall has a few principles he wants to follow.

“When we make a shipping investment our base case investment model always assumes that liquidity comes from selling the assets and distributing the sale proceeds,” he explains.

There will be times and structures where a strategic sale or public float may provide a premium to the net asset value and Alterna endeavours to structure its investments to position itself to take advantage of this, but that outcome would be upside to its investment case. All of this means that acquisition price and operating cash flow are critically important to Alterna’s success investing in shipping. Also, understanding Alterna’s partners’ motivations and then aligning interests is essential.

“We believe that if we get those things right and are patient investors, industry volatility will create attractive exit opportunities,” concludes Furnivall. [04/07/14]