“Water, water every where, nor any drop to drink.”

Those words from English poet Samuel Taylor Coleridge may come to mind for the shipping sector as it surveys the vast amount of capital being put to work in the market for special purpose acquisition companies — Spacs.

Spacs, also known as blank-cheque companies, turned record numbers in 2020, raising more than $82bn through initial public offerings. The momentum accelerated last month, with 91 Spacs raising $25.1bn, according to Dealogic.

But none of that cash has been directed towards a shipping deal.

Familiar names are now starting to enter Spacs in some form. The Scorpio Group, investor Wilbur Ross and Greek shipowners Akis Tsirigakis and George Syllantavos have all pounced. But shipping continues to be a difficult match for the new capital.

“The market is looking for growth and shipping isn’t perceived as a growth industry,” said former Credit Suisse investment banker David Herman, who now heads the financial arm of Connecticut tanker brokerage Charles R Weber.

“Plus the performance of most shipping companies over the past decade has been a disappointment, so there’s limited investor momentum in the space.”

Most Spac money is flowing into sectors such as financial and consumer technology and healthcare — industries perceived to have a strong growth trajectory.

The very structure of a Spac also weighs against the shipping model.

Blind pool of equity capital

Charles R Weber brokerage finance chief David Herman: 'Shipping isn't perceived as a growth industry.' Photo: Joe Brady

A Spac is essentially a blind pool of equity capital in which the sponsors do not specify exactly how the funds will be used. Instead, investors trust the sponsors to find assets that can be acquired at a bargain private valuation that will grow higher once the public merger is consummated.

Sponsors typically have two years to find the right deal. If they fail, or if investors are not convinced it is a worthy deal, the capital must be returned to the investors with interest.

“The challenge for private shipping companies going the Spac route is that public market valuations have largely been below NAV [net asset value] in recent years across most sectors and for most companies,” said Evercore managing director Mark Friedman, a veteran shipping investment banker.

“Therefore there is no apparent pick-up in value for this alternative for the private company.”

Evercore managing director Mark Friedman: 'There is no apparent pickup in value.' Photo: Johnathon Henninger/TradeWinds Events

Shipping’s tendency to turn on asset values is a built-in problem.

“If the price of a ship is, let’s say, $100, you kind of have to pay $100 to acquire it, as opposed to some of these new growth industries where the sponsor can claim a company is valued at 12 times earnings but he can take it to 20 times earnings through the Spac,” Herman told TradeWinds.

Investors must take into account that a Spac usually involves significant transaction fees, the sponsor’s “promote” — which can be 20% of the equity — and dilution through warrants.

“So the investor has paid $10 per share,” Herman said. “The sponsor can’t argue that now it’s worth $10.01. It’s got to be worth $11 or preferably $12. Otherwise the investor can just ask for his money back.”

So does this mean Spacs can never work for shipping? History would beg to differ. In fact, prominent New York-listed shipowners such as Star Bulk Carriers, Navios Maritime Holdings and Global Ship Lease were formed through Spacs.

That said, it has been more than a decade since the most recent of these: the Spac merger that resulted in Global Ship Lease.

And Star Bulk Carriers and Navios worked because the dry bulk sector was poised to undergo a generational “super cycle” between 2004 and 2007 that allowed just the type of lift in asset valuations that a Spac requires.

One public company executive mentioned another factor in those deals. The owners who sold their vessels into the Spacs committed to a six-month lock-up on pricing that provided time for the market to shoot up and asset values with it.

“So you got the escalation in ­values that you needed, but it was the six months that provided the uplift, not the reputation of the sponsor,” the executive said.

“That six-month period would never be available to the sponsor today. The sellers are much smarter and would never agree to give such a valuable option for free.”