As veteran investment bankers like to say, “It took only 10 years for everyone to forget the mistakes we made last time.” So, with the dawn of the 2020s, where does shipping turn for fast and accessible investment?
Multinational banks are increasingly cautious about investing in the industry, and some European players have left the sector entirely. Meanwhile, some of the largest Asian banks (particularly those in China) have grown portfolios in a very short time.
The financing of ships will need to change fundamentally if the industry is to find the funding for operational needs and growth objectives.
IMO 2020 regulations and environmental, social and governance (ESG) policies will add to the burden on owners in terms of direct costs and manpower.
Public shipping companies with ESG policies and access to capital markets will be aligned with the needs of large shipping banks, and continued funding for fuel-efficient, technologically advanced ships appears set to continue.
However, large ship finance banks could well be unable to respond promptly to requests from new customers for funding.
While these issues create difficulties for small to medium-sized companies, we shouldn’t discount the effects on finance providers.
They may not be able to lend as much or make as many loans as they would like — and additional compliance requirements could slow lending speed. That affects a lender’s volume and profitability.
Those combined factors leave a potentially big — and profitable — gap in the ship finance market.
This is where new entrants with a technological edge could take advantage. Fintech — financial technology — has already made strides in the wealth management, retail, real estate, broking, insurance and automotive sectors, and new ventures are launching in shipping, too.
Speeding the lending process
Fintech tools being developed will speed up the lending process — to the benefit of borrower and lender — while other tools will focus on the secondary finance market and how the lenders themselves obtain investment.
Investment and asset-finance platforms already exist and are specifically targeting ship finance markets. One example is YieldStreet’s marine finance, which provides alternative finance through a digital crowdfunding platform.
Its immediate impact is to increase transparency of costs and make millions more dollars available to the shipping market — directly from consumers.
This month’s partnership between Citigroup and YieldStreet highlights the potential scale of individual investors as a buying force in the alternative credit space.
Private equity firms are also showing a great deal of interest in shipping. They have access to significant funds but are often subject to fewer regulations compared with traditional banks.
The need for shipowning stakeholders to improve access to finance is leading to the development of technologies that can simplify and speed up the lending process at all levels of the money supply chain. This type of common interest will see more traditional shipowners working with private equity firms to develop and utilise new financial technologies.
As a starting point, innovation will focus on availability (more cash) and speed (quicker delivery). Not far behind that will be the competitive drive for lower pricing through fintech, compliance and back-office efficiencies. It’s not a big leap of faith to see that ships will become smarter, more efficient and better for the environment.
Whether those changes will be the catalyst for ship finance to develop is still to be seen, but new technologies have too much potential to ignore — especially for those in the business of making a profit from lending (or borrowing) money.
An oversupply of money for shipping seems a distant dream for now, but change in the ship finance market over the next decade seems a given. As sci-fi and superhero fans will agree, “It is inevitable…”
Jasel Chauhan is partner and head of international finance at law firm Hill Dickinson
