The magic of the IRR: Are high returns prompting the return of investment funds in shipping?

The internal rate of return, or simply the IRR, is the magic figure that private equity fund managers, shipping-focused investors and affluent shipowners alike employ to determine if an investment makes sense. The investment firm recently launched by the prominent Greek shipowner George Livanos and two bankers, as well as the launch of Schulte Group’s shipping fund, has prompted me to explore the power of IRR and engage in some simple number crunching. Take a five-year-old, 9,000 TEU containership costing $48 million that can be chartered out for three years at $34,000/d. A fund manager with a five-year plan might be able to secure a charter at $32,000/d over the five-year investment period. This may be below market rate but an all-equity purchase of the vessel can achieve a 15% IRR if the vessel is sold, come mid-2023, for $35 million. A leveraged investment could have an even higher IRR. Might such returns trigger a flurry of newbuilding orders, or will purchases be limited largely to the secondhand market? Newbuilding and secondhand prices usually go hand in hand, and while an investment in a secondhand vessel can produce immediate revenue for the investor, opportunities might arise in the newbuilding market.… continue reading

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