COLUMN | Pass the Private Equity Dutchie ‘pon the Left Hand Side: Pelagic, Clear Ocean and Golden Energy; Macquarie, Permira and Ziton [Offshore Accounts]

One of the more questionable songs of the early 1980s was Pass the Dutchie by British-Jamaican teen band Musical Youth, who went to great lengths to explain that their reggae hit was all about passing a Dutch stew pot to the left hand side, and not at all about sharing marijuana. Of course, that’s why the band of cheerful Caribbean kids were allowed on national television.

One of the more questionable myths of modern finance is that the practice of passing existing businesses between private equity players is all about value creation and business growth, and not at all about milking companies dry with excessive debt and financial leverage, whilst failing to improve the fundamentals.

Of course, that’s why the private equity partners deserve such large pay cheques as they pass the Dutchie of their investments around, never announcing the prices for any of their deals between each other.

Another set of deals last week highlights the continued investment of private equity in the offshore industry. From the outset, we should warn readers that we prefer the transparency of public listed companies to the opaque structures and financial engineering used by many private equity companies. We also prefer the long-term vision of family-owned private shipping companies to the short-term focus of private equity firms.

I am not a fan, and don’t get me started on how private equity managers often pay less tax than regular salaried staff through the carried interest tax break.

Wind and standby boat domination

However, private equity now dominates the windfarm support and safety standby sectors in the North Sea, with Esvagt owned by 3i, North Star Shipping by the Partners Group, and Sentinel Marine by Cyan Renewables. I fully expect Vroon’s North Sea emergency response and rescue vessel fleet to be acquired by a private equity player when the Dutch player sells its 30-odd vessels early next year.

The German-managed anchor handler owner United Offshore Support is owned by Hayfin. EnTrust Global-backed Purus Marine is now a major investor in the offshore wind support market, as is Cyprus-based fund Pelagic Partners. Pelagic has two firm and additional optional vessels of the UT 5520 design of commissioning service operation vessels (CSOVs) on order at Cochin Shipyard in India, whilst Purus has three CSOVs on order, three in service under the management of Rem Offshore in Norway, and one smaller service operation vessel (SOV) in operation (Purus Horizon), along with a fleet of nearly 30 crewboats under the HST brand.

Something fishy at Pelagic Partners?

We have previously highlighted some of the more dubious interesting connections of those involved with Pelagic Partners, the Merhi family of Lebanon and Cyprus. Pelagic Partners is also a major shareholder in Norway’s Golden Energy Offshore Services, which owns seven large platform supply vessels (PSVs), alongside America’s Clear Ocean Partners, which bought out Oaktree Capital’s stake in the company earlier this year. Pass the PSV Dutchie!

Only last week, Golden Energy announced that Clear Ocean and Pelagic had purchased two subsea vessels from John Fredriksen’s Seatankers Management, the 2021-built Edda Sphynx and Edda Savanah, which will be renamed Energy Sphynx and Energy Savanah and placed under Golden Energy’s management. These ships had been acquired by Mr Fredriksen in late 2022 from China, as we reported at the time, so this is a quick flip for him, with the capital recycled into the four new building subsea/light construction vessels of Salt Design, which his company has under construction at  Wuchang Shipbuilding Industry Group in China.

The precedents at Global Marine Systems – pass the sick bag

Longstanding readers of this column will recall us lamenting how pioneering British cable-lay player Global Marine Systems has been bled dry by not one, not two, but three different private equity owners over the last two decades, as the Dutchie was passed from player to player, shrinking as it went.

As the Global Marine fleet aged through lack of investment in new tonnage, and its market share in its core cable laying and cable repair business collapsed, the third private equity owner of the company jettisoned its final growth business – offshore wind crewboat owner CWind, to another financial player, Inspirit Capital, a UK-based investment firm – a year ago, having previously sold its fleet of Taiwanese crewboats separately.

Pass the Dutchie, indeed! This company is a case study in weak leadership, underinvestment and poor strategy under private equity ownership.

In 2021, we asked “Private equity: can the billionaire factory save the offshore industry?” I would argue no, but the habit of passing the second-hand shipping Dutchie around is now endemic.

Macquarie buys Danish windfarm maintenance player Ziton

Last week Australian infrastructure investment manager Macquarie announced that it was acquiring Ziton, the Danish owner of five small windfarm maintenance jack-ups. We last looked at Ziton in June 2022, when the company had just announced (here) that it had been refinanced, and was now controlled by Permira, a private equity company.

That refinancing included an extension of the company's loans by two years, an improvement of Ziton's equity by €37 million (then US$39 million) and an improvement to what it described as its "liquidity" by €13.2 million (then US$13.9 million). The improved equity came from that classic restructuring trick of converting the company's debt into new shares, which was necessary as Ziton had been suffering from a negative equity problem for several years with liabilities of over US$200 million (which exceeded the value of its jackups before the Permina restructuring).

At the time we asked, “What will Permira's exit strategy be?” noting that Ziton's fleet of four small jackups at the time was not as large nor as impressive as Cadeler's or Fred Olsen Windcarrier's. It still isn’t.

What did Permira do for Ziton?

Under Permira’s control in 2023, the company bought a fifth unit, Wind Energy, the sister to the company’s existing Wind Enterprise, capable of maintaining and servicing turbines up to 10 MW. The two vessels are each equipped with an 800-tonne crane and are capable of working in water depths of up to 48 metres. Most new windfarms in Europe are being built with turbines larger than 10 MW and many are being built in water deeper than 48 metres.

Solutions that worked a decade ago when the ships were originally delivered are now obsolete – as Eneti discovered when it sold three of the former Seajacks small wind maintenance jackups Seajacks Kraken, Seajacks Leviathan, and Seajacks Hydra a year ago. These older NG2500X wind turbine installation vessels (WTIVs) were 14 years old, could only install 4MW turbines, and only had 300- or 400-tonne capacity cranes. Eneti sold them to a Middle Eastern player for a US$49 million loss on book value, as we reported. Ziton has three similar units in its fleet.

The road to obsolescence

Wind Enterprise was originally owned by a subsidiary of German utility RWE as Friedrich Ernestine upon delivery in 2011. It was then sold by Innogy to Hong Kong leasing company SPIC Ronghe International Financial Leasing in 2020 and renamed Guo Dian Tou 001 for service in China, before being taken back to Europe and reflagged to the Danish registry by Ziton in 2023. The sister ship has been acquired by Ziton from troubled Dutch shipowner Vroon in 2015.

Last year, we expected somebody would buy Ziton simply to acquire its track record and windfarm competence ahead of the delivery of a larger newbuild WTIV, just as Eneti bought Seajacks to provide it with a track record ahead of its own newbuild WTIVs in Korea being bid to clients. This argument is still valid and Ziton would make a great foundation for a player looking to enter the WTIV market, where each modwrn newbuilding carries a minimum US$320 million price tag and where clients want to see an operational track record.

Now Permira has sold... to another private equity player: Macquarie.

The checkered record of Macquarie

Depending on where you are in the world, Macquarie has many different connotations. In finance, it is known as “The Millionaire’s Factory” for how many of its staff it made very rich.

In Australia, it is notorious as the company that privatised Sydney Airport in 2002 and pioneered a whole series of obnoxious charges on passengers, like fees to use a baggage trolley and extortionate parking charges close to the terminal, now copied by other private airport operators everywhere.

That was Macquarie’s genius – a model of investment in infrastructure that is win/win for the company and its senior managers. It takes toll roads, airports, ports, and power stations and packages them to investment funds that it controls.

Macquarie acts as manager on behalf of funds, which it sells to pension managers and other investors. It charges a fee for its management of the infrastructure projects, it often lends the utilities and infrastructure companies money at high rates of interest, and it charges them for other services.

Macquarie’s reputation flushed away

Most notoriously, the toxic nature of Macquarie’s infrastructure model became evident in Britain, where it owned Thames Water between 2006 and 2017. During the period, the water company was loaded with over US$2 billion in extra debt through entities in the Cayman Islands, doubling its debt load, but paid out large dividends to Macquarie, whilst often paying no corporation tax but rewarding its executives with very high remuneration packages.

A study commissioned by the BBC found that the total returns made by Macquarie and its co-investors from Thames Water “averaged between 15.5 and 19 per cent a year,” which was "twice what one would normally expect."

At the same time, Thames Water caused extensive pollution of the River Thames, and other waterways by dumping 4.2 billion litres of untreated sewage into them during the period 2012 to 2014. In March 2017, the water company was fined a record £20 million (then US$26 million).

The judge who imposed the penalty at the crown court, Judge Francis Sheridan, said there had been "inadequate investment, diabolical maintenance, and poor management". He found the pollution caused by Thames under Macquarie’s ownership had been in the "reckless" or "borderline deliberate" category, and he determined that "Knowledge of what was going on went very high indeed" in the company.

Pass the leaky sewers ‘pon the left hand side

Macquarie exited in 2017 and sold the water company to a consortium of new investors, including the Abu Dhabi and Chinese sovereign wealth funds, the British pension manager USS and Canadian pension fund Omers. The buyers professed to be shocked by the dilapidated state of the water company’s infrastructure, which continues to spill huge quantities of excrement into rivers and the sea, and whose pipes leaked vast quantities of water, amid public outcry. Now Thames Water faces bankruptcy and possible nationalisation after it warned it could run out of cash before Christmas.

I think it is fair to say that Macquarie’s name is dirt for many in Britain, as soiled by the filthy effluent releases and the naked greed of its short-term management of the utility. But note that Macquarie profitably exited Thames Water before the proverbial effluent hit the fan – the buyers and not Macquarie are the ones facing the write-offs and losses as the troubled utility faces collapse, despite the company's evident role in Thames’ long-term problems.

Macquarie’s ferry punt

Macquarie’s ability to pass the Dutchie before the stew is rancid was also evident in its previous shipping adventures. There’s no vision, little investment and very little operational value add.

Macquarie has had other shipping adventures, and owned Condor Ferries which serves routes between Guernsey, Jersey, the UK, and the Port of St Malo in France, from 2008 up until 2020 when it sold the company to... another private equity company, Threadneedle. Threadneedle then sold 51 per cent of Condor to Brittany Ferries in August.

Pass the Ferry ‘pon the left hand side!

Macquarie builds and sells MEO, buyers take the hit

As we detailed, Macquarie bought crewboat operator Express Offshore in 2007 from Svitzer, and then merged it with Singaporean entrepreneur Michael Kum's tug and barge operator Miclyn Offshore later that same year. Macquarie took out a US$261 million loan to pay for Miclyn (here) and renamed the business Miclyn Express Offshore (MEO).

Just three years later, Macquarie listed MEO on the Sydney Stock Exchange with a market capitalisation of US$470 million, but held on to 34 per cent of the shares in the Singapore-headquartered company (here). In 2011, it managed to sell its stake ("dump" in the uncharitable words of the Sydney Morning Herald here) to two fresh private equity groups, Australia's Champ and Hong Kong's Headland Capital Partners. Champ acquired its stake for AU$199 million (then worth around US$206 million) in September 2012, whilst Headland bought its stake in August 2011.

With remarkably bad timing, the two private equity groups first increased their stakes in MEO, and then chose to double down on their investment and completely buy out all the minority shareholders in December 2013. The company took out a large Singapore dollar bond (here) and the private equity owners stated that they were confident that they could quickly flip the company with a new listing two or three years later (here).

They were wrong. The Dutchie could not be passed as the offshore market went into freefall. In 2019, MEO went into a full restructuring and Champ and Headland saw their equity wiped out. The full horror of MEO’s situation is captured neatly in the slides from the crisis town hall with creditors held in Singapore in 2019.

From Thames Water to MEO, receiving the Dutchie from Macquarie can be akin to receiving a poisoned chalice. The Ziton deal may make some Macquarie partners very rich, but when it comes to passing the Dutchie and flipping the windfarm service company down the line, we would recommend passing entirely.

Phalippou found private equity makes private equity partners rich

We remind readers that research by Ludovic Phalippou of the University of Oxford in 2020 (here) found that the billions generated for private equity partners wasn't the result of outstanding performance by their funds.

Professor Phalippou concluded that private equity funds "have returned about the same as public equity indices since at least 2006… yet, the estimated total performance fee (Carry) collected by these private equity funds is estimated to be US$230 billion, most of which goes to a relatively small number of individuals."

Passing the private equity Dutchie is very profitable for private equity partners, but not necessarily for their investors, not the staff at the companies they buy, and certainly not for the long-term prosperity of the companies involved.

There will be more private equity deals in offshore, but buyer beware.

Background reading

We covered the history of Energy Sphynx and Energy Savanah in late 2022 when Mr Fredriksen bought them – the hulls were originally ordered by Toisa, and Pelagic/Clear Ocean will be the fourth owner of the hulls since the order was placed.

For the complete history of Macquarie, I would recommend to read The Millionaires’ Factory: The Inside Story of How Macquarie Bank Became a Global Giant by Joyce Moullakis and Chris Wright (2023). It sets out the story of how what was originally the Australian branch of venerable British investment bank Hill Samuel Australia became a global infrastructure and private equity powerhouse, beginning via an advisory role on the privatisation of the Australian M2 motorway after becoming independent in 1985.