FROM: Don Pierce, Chief Investment Officer
SUBJECT: Greywolf Capital Management MCA
RECOMMENDATION:
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Approve the creation of a Master Custodial Account (MCA) with Greywolf Capital Management, subject to completion of operational due diligence and finalization of legal documents. The MCA will have an initial focus on the firm’s commingled maritime opportunities fund and an SBCERA-directed maritime fund-of-one.
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BACKGROUND:
Greywolf Capital Management (“Greywolf” or “the firm”) was founded by Jon Savitz in 2003 and currently has approximately $3 billion of assets under management. The firm began investing in commercial shipping in 2006, with dedicated maritime investments beginning in 2017. Since that time, Greywolf has raised six dedicated maritime funds and invested in 27 commercial ships. The maritime strategy is led by James Kelly, who first joined Greywolf in 2004; after four years at another firm, he rejoined Greywolf in 2013. The firm is headquartered in Purchase, NY and employs 31 total employees, of which 15 are investment professionals.
The maritime strategy developed from distressed ship investments executed after the Great Financial Crisis; the investment thesis focuses on acquiring mid-to-end-of-life ships in niche markets (primarily smaller feeder containerships). These ships are a small subset of the overall shipping market, and the strategy benefits from a long tail of fragmented sellers with a large pool of disparate buyers. The firm underwrites to a low case in which return of capital is achieved through the ship’s demolition value plus in-place contracted cash flow; upside is achieved through re-leasing and potential sale of ships at a premium to demolition value.
Greywolf works primarily with Conbulk Shipmanagement (a commercial/technical shipping manager and operating partner) to underwrite and manage the ships in the portfolio. Conbulk is responsible for the asset and fleet management of ships, including crewing, leasing and maintenance; additionally, Conbulk jointly underwrites assets and invests in the equity of the ships they manage alongside Greywolf and other limited partners.
Greywolf’s maritime strategy targets an unlevered net IRR of >15% and net MOIC of >1.8x. The vast majority of returns should derive from current income (driven off chartered cash flow), and any potential upside will be driven by re-leasing and/or capital gains from asset sales. A typical fund should achieve 1.0x DPI in approximately three years.
Staff and NEPC believe that Greywolf is a compelling opportunity for SBCERA for the following reasons:
- Attractive standalone opportunity in a niche segment.
o While the shipping industry has been historically volatile, current ownership of feeder containerships is highly fragmented, creating inefficiencies with multiple sellers of assets. Additionally, the orderbook of new assets has been persistently low; paired with increased demand for shipping, this has led to a sustained improvement in the supply/demand for shipping capacity.
- Nimble fund size and assets under management.
o The commingled fund and an SBCERA fund-of-one still represent a very small portion of a large market; the underlying thesis does not require a specific shipping cycle or continued secular tailwind. Rather, the opportunity will be driven through selectivity and opportunity-specific attributes.
- Relevant experience and complementary skill set of partners.
o Messrs. Kelly and Dalakouras are uniquely qualified as partners in this strategy. Kelly has over 20 years of experience consulting for and underwriting hard assets in transportation, while Dalakouras has over 30 years managing ships globally. Together, they blend a holistic perspective and shared economic alignment across the underwriting and operating of ships across a variety of cargoes, routes and vessels.
- Idiosyncratic return profile with portfolio diversification benefits.
o Shipping returns and charter rates have shown a low correlation to overall equity, fixed income and commodity indices. Moreover, this asset class should act as a hedge with respect to both inflation and geopolitical disruption. The style of investment (a focus on downside protection with potential equity upside) should generate significant current income that can both be re-invested or harvested as needed.
Greywolf’s maritime strategy represents an attractive fit within SBCERA’s portfolio, namely as a source of idiosyncratic, uncorrelated returns and the capacity to scale with preferred economics. The founding principal has significant relevant experience, direct philosophical alignment with SBCERA’s investment beliefs, an ability to generate strong returns and a clear motivation to succeed. Staff and NEPC are recommending the Board establish an MCA with Greywolf, with an initial funding commitment of $125m million of plan assets (~70 basis points) and the potential for account growth over time.
BUDGET IMPACT:
Investment Costs are deducted from Net Asset Value.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Thomas Kim
ATTACHMENTS:
Exhibit A: Greywolf Presentation
Exhibit B: NEPC Letter
Exhibit C: NEPC Memo (confidential)
Exhibit D: Additional Staff Information (confidential)