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October 2013 www.sname.org/sname/mt The fund manager cleared his throat and told the shipping man, I have made money for my cli- ents in almost every lousy industry in the world ? coal, steel, hi-tech, telecom, mining ? you name it, but I have never seen as many risk factors in an IPO as you have in your supertanker prospectus. Tanker shipping makes my other investments look as risky as investing in a little kids lemonade stand after his mommy bought all the lemons. Ive never seen an industry where rates can rise 400% one month and drop to almost zero the next.? He went on, I know you shipping men are used to sweet talking commercial bankers into giving you cheap debt, but you need to stop apologizing for the fact that you operate in a risky business. Risk isnt something to be ashamed of. It is something to be celebrated.? e shipping man tried to nish his road show pitch but the fund manager continued. ere are three kinds of investors in this world.? Before the shipping man could start guessing, the fund manager went on. Okay, ne, Ill just tell you. e rst kind of investor is a debt investor. e next kind of investor calls himself an equity investor but he thinks like a debt investor. Hes the guy who wants a high return, but is so afraid to lose money that he almost always does. You have to watch out for that guy. Hes the one who will attempt to convert your little shipping casino into a transportation utility and end up with the worst of both.? After an awkward silence, the shipping man asked And the third kind of investor?? After an OMG-type exhale the fund manager explained. e third kind of investor is the guy whos just looking for a high-odds game in which to bet some money. He is the guy at the horse track who still has the fty bucks he started with and the last race is about to begin. He wants to win big or lose and go home. ats the guy who really wants risk, and needs risk.? He continued I am looking to make ve times my money or lose it all and the supertanker business is one of the things that can provide that on a regular basis.? e preceding dialog is borrowed from the book Viking Raid by Matt McCleery, which will be published later this year. It is the sequel to the widely acclaimed shipping novel, e Shipping Man .Compared to the shipping industrys historic (that is, the days when period time charters were common) aversion to risk, this conversation represents a distinctly dierent way of looking at risk. Call it the Gordon Gekko version, but it seems to be exactly where we are in ship- ping and commodities today. As a mature industry, shipping has always been risky and in a state of change, but now we have two shipping worlds or markets and the word risk? is understood dif- ferently in each. e shipping business that we are used to is still about ships, but has added the eects of deriva- tives to the business side. e other market is all about buying, nancing, and selling ships and eets. How did we get to this? ose who buy, sell, and trade raw materials and agricul- tural commodities look beyond the sea and treat shipping as just another commodity. As the great freight market crash of the 1980s ended, multiple-year time charters dis- appeared and most tramp shipping people recognized that things must change. Nevertheless, very few owners altered their business model. At the same time, defaulting loans and the cyclical nature of the industry scared o many traditional shipping lenders. Shipping faced a shortage of capital to renew the eet. Junk bonds, REIT-like nance schemes and Norways and Germanys KS/KG schemes lled the vacuum for a while. IPOs for publicly-owned ship owning companies emerged. Along about 2005, Wall Street discovered? shipping. e commodities/industrial materials desks of mer- chant banks discovered that they had missed the abrupt upward move in prices induced by Chinas entry into the World Trade Organization. ey were too far behind the shippers, merchants, and Chinese, but recognized Understanding Risk Dierently It depends on which shipping world one inhabits BY DONALD B. FROST ose who buy, sell, and trade raw materials and agricultural commodities look beyond the sea and treat shipping as just another commodity.