Shipping’s Illiquidity Premium
Illiquidity premium is the additional return an investor requires to own an asset that cannot be easily or quickly sold at its fair market value. This premium should generally be ~30%, according to famed valuation guru Aswath Damodarn of NYU Stern Business school.
So, what is the illiquidity premium when investing in shipping?
I evaluated the most recent dry bulk vessel returns, arranged by well-regarded Norwegian project finance house NRP. NRP packages investment opportunities directly into ships for investors, whose shares do not trade on an exchange and are thus private/“illiquid”.
With a similar fleet portfolio to NRP, Greek dry bulk shipowning company Star Bulk Carriers (Nasdaq: SBLK) is our public/“liquid” investment comparison.
As one might expect, there is a wide distribution of investment returns, but on average, the private/illiquid NRP projects have outperformed the public/liquid SBLK shares by just 2%.
Is a 2% premium enough for investors to restrict their ability to quickly exit their bets in order to take profit (or minimize losses)?
In an industry as volatile as dry bulk shipping, I’d make the case that 2% is far from sufficient– even if owning shares in a publicly-traded shipping company doesn’t come with the ego-boost of telling folks at a cocktail party that you’re a shipowner.
Separate but related: publicly-listed Eurodry (Nasdaq: EDRY) sold two of their vessels into an NRP structure in November 2023. Based on NRP’s most recent public reporting, an investor owning EDRY’s public/liquid shares would have outperformed an investor owning NRP’s private/illiquid shares by ~45%.
