Inside Opinion: What next for the KG Funds?

The German KG fund system is sometimes referred to as "the dentist ship fund". This is because they are single-shipowning funds offered to small private investors in Germany with a little bit of disposable income who want low risk returns across a long time period. And you never see a poor dentist right?

The issue is everyone loves value, and quite understandably a lot of the dentists, doctors, lawyers, management types and civil servants plummed for higher percentages of less valuable vessels than smaller ones of more valuable ones across the last 30 years. Why buy 1% of a chemical tanker when you can have 2.5% of a container ship for the same money, right?

I think it is safe to say the chastening market conditions of the last few years have put paid to that wisdom once and for all. I imagine the dentists were feeling pretty smug about their 2.5% of their 1,500 TEU 90s built feeder until she got redelivered from her nice profitable time charter in 2008 and has made a loss scrabbling around on the spot market ever since.

The daily operating costs get exceeded generally, but idle days waiting for charters kill overall profitability. Then comes the double whammy. The vessel was worth $12m in 2008, and the linear gentle downward slope of depreciation suggested she may have another 15 years left in her.

Boom.

The over-capacity in the container segment saw much larger vessels cascading down onto secondary routes as the trunk routes struggled to accommodate the glut of bigger box boats. An asset that was worth a lot of money in 2008 is worth just above nominal scrap value only now, despite potentially being European-built to a high spec and well-managed and maintained.

What should have been a 25 year investment for Mr Dentist looks like being much much shorter than this, and loss-making for much of that time. Sure, some got lucky and their precious assets are staying away from the lottery that is the European or South East Asian spot markets. But for many this dentist drill nightmare is all too true.

So where now for the KG fund managers? The business case is sound but the choices were wrong. Will there be the same demand for tiny fractions of a fraction of lower risk vessels like VLGCs on time charter to state-owned gas companies for 10 years at very handsome returns? Or as Dr Peters, one of the best known KG fund managers in Germany has been doing, offering even tinier fractions of a fraction of a Boeing 777 and Airbus A330 aircraft on long lease to airlines like Emirates?

That is a tough question.

One wonders whether the old adage of bricks and mortar may come into play, and KG funds should start to look to port terminals and infrastructure as possible investment sources? Given the rise of build-to-manage contractors for malls and leisure complexes in Europe and beyond, why not?

Or a privately funded initiative for LNG bunkering floating storage infrastructure in a sector desperate for investment? Smaller capex cost, equating to higher shares for your money, lots of long charter/lease opportunities, in many cases to governments and blue chip oil majors etc and the possibility of a sale windfall at the end of it if the market keeps expanding?

See that, I could invest in. If only I was a dentist…