As a partner at one of the industry’s leading law firms, what are your expectations of the custom new-build market beyond 2017?
My expectation is one of continued robustness. The market came back with a bang about two or three years ago and there are absolutely no signs of that end of the market being affected by any change in the economy. If you look at the profile of the buyers, they are typically repeat buyers and people who enjoy the excitement of building a superyacht.
What impact, if any, has current economic and geopolitical instability had on Clyde & Co’s business activities?
Of course it affects us, but the point is to respond to that instability in a positive and constructive way, because in a crisis situation, or one of uncertainty, there will always be a need for legal services, be they litigious, transactional, financial or purely advisory. It doesn’t matter if you’re a designer, an owner or potential owner, a crewmember, a builder or a banker – depending on the economic situation, you’re going to need some sort of legal advice.
Even in the darkest days immediately following the crash in 2008, Clyde & Co was able to respond to all of those issues because we have a depth of experience that extends beyond the superyacht environment. From our experience in the commercial maritime sector, we had seen crashes come and go and we knew what to expect and how to react appropriately.
Before becoming a superyacht lawyer, I was an economist and I was well aware that a crisis does not mean that economic activity ceases. Economic pressures will vacillate but business activity does not stop. The superyacht industry was hit hard by both the wider macroeconomic forces and the narrower microeconomic adjustments brought about by distortion in ricing, supply and too many players in the market. Clearly some businesses do falter and some fail; Fitzroy, Moonen, ISA and the Rodriguez Group are obvious examples.
Going forward there is uncertainty. What is happening in Greece, the power play between the west and Putin, the advance of Islamic fundamentalism in the Middle East – this all creates a sense of nervousness. But what I haven’t seen are people opting not to get into business because of all of this. People have become normalised to uncertainty, and when that happens, they make the decisions that are right for them and they price into their decisions the cost of failure. If that decision is to build a superyacht, to work on one or design one, they will do that. What I am seeing is people living for today and, quite correctly, factoring in risk and not being put off by the effects of the crisis and accurately contemplating the full cost of ownership. Over the years we have seen shipping companies and builders fail and others restructure and survive. We have advised and litigated and have learned important lessons which are the bedrock of our advice to the superyacht world.
From your perspective, which markets are currently performing well, and which are exhibiting decreased activity?
We often know something is happening before the markets knows about it. An owner will come to us to talk about designing a project. It won’t necessarily go to build, and what we’ve seen more of in recent years is owners commissioning custom builds and putting together a complete design and engineering package that goes to tender for a number of shipyards. By changing the dynamic and taking control, owners are certain of what they want instead of picking the yard and saying, ‘Can you help me?’. Where the yacht is built is almost secondary to what the owner wants from the superyacht.
We’re seeing strong activity in the 100m+ sector. We’re seeing good activity in the 50-80m sector, mostly semi-custom, but some custom. And we’re seeing, at the smaller end, that the quality yards are not short of work. I’m heartened to see new build activity at places like Heesen, Sanlorenzo and Baglietto. These are good, established names; there is not the explosion of activity we had at the turn of the Millennium, but each yard is quietly getting on and doing what it does well. What is interesting is the return of personal customer service and the rise of the bespoke superyacht broker, who looks to sell you the right superyacht.
The financial doping that we had with the rapid of influx of wealth into the market at the beginning of the 21st century was a once-only hit. It wasn’t the beginning of a never-ending love affair between high net worth individuals and the yachting industry; it was a moment in time when a select group of individuals became very wealthy very quickly, and in a moment of blind love they fell in love with superyachts. But that moment has passed and I see no new fleet of the wealthy that is going to dash into the industry with that sort of enthusiasm again.
There was a misplaced rush to China in the hope that new Chinese money would replace the eastern Europeans who were responsible for that turn of the century boom, but that hasn’t happened. And in all of this, what people have forgotten is that around 40 per cent of the world’s superyacht owners are American; they have remained the only constant and the only time they’ve been overtaken is when new money came into the market. Perhaps where we are now is the natural state of the market.
London has long been the epicentre for superyacht legal services. But with maritime legal hubs emerging elsewhere, do you believe English law will continue to retain its primacy as the jurisdiction of choice for the superyacht industry?
The Anglo-centric dominance of this industry is well documented and one must understand the legal, social and economic reasons for this. The industry is dominated by the Anglo- Saxon market, which has historically tended to speak to Anglo-Saxon lawyers. This goes hand in hand with the dominance of London maritime insurance market.
In the short term, England will still continue to be the dominant player in contracts, but we are seeing more contracts where the builder is demanding the contract is written in Italian, Dutch or German law. This may be because the builder has had a poor experience of litigation in this country; it’s expensive and for those from a civil law jurisdiction, it is often illogical and impenetrable. Both are fair criticisms.
Even in circumstances where they will accept English law, those builders all know that certain aspects of the contract will always be governed by local law, especially when it relates to issues such as title or insolvency.
In the commercial space there has been a huge play by Singapore to turn itself into an alternate arbitration hub, to challenge that of London. It’s something we as a firm have responded to, and we have a significant office in Singapore, because we know London isn’t the only fruit in the basket.
However, in sale and purchase I see no change; London is still the place of choice for transactions. But any player in this market should be aware that we cannot afford to be arrogant; we don’t know all the answers and there are other ways of doing things. We may pride ourselves on the fairness of English law, but that’s the way we see it and it’s not necessarily the way the rest of the world sees it.
Legal services are often seen as omnipresent, but how is the service you provide your clients evolving?
We have to respond to changes in how clients wish to use our services. There are also clients who do lots of it themselves and then come to us with questions. Then there are clients who treat us as if we are the legal department of the client. But the important thing is that we have the ability to be flexible. It might sound terribly clichéd but it’s not a case of ‘one size fits all’.
We’ve just completed a sale and purchase where the client felt that he was sufficiently sophisticated enough to ask us questions only when he needed guidance. But we have also had a client where we are effectively embedded in his organisation; we speak and email every day, as if we are a department of that client’s organisation.
What is important in all of this is that clients want to see value for money and they want transparency. If you have a prior connection with any part of the network you’re dealing with, the client wants to know because they want to judge the integrity of your advice. If I were introduced to a client it would be incumbent on me to tell that individual about the origin of the introduction, and it’s important that transparency exists.
Historically the superyacht industry has been labelled ‘clandestine’ and ‘amateur’. Do you feel the spotlight is now being directed on to owners and their vessels?
The great thing that has come out of the crash is the wider geopolitical drive towards transparency not just from the International Superyacht Society, but also from the international community. Yacht builders look at whom they are building for. Gone are the days when they build for anyone – it has to be someone they want to build a yacht for and they want to know where the money has come from. The flipside of that is owners now scrutinise builders more rigorously. ‘Is that shipyard financially stable?’ ‘Is the yacht being built by people I can trust?’ ‘Are they gentleman amateurs or are they a professional outfit?’
It doesn’t mean that everyone has their house in order – not by any stretch – but if you look at the discipline placed on yards by the new money coming into their business, it has made them sit up and become better businesses.
I recently worked with an Italian builder and I was pleasantly surprised by the approach they took. They had changed, which is not to imply they were not professional in the past, but they matched the new business expectations of the modern superyacht buyer. And look at Sunseeker – the confidence people now have in that business is a testament to people willing to make changes. You can see that in their approach to business.
Do you feel there is currently adequate liquidity in the superyacht market, for both buyer and builder?
Historically, builders looked to owners to fund the shipyard and they looked purely at the instalments to fund the project. There was no residual working capital to self-fund. By and large that hasn’t changed.
What has changed is the financial discipline, such that, in the past, in order to get a deal yards would be fairly aggressive on their pricing and not make the margins that they needed to make as a result. They might then pinch a little money from another project in order to fund a current project and hope they got another project in to fund that one. It’s not financial mismanagement but it’s not the strict financial controls and proper pricing that we see now.
Now, the yards that survive and are successful are those with strong financial management, and those who also look for other areas of work.
With the resale market heavily in favour of the buyer, what are you advising your clients, on both sides of the fence?
The trend that troubles me is the number of price reductions on yachts. There is a tension that exists whereby, on the one hand, we present our industry as one of luxury, exclusivity and refined lifestyle and, on the other, one of commoditising and placing them en masse in the reductions bin. That is a mixed message; it confuses the buyers.
I recently completed a yacht sale and purchase for a client and when we were talking about yachts he wanted to buy, whenever he saw the price he automatically discounted it by a third. This particular individual is very closely connected with the industry and studies pricing carefully. He studies the price drifts. We ended up buying a boat very competitively; he could have spent more, and he could have afforded more, but he said, “I’m going to get the boat that I want at the price I want to pay and then I will invest in a refit”. This buyer is not on his own and we have seen a number of similar deals in recent months.
The knock-on effect of these price reductions is that, particularly with older boats, the owners are less inclined to maintain them. We are seeing some very distressed and very tired tonnage. When an owner gets it in mind that he’s going to sell it, and take a haircut on the price in the process, he’s less inclined to invest. So what we’re telling buyers is that the boat won’t be perfect and they have to take that into account.
It’s not like it was seven, eight or 10 years ago; boats are not appreciating in value. Like all movable assets, they’re now depreciating and the psyche has changed. For the people selling we are advising they need to do whatever they need to do to make the deal happen. [Sellers] can’t be so tough on the contract that it makes it difficult for a buyer to buy; they need to be flexible.
Are there any current or imminent legal or regulatory developments that you feel the industry has been slow to respond to?
The thing that confuses and upsets the industry is the issue of taxation and the confusion surrounding the choice of flag and cabotage. You have messages coming out of the European Union that yachts are covered by the cabotage regime. Yet, at the same time, the law says that there is no pan-European cabotage area, and that each individual country can determine whether the flag of a foreign state can operate commercially within its waters.
Politically, throughout Europe, there is a message that taxation should be applied fairly, whether you’re an ultra-high-net-worth individual or a big corporation. The constant battle within our industry is between those who behave properly and the group of people who find cleverer and cleverer ways of avoiding a fair level of taxation within the European Union. And this situation is wholly unedifying. It speaks volumes to those who are envious and allows them to criticise us. And why shouldn’t they when you still have ridiculous situations where a yacht built in a European country has no tax paid to any EU jurisdiction at any point during the build. It is instead exported, reimported and then put into a clever tax scheme and ends up paying three or four per cent VAT, and is then in free circulation. Nobody can put their hand on their heart and say that is ethically acceptable. I’m the last person who wants to pay more tax than I’m liable to pay but when the numbers are so great, we become an easy target for scrutiny and criticism and that applies as much to new builds as it does to owners’ supplies and tax-free fuel.
We should expect further safety, environmental and tax changes, and our industry cannot simply play the broader economic impact card to stave off all regulation. Politics is sometimes more powerful than economics.
From your perspective, what are the main challenges facing the superyacht industry’s longevity?
The problem we have is refreshing the ownership base. Historically, there was a funnel, where at one end you have the small day boats, and at the other the big superyachts. You get owners going through that funnel and stopping at various points, depending on their level. But what’s always important is that you have enough people at the bottom feeding the market.
Our biggest problem is that, when the crash happened, we lost a generation of yacht owners who would have bought the smaller boats and then, in progressively fewer and fewer numbers, graduated to the 40m, 50m and 60m. But they never came in to the market. They found something else to spend their money on. We also have a generation of yacht owners who the actuaries will tell you are not long for this world and their prodigies are not necessarily interested.
Yards are behaving responsibly, fi nancial prudence is the buzzword, but what is important is that we foster an interest in the superyacht space and make it attractive to as many people as possible. We cannot force people to spend money with us, but it is an important part of our working lives to sell and promote the lifestyle that is super yachting.
This article originally appeared in issue 166 of The Superyacht Report.