Investing In A Superyacht
27th July 2015 Simon Cardiff
Preparing Families and Family Offices for the superyacht ownership lifecycle, Simon Cardiff subjects superyacht management to some business discipline.
A disciplined and business-like approach to superyacht ownership can provide a sound foundation for families to get the best out of ownership over the long-term. When planning for the future, it can be instructive for families to articulate what superyacht ownership means to them. An effective starting point for defining this meaning is to explore these three foundations:
The experience of being onboard the yacht as a holiday destination, a place for entertaining friends and family, an impressive business venue and a place of discreet solitude.
Status of being a superyacht owner
Including being involved in the design, build, purchase, management and operation of a yacht as well as the intangible feelings of being part of the exclusive club of superyacht owners.
Recognising that the total cost of superyacht ownership is more than the purchase price and annual running costs. With the help of an ownership strategy prepared by or for the family, owners can feel confident that the superyacht portfolio – whether it consists of one vessel or a fleet – is set up and operated in a way that maximises their enjoyment, and importantly protects their reputation, wealth, privacy, safety and the vessel.
Of course, there will be families who feel that this approach to superyacht ownership is not necessary for their situation. However it will appeal to those who like to be properly prepared and protected before burdening the family estate with significant long-term risk and to those who prefer to adopt a disciplined and business-like approach to significant family investments.
A role for business discipline
The likelihood of enjoying superyacht ownership for the long-term can be increased by applying the disciplines of family governance, business strategy and risk management to a fleet portfolio. Regardless of how often owners and families use them for pleasure, superyachts are similar t0 24/7-operated businesses behind the scenes.
They require extensive back and middle office support beyond the capacity and capability of the onboard team. A small sample of these activities include:
- Complying with complex maritime law, safety, security and environmental obligations.
- Employing, training and dismissing crew and manning the vessel 24/7.
- Dealing with random unannounced inspections by government and tax authorities.
- Marketing charter yachts to find charterers.
- Performing continuous maintenance and repair programmes.
- Planning and monitoring tax, VAT and financial obligations.
- Safeguarding assets against fraud and mismanagement.
It is prudent for families to establish a governance, business strategy and risk management regime, that allows them to feel in control of the superyacht portfolio. That said, they will delegate various technical and operational matters to third-party specialists, captains and crew.
The real costs of ownership
Discipline and costs go hand-in-hand. The ongoing costs of operating, maintaining and protecting the value of a superyacht portfolio is significant. Annual running costs can range from 5% to 15% of the purchase price – i.e. from hundreds of thousands of Euros to millions of Euros, depending on the nature of the portfolio.
But families beware: the annual running cost is not the same as the total cost of ownership.
What is the difference?
- Annual running cost: the sum of the annual expenses incurred to operate a yacht, such as fuel, maintenance, food, surveys, crew benefits, insurance, communications, port fees and all the other costs.
- Total cost of ownership: this includes annual running costs plus the purchase price, depreciation, finance costs, modifications to the yacht and one-off capital investments to ensure the vessel remains seaworthy, among others.
Families would be better served by basing their financial decisions on the total cost of ownership and not the annual running cost. A superyacht ownership strategy developed within a family governance framework can be a useful tool to support these financial decisions.
Overall direction and control of the superyacht portfolio should be kept in the family by applying well-established family governance principles. This involves:
- Setting the superyacht ownership strategy and identifying material risks.
- Allocating responsibility for managing the superyacht portfolio to a family member or family office executive.
- Prescribing policies for the superyacht portfolio, such as deciding who may use the yacht and on what conditions, the type of services to be provided onboard and choosing senior crew and managers.
Families should not overlook the potential to use a superyacht portfolio as part of a programme for preparing the next generation to take over the family enterprise. Placing younger family members in charge of the portfolio can provide exciting opportunities to develop their leadership and business management skills.
So in this context, the family member or family office executive assigned to oversee the portfolio can lead and evaluate the superyacht team – including the captain, senior officers, yacht managers and advisers. The role of this team is to execute the superyacht ownership strategy and to protect the family’s interests.
Superyacht ownership strategy
Superyacht ownership lifecycle is one way to describe the long-term approach to ownership. It means the period from first consideration of the initial investment decision through to the eventual disposal of the superyacht. This period typically ranges from 5 to 15 years, illustrating the long-term commitment required.
While every family is different, an owner’s ability to clearly articulate their personal approach to ownership is going to have a significant impact on whether they will enjoy superyacht ownership for the long term.
Many families are likely to be motivated into ownership by a range of personal goals and objectives. These goals and objectives can be used to form the basis of a strategic plan to ensure that the superyacht portfolio delivers a satisfactory return on investment – financially and experientially.
A strategic plan covers requirements for the full superyacht ownership lifecycle, from concept to acquisition to disposal. Each family’s plan is different, but would usually include issues such as: the yacht ownership structure, operating model, organisational structure, responsibilities, reporting systems, budgeting and capital requirements, and so forth.
A timeline of significant activities and costs that occur throughout the full ownership lifecycle (i.e. 5 to 15 years) will help to protect owners from unpleasant and costly surprises.
In addition, two particularly useful sections of a strategic plan are:
- A luxury onboard service strategy which specifies the range and standard of services and activities the family expects onboard. The best way to understand and define these expectations is to speak directly to the family. The service strategy aligns the owner’s objectives, expectations, available resources and organisational structure, which includes the shore-based team, captain and crew.
- A superyacht asset management strategy which is a high-level description of the owner4’s approach to the acquisition, operation and eventual disposal of the yacht. It is a tool for managing superyacht risks, preserving the value of the superyacht portfolio, implementing cost-effective operating and maintenance regimes and calculating more accurate estimates of cash flow and capital investment requirements.
Effortless and enjoyable ownership
A disciplined business-like approach to superyacht ownership empowers owners and families to articulate what ownership means to them.
And with the right strategy in place, families and their offices can predict and control the costs and risks that may occur at each stage of the possession lifecycle. By planning ahead, families are setting themselves up for an enjoyable and effortless superyacht ownership.
This article first appeared in Familia Magazine and has been reproduced with their permission. You can find out more about Familia Magazine here