08/03/2017

Snapshot: Aviation Equity Investors

Snapshot: Aviation Equity Investors

Equity investors in the form of pension funds, private equity firms and Chinese and Japanese banks continue to pour into aviation as historically low interest rates prompt investors to seek greater yields.

Investing in an aircraft leasing company is an attractive way to get US dollar exposure in a stable asset class. Aircraft finance requires large sum of capital which it delivers efficiently, along with steady returns and good security on the underlying asset. A surge of non-traditional sources of finance has become widely accepted in the industry and in Ishka’s view, shows no sign of abating. In this Insight Ishka provides a brief overview of some of the recent trends among aviation equity investors split into three classes: private equity, institutional investors and Asian banks and conglomerates. 

 

Private Equity

 

Private equity firms (PE) have historically been behind many of the larger lessors. Avolon, Awas and Aircastle all had private equity founders and owners at one point. Typically, a PE investor seeks a high return on fast growing start-up lessors and with a view to sell after several years either though a sale or an IPO.

After its 2014 initial public offering (IPO), Avolon sold around 20% of its shares for $1.6 billion and was later acquired by China’s HNA group in 2016. Terra Firma is in the stages of selling Awas to a final group of bidders while PE firm Fortress founded Aircastle which subsequently went public in 2006.

Lower equity returns being derived by mainstream lessors has pushed recent private equity investors towards smaller niche lessors specialising in more esoteric assets such as turboprops or regional jets  (EQT’s investment in Nordic Aviation Capital) and Oaktree’s investment in Elix Aviation Capital while Ishka understands that hedge funds have been seeking opportunities among mid-life or end of life leasing platforms. Many of the new start-up leasing platforms such Cusco Aviation are actively seeking private equity investors.

 

Source: Ishka research

 

 

Pensions and funds

 

Unlike private equity firms, institutional investors often take minority positions and prioritise steady cash flow over high returns.  Favoured methods include sidecar, special-purpose vehicles, and joint ventures which leverages capital for industry know-how and experience.  One example is Canada’s Public Sector Pension Investment Board, which partnered with an existing management team to form SKY Leasing.  In recent years, Korean investors in particular have turned their attention to Ireland.

 

Source: Ishka research

 

Asian banks and conglomerates

 

The involvement of Asian lenders in the aviation space continues a trend away from traditional western European banks after the financial crisis and towards Chinese and Japanese banks. A good example is the acquisition of Jackson Square Aviation by a Mitsubishi Corporation entity, DVB’s sale of its shares in TES Aviation to the Development Bank of Japan (DBJ) and the acquisition of RBS Aviation by Japanese Bank Sumitomo Mitsui.The involvement of Asian lenders in the aviation space continues a trend away from traditional western European banks after the financial crisis and towards Chinese and Japanese banks. A good example is the acquisition of Jackson Square Aviation by a Mitsubishi Corporation entity, DVB’s sale of its shares in TES Aviation to the Development Bank of Japan (DBJ) and the acquisition of RBS Aviation by Japanese Bank Sumitomo Mitsui. Asian banks typically target a developed leasing platform with a proven technical expertise and scalable platform and have to date been successful in increasing the size and portfolio of their  leasing platforms. 

Source: Ishka research

 

The Ishka View

In line with the general growth of the aviation industry equity investors have ben offered a wider range of opportunities through aircraft leasing platforms. Non-traditional equity investors are now a normal feature in the aviation finance landscape and represent a vast pool of capital to be tapped.  Exit strategies vary between investors but tend to reflect their underlying strategy:  private equity firms typically sell or go public after a few years with a high margin, while pension funds value steady cash flows and are longer term investors like banks who tend to buy and hold.  Recent equity behaviour appears to dominated be chasing yield. Many investors are being forced to lower their yield expectation as soft lease rates for mainstream aircraft assets continue to depress returns. 

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