Aviation funds are becoming important sources of alternative financing. Will Roberts looks at some of the big hitters.
In these times of diminished liquidity airlines can rely on alternative sources of capital in the form of established aviation funds. This survey looks at the major players in the market.
Kuwait lessor Alafco is set to launch a new aviation fund with a portfolio worth between $1 billion and $1.5 billion. The fund will consist of between 25 and 30 narrowbody aircraft. A regional bank will provide 20% equity for the fund; Alafco will raise the debt.
The fund, which is yet to be named, is exclusive to one investor, but Ahmad A Alzabin, chairman and chief executive, will be looking to grow it.
Alafco, which provides sharia-compliant leasing, also co-manages the Millennium Aircraft Leasing Fund.
Cecilia Park and Mostafiz ShahMohammed, both previously managing directors at UBS, left the bank at the end of May and formed a new private equity company, Amur Capital Management. The firm is raising funds for its inaugural fund Amur Transport & Commercial Fund I.
The target size of the fund is $500 million. It will specialize in transportation and commercial industries. The fund will engage in the buy-out of small-to-mid-size companies such as transportation leasing companies, trade assets and/or cash flows, and invest in distressed debt secured by transportation and commercial assets.
The fund will have an emphasis on assets and cash flows that offer backstop value.
Apollo Aviation Fund
Aviation consultancy Apollo Aviation is setting up an aviation fund, which will lease and market commercial jet aircraft and engines. Gary Butler, who joined the company as vice-president of capital origination from Global Aviation Asset Management, will assist in setting up the fund.
Deutsche Capital Management (DCM)
DCM is a German issuing house specializing in closed-end funds. The Munich KG fund has a capital volume of €15 million ($21.4 million) and about 83,000 managed investments. DCM entered the aviation industry with the creation of DCM Aircraft Fund 1 KG in 2007. The fund was launched with a capital volume of $91.5 million and is expected to run for 17 years. Lease rentals will generate the income. The minimum investment is $15,000.
In July Deucalion Capital VII sold four 777Fs to DCM Aircraft Fund 1 KG. The aircraft are on operating lease for 10 years with AeroLogic, a joint venture between Lufthansa Cargo and Post World Net.
DCM uses a legal framework in Germany to set up a special purpose vehicle, which owns and remarkets aircraft. Investors are high net-worth individuals and the debt portion is structured into the special purpose vehicle. The structure is a German-based legal entity. The tax benefits of the structure are paid to the investor.
Deucalion Aviation Funds
Deucalion Aviation Funds are a group of actively managed funds established at the beginning of 2002 and supported by DVB Bank. DVB Investment Management advises the funds. Deucalion is structured as an investment company. A team of investment managers in London and New York analyzes investment opportunities in the aviation industry and monitors investments made on behalf of Deucalion.
Deucalion Aviation Funds comprise 13 predominantly Cayman Islands-based funds that act as investment vehicles through which DVB and a group of private and institutional investors invest in aircraft, engines, airlines and aviation-related assets. The funds also provide equity solutions for DVB's airline clients through the provision of equity solutions in their aircraft acquisition and divestment strategies.
The total capital committed to the Deucalion funds by DVB and third-party investors exceeds $400 million, invested in assets with a market value of more than $2 billion. The funds invest in 55 commercial jet aircraft, a diversified portfolio of spare jet engines, airline equity holdings and 747 conversion slots.
The funds acquired 22 aircraft during 2007, with a market value of $1.8 billion, and sold four aircraft. In August this year Deucalion Capital VII (DCVII) sold four 777Fs to Munich issuing house Deutsche Capital Management (DCM). This was DCM's first freighter aircraft. The deal came after a joint venture between Deucalion Aviation Funds and AerCap to purchase a 19-aircraft portfolio from TUI Travel in a sale/leaseback deal.
Deutsche Structured Finance
Deutsche Structured Finance, part of Aareal Bank in Germany, specializes in structured financing and investments in fixed assets in aviation, renewable energy and property. The company is the initiator and pioneer of the so-called German operating aircraft lease fund. Its closed-end aircraft funds have invested in 767-300ERs, 737-300s, CRJ-100ERs and Dornier 328s. See box for closed-end public funds.
Through those funds, aircraft have been leased and remarketed by Deutsche Structured Finance – as asset manager – to: Sobelair, Hainan Airlines, Ethiopian Airlines, DBA (low-cost airline in Munich), Air New Zealand, Air Sahara, Aegean Airlines, Karthago Airlines, Air One, Bulgaria Air, Blue Panorama, Norwegian, Thomsonfly, Eurowings, Belavia and Mesa.
Doric Asset Finance
Doric Asset Finance brought aircraft worth USD 2.4 billion to the German closed-end fund market. The company arranges, structures and manages aircraft investments for third parties as well as under its own name. Key to the investments is the criterion of new, modern aircraft leased to top-quality lessees. Airlines currently leasing aircraft from Doric include AirAsia, Singapore Airlines, Emirates and Virgin Atlantic.
Typically, a 50/50 leverage and fixed-rate debt reassure investors who are looking to reduce risk exposure in their pension funds. Within the last year, Doric closed the following aircraft funds with a total transaction volume of over USD 650 million: Doric Flugzeugfonds 2 (A330-200), Doric Flugzeugfonds 3 (A380-800), Doric Flugzeugfonds 4 (A330-200), Doric Flugzeugfonds 5 (B777-300ER), Doric Flugzeugfonds 10 (A320-200). The Doric Flugzeugfonds 11 is to be launched in December.
Dr Peters Group
Dr Peters Group launched three KG aviation funds in 2007 and a further three since August 2008. This year it will have launched two new aviation funds. Each fund will have one 777-300ER and a total investment volume of $176 million, with a 50-50 debt-equity split. One was launched in October and the other in November.
Doric Asset Finance is Dr Peters Group's asset management partner.
The Dr Peters Group funds are: DS-Fonds Nr122 (one 777-200LR), DS-Fonds Nr124 (one 777-300ER), DS-Fonds Nr128 (two A319-100s), DS-Fonds Nr130 (one A380-800) and DS-Fonds Nr131 (two A380-800). Funds to be launched in October/November 2008 are DS-Fonds Nr133 (one 777-300ER) and DS-Fonds Nr134 (one 777-300ER).
Falak Aviation Investments, a leasing fund, was established in 2007 as a joint venture between United International Bank (UIB) and Muzan Partner (a company attached to Novus Aviation). Falak is managed by Novus Aviation, which also manages several other aircraft funds. Falak is co-sponsored by UIB and International Leasing and Investment Company and is backed by several Gulf Co-operation Countries (GCC) financial institutions, including First Leasing Bank. The fund is worth about $120 million and has a portfolio size of more than $400 million. Falak's target size is $150 million.
Its portfolio comprises 11 aircraft leased to airlines worldwide. Aircraft types include the A321-200, A340-300, 737-800, 747-400, 767 and ERJ 145. Lessees include Cathay Pacific, BMI, Etihad Airways, Flybe, Gulf Air and Jet Airways. More aircraft are expected to enter the fund in the fourth quarter of this year. Two 767s are for sale.
Investors include MPL/Novus Aviation, UIB and other GCC institutions and investors. Return on investment in 2007 was above 12%, with dividends of 8.5%. Falak targets institutional and individual investors in the Gulf.
Novus also manages Muzun International Aviation Fund ($45 million), DIB Aircraft Leasing ($25 million), ASL ($33 million) and IB ($14 million). Millennium Aircraft Leasing Company, co-managed by Novus Aviation and Alafco, is capitalized at about $175 million. Novus is also co-owner/co-investor in these funds.
Global Aviation Holdings Fund
Global Aviation Holdings Fund (GAHF) is more of a traditional lessor than closed-end aviation funds, but it nevertheless makes the list. Global Aviation Asset Management (GAAM), the fund's owner, is an originator and manager of operating lease deals on behalf of GAHF. GAAM manages aircraft on long-term operating leases with 25 airlines worldwide. Its portfolio consists of 53 aircraft on long-term operating leases with airlines around the world. In December last year GAHF bought all of Lease Corporation International's 21 aircraft as it renewed its fleet.
GSI established its first German investment fund for spare engines in 2006. Before setting up the fund the team structured several aircraft deals aimed at wealthy entrepreneurs. In 2007 Engine Lease Finance (ELF) sold 28 engines to GSI, with ELF declaring trusts in favour of GSI over the engines and their leases. The company recently bought 10 engines from Willis Lease Finance for placement into a new investment fund. NordLB provided the debt for the deal.
The bank will also provide an equity bridge loan for GSI, which plans to raise up to $25 million of equity over the next few months. Clyde & Co advised GSI, while Pillsbury Winthrop represented Willis. GSI Engines Gamma Limited Partnership in London is purchaser of the engines. It will acquire the Stage 3 engines for which existing leases are already attached. A trust structure will remain in place for a term of seven years. There are no novations. GSI is planning its next engines fund for the end of 2008.
Guggenheim Aviation Fund I and II
Guggenheim Aviation Partners (GAP) established Guggenheim Investment Fund (GAIF) in 2005 to invest in aircraft and engines. In January 2007 GAIF sold 38 aircraft, valued at $1.6 billion, to Aircastle. The aircraft were sold in a series of closings. GAIF's last asset was sold off in the second quarter of 2008.
GAP formed GAIF II in 2006, with a similar investment strategy in the jet aircraft and engine sector. GAIF II has 55 aircraft, of which 39 are owned and 16 are on order from Boeing and Airbus. The portfolio has a total value of about $2.8 billion. GAIF II's investors include institutional investors, endowment funds, pension funds and high net-worth individuals. The fund closed in September 2007 with a total amount of $737 million. A third fund is planned.
HGA/Aviation Co-Invest 1 is the aircraft leasing fund of HGA Capital and is managed by Amentum Capital, a subsidiary of HSH Nordbank. The feeder fund invests in a master fund (HSH Global Aircraft 1), which HSH Nordbank launched for institutional investors such as insurance companies, pension funds and private equity groups.
As well as institutional investors, the fund provides private investors with access to the aviation market for a minimum investment of $25,000. It plans to develop a portfolio of between 25 to 30 aircraft, spread over various aircraft types, airlines and lease periods.
HSH Nordbank Global Aircraft Fund
HSH Nordbank's Global Aircraft Fund was launched last year and initially geared towards institutional investors, such as investment companies (excluding pension funds) and has a retail sub-tranche. The fund term is for 10 years, with an option for a two-year extension.
With a target volume of $1.3 billion, its aircraft portfolio is being developed during a three-year investment period, with a focus on narrowbody aircraft. Dublin-based Amentum Capital, HSH Nordbank's leasing arm, is asset manager.
The fund acquired six aircraft (two A320s on lease to Air Deccan, two 737-900ERs on lease to Lion Air and two A319s on lease to Hamburg International), and is committed to getting a further 13 aircraft. The fund is in final negotiations with BMI for two A321s, Emirates for one 777-200LR, Air Comet for two A330-200s, TUI Group for two 737-800s, a cargo airline for one 747-400F and Air France/KLM Group for five Embraer 190s.
Investec Global Aviation Fund
Investec Global Aviation Fund was launched in April and has $300 million of assets under management. Seed investors include three large industry superannuation funds – Auscoal Superannuation, the Seafarers' Retirement Fund and the Stevedoring Employees Retirement Fund. The fund buys aircraft and leases them to airlines worldwide. Investors get a return from a coupon after the aircraft lease term, based on its residual value.
The fund has five aircraft – two 737-800s on lease to Jet Airways, two A321-200s on lease to Qantas subsidiary Jetstar and one new 777-300ER on lease to Eva Airways. The fund is planning a further capital-raising initiative this year.
Millennium Aircraft Leasing Company
The Millennium Aircraft Leasing Company was established in 2002 as a joint venture between Kuwait Finance House and Muzun Partner to launch an Islamic aircraft leasing fund. The fund is aimed at institutional and retail investors. Muzun Partner, which is backed by a group of regional investors, is co-sponsor of the fund. Alafco and Novus are co-managers. Kuwait Finance House acquired Alafco in 1999; Alafco has a 50% stake in Millennium Aircraft Leasing Company.
Registered in the Bahamas, Kuwait Finance House was lead sponsor, with a capital commitment of $50 million. The fund's total equity at start-up was $200 million, but it will seek an additional $600 million, to bring total assets under management to $800 million.
Established by Nordcapital at the beginning of 2008, Nordcapital Aviation is a KG fund in Hamburg. The fund complements Nordcapital's existing funds in the shipping, property and new energy markets. Rachel Frye, formerly of AMS and Waha Capital, is senior manager, portfolio and risk management. Peter Huljbers is managing director.
Each aircraft deal constitutes a separate fund. The first fund will be created in the second half of this year, with an approach to the market at the beginning of 2009. The fund is issuing letters of intent and purchase contracts to different sources, including lessees and manufacturers. All aircraft in the fund will be new, and consist of both new widebodies and narrowbodies.
The funds will place direct orders with manufacturers but will also buy aircraft from other lessors, or from airlines in sale/leaseback transactions. They will target major Asian and European airlines as lessees to reassure investors with little knowledge of the market. A sale and distribution team will market assets to the investors, consisting mainly of doctors and dentists.
The equity portion will amount to 40% when purchasing aircraft. The fund has approached five or six banks, including two new banks, and is awaiting a mandate to provide 60% of the debt.
Dividends are tax-free, with the tax loophole lasting until January 2009.
Pentium is planning to launch a new fund that will lease assets, including aircraft, to corporations. The fund will finance aircraft, in addition to property and other corporate assets, and lease them at a fixed monthly rate. The fund will invest directly in aircraft assets, rather than via other funds, and will seek stable returns from long-term investors.
Pentium plans to make about 2% per month from leasing and will be 2:1 leveraged. The investment minimum will be either €100 million ($149 million) or €25 million, but larger investments will be sought.
Q Investments, a private investment firm in Texas, launched Q Aviation in September 2003. Q Aviation's strategy is geared towards the asset – aircraft type, configuration and maintenance state. The company has a portfolio of 50 aircraft, with 18 single investor aircraft loans and a combined market value of about $1.7 billion. The extension of the portfolio was completed in early 2007, with the view that aircraft values were then reaching a peak. Two-thirds of the portfolio – both in terms of value and quantity – was sold in a number of separate transactions completed in the second half of last year and the first quarter 2008.
Q Aviation has a portfolio of 27 aircraft and single investor loans with a combined market value of about $700 million. Aircraft types include A319, A320, 737-300, 757-200, 767-300ER, A330-300 and 747-400.
The fund has about $5.5 billion-worth of assets under management in a wide range of investment and asset types. Investors are primarily pension funds, university endowments and high net-worth individuals.
Trafalgar Kahala Jet Fund
Trafalgar Asset Managers, the UK hedge fund, launched Trafalgar Kahala Jet Fund in July 2007 in partnership with First Greenwich Kahala, an aviation-leasing specialist. The fund aims to acquire high-yielding mid-life aircraft and earn returns from monthly rental income. It will also extend existing leases and provide remarketing services to new operators.
Woelbern Invest has two German operating lease KG funds: Woelbern Invest Global Transport Aviation 02 (GT 02) and Woelbern Invest Global Transport Aviation 03 (GT 03). Total investment volume for each fund is ?29.1 million ($41 million), with total equity raised of ?12.2 million. Each fund has one A319, with delivery for GT 02 scheduled for April 2009 and May 2009 for GT 03.
The management team for the two funds is Woelbern Invest/Aircraft Lease Management. Investors are German private investors with a minimum share of ?15,000. Placements started in June for GT 02 and July for GT 03.
GT 02 and GT 03 have many competitors in the German KG market. The tables show some – but not all – of the KG funds in Germany.