Funds are taking off
The most recent listed is Doric Nimrod Air Three (DNA3), a closed-end aircraft leasing fund, with £220m in assets. Created by Nimrod Capital with specialist German financer Doric Asset Finance, DNA3 will buy four A380 aircrafts and lease them to Dubaibased Emirates for up to 12 years. The aim is to pay investors 2.06p per share per quarter, equivalent to an annual dividend of 8.25%. Once the leases expire, the planes are sold and investors paid from the residual value.
“There are a number of attractions,” says Shantanu Tandon, fund manager, multi-asset group at Insight Investment. “It displays low correlation to equities, there is an attractive dividend rate and strong income generation from aircraft lease. There is also the potential for capital appreciation. The mostimportant aspect though is to ensure that you have the right combination of aircraft and airline. This means looking at the lease terms, operator, level of debt and strength of balance sheet. These are complicated assets and unlike other investments, there are additional considerations to think about.”
The market also saw the launch of Investec Aircraft Syndicate Ltd (IASL) last November which plans to invest $500m in new generation, fuel efficient aircraft on lease to airlines worldwide. It aims to offer a cash yield paid from contracted fixed cash flows locked in for on average five years. Investec’s previous offering, the Investec Global Aircraft Fund, is similar and manages 20 aircraft with an acquisition cost of around $1bn.
According to Ramki Sundaram, co-fund manager of IASL, Investec’s aviation funds have attracted investments from insurance companies, pension and Australian superannuation funds, private banks and high net worth individuals across different regions. “It is like an investment in infrastructure because these assets generate predictable cash flows with high single digit yield. We are seeing increased interest from institutions looking for diversification and uncorrelated returns. Investors should assess investment opportunity in this sector especially with respect to the construct of the cash flows, the counterparties and the type of aircraft.”
There are other structures available to investors; for example, in the first five months of this year, Apollo made $220m of purchases on behalf of SASOF II, an investment fund with approximately $595m in capital commitments that seeks to acquire mid-life inproduction aircraft models for lease or immediate disassembly and resale of the systems, components and parts.
Recent purchases included two A320 CEO family aircraft, one A330-200, one A330- 300, seven B737NGs, and seven engines and 10 of these are on lease to airlines in Asia, Europe and North America.
“There are different ways to play the market and we think that this area provides attractive opportunities although you do need specialist knowledge,” says Treital. “There is slightly more risk but investors are rewarded with higher returns.”
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