Major airline companies could remain grounded for years to come, but Guggenheim Capital is betting that airplanes themselves will increase in value. The investment advisory has partnered with a team of longtime aviation investors to form a new private equity fund focused on commercial aviation assets, named Guggenheim Aviation Partners.
“We’ve really had some fundamental changes to our market, with the decline in air travel after Sept. 11, the rise of low-cost carriers and having just two manufacturers instead of three,” explained Steven Rimmer, executive officer of the new effort. “The liquidity has been sucked out of the market, and Guggenheim thinks that this type of fund can offer good upside with low risk.”
Guggenheim Aviation is looking to raise $250 million for its inaugural vehicle, with the initial $50 million already being contributed by sponsor Guggenheim Capital. It features a 2% management fee, 20% carried interest structure and a minimum investment of $10 million.
The basic investment strategy is to invest in specific types of used and commercial aircraft, aircraft equipment (namely engines) and debt instruments used to secure aircraft and aircraft equipment. Some deals will be done on a sale-leaseback basis, while others will be purchases of off-lease assets with the hopes of leasing or trading the asset. The fund also will purchase either private or public debt secured by aircraft assets.
It already has signed a letter of intent for its first deal, whereby Guggenheim Aviation will acquire an MD-11 aircraft from a former Swiss Air fleet, convert it into a freighter and lease it for seven years to Martin Air, a subsidiary of KLM Dutch Airlines.
If all this sounds a bit more alternative than a typical alternative investment opportunity, that’s because it is. Most transportation-focused private equity funds buy up companies rather than specific assets, just like their counterparts in the IT or life sciences spaces. Rimmer suggests that Guggenheim Aviation is almost a cross between a traditional private equity fund and a real estate vehicle, with hard assets shielding risk for limited partners.
“We’re going to put them into deals where the downside is that they get 90 cents on the dollar, and the upside is 20% or 30% per annum,” Rimmer said. “We have a five-year investment horizon and a seven-year liquidation period, but think that we can start returning capital within three to five years.”
A private equity investor focused on the transportation sector, who wished to remain anonymous, believes that the Guggenheim Aviation model can work from a returns perspective, but is unsure of its attractiveness to prospective LPs. “There are some really smart aircraft players and traders who are very active in the marketplace, but this is asking LPs to fit into a very small niche,” he cautioned.
Rimmer is confident, however, because his team has many years of experience with these types of deals. Three members, including Rimmer, worked with an aviation finance company named Curtis & Co., which eventually was subsumed by General Electric. The managing directors include Paul Newrick, who formed XS Aviation with Rimmer, and Robert Peart, former general manager of engine trading and leasing for AAR Corp.