Why Thora Capital is rethinking helicopter investment
Four years into the downturn, it is probably safe to say that the first Golden Age of helicopter leasing lasted for four years.
It started with the launch of Milestone Aviation in 2010 and then ended when GE Capital Aviation Services announced it was buying the lessor in September 2014. During that time investors were keen to finance new lessors and the industry received several billion in equity.
So, apart from some opportunistic funds looking to play the cycle, it is not surprising that there are few firms looking to enter the market until there are more signs of the upturn. And this is why Thora Capital stands out.
A dedicated aviation fund, Thora Capital is raising a dedicated long-term fund. Helicopter Investor spoke with Matthew Rothschild, CEO, and Russell Christopher, Managing Director, to discover Thora Capital’s strategy.
Helicopter Investor: Why are you looking at helicopters now?
Matthew Rothschild: Helicopters represent a niche and nascent asset class.
The founding of the commercial jet leasing industry, with GE’s aircraft finance division, GECAS, and ILFC (now owned by Aercap) happened almost half a century ago, while Milestone was only founded within the past decade, which is just one indicator of the infancy in which the industry currently finds itself.
Thora along with other large capital allocators, have rightfully identified aviation investment as an attractive asset class due to many of its favorable characteristics, including, but not limited to low volatility, predictable cash flows with immediate cash returns, low correlation with traditional and “alternative” asset classes, and global diversification with limited currency risk. As capital enters the industry, as witnessed by the identification of investing in operating leasing of commercial jets by institutional investors, ultimate operators see material benefits, most notably lowered cost of capital. Helicopter leasing, in contrast, has to date largely been overlooked by the investment community because of the industry’s fragmentation and its less mature nature. This has led to a dearth of capital available for operators to efficiently manage their balance sheet and optimize the mix of owned versus leased assets.
Until we launched Thora, the only way for an investor to access returns offered by helicopters was to invest in the equity of one of a handful of specialty finance firms dedicated to helicopter leasing. For capital allocators, investment into a specialty finance firm presents some challenges relative to a fund investment; notably, they don’t have a clear sense of timing on exit or return of cash flow as the specialty finance firms are looking to grow and thus need to retain earnings to fund that growth. In contrast, Thora intends to immediately distribute the cash generated from its investment in aviation leases and our closed-end fund structure provides a time-certain exit strategy for our capital partners.
As observed with the maturation of the corporate jet leasing industry, there exists a symbiotic relationship between specialty finance companies that are balance sheet-backed and the investment fund managers that are deploying capital on behalf of limited partners. To date, specialty finance helicopter lessors had limited options to undertake a portfolio optimization and asset disposition strategy compared to their commercial jet leasing counterparts.
We anticipate that Thora will be able to partner with many of the dedicated helicopter lessors so that they can optimize their fleet and demonstrate secondary liquidity to their capital backers. We also anticipate a strong sales and education effort to demonstrate the advantages of leasing versus owning to smaller operators who historically have not been presented with the choice due to the specialized nature required to underwrite a deal.
Helicopter Investor: We are still seeing a lot of restructuring going on in the market, do you think this is the bottom of the cycle?
Matthew Rothschild: Thora was specifically created with the intent of avoiding cyclical investing. We firmly believe that there exists a secular growth opportunity as operating lease adoption for helicopter financing follows a growth curve similar to, if not more rapidly than, commercial jets. The last time operating lease penetration for commercial jets was below 10% was in the late 1980s or early 1990s, and since then the growth of the leased fleet of commercial jets has compounded at a double-digit rate for three decades. We’re attracted to low volatility and low correlation return streams; so that growth opportunity and those return characteristics are what excites us about the space.
Russell Christopher: That said, we also believe there exists an opportunity to deploy capital into assets where the prices are distressed but the assets themselves are not, offering the potential to provide attractive returns to Thora. Some of the existing lessors who grew too rapidly have now started to recognize that pricing discipline is paramount and that assets need to be priced appropriately for exposing one’s capital rather than trying to grow for growth’s sake.
With the recovery in energy prices increasing the attractiveness of offshore exploration, we’ve started to observe a recovery in the revenue profiles of the exploration and production companies, as well as their suppliers, which hopefully bodes well for further demand. We also expect the changes to the US healthcare system that were already happening, but catalysed and accelerated by the Affordable Care Act, to increase demand for EMS. Lastly, despite the strong U.S. economy, we still see municipalities subject to budget pressures, and accordingly we anticipate growing demand that the capital efficiency of leasing versus owning provides to the para-public sectors.
Helicopter Investor: Who are your investors?
Matthew Rothschild: We are actively raising capital from a mix of foundations, endowments, family offices, and ultra-high net worth individuals that are attracted to the cash-yielding nature, low volatility, and low correlation that our investments are expected to offer.
Helicopter Investor: What sort of deals are you looking at?
Russell Christopher: We are in the early stages of portfolio construction and therefore we have the flexibility to consider any deal that we believe offers attractive risk and return characteristics. Although we will not shy away from opportunities with exposure to the oil and gas sector, our bias is towards EMS, law enforcement and, to a lesser extent, utility missions.
We are seeing healthy demand for sale leaseback opportunities where our customers are currently capital constrained. In instances where owners prefer retaining title to their assets, we’ll deploy capital in the form of an asset-backed loan, though that is less of a focus for us. There is also a significant amount of M&A activity currently occurring in the space, which we expect to produce attractive investment opportunities.
Helicopter Investor: What part of the market is the most exciting at the moment?
Russell Christopher: As we are early in our growth cycle, we consider the extensive portfolio deal opportunities available in the market as exciting, but we also are drawn to small niche opportunities to address customers’ balance sheet needs and provide them with financing that they previously had difficulty sourcing to facilitate the lowering of their overall cost of capital.
Helicopter Investor: How big do you want to become? Are you looking to build a platform?
Matthew Rothschild: We are looking to build the preeminent investment firm offering institutional investors access to returns backed by helicopter assets. We understand that with a focus on helicopters we neither have the ability nor desire to scale to the size of some of the larger investment funds that have established platforms in commercial jet investing. Over time as we grow and scale, we might opportunistically seek to finance commercial jet leasing as well, but that is not a near-term focus for capital deployment.