CPPIB Preparing For Landing?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Benefits Canada reports, CPPIB to sell Irish aircraft leasing company:

The Canada Pension Plan Investment Board and its co-investors have announced the sale of Dublin-based aircraft leasing company AWAS to Dubai Aerospace Enterprise Ltd.

The CPPIB first invested in the company with European private equity firm Terra Firma in 2006.

“We are pleased with the outcome of this transaction,” said Ryan Selwood, managing director and head of direct private equity at CPPIB. “We continue to believe that the aircraft leasing industry is a highly attractive market for CPPIB over the long term and look forward to exploring future opportunities to invest in the sector at scale, subject to market conditions.”

AWAS leases airplanes to 87 airline customers in more than 45 countries and has assets totalling about $10 billion as of last November. The company owns 214 aircraft with an average age of 5.8 years, and has also ordered 23 new aircraft.

In March 2015, AWAS sold 84 aircraft to Macquarie Group Ltd. Since then, it has continued to grow its business and portfolio.

The deal is subject to regulatory approval and is expected to close in the third quarter of 2017.

The Telegraph also reports, Guy Hands’ Terra Firma sells aircraft leasing investment to Dubai-based rival:

Private equity baron Guy Hands has sold an aircraft leasing business his hedge fund Terra Firma has co-owned for more than a decade.

The fund, alongside co-investors and the Canada Pension Plan Investment Board (CPPIB), has sold the Dublin-based aircraft lessor Awas to Dubai Aerospace Enterprise, the largest aircraft lessor in the Middle East. The terms were not disclosed.

Awas was formed in 2006 when Terra Firma and CPPIB bought the underlying business and later snapped up rival Pegasus in 2007. It now boasts $7.5bn of owned aircraft assets that it leases out to 87 airlines in more than 45 countries. Besides the 214 aircraft it owns, Awas also has 23 new ones on order.

At acquisition in 2006, Awas owned 154 Airbus and Boeing aircraft, with long-term leases and what the investors saw as good rental income.

Terra Firma said its decision to invest in the company was based on its view the aviation sector would grow rapidly, with the world fleet expected to double by 2034, and steady demand from airlines for leased aircraft.

International Airlines Group said in its recent results in February it had 32 additional leased aircraft compared to the same period last year partially due to fleet renewal with 13 less owned aircraft.

But some airlines are eyeing greater levels of ownership, with easyJet stating in its full-year results in November last year the size of its leased fleet had decreased by 6.4pc to 64 while its owned fleet rose by more than 10pc to 180 thanks to its recent purchase of 20 A320 aircraft.

Mr Hands, chairman and chief investment officer of Terra Firma, said it was “the right time for Terra Firma to realise maximum value for our investors”.

“Under our ownership, we have transformed the company to better reflect the fast-changing market that it serves,” he said.

“This has been achieved through an active aircraft acquisition and disposal strategy to optimise the business’ portfolio and align with its diverse customer base.”

The sale of the business comes just over two years after the company sold 84 aircraft to Macquarie Group, a transaction that Terra Firma said was a significant stage in preparing the business for sale.

Dubai Aerospace Enterprise was founded in 2006 and counts airlines such as Emirates, EVA Airways, easyJet, Wizz and EgyptAir among its customers.

Ryan Selwood, managing director, head of direct private equity, at CPPIB, said in spite of the sale it would look for other opportunities in the aircraft leasing space in the future.

Goldman Sachs is acting as financial advisor and Milbank as legal advisor to the seller. The deal is subject to regulatory approval and is expected to close in Q3 2017.

Anshuman Daga of Reuters also reports, Dubai Aerospace to buy aircraft lessor AWAS, catapults to top tier:

Government-controlled Dubai Aerospace Enterprise Ltd (DAE) is acquiring Dublin-based AWAS, the world’s tenth biggest aircraft lessor, in a deal that will add over 200 planes to its fleet and more than double the size of its current business.

AWAS is the latest asset to be sold in the rapidly consolidating global aircraft leasing industry whose top 50 lessors had a fleet value of $256 billion last year, according to consultancy Flightglobal. The sector is seeing increased investment from players in emerging markets such as China, which were also in the running for AWAS, sources said.

Reuters had reported in December citing sources that AWAS had been put up for sale in an auction that could value the lessor at $7 billion, including debt.

DAE, controlled by the government of Dubai, signed a definitive agreement to buy AWAS from British financier Guy Hands’ private equity firm Terra Firma Capital Partners and Canadian Pension Plan Investment Board (CPPIB), the companies said on Monday. They did not disclose financial terms of the deal.

DAE, which calls itself the largest aircraft lessor in the Middle East with a portfolio of 112 planes, said the combined company will have an owned, managed and committed fleet of 394 planes with a total value of over $14 billion. It will have more than 110 airline customers spread across 55 countries.

“This acquisition of AWAS is strategically compelling and propels DAE into a top 10 aircraft leasing platform,” DAE Managing Director Khalifa H. AlDaboos said in a statement.

“Our leasing business has been growing at a rapid clip and this acquisition will more than double the current size of our business…”he said.

Paid for in U.S. dollars, aircraft are comparatively easy to re-lease to various airline operators across the world.

AWAS has a fleet of 263 owned, managed and committed narrow and wide-body aircraft, including a pipeline of 23 new aircraft on order to be delivered before the end of 2018.

DAE said its transaction will be financed by the group’s internal resources and committed debt financing. The deal is subject to regulatory approvals and is expected to be completed in the third quarter of this year.

The latest sale marks the exit of Terra Firma and CPPIB from AWAS, in which they first put in money in 2006. In 2015, Macquarie Group bought about 90 planes from AWAS for $4 billion.

DAE was advised by Freshfields Bruckhaus Deringer LLP and Morgan Stanley & Co. LLC. DAE was also advised by KPMG and Latham and Watkins LLP. Goldman Sachs is acting as financial adviser and Milbank as legal adviser to the seller.

You can read CPPIB’s press release on this deal here. What do I think of this deal? It’s a great deal for all parties involved.

Let me provide you with some background. Back in March 2011, CPPIB spent $266 million to help fund an expansion of AWAS:

The Canada Pension Plan Investment Board has pledged to spend $266 million to help fund expansion at Dublin-based aircraft leasing firm AWAS.

AWAS has a fleet of over 200 commercial aircraft on lease to more than 90 customers in approximately 45 countries. It employs roughly 120 people worldwide, and has 110 aircraft on order from Airbus and Boeing.

CPPIB’s investment adds to the $347 million US that CPPIB has already directly invested in the company.

The investment is part of $529 million US in total that AWAS secured to fund its expansion plans Thursday. The other major partner is Terra Firma — which pledged an additional $246 million US — but other investors are also putting up $17 million US.

CPPIB already owns 16 per cent of AWAS and the investment will increase its stake to 25 per cent. Terra’s stake will increase to 60 per cent, and other investors will own the remaining 15 per cent. CPP’s stake could increase beyond 25 per cent because it has committed a further $200 million US that AWAS could draw on at a later date.

The aircraft leasing firm’s plan to grow comes at an opportune time, CPPIB management said in a release.

“We are delighted to help fund AWAS’ acquisition strategy at what we feel is an attractive point in the aviation cycle to invest,” said Andre Bourbonnais, senior vice-president for private investments at CPPIB.

“We see this as another affirmation of the value of our proven platform, growth strategy,” AWAS president Ray Sisson said of the deal.

The CPPIB invests surplus money from employer and employee contributions that aren’t required to pay current retirement benefits. It had $140.1 billion in assets at the end of December.

As you can see, CPPIB can also thank André Bourbonnais (and Mark Wiseman) for this deal which netted it a very handsome return (AWAS was bought for roughly $4 billion and reportedly sold for over $7 billion).

Interestingly, Mr. Bourbonnais is now the CEO of PSP Investments which launched its own aviation leasing platform back in 2015 (SKY Leasing) with industry veteran Richard Wiley (Jim Pittman who is now the head of private equity at bcIMC worked on that deal).

What does Dubai Aerospace Enterprise (DAE) get from this deal? It’s catapulted to a top tier global  aircraft leaser and will enjoy rental income for many more years ahead but will likely ride out some turbulence in the short run depending on how bad the next global economic downturn is (you can read more on giants of aircraft leasing here).

If you look at the latest press releases from CPPIB, you’ll see it has been very busy lately with mega private deals which I would characterize as more defensive in nature (this after I recently stated CPPIB is sounding the alarm on markets).

For example, along with Blackstone, it recently acquired Ascend Learning from private equity funds advised by Providence Equity Partners and Ontario Teachers’ Pension Plan.Ascend is a leading provider of educational content, software and analytics solutions.

Today CPPIB announced that it and funds affiliated with Baring Private Equity Asia (BPEA) announced their intention to purchase all outstanding shares of, and to privatize, Nord Anglia Education, Inc. (Nord Anglia), the world’s leading premium schools organization, for a purchase price of USD 4.3 billion, including repayment of debt:

  • Nord Anglia operates 43 leading private schools globally in 15 countries in China, Europe, Middle East, North America and South East Asia
  • Funds affiliated with BPEA are the majority shareholders of Nord Anglia and BPEA controls 67% of Nord Anglia’s issued and outstanding share capital

The transaction is subject to shareholder approval and customary closing conditions.

Keep in mind, this mega deal comes after another deal announced in March when CPPIB and Singapore’s GIC bet big on US college housing.

Why invest billions in private schools and higher education? It makes perfect sense from a long-term perspective. It’s a play on global wealth inequality and how rich foreigners will spend a lot of money sending their kids to private schools and US colleges.

But it’s also a play on the need for students from all socioeconomic backgrounds to invest in higher education to compete in an increasingly more competitive workplace where certain skills are highly coveted (interestingly, the Fed’s Kashkari thinks spending on education, not infrastructure, is the key to US economic growth).

Lastly, please take the time to read this recent interview with John Graham, Managing Director, Head of Principal Credit Investments at CPPIB. Graham discusses CPPIB’s approach in private credit investments, including which segments are most attractive in this space and how CPPIB is dealing with increased competition from other institutions getting into private debt markets.

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