A May 2017 survey by German asset manager KGAL found that "institutional investors' interest in aircraft leasing business is seeing a sharp rise due to the attractive ratio of risk to return".

Institutional investors emerging as significant aircraft investors was at the tail end of last year expected by many industry observers to be a key theme of 2017.

However, this much-vaunted new money has so far failed to tangibly materialise, FlightGlobal understands from financial sources.

"This new money probably won't come into the sector meaningfully for the next 10 or 12 years, when I'll be retired," an aircraft-financing source laments.

A number of macro factors may explain why institutional investors' aircraft investments have stalled.

Firstly, despite aircraft deals offering 12- to 15-year tenors in US dollars and thus providing an attractive asset and liability match, aircraft are still an emerging asset class for these investors.

Cautious by nature, institutional investors tend to make decisions slowly. But once committed, they invest in an industry for a long time. So, where aviation is concerned, they may simply be weighing their options still.

Secondly, the low interest rates that prevailed after the global financial crisis are ending.

Fundamentally, this pushed institutional investors into a hunt for yield away from their traditional investments such as sovereign bonds. Now, with rates rising, insurers and pension funds may decide to return to their natural habitat, leaving behind exotic asset classes such as aircraft.

Despite a roughly decade-long hunt for yield, these investors had only just turned their attention towards aircraft, after first finding higher yields in assets such as real estate investment trusts, student housing and privately placed Middle Eastern bank bonds. Simply put, aviation finance has perhaps missed the boat.

Crucially, though, there may be another, market-specific reason that only limited institutional-investor money is actually coming into the sector now – a lack of deal volume.

A quiet primary aircraft financing market has been noted by numerous industry participants.

In particular, requests for proposals from lessors and airlines have been thin on the ground, with the result that many deal arrangers say they have a limited pipeline of new activity to pursue.

"There's still stuff going on in the background, stuff that keeps you busy, but yes, it's quiet out there and hard to find a good number of deals to work on," says one source.

As to why the market appears to be quiet, there is no consensus. However, various factors have been mooted as causes, among them the overall uncertainty of the macro outlook, both politically and economically; leasing-sector consolidation's removal of certain key firms from the fray; and the possibility that the market's cycle is plateauing before falling.

Whatever the case, this quiet period has meant that most closed deals have been vanilla in nature, with JOLCOs and commercial debt figuring strongly, at least in Europe and Asia. In North America, capital-markets structures are still the norm in 2017.

But it was only a year ago that some industry participants, such as Stellwagen, were publicly proclaiming themselves market disruptors.

The narrative was that the aircraft finance market was primed to see a number of new and innovative debt and equity-raising options compete with, or at least complement, more traditional and vanilla structures.

"We want to disrupt the aircraft financing market, which is in dire need of innovation," Stellwagen's Howard Millar told FlightGlobal in July last year. "The aviation finance banks and the operating lessors have been dancing to the same tune for the last 30 to 40 years, and that's not the way forward."

At the time, Millar said that Stellwagen’s proposed fund, StellCap, would look to initially raise $1 billion by the end of 2016.

Ultimately, the fund locked down an initial round of funding of $250 million last year.

It is still hoping to raise an additional $200 million by October, Millar recently told FlightGlobal. The fund is targeting overall returns of 8-10%, including leverage, and has a mandate to raise up to $5 billion.

After closing its first deal with lessor CALC last month, Stellwagen Capital had another four transactions in the pipeline, Millar indicated. He put the value of deals in the pipeline at $400-500 million. "If I had the cash today, I could lend that," he said.

German asset manager KGAL has also found institutional investor money available for aircraft investment. Its Aviation Portfolio Fund 3 has raised roughly €73 million of a targeted €200 million, it disclosed today. APF 3 is a follow-on fund from KGAL's APF 1, which was used to acquire 22 jets after raising €400 million.

Clearly, there is still scope for new sources of finance, but they remain exotic and are not rivalling traditional structures yet.

For the time being, an attitude of plus ca change has replaced the revolutionary fervour that gripped the industry last year.

Source: Cirium Dashboard