Corporate Jet Investor – By Alasdair Whyte
William Kelly, the chief executive officer of Milestone Aviation, is clearly enjoying himself. Having stepped down as CEO of NetJets Europe a year ago, he and the rest of the management team are relishing the new challenge. Milestone, a dedicated helicopter and business aircraft leasing company, only launched in August but has already bought and leased two new helicopters and has four others deals that are close to signing.
“The fun part about any business is growing it,” says Kelly, the former CEO of NetJets Europe. “We took NetJets Europe from 16 aircraft and 89 customers to 165 aircraft and 1,600 customers. Managing a big company is enjoyable, but for me the really fun part is building the business even the times when you have to clean the toilet when there is no-one else to do it!”
While the company is in start-up mode it will not be a small business for long. With Richard Santulli, the founder of NetJets as chairman; Kelly; and five other former senior NetJets executives; $500 million in equity; and offices in Dublin and Columbus it has cash to invest; and is already hiring.
Milestone is principally a helicopter jet leasing company. Kelly says that it eventually expects its portfolio to consist of 80% helicopters and 20% business jets. But the company is keen to take advantage of distressed business jet prices and the management team’s expertise and contacts in the short-term.
“With helicopters our intention is to hold on to them following the expiration of the initial lease. At the end of the lease we will either seek to have the original operator extend the lease or we’ll look to place the helicopter with another operator,” says Kelly. “But with business jets our intention is to sell them at the end of the lease. As business jets are currently undervalued, distressed assets we hope to sell them for a profit of 5%-10%.”
They are only interested in buying pre-owned jets and only expect to concentrate on this market while prices are low. Although they have bid on several private jets they have not yet had an offer accepted. They are also talking with several banks about buying business jet portfolios but Kelly says that it is not a top priority.
Kelly says that they are looking to grow the portfolio to a value of between $4 billion and $ 5 billion within five or six years.
Launching the business
Although most of the team’s experienced is in business jets, Santulli has financed helicopters before NetJets when he ran RTS Helicopter which focused on offshore oil and gas leases in the Gulf of Mexico.
“Before NetJets Rich ran the world’s largest helicopter leasing company,” says Kelly. “After leaving NetJets he looked at the market again and realised that nothing had changed. Helicopters had got bigger and more expensive but no easier to finance.”
Santulli started working on Milestone in October 2009 with a number of colleagues. Kelly joined in March 2010.
Credit Suisse organised road shows in the Middle East and US in April and Milestone spoke to about 40 private equity companies and sovereign wealth funds in total.
Kelly says they had a number of offers but agreed a deal with, lead investor, The Jordan Company and Nautic Partners investing $500 million between them in August. Kelly says one of the things that attracted them to Jordan was that it was prepared to take a longer-term view than many.
The company is registered in Bermuda but based in Dublin to benefit from tax breaks and Ireland’s numerous double-taxation treaties which make it easier to lease foreign-owned assets like aircraft into different countries. Ireland is the base for most of the world’s aircraft leasing companies for this reason. To qualify for the tax advantages companies have to base a significant part of their operations in Ireland. It also helps that Kelly, the company’s CEO is an Irish citizen.
Milestone’s financing strategy is different to that of most start-up commercial aircraft leasing companies. This includes Avolon, led by Domnhal Slattery former head of RBS Aviation Capital who then tried to launch air taxi company JetBird, and Steven Udvar-Hazy, the founder of AIG -owned International Lease Finance and now CEO of Air Lease Corporation.
Avolon and Air Lease have chosen to raise debt now to allow them to leverage deals. While Milestone plans to borrow debt later at the moment it is only using the $500 million in equity that it raised.
Most private equity firms like aircraft lessors to use debt straight away to increase returns and lessors are typically looking for long-term debt to match long-term assets (helicopters can have economic lives of over 20 years). Although pre-owned aircraft should give higher returns so leverage is less important.
“We wanted the $500 million so we could go out and close deals straight away,” said Kelly. “Customers know we can close deals quickly and have all the funding in place to invest $500 million anywhere in the world.”
He says that Milestone is likely to borrow debt in about 18 months to two years and that it will do it on a corporate basis rather than using the portfolio to secure deals. Milestone will be probably be leveraged by between 55% and 65% when they raise debt allowing them to grow a $1.1 billion portfolio with the $500 million of equity they have now.
Kelly says that they expect 70% of the portfolio to be from outside North America. While most of the business jets they buy will be from the US or Europe, the helicopter business is focused on emerging, commodity rich, markets of Latin America, Africa, southeast Asia and Australia.
“While we see opportunities with the big operators our key market is small-to-medium sized helicopter operators,” says Kelly. “We are just as keen to do deals in Indonesia or Brazil as we are in the US.”
The other big advantage of these markets is that they are less competitive. Milestone is still competing with banks to finance aircraft and, of course, operator’s own cash. Kelly says Milestone’s focus on helicopters and pre-owned aircraft sets it apart from banks which view these as small niches. It is also offering 100% financing.
Unlike many commercial aircraft lessors, Milestone is not planning to place speculative helicopters orders with manufacturers. It will acquire new helicopters through sale/leasebacks with customers. As it is possible to rebuild much of a helicopter’s value through maintenance and replacing parts the average age of the fleet will be less important to Milestone that to commercial aircraft lessors.
This is the third business that Santulli has created since leaving his job running Goldman Sachs’ equipment leasing – RTS Helicopters, Executive Air – later NetJets – and all of them have been fast growing entrepreneurial companies where decisions are made quickly. One example of this at Milestone is its promise to get back quickly to all potential customers.
“We tell them that they may not like the decision but we will get back to them within five days with a decision,” says Kelly. He contrasts this with his time at Proctor & Gamble – which he stresses is a “great, great company” – where he would need to submit a 90 page memo to raise the price of shampoo by around 10 cents.
“We are still a small team so it does not take long for the team to review deals,” said Kelly. “As an accountant and former CFO I am having a fantastic time doing nerdy things like looking through customer’s financial statements.”
And he has not yet had to clean the toilet.