KKR spreads its wings with $1bn aircraft leasing investment

The deal for a 50% share in Altavair has been made by both KKR’s infrastructure and credit businesses.

KKR’s infrastructure team has made its first foray into aircraft leasing with the acquisition of 50 percent of aircraft-asset manager Altavair, in a deal worth $1 billion.

The deal was made alongside KKR’s credit unit on a 50-50 basis and will see KKR and Altavair seek to acquire commercial aircraft over the next several years. The pair’s initial investment is to go towards acquiring six cargo aircraft with a variety of airline counterparties, although KKR expects growth to be focused on passenger aircraft.

Altavair was founded in 2003 as a joint venture between the management team and Guggenheim Partners, with the latter exiting to management in 2016. Altavair has completed more than $8 billion in aircraft leasing transactions with more than 40 airlines, including domestic and international passenger airlines and cargo operators. The company has offices in Seattle, London and Singapore.

KKR has been “interested in pursuing” such a transaction “for several years”, according to Brandon Freiman, the firm’s head of North American infrastructure. The deal is the first of its kind for KKR on the infrastructure side, but the group has made investments in helicopter and aircraft leasing companies through its other strands in the past.

“As we thought about how to approach this space, we thought it made sense to put the full weight of KKR behind this platform and really scale [it] in a way that’s distinctive,” Freiman explained to Infrastructure Investor.

He added that Altavair’s assets are typically backed by 12-year contracts from the outset and KKR plans to enter into new contracts as well as acquire assets at various stages of the contract cycle.

“We’ve always defined infrastructure as hard assets with long-term contracts that give you very robust downside protection and that’s exactly how we think about  aircraft leasing,” said Freiman. “It’s pretty consistent with what we’ve done with other asset-leasing businesses in the past.”

He compared Altavair with KKR’s investment in German locomotive leasing firm ELL, an existing investment from its first infrastructure fund. ELL has previously been described by an LP as “by far the most exciting” of assets in the fund.

Freiman said KKR is seeing more asset-leasing businesses being invested into in the infrastructure sector, although he did issue a caution on some deals.

“I think it’s very important to take a risk-based approach with asset leasing,” he said. “We’ve seen opportunities that are much more volatile with much shorter-term contracts and to us, that’s not infrastructure. You really have to look at the underlying downside protection and contracts. For instance, power generation assets can be infrastructure, but merchant power with a lot of commodity exposure is not.

“That same approach needs to be applied to asset leasing as well. It certainly does seem to be an area where seems to be more activity on the infrastructure side than there was five years ago. There needs to be careful consideration about  on what provides the downside protection.”