“To improve is to change; to be perfect is to change often” – an oft-quoted phrase from Winston Churchill. In a turbulent economic and geopolitical environment, it could be argued that to change often has become more of a necessity in a more unstable and unpredictable post-pandemic world.
Castlelake is no stranger to change. In response to the demand for liquidity after the pandemic, its aviation team expanded its business alongside its large scale midlife leasing platform to offer a wider variety of services for its clients. As the asset backed securitisation (ABS) market for aircraft assets waned, the team adjusted again from its midlife aircraft investment thesis to deploy more capital from its fourth and largest fund - Castlelake Aviation IV that secured $1.6bn in capital commitments at its close in January 2022 – with new, next generation aircraft, and also formed Castlelake Aviation, a corporate lessor of commercial aircraft to focus on financing a portfolio of modern, young, fuel-efficient aircraft. The team expanded again in January 2023 with the launch of Itasca Re, an aircraft non-payment insurance (NPI)-backed financing provider.
The Castlelake team has continued to innovate into 2024. In September, Castlelake secured a $1.5bn strategic partnership with Brookfield Asset Management. Brookfield acquired a 51% stake in Castlelake’s fee-related earnings and Brookfield Wealth Solutions has committed to invest into Castlelake’s investment strategies and private funds.
For Castlelake, Brookfield’s investment will help to accelerate its innovation and help it to scale its platform while continuing to operate independently. The Brookfield transaction also provides Castlelake with permanent growth capital to capitalise on market opportunities. For Brookfield, acquiring a share in an asset-based financier will enable the company to achieve its ambition to target $2bn assets under management (AUM).
In September, the team also took the bold decision to sell its entity Castlelake Aviation Limited (CAL) to Avolon along with the entity’s portfolio of 118 aircraft.
Although unrelated apart from their timing, these headline moves by the Castlelake team again demonstrates the flexibility of the company to pivot and adapt quickly to take advantages of opportunities in the market.
Joe McConnell, partner and deputy co-chief investment officer at Castlelake, shared his view on the changes at the firm with Airline Economics. “Our view is that young aircraft – from zero to five years old – given the undersupply from the OEMs, the rise in interest rates, and the amount of investment grade lessors in the market with too much liquidity, aren’t delivering the returns that we need as an alternative investment manager today,” says McConnell. “We think it was was an opportune time for us to sell our portfolio of young assets to Avolon. We still believe that this is a great portfolio of assets. We would have been happy to own it for longer, but it was also a great time for us to sell. It allows for us to return capital to investors for a pre-Covid Aviation fund that was fully invested before the pandemic.”
Delivering returns is a great endorsement for the firm, which can now focus on investing in the secondary market with aircraft older than five years. “This sector is dominated by alternative investors, many of which did not perform well through the pandemic in our view,” adds McConnell. “At the same time, there is an onslaught of supply in terms of forced and motivated selling from such competitors that no longer have access to bank capital, as well as usual sales from the big leasing companies.”
Castlelake is deploying a lot of capital into secondary market purchases and is in the process of buying a portfolio of more than 60 aircraft financed with a recently secured $1bn term loan. The loan facility – provided by Deutsche Bank, Goldman Sachs, BNP Paribas and MUFG – was designed to provide longer term flexibility compared to short duration warehouse facilities. “We are working on a number of other transactions of this size – this is just regular business for us,” explains McConnell. “We are working on a number of other transactions of this size – this is just regular business for us,” explains McConnell. “While we are working to complete this sale of younger aircraft to Avolon, we also continue to underwrite new opportunities in other areas of the market.”
This new direction seems more like a return to Castlelake’s bread and butter of midlife aircraft investment. “The pandemic created an interesting, point-in-time opportunity to acquire younger aircraft,” says McConnell. “Interest rates were low, many of the order book lessors were a little bit frozen, which created an opportunity for us to step in. But we do not see that opportunity as attractive today. What we believe we have done well over time is innovate and evolve and move with the market to find attractive opportunities. And right now, we believe that the midlife sector is where we should be.”