On this podcast we discuss the potential for private equity, hedge funds, pension funds, securitization originators and issuers, banks and pure-play corporate lessors to achieve solid returns while providing a valuable financial service to operators.
On this podcast we discuss the potential for private equity, hedge funds, pension funds, securitization originators and issuers, banks and pure-play corporate lessors to achieve solid returns while providing a valuable financial service to operators.
Steve Katz
Hi, everybody, and thanks for taking time out of your busy schedule to listen into our Hilco global smarter perspective podcasts. As return listeners know by now I'm your host, Steve Katz. And if this is your first time with us, as we always say, welcome, we're really glad that you could tune in. Today, we're gonna be talking about something that we've never really discussed before on the podcast, and that's big ticket assets, and how they can offer a unique set of advantages to the right investors, particularly when they're well informed and advised, which is exactly why our guest today is with us. And our guest is Andy Blumenstock, Managing Director at Hilco Enterprise Valuation Services. So welcome to the podcast.
Andy Blumenstock
Great to be here, Steve. Thanks for having me.
Steve Katz
Yeah, we're glad to have you on. I know our listeners may not be familiar with big ticket assets, at least by that overarching classification, because I was not although I was familiar with many of the assets that are grouped under that nomenclature. Can you give us a bit of a primer just get started?
Andy Blumenstock
Sure thing, Steve. You know, if it can move large numbers of people or product from point A to point B, and doesn't use a road to get there, then it's likely a big ticket transportation asset. So in the context of where we see them as financial instruments, this most commonly refers to commercial aircraft or shipping vessels, or freight rail cars, but we also see standalone aircraft engines and business jets and helicopters, locomotives, and shipping containers. So similar to the over the road transportation assets we're all familiar with, like cars and trucks and trailers. These big ticket assets are often leased by operators for capital management purposes, to enable operational nimbleness and to limit their exposure to obsolescence.
Steve Katz
So Andy, these are clearly pretty expensive assets to acquire. So why would they be appealing to investors? And what are the economics of owning them?
Andy Blumenstock
Well, you are correct, these are often very, very expensive assets. You know, the name Big Ticket implies, this means big dollars either on a per unit basis such as $300 million wide bodied aircraft or rail cars, where an operator may require 1000s of them. Which can run you know, there's some out there stainless steel tank cars could run 400 grand a pop, so, railcard fleet portfolios, readily will number in 10s of 1000s. And people should be talking about like shipping containers we're talking about in the millions. But, you know, importantly, these big dollar assets can operate for very long time, typically 20/30 years for aircraft and shipping vessels as long as 50 years for freight rail cars. So, in that way, there are some investment tenants that resemble real estate more than they do short lived leased assets such as, such as vehicles. So given these distinct characteristics, operators of these assets often choose not to outright own their portfolios, or for that matter own any of the assets of at all. Steve, you very well may be a frequent flyer and an airline that doesn't own a single one of its planes. Yeah. So this is where the opportunity for a wide range of financial players including private equity, hedge funds, pension funds, securitization originators and issuer's, banks in pure play corporate less, I could go on and on, you know, get involved in to achieve solid returns while providing a valuable financial service to operators. Over the last 50 years, we've seen some of the largest big ticket transportation asset portfolios, owned by enormous insurance companies, industrial conglomerates, you know, captive less ors, and some of the world's largest commercial banks. And while many of those and particularly the commercial banks are still big players, there are so many other investors that outright own or have significant financial stakes in you know, a dozen or so shipping vessels or a handful of commercial aircraft. And some of them you know, are just happy with that exposure and others have ambitions to scale even further. So, you know, these assets since they generate income through operating leases, we've also seen many of these structures pooled and packaged into asset backed securities. So the opportunity to invest in these assets has become even more accessible.
Steve Katz
Yeah that's a great way to frame it up. Because I think there probably are a lot of investors who never really thought of, of these types of assets as being accessible to them simply because of the costs involved. But given the fact that they're that they're leased and pooled the way you're talking about, that kind of changes the equation, are there additional advantages to holding big ticket items over the long term and leasing them then?
Andy Blumenstock
Absolutely, Steve, the beauty of big ticket assets is that given these leases are typically structured as operating leases, so more like a rental model, the owner or the lessor, holds a secured position in a fixed income like arrangement, where it's not unusual to see 10 year terms. But even better following that first lease period, these assets may still have their best economic years ahead of them. As there are release options there can be purchase options, and even many years down the road, these assets still have considerable value. So these assets remain valuable either in the hands of the lessor, or in the hands potentially down the line for the lessee, because at the end of the day, these are often business essential assets to them. So standard industry practice, though for leases of most of these high dollar big ticket asset classes include pretty rigorous contractual safeguards in order to protect the assets physical condition, and make sure they can fruitfully enjoy that long, useful life. So this includes like maintenance escrow programs for the lessee to pay into to ensure there's ample cash to comply with routine and maintenance requirements. As well as ensure the lessor isn't exposed to a costly maintenance deed should the asset repossession occur and they were talking with certain aircraft maintenance events, for a large one could be 10 $12 million. So you certainly don't want to be holding the bag there. You know, also big ticket classes, generally fueled by GDP growth, and the maturing of developing economies. And given their long useful lives, these assets can effectively ride out economic cycles, which makes them you know, pretty attractive, and allows, you know, owners to lever up significantly. So you pair that levering with equity returns that can readily exceed 20%. You know, these big ticket transportation assets offer a pretty unique opportunity to diversify a portfolio. What's also fairly unique to big ticket transportation assets, compared to say, those over the road assets such as vehicles, is that you can more fully optimize the returns on that initial purchase price. And what I mean by that is, as these investments usually get exited through private treaty transactions, as opposed to through an auction, or through a wholesale middleman, where you can't achieve a full retail residual, in this case, you don't really give much away from the proceeds. And you can model out your returns based on full or near full fair market value of of the asset at the end of its lease term.
Steve Katz
Yeah, okay. All great information. I'm trying to I'm trying to digest it. I made a couple notes here. So yeah, what else do potential investors need to understand about this market? Because as you point out, there's a number of nuances to holding these assets, like maintenance costs, and I would imagine things like regulatory requirements, also, so what else? What else should people understand?
Andy Blumenstock
Sure. You know, what I tell financial players is that the beauty of these assets is, there isn't necessarily a need to race the clock as you would with asset portfolios. With shorter, useful lives, we've only got so long to try to achieve that return. Because eventually those assets are going to reach their end of life, either physically or technologically, mean for these assets that are going to last 20/30/50 years just do the math, right? The depreciation in any given year on average is going to be low single digits. And in some markets, you know, over short periods of time these assets can actually appreciate. So this means that time is really on your side, to ride out recoveries and avoid having to make like rash decisions and setting into onerous releases, or selling the assets into a down market where, otherwise you're racing the depreciation curve. So look during COVID, aircraft investors face the most challenging time period the aviation industry has ever seen. But most of them weathered the storm and aircraft values now are largely back in line with pre pandemic levels. For most aircraft variants. There was also the opportunity to add diversification within a big ticket asset class to mitigate risk. So in commercial aircraft, we've got freighter aircraft, and we've got passenger aircraft options, there are regional jets that can puddle jump passengers, or jumbo jets that can shuttle passengers on those 15, hour international voyages, shipping vessels ranged from oil tankers to bulkers, to container ships to car carriers, just to name a few there, there's tons of them railcars, by far, probably the more most diverse with, you've got more than well over 100 different car types out there in use, which support all sorts of industries and commodities. So you could create that diversification by virtue of the sectors that they support. You alluded to regulation, and yes, big ticket transportation assets are highly regulated by safety and environmental authorities. So in the US, we've got the DOT, the Department of Transportation, we've got the FAA, the Federal Aviation Authority. Globally, in the in the shipping industry, we've got the International Maritime Organization. And, you know, over the last decade alone, we've seen the impacts of these regulations, the impacts of aircraft model recalls. In shipping new low sulfur, you know, fuel standards. There's been, you know, we've all heard of some of these tragedies of certain railcar types. So, some of the flammable commodities have had new regulations that have shaken things up for some of these assets. So, you know, other investment options, though, are not immune to similar forces just in different forms. So, again, this is why pretty much every investing strategy will tell you, you need to diversify. Lastly, I'd say while big ticket transportation assets require significant capital, there are also multiple ways an investor can dip their toe in the water, minority stakes, less expensive, use mid life assets. And smaller fleets, you know, are all very common methods that you know, some of the current major players have used in the past to cut their teeth, and eventually scale. So, when you put it all together, you've got the long term nature of the assets themselves, the range of methods available to monetize them, under a highly levered secured, fixed income-like operating lease structure, you've got those high yields of proceeds at disposition. And then just the overall market fundamentals, in my opinion, make big ticket transportation ideal assets for investors to consider when they expand and diversify those portfolios.
Steve Katz
Fantastic, really, really interesting stuff. And again, we had never really discussed these types of assets as collectively as a group, although as I said, we had talked about, you know, things like tank cars, or aircraft, vessels, and individually, in a lot of times, we're talking about in relation in recent years in relation to supply chain issues. So it's really interesting to sort of understand them as a collective asset class and the potential for investing. So thanks so much for your insights on that. Andy, we really should have you back on in the future to discuss something else that we may not have considered. So thanks for being with us. And if listeners have questions or want to discuss their specific situations and the potential for getting involved in big ticket assets, how should they get in touch with you?
Andy Blumenstock
Yeah, no. Firstly, great to join you today. I really appreciate it and I'm happy to assist anyone who has any questions, you can reach me at my email address, ABlumenstock@hilcoglobal.com and feel free to give me a ring at 212-682-6058 or hit me up on LinkedIn love to talk to you.
Steve Katz
All right, perfect. And listeners. As always, we hope that this smarter perspective podcast providing you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward as well. And remember that you can check out more great podcasts and articles featuring timely insights from Hilco experts at Hilco global.com/smarter-perspectives. Until next time, for Hilco Global, I'm Steve Katz.