“We are all about the metal”
Niche financier Shearwater Aero Capital has just had its best-ever year. Chris Miller, its founder, wants to accelerate the growth in 2019.
WHEN CHRIS MILLER, the founder of Shearwater Aero Capital, needs a break he goes for a ride on his dirt-bike. When he really wants to switch off, he races for 24 hours. “It is technical – particularly at night," says Miller "and I try to ride at the edge of my ability which unfortunately leads to me falling off the bike a good bit.” Despite his focus, Miller admits that he stills crashes regularly, although that is partly because of the terrain he rides on. He is now in training for his second Perry Mountain 24-Hour Challenge. He will race around a twisting, 10-mile technical circuit competing against professionals. The Alabama race is famous for heat, dust and humidity. Most professionals come off their bike at least a handful of times during the race primarily to refuel their bodies and bikes. When he is not riding, Miller puts the same concentration into Shearwater Aero Capital, the niche aircraft finance company he launched in 2014. And it is working. In 2018 Shearwater’s aircraft portfolio hit $100 million. That might be small compared to most banks, but with an average loan size of $7 million, it is a decent number of transactions for a team of four.
Shearwater is not looking to be the world’s biggest aircraft financier. It just wants to do some of the deals that other lenders are not interested in. It partners with private equity and family offices on individual deals and takes an assetbased approach. This means that it is willing to consider unusual transactions. Shearwater is prepared to look at any aircraft type – past deals range from
Hawker 400XPs to Bombardier Global aircraft – pretty much anywhere in the world. It also likes financing older assets. In fact, many of the aircraft it finances are over 10 years old at the start of the transaction.
“We are all about the asset – all about the metal,” says Miller. “We are flexible and creative in mitigating risks of any dollar losses. We don’t have a maximum age of aircraft. But fees and time are significant so we can’t do really small deals.”
Because Shearwater relies on the aircraft if anything goes wrong it tries to structure out as many risks as possible. It likes customers to retain significant equity (typically 35%), prefers deals with independent aircraft-management companies and insists on engines being covered by an hourly maintenance programme.
“Our investors are trusting us to make sure that they come out whole if something goes wrong,” says Miller. “But none of that works unless you have equity. If the customer is trying to preserve equity you are on the same side. That comes at the start of the loan and then you have to amortise the loans and have true-up clauses in there as well.” (True-up clauses require borrowers to pay more if asset values have fallen significantly.)
Putting deals together
Shearwater has relationships with a number of family offices and private equity firms that come in on different transactions – it also invests its own equity in every deal. This gives it a clear incentive to make sure investors do not lose money on any transaction.
The company often splits financings into different equity and debt tranches so deals can involve investors with different risk and reward appetites. “We have got to know our family office partners and what types of investment they want,” says Miller. “They all have different tolerances for risk and return. But the key is that so far, our investors are really happy with the way the deals have worked out.”
So far Shearwater has provided its private investors with an average return on investment (ROI) of between 13% and 15% and, importantly, has sustained zero losses.
Shearwater’s team consists of four specialists: Miller, who headed Guggenheim Partners’ Business Aircraft Investment Group (now Stonebriar), after starting his career in the United States Marine Corps, as an F/A-18 pilot; Katerina Barilov, managing director, who worked in the transportation team at Goldman Sachs and was in charge of structured finance for Europe, the Middle East and Africa at Hawker Beechcraft; Kyle O’Donnell, senior associate, who joined from Nomura Asset Management; and Mike Kahmann, who is on the advisory board. Kahmann was group head of CIT’s Business Aircraft Finance Division between 2011 and 2017 and also worked at GE Capital and Emigrant Bank.
“We are a small team, so we all work across different functions,” says Miller. “Mike is not full time, but is invaluable. It is amazing for a small business to have someone like Mike who can do anything and also helps us set up systems, reporting and analysis so we can give sophisticated investors what they want.”
Miller does not believe that Shearwater will ever have many fulltime staff. “You don't really need a lot. When we grow to be a billion-dollar platform our headcount is going to be, like, 14,” says Miller. “That’s based on my experience at Guggenheim and Mike's experiences at CIT. We can make it to $1 billion too.”
Other business aviation petrol heads
Competing for deals Shearwater is not looking to compete with traditional corporate jet financiers like private banks, commercial banks or new non-bank financiers like Stonebriar and Global Jet Capital.
“I think there are always deals out there looking for different funding sources and there are a lot of complementary offerings in the market from other institutions,” says Kahmann. “But there is definitely space for Shearwater’s approach to structuring deals. The results speak for themselves.”
Kahmann also feels that there are opportunities for banks to partner with Shearwater – something CIT used to do. “Hopefully it's a matter of time. Most domestic US banks are more attuned to the balance sheet sort of corporate lending than they are to high-net-worth lending. There are a few exceptions but that is one of the reasons why there are not that many non-private banks in the HNW international business aircraft lending space,” he says. “US banks are also more attuned to domestic lending – so hopefully they will see Shearwater as a US platform (albeit with international assets) that has a track record of being able to demonstrate that this lending can be done safely with low or no losses.”
And both Miller and Kahmann stress that they are not looking to compete with private banks. “Private banks are formidable and they're very good at what they do,” says Kahmann. ”But, typically, private banks are not as interested in older aircraft or smaller deals.”
On top of structuring deals, raising money and even appraising aircraft, Miller is training hard for his next race. Although he races for fun, there is slightly more pressure this year. “I actually won my age group last time,” says Miller. “Although honestly, this does not mean very much. I tend to crash a good bit but always manage to get back on the bike and finish!”