Private Equity as an Alternative Form of Financing | Private Equity in ...

From the perspective of a Private Equity firm, it is easy to see the mutually beneficial relationship it may enjoy with a company possessing good growth potential. For business owners who have no prior dealings with PE firms, things may not always be as obvious. It is thus important for PE practitioners to articulate and accentuate the role of PE as an alternative source of financing for target companies. Given the host of funding options available, business owners may not always be able to recognize the benefits that make PE a compelling alternative. Indeed, debt financing via banks loans has long been the traditional option undertaken by most mid-sized companies.

If one were to look around for a real life example comparing debt financing (bank loan) and PE financing, the case of International Lease Finance Corporation (ILFC) and Air Lease Corporation (ALC) clearly exemplifies such a comparison.

Founded in 1973 by Steven Udvar-Hazy and Leslie Gonda in 1973, ILFC has been regarded as the pioneer of the aircraft leasing business. Following an IPO on the NYSE in 1983, ILFC was bought over by current owner, AIG, for US$1.3 billion in 1990. Despite a proliferation of competitors in the 1990s, ILFC surmounted challenges to establish itself as one of the largest aircraft lessors globally by the late 2000s, second only to General Electric?s aircraft leasing unit, GECAS. However, after the Federal bailout of AIG in 2008, compensation curbs as well as limits to purchase new aircrafts were imposed on ILFC. Between 2008 and 2009, AIG had actively sought to sell off many assets, including ILFC, in order to pay down its debt. In failing to attain a good sale value for ILFC, AIG then embarked on the disposal of ILFC?s existing fleets. Steven Udvar-Hazy had then rallied up several potential investors in bid of a potential MBO to extricate ILFC from its debt-laden owners. The failure of the MBO eventually saw industry veteran Steven Udvar-Hazy leaving ILFC to set up ALC in early 2010.

The recovery of the global economy and the broader airline industry saw both ILFC and ALC seeking financing to fund purchases of aircrafts in 2010. While the duo was as alike as peas in a pod (barring size), the two companies embarked on markedly different paths of financing. Most significantly, ILFC secured a US$1.5 billion term loan with Citi, BNP Paribas, DVB and Credit Suisse, as well as a US$2 billion 3-year revolving credit line from AIG and the Federal Reserve Bank of New York. ALC on the other hand, opted for a bulk of its financing to be PE-based ? a total of US$500 million was invested by PE firms Leonard Green & Partners, and Ares Management. (Another US$1 billion of equity financing was also raised from various investors)

In 2011, both companies announced plans to file for an IPO. ALC successfully went public in April 2011, raising a higher than expected US$802.5 million. ILFC on the other hand, had waited till September before officially filing for its IPO, and the actual IPO date has in fact been shelved indefinitely, with owner AIG citing weak IPO markets as the key reason for the delay. The latest twist in this saga sees ILFC owner AIG taking Steven Udvar-Hazy to court early this year over allegations of stealing trade secrets and other confidential information.

?	International Lease Finance Corporation (ILFC)	Air Lease Corporation (ALC)
Founded	1973	2010
Revenue (2011)	US$4.5 billion	US$336.7 million
Net Income/Loss (2011)	(US$723.9 million)	US$53.2 million
Book Value (2011)	US$ 7.5 billion	US$2.2 billion
Average No. of Aircrafts in Fleet (2011)	932	46
Targeted Amount to Raise in 2011 IPO	US$1.5 billion	US$625.0 million
Status of IPO	Postponed	Successfully Raised US$802.5 million

Figure 1: Comparison Table between ILFC and ALC

As we eagerly watch the saga further unfold, what is clear is that ALC has claimed victory in a ?David and Goliath? battle to secure public equity financing against ILFC. It is apparent that the young company with no more than 50 aircrafts has reaped significant gains from its partnership with its PE investors. The speedy and smooth IPO process demonstrates 2 of the key advantages that PE-backed firms have over debt-financed counterparts: 1) Greater support for IPO arising from incentive for PE firms to exit, and 2) Access to PE firms? rich experience with deal structuring, IPOs, as well as the firms? extensive networks. Further, from a business perspective, PE-backed firms may also enjoy synergies with the other companies in the PE firms? portfolios. For example, aircraft and engine components manufacturer Aersale, one of Leonard Green & Partners? portfolio companies, would have presented ALC with an invaluable opportunity for collaboration. This benefit is likely to be even more apparent for sector-focused funds. Finally, PE-backed firms will most certainly benefit from a greater alignment of interests (with those of PE firms) to grow and increase the value of the company. In contrast, the alignment between debt-financed companies and debtors is more likely to be limited to the timely payment of interests and the principal on maturity.

The lesson drawn from this case can also be applied in China or the region in general. From personal observation, PE is much too often misunderstood, or incorrectly associated with other forms of investments. In China for example, PE is best termed as ?Si Mu Gu Quan Tou Zi Ji Jin?, which literally translates to ?privately-raised equity investment fund?. A shorter form of the term ? ?Si Mu Ji Jin? (taking the first and last two characters of the original) ? while used commonly, is also a cause of confusion for many Chinese business owners as it is occasionally employed as an umbrella term for other forms of private investment vehicles such as hedge funds. In Singapore, PE is instead often inappropriately associated with Venture Capital, evidently so in local media coverage and universities curriculum. Lack of knowledge about the concept of PE, and consequently an unawareness of the wealth of resources, experience and networks that PE firms can present to a company is most certainly a key factor deterring business owners from seeking out PE financing. Thus, there is certainly an impetus for practitioners to actively educate business owners about this invaluable source of project financing in order to take the Private Equity industry in the region to the next level.

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