Jun 11, 2010
CHICAGO - Jim Raff
is swooping back into the aircraft market, looking for bargains and packing a $600-million bankroll from private-equity giant Carlyle Group
He's hoping to repeat the performance of his last fund, which successfully rode the industry's bust and recovery cycle from 2004 to 2007.
"We think the time is right to start buying," says the Chicago banker, who got his start 23 years ago lending money to United Airlines. Mr. Raff's RPK Capital Partners LLC hopes to leverage Carlyle's funds to buy more than $1 billion in aircraft and engines or related bonds and debt.
He's riding a wave of private-equity money flooding into the aircraft-leasing business on the theory that prices are nearing the bottom and will climb as aviation recovers. Connecticut private-equity firm Oak Hill Capital Management LLC and others invested $1.4 billion in Avolon, an aircraft leasing venture based in Ireland; San Francisco-based Jackson Square Aviation LLC raised $500 million from Oaktree Capital Management L.P.
The capital is crucial to the continued rebound of plane makers like Chicago-based Boeing Co. Its airline customers must sell off older planes before they can buy new ones like the 787. But more cash for leasing firms also means more competition for deals.
"The biggest risk is if they're all in a giant rush to invest that money in transactions that don't make sense," says Glen Langdon, CEO of Langdon Asset Management Inc. in San Francisco, which buys and sells aircraft.
Washington, D.C.-based Carlyle is making its first foray into aircraft finance, betting big on Mr. Raff and partners Paul Redman, Robert Gates and Chris Chaput.
"We liked Jim's strategy and approach," says Adam Palmer, a Carlyle managing director. "When combined with his track record through the last cycle, we decided to partner with him and his team."
Mr. Raff grew up in rural Connecticut and came to Chicago in 1987 as a lender for AMRO Bank. He later worked for Denver-based aircraft-leasing company Republic Financial Corp. and Boston-based BTM Capital Corp. before returning to Chicago in 2004 to start RPK Capital, a $200-million fund.
During the next three years, he produced a 54% annualized return for investors. He then sat out the industry collapse that followed. "We started selling before most people, and we didn't get greedy," he says.
Last time, Mr. Raff was buying planes from U.S. carriers in bankruptcy. This time, he expects to buy planes primarily in Europe, then sell or lease them to airlines in growing markets in Asia and the Middle East.
Unlike Avolon or Australia's Macquarie Group Ltd., he's targeting used planes. "If you're buying a five- or 10-year-old plane, banks won't finance them. That's our sweet spot," he says.
Aircraft finance is a high-wire act that attracts smart, competitive workaholics, Mr. Langdon says. Mr. Raff, who used to race sailboats and sports cars, fits the mold, though the 50-year-old father of two now finds the carousel at Lincoln Park Zoo more his speed.
Laura Schramm, a former bond trader who sailed with Mr. Raff two decades ago on Lake Michigan, recalls his response when a key part broke after the first of three races: "He already had the tool kit out and put it back together while I was still trying to figure out what to do," she says. "He was very focused and intense."
Like sailing, the aircraft finance business is risky and prone to sudden shifts. "Aircraft are unique and expensive assets," says Dean Gerber, who chairs the equipment finance practice at law firm Vedder Price P.C. in Chicago. "You can't make a lot of mistakes. Every mistake is a multimillion-dollar one."
Mr. Raff learned a hard lesson when he lost millions of dollars on two MD-80s in the air travel slump that followed the terrorist attacks of Sept. 11, 2001. "For everything we do now, we have a plan B," he says. "Our deals are much better thought out."
Mr. Raff and his partners have plenty at stake: $20 million of their own money is invested in the new fund. That's why they always fly coach, even overseas.
Tenacity can be as important as thrift in a business where collateral is retrieved, not written off. Mr. Raff once chased down a plane leased to a Jordanian client, who was flying it to Sudan, violating U.S. law. He sold that plane at a profit. But he's run up more than $1 million in legal fees on a long-running court fight over a $1.3-million thrust reverser leased to another client.
"You can't let someone steal your parts or equipment," he says.