US lessor and asset manager Zephyrus Aviation Capital plans to deviate its investment plan for its second fund, ZAP 2, from the original fund in 2018 where it sourced mid- to end-of-life assets.

In an interview with Airfinance Journal Zephyrus Aviation Capital’s president and chief executive officer Damon D’Agostino explains that the investment criteria has changed slightly to reflect market conditions.

D’Agostino says the second fund will concentrate more on younger assets, with an average age of eight to 10 years.

“We have pivoted from mid- to end-of-life assets to young to mid-life assets as we have seen opportunities to acquire younger assets. We can add value with aircraft that need a transition event and manage through its lifecycle as opposed to the previous fund where assets were acquired for value in the end-of-life to part-out phase,” he explains.

He recalls that the first pool of aircraft included four intermediate-size widebodies. The second fund will lean towards narrowbodies as it remains challenging to finance widebody aircraft.

“As the debt market opens up for widebodies, we will probably look at those asset types more selectively with the possibility of having a couple in the mix for Fund 2. But we have to wait for the debt markets to be more accepting.”

D’Agostino says the investment mandate for the second fund is through two channels: sale and leaseback transactions as well as originating assets through other leasing platforms and investments that are looking to liquidate their positions.

He sees new technology assets qualifying for the second fund.

“If you look at the first deliveries of the Neos in particular, they are really coming into that age profile where they are certainly in that sweetspot. If we are targeting an eight-to-10-year age, some will be younger, others older, but the Neos and to a certain extent some Maxs will fall into that zone during the fund life.”

Earlier this year Zephyrus closed an initial investment into its second fund, under management by shareholder Virgo Investment.

The fundraising target is $300 million and D’Agostino says the US lessor is well on its way towards that target.

“The additional aircraft we are now closing will fund in ZAP 2,” he comments.

The fund marks the lessor’s second round of equity financing, having already closed its first $200 million fund in 2020.

The market is still awash with liquidity but D’Agostino remains conservative regarding the fund's potential size.

“There are two reasons behind the ZAP 2 equity fundraising <$300 million>; We look at it as measured growth but we also look at the pipeline and the way we source deals.”

“The way the market is today, if you have $500 million of equity, I am pretty confident you can spend that. The market is not short of transactions. Some of the M&A activity from the large lessors will drive more portfolio activity.”

“There is a pipeline out there to do more, but Zephyrus is focusing on the growth trajectory for smart deals, not just doing volume deals.”

D’Agostino adds that Zephyrus has told investors that the firm is targeting this <$300 million> size to allow it to choose the right deals, and not just to have capital for the sake of deploying capital.

“We are disciplined in the type of deals and the type of growth we go after.”

ZAP 2's investment period will be two years, mirroring the first fund.

In the first half of this year Zephyrus closed 20 transactions. It also entered into commitments for two debt facilities.

One facility with Volofin was on a couple of aircraft purchased with leases attached to American Airlines.
The lessor also committed to acquire further aircraft earlier this year and will finance those acquisitions through a second debt facility.

That facility is structured with flexibility as to the size and has an accordion to allow more purchases, Airfinance Journal understands.