Rasmala US Leasing Fund 2: Supporting Diversification

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Eric

 

Eric Swats, Head of Asset Management at Rasmala describes the remit and opportunities of Rasmala’s US Leasing Fund 2 and the trend for GCC investors to target yield whilst diversifying their investment portfolios.

 

How does Rasmala’s US Leasing Fund 2 fit within Rasmala’s portfolio of investment opportunities?

Rasmala is an investment manager of choice in the region for local investment opportunities having ourselves invested in the region’s local markets since 1999, assisting local and international money looking for opportunities in this region’s market.

The Leasing Fund is one product of a series of innovations from the expansion of Rasmala’s product range for our GCC investors, executed over the past four years.

In 2012 we took the strategic decision to broaden and diversify our product set for the benefit of our clients. In that effort, we launched our Global Sukuk Fund, which now has daily liquidity and is domiciled in Luxembourg. The second strategy is the equipment leasing programme, which has been running for the last three years. The third strategic prong in this broadening of our pipeline is the Trade Finance Fund which we launched at the end of 2014 and the most recent expansion includes the promotion of UK commercial real estate investment opportunities for our GCC investors.

Whilst developing, broadening and enhancing the profile of all these products for multiple constituencies, we’ve ensured that they remain Sharia’a compliant.

How is US equipment strategy appealing to GCC investors?

This investment strategy was launched from the genesis of an idea around 2012 of providing evergreen products to investors in an effort to support their overall asset allocation, inclusive of diversifying into other asset classes and other geographies whilst providing regular quarterly income stream.

The investment strategy is focused on the purchase of equipment concurrent with the leasing of that equipment to companies, including Fortune 1000 companies, with strong credit characteristics. The Fund’s objective is the purchase of long-life, low obsolescence equipment, concomitant with lease arrangements with top-rated US based corporates such as Fedex, Ford Motor Company, Cargill and Rubbermaid.

As the lessees are of a high credit quality, we consider the credit risk of the strategy to be low and, therefore, aligned with protecting investors’ capital; most of these corporates have never defaulted on debt obligations and it is highly unlikely that they would run into financial difficulty in the future. Rasmala’s strategy, in further support of our investors, is that should any of these entities run into financial difficulty, their financing is secured through ownership of the equipment by the Fund.

There are also stable quarterly cash distributions in times of high volatility and this diversification move into equipment leasing also provides our clients an alternative to investing in US bonds.

How is this strategy innovative?

This is a niche Sharia’a compliant US equipment leasing strategy available to sophisticated investors. The strategy is the product of bringing together US equipment leasing expertise alongside US tax/legal and Sharia’a scholars to launch a truly asset backed investment product for investors particularly those who are looking to diversify risk whilst maintaining yield.

Why is this a good time to invest in Rasmala’s US Leasing Fund 2?

Asset backed strategies provide a degree of certainty in an uncertain economic outlook. We see that the US equipment leasing strategy continues to demonstrate strong fundamentals offering income and diversification opportunities away from the GCC markets.

The US economy continues to show modest growth estimated around 1.9 per cent in 2016, supported by the positive impact of lower oil prices on consumer sentiment and spending. Also a leading industry body, Leasing Foundation www.leasingfoundation.org estimates that investment in equipment in the US, is expected to continue to grow by 4.4 per cent in 2016 providing increased opportunities and depth in the market for sourcing credible leasing deals.

What type of equipment is being leased?

We’ve leased equipment to companies that don’t want to utilise all their working capital nor raise debt to buy these, so they lease them from us; for instance, we have leased to Ford Motor Company forklifts and tractors.

One significant transaction that offers a sense of the immense opportunities and earnings potential and that strikes a chord with investors also due to the household-names involved is in the example of the 21 year old airbus cargo plane that Rasmala bought earlier this year and leased to FedEx over three years. The sum of the three year annual payments will represent some 95 per cent of the purchase cost. The plane will then be 24 years old but with a 30 year life expectancy we anticipate re-leasing it to FedEx for another few years. The projected internal rate of return (IRR) is greater than 19%. Even if we are not able to re-lease the plane, then the scrap value of the plane shows an IRR of 9.7% over a three year holding period. So we regard this as a ‘win-win’ business model for all concerned.

This speaks at the heart of financing the ‘real economy’ and the fact that all of this Fund’s business is Sharia’a compliant broadens its appeal. In a sense, this type of investing rather excites the investor because they, effectively, own the plane. That minimises speculation and rather promotes the sharing of risks and returns and does this in a direct way.

   fedx  ford  
  Airbus A300-600 freight aircraft
Lessee: Fedex
Material Handling & Tow Tractors
Lessee: Ford Motor Company
 

Can investors directly access this investment strategy?

We know that it’s not easy for investors to simply ‘get on the internet’ and seek out a McDonald’s or General Motors CFO and offer to lease them 18-wheeler trucks. “Rasmala differentiates itself by providing access to leasing investment opportunities that previously remained principally the preserve of specialist financing companies and banks.

Has the performance matched expectations?

The US Leasing Fund 2 is our second fund, a closed-ended fund with a six-year term targeting an income of 8-10%. The first Fund witnessed the final closing in March 2015 with $62 million raised and deployed across 86 equipment leases, and our unit holders are earning the projected cash flows from those lease obligations. Overall IRR returns will depend on the residual value of the equipment at the end of the 6 year fund life.

What are future plans for Rasmala’s US equipment leasing strategy?

I believe that due to the innovative nature of this product, there has been an educational process at play in raising the comfort level of investors in what Rasmala is looking to do. When we go out pitching for those first investments, in any product, a number of investors look for a proven track record of success before they commit. Slowly and surely Rasmala is building a very successful track record, and increasingly reaching a broader audience.

At the end of 2011, Rasmala had $350 million of assets under management (AUM) and currently we have $1.1 billion dollars of AUM and, starting with zero monies invested into a programme like this, about $100 million has come into the Leasing Fund programme. So we anticipate this programme to grow to several hundred million dollars over the course of the next few years.