Thu. Jan 20th, 2022


As travelers face rising car rental prices this holiday season amid rising demand and a shortage of new vehicles, two unknown investment groups are reaping great rewards from one of the hedge fund industry’s most lucrative 2021 operations.

Certares Management and Knighthead Capital Management are sitting on nearly $ 3 billion in paper profits after a bold $ 2 billion bet in May on Hertz, part of the century-old car rental pioneer’s exit from pandemic-induced bankruptcy.

Central to their investment thesis is that the pandemic battle for Hertz, when a global travel crash suppressed demand for its vehicles, will be a blow dominated by a longer-term opportunity.

New York investors believe the company’s fleet and network of locations could be redeployed as infrastructure for both the booming electric car industry and the coming era of autonomous taxis.

“There’s always one sector that is in the middle of every emergency cycle,” says Tom Wagner, a former managing director at Goldman Sachs who founded Knighthead in 2008 to invest in fatal assets. “In this case, it was travel and relaxation. If we could get it right, we could get the whole portfolio right. ”

With this in mind, Knighthead, which now manages $ 8.3 billion in assets, and Certares, which specializes in investments in the travel, tourism and hospitality sectors, raised $ 1.5 billion in the spring of 2020 to invest in the emergency travel sector. .

They do not have to wait long to put the money to work. When Hertz filed for bankruptcy in May 2020, it was just the kind of event they had in mind.

Together the two embarked on a marathon auction process to extract the company from Chapter 11 administration. When they emerged victorious, they made a combined $ 2 billion investment in Hertz, fueled by their earlier fundraising and their existing funds.

The value of their investment has risen 2.5 times in the seven months since then – an outstanding return for distressed investors who have had few good investment opportunities during a long period in which central banking has supported the stock markets.

In November, Knighthead and Certares Hertz listed on the Nasdaq and sold nearly $ 500 million worth of shares, but retained a 39 percent stake in the company, valued at $ 4.5 billion. The private equity group Apollo Global, which made a $ 1.5 billion preferred investment in Hertz as part of the bankruptcy auction, redeemed its stake for nearly $ 1.9 billion the same month – a profit of more than 25 percent in just six months.

The pandemic continues, but the fate of the rental car industry has reversed, adding momentum to Certares and Knighthead’s trade. Hertz is on track to generate more than $ 2 billion in operating cash flow this year, nearly four times its pre-pandemic profitability, despite a 43 percent drop in volumes, according to estimates by analysts at JPMorgan.

A major driver of profits is the global semiconductor shortage that has curtailed the production of new cars.

With limited ability to expand their fleet, brands such as Hertz and Avis Budget have raised prices to suit rising demand. Average daily car rental rates during the holidays were well above $ 100 a day in beach destinations such as Hawaii and ski destinations in Colorado, Montana, Utah and Wyoming, according to the online travel agency Kayak.

Meanwhile, supply chain restrictions have led to an increase in used car prices, which also helps Hertz’s profit margin – rental car companies keep large fleets that they sell to used car dealers as they get older.

Although the group benefits from conditions that will eventually fade, Certares and Knighthead believe there is an opportunity to use the profits to reform Hertz, which was founded in 1918 to lease Ford Model T cars, into critical infrastructure for electric vehicles and autonomous taxis.

“To make it work, we decided we would have to make a significant push in electrification,” Wagner said. “Hertz has a location within 10 miles of 90 percent of the U.S. population.”

With more than 12,000 sites worldwide, including in most U.S. airports, he added, Hertz could become an electric vehicle hub where travelers rent from automakers like Tesla that do not have large dealer networks, which supply electric vehicles to potential new buyers. tone set.

Hertz announced later this year that it has 100,000 Teslas ordered for delivery by the end of 2022, part of a strategy to use its locations as charging infrastructure for electric vehicles. It has also entered into a partnership with the Uber group, which is expected to make 50,000 Teslas available to Uber drivers by 2023.

Hertz’s existing locations are critical to the strategy, as building new rental car rentals is expensive and cumbersome. And its urban locations could be useful for Uber drivers who adopt electric vehicles, according to Greg O’Hara, founder of Certares.

O’Hara believes Hertz’s outlets will eventually become service areas for cleaning and charging autonomous taxis, and expects to unveil new partnerships to place charging stations in hotel chain parking lots.

“It should be one of the best ESG investments in the market today,” he said, pointing to the growing demand among investors for environmental, social and managerial investments. “It helps an internal combustion engine company to become an electric vehicle company, and a fleet services for autonomous management company.”

The company’s windfall is controversial in Washington. In November, the prominent Massachusetts senator Elizabeth Warren sent a letter to Hertz criticizing the company for raising rental prices and authorizing a $ 2 billion share buyback program after the company sold cars and laid off thousands of staff during its bankruptcy, which led to complaints from customers.

“The company likes to reward managers, company insiders and major shareholders, while ignoring consumers with record high rental car costs and the recent history that has almost obliterated the company,” she wrote. “Hertz owes the public an explanation for this corporate greed.”

Wagner and O’Hara see their investment in Hertz not as corporate greed, but as financing the automotive industry of the future.

“We have a commitment to electrification,” Wagner said, referring to Hertz’s work with Tesla, Uber and online used car salesman Carvana. It “requires investment in vehicles, investment in charging networks and investment in used car partnerships. . . You can expect to see how it expands and we will be very creative in how we do it. ”

Additional Report by Sujeet Indap in New York



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