Why is Private Equity investment in aerospace and defence about to take off?
15 November 2016
This an exciting time for aerospace and defence (A&D). The industry is seeing structural changes, including corporate divestments of non-core divisions, sub-sector consolidation and the emergence of disruptive technology. The market is underpinned by solid demand, and through our work with corporate and private equity (PE) clients we see significant opportunity for investors.
Commercial market remains robust
Despite some recent signs of demand flattening, the commercial aerospace market continues to grow. This “supercycle” is driven by increased passenger numbers due to a growing middle class in emerging markets and by airlines’ need for continuous improvement in performance and efficiency. Demand is reflected in the robust order books of aircraft manufacturers and their supply chains.
Defence budgets growing
Defence demand fluctuates in response to the requirements of actors in conflicts across the world. After a period of uncertainty following the financial crisis, budgets in accessible defence markets are on the increase. This includes the UK where defence budgets are now ring-fenced at 2% of GDP, and in the world’s largest defence market, the US, where spend is now on the rise again following budget sequestration. We also expect that Donald Trump’s surprise election victory could increase spending, both in the US and in other NATO members that he claims are not spending enough on defence.
Against this backdrop we see three key drivers of opportunity for PE investment in A&D.
Large A&D players divesting non-core assets
Firstly, as part of their strategy to focus on core businesses, large A&D players are looking to divest their non-core assets. In many cases, this is driven by pressure from shareholders to reduce diversification to allow management to focus on their core business. Acquisition of one of these spun-off assets could allow a PE house to drive performance in a business that could have been neglected in the past but may reside in a profitable niche.
Mid-market consolidation continues
Secondly, mid-market consolidation has been considerable in recent years, driven in part by Original Equipment Manufacturers’ (OEM) desire for stability of supply and to push production risk down the supply chain. Although significant consolidation has occurred in certain sub-sectors such as component manufactures through the likes of PCC and Transdigm, we believe there remains an opportunity in other areas to create value through economies of scale. For example, aerostructures businesses seem to have resisted this trend so far and look ripe for consolidation, especially as composite technology progresses and grows.
Disruption from technology and new entrants
This leads us into our third opportunity driver, disruptive technology. In a changing industry, application of new technology or processes can lead to a significant advantage over peers. This could include composite design and production, additive manufacturing or the increased cross-over with digital and cyber technology. Additionally, in certain sub-sectors, for example aircraft seating, incumbent businesses have not performed to customer expectations, meaning OEMs are encouraging disruptive and innovative new entrants.
In all cases, there are many businesses out there that require investment and experience from the right investor to increase their scale and competitiveness. The priority for a PE house looking to invest in an A&D business is to choose a company with exposure to these strong end markets and one that possesses the know-how to be a market leader under the right ownership.
We have strong relationships with key corporate and PE industry players through advising on buy and sell side M&A… so please get in contact and we can help you maximise your opportunity.