For many, 2022 represented a year of challenges as inflation and rising interest rates caused significant disruption that was reflected in declining public equity valuations, choppy credit markets and ultimately reduced M&A activity. While the A&D sector was not totally immune, we repeat our sentiment from the last several quarters that M&A activity within our industry has outperformed by a massive factor. The reason is simply that both the commercial aerospace and defense end-markets are not only recession resistant but are growing at rates that would be attractive in any macro-environment.
As so often the case, public headlines tend to over dramatize the reality of the current M&A environment. While its true that total M&A volume has declined ~37% YoY, this is off a clearly unsustainable 2021 and is inline with 2019 & 2020 activity levels. A&D outperformed the broader M&A market with more modest declines (-4.3%) as the hardest hit sectors were early-stage, low-profitably businesses within tech and healthcare. Perhaps the easiest illustration of the root cause of this discrepancy can be seen in the public equity performance of key defense companies like Northrop (+41%), Lockheed (+34%), Raytheon (+18%) all of which not only outperformed the S&P500 but ended the year well up!
Within A&D, we saw the momentum of the sector improve in 2H 2022 as several large transactions were announced or completed including Parker’s acquisition of Meggitt and Audax’s take-private of Maxar. This large-scale activity continues to be amplified amongst our core clientele of Tier II/III businesses as transaction activity within several sub-sectors of the supply-chain has picked up, most notably in the aerostructure and aero-engine sectors which have been amongst the last to recover post-COVID.
For 2023, we expect activity levels to be flat to slightly up with continued outperformance versus the broader market as the ongoing strength of commercial and defense end-market demand continues to attract private equity and strategic consolidators looking to deploy capital in growing, recession-resistant industries. Ideally, the debt markets adjust to a new higher-rate environment and provide supportive levels of credit availability to assist private equity groups in closing transactions at seller-friendly valuations.
For KAL Capital, we are proud to have continued to assist our clients in achieving great results from their M&A processes and ultimately achieved a new annual record for the firm of seven closed transactions, which brings our total since our founding in 2017 to over 40 closed deals! We have great expectations for 2023, continue to add to our team, and look forward to bringing several exciting transactions to market in Q1.
Trevor Bohn & Ryan Murphy