KAL Capital 2020 Q2 in Review

Please Review our Full Q2 Report Here.

Dear Friends,

Despite it almost being cliché at this point, we hope that you are staying safe and healthy. The past quarter has been a wild ride as we saw COVID-19 emerge as the most important global event of many of our lifetimes.

We are very pleased to announce the sale of Aero Systems Engineering, a portfolio company of Gencap America, to Calspan. ASE is a market leader in the engineering-centric world of engine and wind tunnel testing. The unique capabilities of ASE and its access to next-generation commercial engine programs as well as hypersonic missile development were critical in attracting a strong response from the buyer community. This is our second closed transaction working on behalf of Gencap America; we are grateful for the trust placed in our firm on both assignments.

For KAL Capital, it has been amazing to witness (less so to participate in) the dramatic shifts in M&A sentiment over the past few months. During April and May, we witnessed M&A activity slow to levels below the depths of the Global Financial Crisis. What followed were “green shoots” of activity level that have matured into a very sector-specific recovery. As we had cautiously expected, this improvement has been led by defense-focused businesses. This dynamic is being led by ease of end-market diligence as the defense world has seen suffered very limited virus induced reductions in demand. For our friends in the private equity community, the expectation of “COVID discounts” never materialized in the defense world. While there are certainly lower valuations aplenty in commercial aerospace, the defense sector remains seller friendly.

For our clientele, the major non-COVID, conversation topic has been the upcoming Presidential Elections and the potential effect of a Biden Administration on both defense spending as well as capital gains tax treatment. On defense spending, the nature of many large procurement programs leads to a very broad manufacturing base, supporting well paying employment. One of the few (maybe the only) topics that both sides of the aisle agree on is that manufacturing jobs are critical to the eventual broader economic recovery. To us, reductions in procurement spending seem to fly in the face of that sentiment, but the scale of economic stimulus leads to inevitable questions about corresponding spending reductions and/or tax increases. On taxes, the Biden Administration has been clear on its goal of raising capital gains tax rates to normal income, which would effectively double the tax bill of many of our clients. While avoiding economic theory, we expect these proposed changes to lead to a massive surge in M&A activity as business owners will be looking to transact ahead of any change. We witnessed a similar effect on M&A activity when the Obama Administration increased capital gains tax treatment by a much more modest degree.


Trevor Bohn & Ryan Murphy