KAL Capital 2022 Q1 Newsletter

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Dear Colleagues –

The end of Q1 is here and we couldn’t be more excited about the rest of the year, we hope you all share a similar sentiment. We couldn’t ask for a better start to our year with several new team members and record setting deal flow as the aerospace/defense M&A market continues to outperform the broader market. Just as we predicted in our last Quarterly Industry Review, 2022 will likely outpace 2021 in terms of deal volume and size!

While there have been several interesting developments in the commercial aerospace sector, the news and expected follow-on effects of Russia’s invasion of Ukraine have dominated conversations.  Simply put, our view is that Russia’s belligerence has forced a re-evaluation of previous paradigms that assumed a generally peaceful world order with limited real threat of war.  This realization will have both near and long-term implications for the A&D supply-chain as leaders across the world evaluate and invest in strategic deterrents aimed to counter-balance the naked aggression displayed by a nuclear-armed Russia.  KAL’s perspective is that the growth seen in the recent DoD budget is just the tip of an upcoming bow wave of re-investment in capabilities that were previously deemed Cold War-era “relics.”  While the DoD has been focused on pivoting to address “near-peer” threats, we expect further investment across the armed forces with major beneficiaries being the Air and Space Forces. On the program side, we view the major winners to include GBSD, B-21, JSF (over the long-run), NGAD amongst others, particularly offensive and defensive hypersonic capabilities.

Expected growth in long-term funding of major procurement and R&D programs will be a major force in maintaining elevated valuations for businesses with defense end-market exposure.  While defense multiples have remained above historic norms, the recent turn of events materially reduces risk that the progressive wing of the Democrat Party will be successful in slashing DoD budets; thereby, creating a strong tailwind for M&A processes.  On the commercial aero side, the aviation world is benefitting massively from a reduction in COVID restrictions and a continued sharp rebound in both leisure and business air travel. We have seen the first commercial aero OEM transactions coming to life and expect real momentum in the sector in 2H 2022.

As we sit at our desks and plan out the rest of the year, we’re ecstatic about being back on the tradeshow circuit and will be attending MRO Americas, Special Operations Forces Industry Conference, Space Tech Exposition and the International Microwave symposium. If any of these are on your calendar as well, we’d love to connect and meet face to face like the good old days.

Please don’t hesitate to reach out as we’d love to hear your input on Q1 and preview for the rest of the year!


Trevor Bohn & Ryan Murphy

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