Dear Friends,
Happy New Year!
For KAL Capital, we reflect back on 2024 and will remember it (mostly) fondly. For
the firm, we continued to grow from both a transaction activity and personnel
perspective. For the year we completed eight M&A transactions, in a variety of
sub-sectors including MRO, proprietary products, build-to-print machining and
surface treatments.
For 2024, we observed a few key trends that drove aerospace and defense M&A
activity. First, we saw a general increase in strategic and sponsor activity as credit
availability recovered representing a significant reversal from the tightness that
characterized 2023. Despite higher base rates, the availability of debt capital to
support M&A is growing dramatically driven by a booming private credit market.
We expect this dynamic to continue to support M&A activity across sectors as the
amount of capital flowing into this asset class seems unlimited. Secondly, within our
target markets we saw buyer interest skew heavily towards aftermarket/MRO and
proprietary products-focused businesses. Multiples for businesses that support both
commercial and military repair/overhaul continue to set all-time highs, particularly if
there is an element of engineering (DER/PMA). In contrast, new build (OEM)
focused businesses continue to be beset by a variety of headwinds which became
particularly pronounced in the fourth quarter when the Boeing Machinists decided
to strike. Boeing’s difficulties providing quality product and a predictable, consistent
production schedule to their supply-chain were the primary Achilles heel of the
entire industry. We expect the delta in buyer appetite between MRO and OEM
assets to shrink driven by a recovery in B737MAX production which will accelerate
the growth rate across the supply-chain.
Looking ahead to 2025, at the risk of being too optimistic, we expect A&D M&A
activity to set all-time highs both in terms of transaction activity and valuations.
There is a confluence of factors that will all contribute, but the most potent is the
incoming Trump Administration. There is a prevailing optimism around economic
prospects, FTC/anti-trust enforcement and the DoD Budget. From KAL’s seat, the
DoD budget will be the most interesting to watch as the new Administration
simultaneously looks to balance the DOGE cost cutters with a Republican rank and
file that is looking to increase DoD spending from its near all-time lows (as a % of
GDP).
We wish everyone the best of luck in 2025 and look forward to connecting.
Sincerely,
Trevor Bohn & Ryan Murphy