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KAL Capital FY23 Q2 Newsletter

Dear Friends,

Happy 4th of July!

We are encouraged by recent developments in both the A&D industry as well as the broader M&A market. For aerospace, we spent several days busily catching-up in-person with financial sponsors and industry participants at the Paris Air Show.  The tone of those meetings was encouragingly positive as conviction around the recovery of OEM build-rates continues to grow. The consensus view is that aerospace is squarely in a strong up-cycle despite well-publicized challenges with supply-chain and availability of labor. This optimism underpins a strong M&A appetite to find opportunities to deploy capital within the supply-chain. Activity levels are picking up significantly and we expect the second half of this year to be quite busy.

For the M&A market generally, the recovery has been more mixed. Larger deals remain hampered by risk-adverse capital markets and a lending universe that is now dominated by private credit funds. The Wall Street Journal provided an accurate description of the current state of affairs when it discussed how “smaller” deals have taken over as the core of the M&A market. While total private equity deal value has declined ~50% YoY, the total number of deals is only down 4% illustrating a dramatic shift towards deals closer to $100mm of value. The number of total deals completed year-to-date is the third highest in 30 years! We have witnessed this shift in every M&A process as buyer behavior remains strongly aggressive and larger equity groups have come down market to pursue transactions in the $50 – $200mm value range. This dynamic has forced multiples (at least in A&D) to remain at or above 2021 levels. 

For the second quarter, we are pleased to announce two transactions. Both are described in greater detail in the subsequent pages, but they are illustrative of core sub-sectors that KAL has spent a great deal of time in. First, we represented International Water-Guard in their sale to Arcline Investment Management. IWG offers a suite of highly engineered, proprietary products to the business jet and commercial aerospace industry. Businesses that own their Intellectual Property and both the OEM and aftermarket revenue streams are commanding all-time high valuations. Secondly, we continue to grow our practice in the world of government contracting, particularly focused on those businesses sitting at the intersection of software and next-generation needs of the warfighter. We were pleased to advise Fregata Systems on their sale to Rotor Capital.  Fregata offers a unique set of software-enabled services that fit into JADC-2 and its related initiatives.

Sincerely,

Trevor Bohn & Ryan Murphy