KAL Capital Q3 2021 A&D Review

Click Here to See the PDF

Dear Friends,

Unreal. That is simply the only way to describe the M&A market at this point. Just when
we thought there could not be more activity and valuations could not be stretched any
higher, we continue to see non-stop new transaction announcements all at or near all-time
high valuation multiples. Our belief is that the back-half of 2021 will break every record
worth noting from a deal activity perspective. Q4 is sure to continue at the same breakneck
pace as the rush to beat capital gains tax changes continues unabated. As an aside, it appears
that fears of radical, retroactive changes in capital gains tax treatment were overdone.
Unfortunately (or fortunately in this case), it’s a good reminder that material changes in our
tax system and any other regulatory framework are incredibly difficult to effectuate.

For KAL Capital, our Q3 was truly madness with five closed transactions. That pace is
incredible and at times felt a touch unsustainable, but we are grateful to our team and our
clients at this remarkably busy time. Our closed transactions were in many of the most
highly coveted sub-sectors within A&D including hypersonics, cybersecurity and composites.
These businesses were undoubtedly leaders in their respective niches and fetched valuations
that reflected their market leading position as well as buyer pools that are pre-conditioned to
pay nose-bleed level multiples.

Despite building to a crescendo in Q4, we are beginning to now transition towards
conversations centering around on what 2022 is going to look like; essentially, the question
on everyone’s mind is will there be some sort of pause in M&A activity given the frenetic
pace of the last 18 months. Our perspective is that overall activity levels only have one
direction to go from here if only because the entire M&A ecosystem is at risk for burn-out
due to going all out for nearly a year. That said, we expect EBITDA multiples to continue to
maintain or drift higher. We have been amazed at how easily the buyer community has
absorbed the incredible amount of supply (deal activity) with no adverse impact on
valuations. In particular, we have seen and experienced a seemingly unlimited appetite from
existing sponsor-backed businesses for smaller, complimentary acquisitions or so called
“bolt-on’s.” While this has always been an important avenue in the processes we run, we
have never seen this category of buyers so prepared to out-bid public-strategic buyers. This
development has created an advantageous, structural change for our clientele that is allowing
businesses in our target zone ($20mm – $250mm Enterprise Value) to generally have
multiple options to sell to sponsor-backed businesses at valuations that are multiple turns
higher than we have witnessed. Anyways, it’s unequivocally a great time to be in the
aerospace / defense M&A ecosystem. Fingers crossed that the good times keep rolling.


Trevor Bohn and Ryan Murphy