In the wake of COVID-19’s disruption of the aviation sector, many aerospace and defense companies are not looking for capital investments or weighing a divestment. PE has plenty of idle capital available for compelling opportunities. This interest convergence means an increase in M&A will likely drive a deal bonanza in the sector.
Commercial aerospace will continue to emphasize shoring up a lagging supply chain, while defense technology innovation will attract the interest of PE. Here’s what you need to know about the market factors affection A&D in the coming year or two.
Recovering from the 2020 Slowdown
The 2020 slowdown meant that many companies delayed deals, and PE did not use much of its available capital. As the economy begins to revive, there’s plenty of money available to fund deals, and plenty of dealmakers looking for synergistic investments. Low interest rates will persist through 2022, potentially encouraging dealmakers to take the plunge.
PE hit a low in 2020, but is surging back. We expect this trend to continue. However, A&D valuations are still lagging behind overall market returns.
Low Valuations
Continued low valuations will entice PE investors to spend on diamonds in the rough. Buyers will be looking to get a deal, spurring a burst of activity. Airlines have already seen an increase in business, and a more substantial recovery is on the horizon. Original equipment manufacturers are still working through their backlog of undelivered aircraft, while awaiting new orders.
The supply chain must also complete with large inventories of new parts and used materials that will take time to burn through. Those recovery lags will continue to keep valuations low, but may eventually help spur an increase in valuations as we head into 2022.
What Will We See in 2022?
Other sectors are witnessing a huge increase in M&A, though A&D has been lagging behind. We expect A&D will begin to see an influx in PE capital and deals as we move out of the pandemic and into a recovery period.
In 2020, there was an increase in deal activity in commercial aerospace because other financial sponsors faced greater financial constraints. This trend should continue through 2022.
Prior to the pandemic in 2022, large commercial aerospace companies were reluctant to sell off operating units. The long downturn has meant that many of these non-essential assets are now driving solvency. Companies may now be eager to divest of some of these assets.
While the challenges of 2020 continue to persist, dealmakers are increasingly optimistic thanks to the faster-than-anticipated recovery and apparent slowdown of the pandemic. Both sides of a transaction now have reason to believe in a better future.
Thanks to this optimism, valuations have increased from pandemic lows, pushing companies to strengthen their balance sheets via consolidation. This new environment increases the likelihood of successful recoveries for companies across the sector.