Q4 2023 Quarterly Report

Download Report Here

Dear Friends,

As we enter a new year, we have spent the last several weeks reflecting on 2023
both from a KAL Capital and market perspective.

For KAL, the year was filled with a few notable milestones. Amazingly, we closed our
50th transaction which would not have been possible without our clients and third
parties, many of which have become personal friends over the past seven years of
the firm’s existence. Additionally, with our new colleague, Trevor McKinnon, KAL has
launched an Emerging Technology practice to respond to both the changing
demands of the warfighter and the surge of new high-tech entrants into the DoD
supply-chain. We have been extremely proud of our early success in this area and
are thrilled about the new opportunities we are seeing in VC-funded space and
DoD businesses.

For the M&A market in general, 2023 was in many ways a disappointment.
Transaction value fell by approximately 30% (source dependent) with private equity
activity down more significantly. The overwhelming reason was that the cost and
availability of debt capital both moved against the sponsor community
dramatically, particularly in the 1H 2023. The more interesting question is what 2024
will look like, and we (like many other investment banks) are extremely optimistic.
There are few very simple reasons to support that perspective. First, the emergence
of private credit can not be overstated. The growth in this sector is astounding as
over the past decade AUM has gone from $373bn to $1,493bn of which a
significant portion will go to support private equity buyouts. Secondly, our good
friends in the private equity community continue to have a capital overhang
dynamic that has grown by 3.0x over the last decade to $2,485bn. Compounding
this issue is an LP base that saw very limited realizations from many of its alternative
asset allocations in 2023 and is undoubtedly wondering when the capital will begin
to be returned. Frankly, those drivers are a bit technical and of interest to only some
sellers. The more emotionally charged (and important) driver will be the upcoming
Presidential elections. The seemingly universal expectation for the election season is
for uncertainty at best and chaos at worst which will drive significant transaction
activity through the first three quarters of the year.

The remainder of this document will go through brief updates on each of the A&D
industry’s major sub-sectors. Our reoccurring theme in 2023 had been on how both
the “Aerospace” and the “Defense” sides of the industry were doing well
simultaneously, and our observation centered on how unusual that alignment was.
The most recent issue with the door of the B737 MAX -9 has added significant doubt
to that ideal, dual scenario, but nonetheless, we are confident that 2024 will be a
robust year with growth in both our core sectors.


Trevor Bohn & Ryan Murphy