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Trends in Private Equity Investing in the Aerospace / Defense Market


Cyclical.  That word speaks both of opportunity and risk.  It also is one descriptor for the aerospace / defense industry.  Private equity funds have been investing in the sector for decades (Forstmann Little, the investment firm, bought Gulfstream in 1990 before selling it to General Dynamics nine years later) and continue to be active acquirers in the industry.  PE activity levels in the “mixed bag” period of the last 7-8 years exhibit these firms’ tendencies, and suggest where future activity might lie.

Since 2008 / 2009, the defense budget environment has been tricky to say the least.  While operating tempo has wound down, budgets declined, culminating in sequestration under the 2011 Budget Control Act.  During this period of uncertainty, net PE M&A activity (as defined by the number of acquisitions by PE firms or their portfolio companies less the number of exits or divestitures) in the defense sector was anemic.  There were just 11 net acquisitions by PE firms in the defense industry in the five-year period from 2008 to 2012.  However, the Bipartisan Budget Act of 2013 helped the defense sector return to a more stable environment, as PE acquisitions increased by 50% during the year.   In fact, during the three years from 2013 to 2015, there were 32 net acquisitions by PE firms in the defense industry.  Defense spending is expected to have bottomed out in 2015 and returned to a new steady growth cycle for the near future.  As the budgetary environment returns to a more favorable outlook, we expect to see a positive trend in M&A deals in the defense sector from PE firms.

The strongly positive macro trends in the commercial aerospace sector have spun a different tale for PE investment.  Since 2008, net acquisitions by PE firms in the commercial aerospace industry have totaled 168 transactions, with particularly robust activity in the 2013 and 2014-time period.  Order activity with the large OEMs, and the resulting impact on their supply chains, from engines to structures to avionics to interiors, has driven M&A activity in the industry.   Looking forward, we expect to see a wave of PE exits from their investments in the past several years.  A key question for these PE firms will be, are there buyers out there for all of these assets at prices that are compelling?  The next few years will be the judge on whether this latest wave of PE investment in aerospace was successful.

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1By acquisition, we are referring to new platform investments from PE firms or add-on acquisitions by PE-backed portfolio companies.