Within your industry, which subsectors do you anticipate experiencing the highest levels of interest? Why?

Within commercial aerospace and business aviation, several subsectors are attracting particularly strong buyer interest right now: first, specialty maintenance, repair and overhaul (MRO) and component repair, due to positive aftermarket demand drivers and the fragmentation that makes these sectors ripe for consolidation; second, composites, most notably from large international strategic buyers and due to aerospace OEMs’ long-term focus on lighter, stronger, and more durable advanced materials; third, specialized outsourced services, due to their role in making global A&D supply chains more agile, focused, and cost-competitive; finally, software, due to new technology and business models that are enabling much better and faster use of aviation-related data.

Similarly, within defense, continued advances in unmanned systems, robotics, autonomy, geospatial imagery, electronic warfare, and software analytics are all increasing demand for more and better data and the systems to make sense of it all. This in turn is boosting buyers’ interest in command, control, communications, computer, intelligence, surveillance, and reconnaissance (C4ISR) assets and services. Power, naval systems, special operations, and space are other sectors where we are seeing significant activity, budget prioritization, and defense buyer interest.

Which metrics are you watching most closely in relation to the performance of companies in your industry?

Within commercial aerospace, our team watches the health of the OEMs aircraft and aero-engine order books as well as projected build rates. Within business aviation, we monitor corporate profitability and business jet takeoffs and landings. Within the federal space, we look at the US Department of Defense budget outlook and funding priorities, as well as the book-to-bill ratios of key sector players. 

Which industry-specific trends or issues are you watching most closely?

In aerospace, we’re closely following the evolving aftermarket and supply chain strategies of the world’s major OEMs given the impact they will have and the opportunities they will create for other sector participants. We’re also keeping tabs on fuel prices, load factors, and commercial airline profitability, as well as a pipeline of potential corporate divestitures. In defense, we’re keeping an eye on the priority initiatives of the newly formed US Army Futures Command, as well as innovative acquisition vehicles and tactics being spearheaded by US Special Operations Command.

Which geopolitical and/or macroeconomic issues are most relevant to your industry? Why?

We’re watching GDP outlooks throughout Asia-Pacific, the Middle East, and South America. These regions currently comprise a historically high percentage of the global commercial aircraft order book and also operate an increasingly important percentage of the total global fleet.   

The rise of China is also relevant to us across multiple sectors. China continues to substantially increase its military spending and now has national strategic plans for key emerging technologies.

Along the same lines, growth in rest-of-world defense spending and industrial base ambitions is something that we’re paying close attention to. That growth will have an impact on US budget priorities, the growth strategies for global defense primes, and the outlook for cross-border M&A. 

Within the US, the near-term federal budget outlook is also very relevant; of course, specifically its impact on contracting dynamics and the overall health of the services sector.

Given the length of the current bull market, what should private companies, private equity groups, and strategic buyers be thinking about?

Private companies should be thinking about their mix of commercial aerospace and defense business, their manufacturing capacity, and their talent road maps. For private equity, the market remains ultra-competitive, so industry specialization, subsector investment theses, and operating partners whose networks can augment deal flow are increasingly important. Strategic buyers, given the strength of the M&A markets, should be proactively identifying priority M&A targets, organizing themselves internally so they can act preemptively, and then differentiating themselves with decisiveness and speed.

Which qualities make acquisition targets most appealing in a more challenging operating and investing environment?

Focused and specialized providers of outsourced services, particularly those tied more to platform operation than build rates, tend to be less impacted by the cycle and good places to focus. Companies with exposure to multiple end markets within A&D also tend to be more resilient over the long term since they can pivot toward new growth sectors during challenging periods in specific core markets.

Scaled platforms within fragmented A&D sectors are also attractive, even in slower-growth, more mature markets, as they often emerge as acquirers of choice during more challenging market conditions. 

Software providers are also very appealing, and we’re seeing a lot of activity in this sector. They enable A&D customers to operate more cost effectively, they frequently benefit from nondiscretionary demand drivers, and they tend to have rapidly scalable business models.

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