Within the defense and government services markets, an evolving threat environment and expanding focus on near-peer threats are driving emphasis on technology development and capability and equipment modernization. Defense budgets are increasing in the U.S. and in Europe as priorities shift toward deterrence, collaboration, and cutting-edge technology.
2023 Outlook - January 12, 2023
Characterized by continuous innovation, market resilience, and mission-critical products and services, the aerospace, defense, and government services industry is a dynamic marketplace with significant opportunity for value creation.
Here, senior professionals from the Harris Williams Aerospace, Defense & Government Services Group discuss the most important industry trends creating M&A opportunities, the subsectors to watch throughout 2023, and how buyer and seller dynamics are shifting.
Which trends will be creating M&A opportunities in your industry in 2023?
Commercial air travel, particularly domestic, rebounded strongly in 2022, and despite some uncertainty in the macroeconomic picture ahead, demand signals among flagship carriers point to continued growth to start 2023. At the same time, private aviation has established a new benchmark for operations after a paradigm shift during the pandemic converted first-time private flyers to repeat users. This strong consumer demand is supporting growth in a wide range of related subsectors, from aftermarket maintenance and repair to outsourced aviation services and others.
Strong air travel demand is driving growth in many areas, and defense budgets are increasing.
Which subsectors do you expect to be most active in terms of M&A?
Defense and Space
As we discussed in a recent article, the dynamic global threat environment is supporting growth in a new subsector of defense technology companies. A leading cohort, which we refer to as SHARPE, is developing proprietary content for strategic applications within tactical communications, autonomy, artificial intelligence, and quantum computing, among others. Space is another key growth area as governments and private enterprises fund large-scale projects for both defense and commercial applications.
Aviation Services
Within commercial aerospace, both the aftermarket and outsourced services sectors will continue to be areas of focus for investors. With more aircraft flying, the need for nondiscretionary, recurring services will continue to grow. Additionally, after years of more limited activity due to production challenges and uncertain aircraft delivery schedules, we expect investors to refocus attention on opportunities within the manufacturing supply chain. In addition, there continues to be a premium on value-added distribution platforms supplying both OE and aftermarket customers in support of this anticipated market growth.
Defense and Space
As we discussed in a recent article, the dynamic global threat environment is supporting growth in a new subsector of defense technology companies. A leading cohort, which we refer to as SHARPE, is developing proprietary content for strategic applications within tactical communications, autonomy, artificial intelligence, and quantum computing, among others. Space is another key growth area as governments and private enterprises fund large-scale projects for both defense and commercial applications.
Aviation Services
Within commercial aerospace, both the aftermarket and outsourced services sectors will continue to be areas of focus for investors. With more aircraft flying, the need for nondiscretionary, recurring services will continue to grow. Additionally, after years of more limited activity due to production challenges and uncertain aircraft delivery schedules, we expect investors to refocus attention on opportunities within the manufacturing supply chain. In addition, there continues to be a premium on value-added distribution platforms supplying both OE and aftermarket customers in support of this anticipated market growth.
How are buyer and seller dynamics evolving in ADG?
We expect sponsor interest to remain high for quality platforms providing mission-critical services or proprietary products with good visibility into near-term growth. Additionally, the opportunity for add-on acquisitions in fragmented industries allows sponsors to underwrite more aggressive projections if the underlying platform has a real advantage as an acquirer of choice.
Infrastructure investors have long been active in pockets of aviation, particularly in terms of fixed base operators and airport infrastructure. In the last few years, we’ve seen these investors expanding their scope to include businesses with asset-based revenue models such as cargo equipment and ground support equipment leasing. We're also seeing them stretch even further into “on airport” services that are considered mission-critical, have enduring and stable demand drivers, and possess high switching costs.
In addition, we believe strategics will continue to be selective, with an emphasis on adding focused capabilities or filling gaps in their product portfolio. Some of these strategics, particularly within commercial aerospace, were significantly impacted by the pandemic but are now reprioritizing M&A as demand in their core sectors improves.