KAL Capital Updates

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Dear Friends,

We are pleased to have turned the corner on what was a difficult winter both in terms of the rainy Southern California weather as well as the environment for M&A. Entering Spring, we have seen the environment for aerospace & defense M&A remain remarkably resilient though not with out its challenges.

From a macro-level, the industry continues to have strong tailwinds with some exceptions. For commercial aero, inflationary pressures and supply-chain struggles continue to be the major themes. The guarded optimism around ambitious OEM build-rate ramps was unchallenged by the recent news of quality issues. On the defense side, the multi-year trend of bipartisan consensus to address threats from near-peer threats is intact, but the recent conversations regarding the debt ceiling bring back to focus the challenge of growing defense spending despite the consistent march higher of competing, mandated entitlement programs. While we believe that this most recent breach of the debt ceiling will ultimately be resolved (like so many before it), it does serve as a reminder of the possibility of a return to an austere budgetary environment or even sequestration.

For our practice, we have closed three M&A transactions thus far in the year and continue to be bullish on the market environment for many of the end-markets that our clients serve within the supply-chain. From both our closed and live deals, we have observed an M&A market that has evolved to reflect the current reality of both an inflationary and a more challenging debt financing environment. First, the aerospace OEM supply-chain is undeniably building towards a full recovery and M&A valuations are reflecting that welcome new reality. We have closed and have several transactions in the market that are benefitting from expanding build-rates of both commercial and business jet programs and have been active participants in transacting at valuations that would require a recovery to pre-COVID financial performance to justify price. There was a multi-year window where commercial aerospace OEM transactions were available for discounted values; we can officially state that those times are over! Secondly, MRO transaction activity will likely approach peak levels before the year is complete. With good reason, Heico’s acquisition of Wencor is grabbing most of the headlines, but it belies significant transaction activity at a smaller scale as both the engine and component MRO segments have high-quality businesses that will be announcing transactions before the year is out. Strategic buyers with access to cash and existing debt facilities will continue to have the upper hand.

We will be headed to the Paris Airshow and would love to see you in-person.

Sincerely,

Trevor Bohn & Ryan Murphy