Due to suppliers’ need for finance to keep up with the surge in demand for planes and parts, executives claimed that financial sector headwinds are opening up new opportunities for private equity investments in the aerospace industry.
Following a pandemic-induced recession, demand from the world’s largest manufacturers of airplanes has skyrocketed. Midsized banks are a source of cash for some of their suppliers, and stricter lending is a danger following the failure of Silicon Valley Bank and shocks to other banks like First Republic Bank.
While the overall economy may experience slower growth or even a recession, Charlie Compton, a partner at Boca Raton, Florida-based AE Industrial Partners, a private equity firm that specializes in investments in the aerospace and other sectors, said that aerospace suppliers need capital now to support the significantly increased demand.
Private equity firms, armed with unprecedented amounts of cash, see the potential to fill the void as some small suppliers were already having trouble finding funding to meet production demand for new planes and parts. Yet, that can result in a loss of control for modest family-run vendors.
JPMorgan analysts noted this week that despite having only 25% of the nation’s banking assets, 300 midsized banks account for about 43% of the country’s commercial loan stock, demonstrating the outsized role that regional banks play in commercial loans in the United States.
Several others disagreed with Anne Balcer, a senior executive at Independent Community Bankers of America (ICBA), a group that advocates for small U.S. banks when she said she did not anticipate a decrease in credit availability.
According to Compton, whose company manages about $5.6 billion in assets, “the bigger risk to the family- and founder-owned aerospace businesses we work with is their reliance on regional banks to finance their working capital and capital expenditure needs, beyond what their businesses can fund themselves.”
Aaron Theisen, president of Washington state-based, family-run supplier TNT Aerospace, told reporters that the company is having trouble raising money to increase the production of parts like precision-machined structural sections to fulfill demand.
Due to a poorer balance sheet the previous year, TNT, which counts Safran SA and Triumph Group as clients, had a muted response from banks. Silicon Valley Bank’s failure “would further worsen the issues with parsimonious capital markets,” Theisen questioned.
As long as he keeps control and the merger makes financial sense by reducing expenses, he claimed he would not be opposed to a private equity investment.
HIGHEST CASH
According to statistics from the research firm Preqin, private equity firms had unprecedented sums of cash available to invest, with companies holding an estimated $1.96 trillion in dry powder at the end of December, up from $1.62 trillion in December 2021.
As they struggle with rising rates and debt while attempting to meet demand from aircraft manufacturers Boeing Co and Airbus SE, small suppliers have seen more private equity investments this year, according to Richard Aboulafia, Managing Director at U.S. aerospace consulting firm AeroDynamic Advisory.
The need for aftermarket components and fixes to keep aircraft in the air is also rising. While Melius Research predicts commercial aftermarket core growth to be above 20%, Jefferies analysts predict a 16% increase in 2023 aftermarket revenue.
According to Refinitiv statistics, there were 216 global private equity agreements among companies with aerospace portfolios in 2022, more than double the number from 2019 and the highest level in over ten years.
Mark Brooks, chief operating officer of Columbia, Missouri-based Permanent Equity, which has $350 million in 30-year committed capital, added that higher interest rates and turmoil in the banking industry “will result in more and better opportunities for private equity as a liquidity alternative to traditional bank products.”
Persistent Equity seeks to make investments in suppliers and repair facilities with a substantial inventory of aircraft components.
While bank loans are still available in Canada for small businesses, rising rates have brought down the cost of real estate.
According to Frédéric Loiselle, a partner at Montreal-based Thrust Capital, some businesses that previously exploited growing real estate valuations to raise cash are now moving to private equity. Thrust Capital has around C$100 million ($72.84 million) invested in small and medium aerospace suppliers.
