AEI forecasts favorable M&A conditions for aerospace and defense

'Bipartisan support exists for a strong defense, National Security Space, and NASA budgets,' said AE Industrial's Kirk Konert.

Today, PE Hub is launching a new Q&A series with private equity leaders who share their reflections on 2022 and their outlooks for 2023. In this installment, we hear from Kirk Konert, a partner at AE Industrial Partners, a Boca Raton-based PE firm that specializes in aerospace, defense and government services, space, power and utility services, and specialty industrial markets.

What were the highlights of your dealmaking in 2022?

This year, AEI acquired majority equity stakes in two leading, founder-owned, and revolutionary space businesses, Firefly Aerospace and York Space Systems, for over $2 billion of transaction value. These two transactions cemented AEI as the leading investor in the space sector. Both Firefly and York are exciting companies that have unveiled new technologies this year that are disruptive to the space ecosystem. In fact, with its successful Alpha FLTA002 mission, Firefly became the first company to launch and reach orbit from US soil in only its second attempt.

What was the biggest challenge to completing deals in 2022? 

The current general macro environment uncertainty creates headwinds for dealmaking, given the misalignment between seller and buyer expectations. The availability for debt capital decreased while the cost of capital increased, putting downward pressure on prices. After a frenzied and frothy 2021, sellers’ value expectations have been slow to decrease to match the market’s current reality.

How do you expect the first six months of PE dealmaking in 2023 to compare with the last six months in 2022? 

Kirk Konert, AE Industrial Partners

We would expect our core A&D market to continue at its current pace, since aerospace and defense are less susceptible to current market conditions due to the strong longer-term funding commitment by the federal government and NASA to the industry. However, as it relates to industrial and general PE dealmaking, we would expect to see a further slowdown in the first six months of 2023. Macro-economic data and debt availability will likely worsen given Fed actions. The back half of 2023 could be much more robust post-Fed backing off raising rates and a “soft landing” scenario.

What will be the most important trends affecting your dealmaking in 2023? 

Given that a lot of what I focus on is driven by government and defense budgets, we will watch the new Congress dynamic closely. We do not expect dramatic changes in defense priorities over the next two years. Bipartisan support exists for a strong defense, National Security Space, and NASA budgets. If there are no surprises in budgets and political rhetoric, we would expect favorable M&A conditions for the government and defense sectors. However, I would be remiss not to mention debt availability and cost of capital. Our models have changed in 2022 and will continue to change in 2023. The PE industry, along with sellers, will likely need to be even more creative with structures to get deals done in 2023.

What’s keeping you up at night? 

Other than my 2-year-old daughter, not much. There are obviously risks that we think about and try to mitigate every day. I do worry that the Fed will raise rates too aggressively. The impacts of monetary policy notoriously lag the actions, which can cause bubbles and severe economic shocks. I don’t think investors have priced in a severe economic downturn, which would cause further asset depreciation and decreased capital availability.

What are you looking forward to most in 2023? 

The Buffalo Bills winning the Super Bowl!

On the business side, I can’t wait to back new founders and companies in our sectors in 2023. The competition for assets has decreased, which will allow us to find great companies to invest behind at better prices.

I am also optimistic that, after some economic pain, the economy will come out of 2023 in relatively good shape and markets will normalize.