The Study of War and Private Equity

Aerospace and defense deals may seem like a “masculine” pursuit until you speak to Tess Oxenstierna, a director at the Bank Street Group.

Oxenstierna has two decades of experience in the sector, having worked at the White House, NATO, the U.S. Department of State and Energy, Raytheon Corp. and the U.S. Navy Reserves. She even holds a friggin’ Ph.D. in “War Studies” from King’s College in London where she focused on nuclear nonproliferation policy.

She is currently head of the aerospace and defense group at Bank Street, a Stamford, Conn.-based investment bank that targets the middle market. Oxenstierna, who grew up on the Island of Guam, has a strong interest in the military. “I grew up loving military history,” she says. “I became a naval intelligence officer after finishing graduate school.”

But before I go on and on about Oxenstierna, I have to get back to my original topic: Aerospace and defense. The current U.S. military budget is $708 billion, which Oxenstierna says is “very robust” compared to other sectors. But Secretary of Defense Robert Gates has told the industry since early June that he’s looking for $100 billion in cost savings over the next five years. Many anticipate that the cost savings will lead to reductions in programs and procurement, as well as the canceling of key programs.

“People are bracing for the worst,” she says.

Consolidation of middle market companies is also expected. Because of the $425 billion overhang, PE firms like Carlyle Group, Blackstone Group and KKR are expected to be very active buyers in the sector. Other niche players include Veritas Capital, Arlington Capital Partners or Admiralty Partners. Veritas, in July, closed its fourth fund at $1.225 billion, up from its original target of $950 million.

PE shops like aerospace and defense companies because they are “technology rich” and have a funded backlog with the U.S. government, which is “obviously credit worthy,” Oxenstierna says. Many times the technology developed by the companies, like satellite communications and the early stages of the Internet, made its way to the commercial world, she says. “It’s what we call dual use,” Oxenstierna says.

In 2007, during the height of the credit bubble, multiples for aerospace and defense companies traded at more than 12x EBITDA. That has dropped down to a more normal 7.5x to 8.5x, she says. However, there are still deals that trend skyward. In June, Boeing said it would buy Argon ST, a combat systems provider, for $775 million in cash or 17x EBITDA. Some firms in training and technical services may trade in much lower multiples, she says.

So what is hot? Oxenstierna pointed to intelligence companies, or those involved in  C4ISR (which refers to command, control, communications, computers, intelligence, surveillance and reconnaissance). Argon ST, which develops sensors and networks to “exploit, analyze and deliver information for real-time situational awareness” is a C4ISR  company.

Firms involved in cyber warfare as well as UAV Platforms, or unmanned aerial vehicles, are also seeing interest, she says. “These can go for well above average multiples,” Oxenstierna says.