An insider’s view of aerospace M&A

It’s a rare opportunity to talk with a private equity (PE) firm about their perspective on aerospace mergers and acquisitions (M&A). Aerospace Manufacturing and Design spoke with Jon Nemo, a managing partner at AE Industrial Partners LP (AE Industrial), a PE firm specializing in national security, aerospace, and industrial services.

Nemo focuses on the origination, execution, and monitoring of the firm’s portfolio investments. He’s a member of the firm’s investment committee and serves on the board of directors of six of the firm’s portfolio companies.

AE Industrial has $5.6 billion in assets under management and has completed more than 130 investments (including add-on acquisitions) since 2015. Its current private equity portfolio includes more than 15 platform companies from high-end technical services and manufacturing to unique technology solutions.

Aerospace Manufacturing and Design (AM&D): What does AE Industrial look for when making acquisitions in aerospace manufacturing?

Jon Nemo (JN): We focus on several markets. Aerospace is one and it includes commercial and business aviation. Another major focus for us is national security. The third is industrial services. We look for businesses and platform opportunities in these markets with high growth potential and where we see an opportunity to build a strategic platform. We’re often a company’s first institutional capital, meaning many of the deals we do are with families and founders. That allows us to partner with owners and bring our expertise, our relationships in the marketplace, our decades of doing deals, and our strategic vision to help accelerate growth and build these businesses.

We look at the long aerospace life cycle of design and development where we’ve had a lot of success helping the original equipment manufacturers (OEMs) and other supply chain partners design engines, aircraft, and critical systems. We then focus on production, where we’re looking for businesses that are sources of critical components and systems on an airplane. We like to invest in businesses that have intellectual property (IP) and have some protection around what they do. The last part in aerospace is the aftermarket where we invest in recurring revenue businesses serving the long operational life of the large global installed base, whether maintenance, repair and overhaul (MRO), parts distribution, or parts manufacturing supporting aircraft.

AM&D: Are you constantly scouting for companies or do companies approach you?

JN: It’s both, but we spend a lot of time proactively developing relationships with the target companies we’d like to invest in. That means we’re very organized internally in terms of where our highest priority targets are. We proactively develop relationships with these companies which often take many years. The expectation that you make a cold call to a company and you have a deal the next day is wrong. We’re 90-plus people, and many on our team are tasked with originating new investment opportunities. We’re also getting deal opportunities from bankers and other intermediaries who are representing companies.

AM&D: How do the target companies get on your radar?

JN: We know the supply chain from design and development all the way through the aftermarket, and we have a very good sense, on a global scale, of who the key players are. So, we’re constantly trying to stay in front of those opportunities in the themes we like. We depend on existing relationships and go to conferences. Sometimes it’s word of mouth or mutual relationships, but we work hard to develop these relationships to get in front of sellers.

AM&D: Are there any companies on your list of priorities?

JN: We love the aftermarket, so you’ll see a lot of exposure to aftermarket parts and services because they’re tied to the existing installed base, not new production. The aftermarket is strong because aircraft are continuing to fly for longer and require more products and services to support them over their 30+ year lives. We’re also looking for businesses with a high level of IP that develop sole-source positions on an airplane.

Business aviation is another major area of expertise for us. That market has been very healthy for the last decade and continues to be a very attractive place to invest. We own Yingling Aviation, which provides MRO and support services to the business aviation market.

AM&D: What’s the current state of M&A and how is that going to change in 2025?

JN: Deal making generally is good with strong strategic buyer interest. A high level of interest in M&A activity in aerospace is weighted to the aftermarket, given the struggles with the OEMs’ production and supply chains. With that said, there are more than 10,000 new aircraft in the backlog that are going to be built and delivered during the next decade. That creates opportunities for experts and specialist investors who understand the supply chain, understand where there’s value, and appreciate the backlog and built-in growth. It may be a little choppy for the next 12 to 24 months, but we think the long-term picture remains very strong. Investments in the production side today will benefit throughout the next 5 to 10 years. We’re also very active in space and defense technology, given the global national security threats, and what we think is going to be an increased focus on the highest technology priorities such as space, cyber security, autonomy, and artificial intelligence.

AM&D: Are you looking for opportunities in smaller and mid-size enterprises?

JN: Our focus is the middle market, so we’re looking at family and founder-owned businesses. Our investment approach is centered on accelerating organic growth and buying and building with strategic acquisitions. Our goal ultimately is to create an asset that’ll garner the attention of a strategic buyer.

AM&D: Where do you provide the most help in preparing companies to be more desirable?

JN: We begin with a vision of what we want to create in the investment platform, then we start building around that. For us to be successful, we have to think about what processes we must put in place such as the financial organization, branding, executive leadership, and business development strategy – so as we build, we have a strong foundation to support growth. We’re not unwinding what makes these companies great but instead helping them get better and putting all the processes in place so they can scale and grow aggressively.

AM&D: Is there any type of company in the space market that you’re seeking?

JN: Space is a core investment theme for us, as it’s a high growth, highly technical market. Our focus in space is around national security/defense applications more than commercial applications, but we like both. What SpaceX has done to enable more rapid access to space has transformed the marketplace and the development of a fast-growing new space economy estimated to grow beyond $1 trillion.

There’s also significant investment and innovation in support of national security priorities, and we’re quickly seeing the winners and losers being established. Some of the winners are large companies that have been strong in space for a long time, but we’re also seeing innovative new companies succeed. We own Firefly Aerospace, which provides launch vehicles and lunar landers and York Space Systems, which provides satellites and complete mission solutions. We also built Redwire, which makes what we call space infrastructure. They’re a vendor of technology and components for space missions and are rapidly expanding into multi-domain defense technology through their recently announced acquisition of Edge Autonomy which is also an AE Industrial portfolio company. Overall, we’re seeing innovation embraced and seeing a lot of new, proven technology win.

AE Industrial Partners
https://www.aeroequity.com

About the author: Eric Brothers is editor of GIE Media’s Manufacturing Group publications. He can be reached at 216.393.0228 or EBrothers@gie.net.