For some PE dealmakers in the space, the market’s supply chain hurdles are where the strongest investment opportunities lie. Manufacturers of the parts needed to build defense innovations are critical to the industrialization and scale of those technologies, and have therefore emerged as a space “ripe for PE dealmaking,” PitchBook’s report found. Sponsors capitalizing on this segment include Avem Partners, which acquired A&D fluid conveyance fittings manufacturer PAMCO in April, as well as H.I.G. Capital, which acquired A&D forged compo- nents manufacturer Premier Forge Group in June. Private equity firm Ventus Industrial Parters, which focuses exclu- sively on the national security space, has positioned supply chain and talent risk mitigation squarely within its investment thesis. In February, Ventus announced the formation of Aeron Defense through the combination of General Tool Company and Magna Machine Company. The platform, formed in partnership with GenNx360 Capital Partners and Admiralty Partners, aims to cre- ate a leading group of manufacturing partners for the U.S. defense sector to support intensifying production demand and help allevi- ate backlogs. When it comes to addressing the talent squeeze, Managing Partner Valerio Massimo di Roccasecca points to Ventus’ employee own- ership model as a key differentiator in the defense manufacturing sector, where he’s observed attrition rates as high as 20%. “We see high turnover in private companies as a potential opera- tional improvement given our model, and our focus on employee ownership is proving to be a strong competitive advantage,” he says. The firm’s investment thesis reflects what to many private equity firms is a more reliable strategy for defense M&A. While emerging
defense tech innovations (and their eye-wa- tering valuations) have captured headlines, experts note that these solutions will not be able to actualize their forecasted growth poten- tial without the ability to industrialize, scale capacity, and retain talent. That, some say, is where private equity can find its footing in the defense market. “One of the best things about defense is that investors don’t particularly need to be innova- tive,” says di Roccasecca. “There are so many mom-and-pop shops making critical compo- nents that could easily sell 2-3x more if they had the capacity to scale due to the underlying demand drivers. “There are certainly huge opportunities for investors within more innovative areas like autonomous vehicles and affordable mass drones, but that’s not the only way to generate an outsized return in this market.” //
CAROLYN VALLEJO is ACG’s senior editor.
ACG MAGAZINE
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