D emand is not the problem in the A&D supply chain sector. With a record U.S. defense budget of $1.5 trillion pro- posed for 2027 and a nearly $1.36 trillion backlog at the five largest U.S. A&D con- tractors, the only question is if produc- tion can keep up. The A&D supply chain has strengthened since COVID, when supply chains for sev- eral industries were stretched to their breaking point and many a weak link
That combination of scarce capacity and secular demand is a powerful tailwind. The supply chain is stretched, but fundamentally healthy.
ADAM OAKLEY | Senior Managing Director and Co-head of Investment Banking, Mesirow
snapped. Since, those critical links have become lucrative investment points, and dealmakers are paying attention: Recent deals span strategic roll- ups, like Arxis acquiring both Omnetics, a designer and manufacturer of connectors and intercon- nect assemblies used in A&D applications, and MagCanica, a designer and manufacturer of torque sensors for extreme conditions; to platform acqui- sitions, like Altair Industries’ acquisition of Central Wire Industries, a manufacturer of specialty wire and cable products with customers across the A&D supply chain. Matteo Peraldo, partner and managing director at AlixPartners, notes that on his recent visit to the
Though the supply chain is no longer as fragile as it was in the immediate aftermath of COVID, bottlenecks persist. On the aerospace side, experts say those bot- tlenecks include skilled labor shortages and manufacturing constraints, particularly around engines, castings, and forgings. Weak points in the supply chain often come down to a single supplier—the only one capable of producing critical components. “A lot of original equipment manufacturers have been aggressively pushing for dual sourc- ing and risk reduction, but the risk still remains in the supply chain,” says Peraldo. However, sentiment across the A&D supply chain is overwhelmingly positive as investments in improved capacity made two or three years ago have finally come fully online, per Peraldo. “What we see now is the result of the effort of the past few years in rebuilding the capacity that got lost during COVID.” Adam Oakley, senior managing director and co-head of investment banking at Mesirow, says that the still-rebuilding capacity and record commercial backlogs at Boeing and Airbus are driving increased aerospace deal activity. Those factors, along with the accelerating demand on the defense side, make the team at Mesirow as “bullish as they’ve been in years.” “That combination of scarce capacity and sec- ular demand is a powerful tailwind,” he says. “The supply chain is stretched but fundamen- tally healthy.”
Farnborough International Airshow, supply chain sentiment was overwhelmingly, and surprisingly, positive. “For the first time, peo- ple were not complaining—or were complaining a lot less—about the supply chain,” he says. “Crisis was no longer the main topic of discussion, which bodes well for the future.” A Stressed, but “Fundamentally Healthy” Supply Chain The demand placed on A&D suppliers is multi-pronged and global. Consumer appetite for air travel is expected to remain strong despite periodic recession fears. The space subsector, long quiet, has been especially active in recent years with global geopolitical conflict projected to drive demand for satellite defense systems. Defense spending is up globally, and no longer just concentrated in the U.S., according to Toby Albright, managing director of Aerospace, Defense and Government Services at investment bank D.A. Davidson. “We’re in a historic period for global defense with the U.S. and other NATO members looking to increase their defense spending,” he says.
ACG MAGAZINE
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