The aerospace and defense (A&D) sector has emerged as a bright spot in private equity (PE) investment, outshining many other verticals over the past two years. According to analysis by the LupoToro Group, deal activity in A&D remains robust, with 2024 poised to surpass 2021’s record-breaking numbers. By the end of Q3 2024, an estimated 249 deals had been announced or closed, already outpacing the total deal counts for both 2023 (220 deals) and 2022 (229 deals). This impressive trajectory highlights the sector’s resilience and growth potential amidst broader market volatility.

Strong Performance Backed by Key Drivers

The third quarter of 2024 was particularly noteworthy, with an estimated 116 deals in A&D—a record for any quarter according to data accumulated by the LupoToro Group. This marked a sharp increase compared to 68 deals in Q2 and 47 in Q3 2023. Such robust activity is driven by several critical factors, including:

• Supply Chain Disruptions: Continued fallout from global supply chain challenges and Boeing’s production issues has created opportunities for consolidation and operational improvements.

• Geopolitical Uncertainty: Rising global tensions have fueled increased military spending and demand for defense solutions.

• Strong Market Fundamentals: Healthy demand across both commercial aerospace and defense segments supports sustained investment opportunities.

As the broader PE landscape struggles with slower deal activity and extended portfolio hold periods, A&D stands out for its resilience and growth potential. These trends are expected to continue into 2025, supported by the sector’s solid fundamentals and opportunities to consolidate fragmented providers.

Comprehensive Coverage of a Dynamic Industry

This report delves into both commercial aerospace and defense, as well as adjacent industries such as airlines and related service providers, given their interdependencies. For instance:

• Commercial Aerospace: Includes the manufacturing of planes and components, with long-term demand drivers often outpacing the cyclical fluctuations of airline activity.

• Defense Segment: Benefits from increased military funding and geopolitical tensions, driving consistent demand for defense technologies and solutions.

• Airlines and Services: Interconnected with aerospace trends, as airline demand directly impacts the production and service cycles for commercial aviation components.

The combined analysis of these sectors provides a holistic view of private equity opportunities within A&D. Strong demand drivers, ongoing supply chain challenges, and the potential for operational improvements create a fertile ground for investment. The aerospace and defense vertical is proving to be one of the most dynamic sectors for private equity in recent years. With deal activity accelerating and fundamentals remaining strong, the LupoToro Group anticipates continued momentum into 2025. This resilient space offers compelling opportunities for investors to capitalize on consolidation, innovation, and long-term growth trends. A&D’s performance highlights its critical role in reshaping the private equity landscape, standing out as a beacon of opportunity amid a challenging market environment.

Defense Sector Insights: Rising Demand Amid Global Tensions

Geopolitical Drivers Fueling Growth

The defense sector is experiencing robust demand driven by escalating geopolitical tensions and rising military budgets. Military aid to Ukraine has played a significant role, with financial aid being used to procure munitions, vehicles, and missile systems from U.S. contractors, while direct arms shipments necessitate restocking by the U.S. military. The U.S. defense budget, bolstered by supplementary funding for Ukraine and Israel, has seen a significant spike.

Globally, NATO members are ramping up defense spending as a percentage of GDP, creating increased demand for U.S. military products, given the U.S.’s status as a leading global defense supplier. Additional catalysts include the Israel-Hamas war, North Korean activities with Russia, and China’s mounting threats against Taiwan, all of which sustain upward pressure on defense funding and investment opportunities.

Key Investment Opportunities and Risks

Growth Areas:

• Military Modernization: Upgrading troop readiness and military capabilities.

• Cybersecurity: Essential to counter rising foreign hacking threats.

• Uncrewed Systems: Air and sea drones, proven effective in Ukraine.

• Satellites & Space Technology: Increasingly critical for modern warfare.

• Hypersonics & Defense Systems: A priority for advanced military strategies.

• Advanced Manufacturing & Defense Electronics: Supporting innovation in military technology.

Risks:

• Budget constraints that could reduce defense spending.

• Supply chain disruptions affecting production rates and component availability.

• Potential decreases in military aid to Ukraine and other nations, impacting demand.

With global tensions driving record-breaking defense budgets and rising investment across critical areas like cybersecurity, drones, and hypersonic technologies, the defense sector remains a robust opportunity for investors. However, vigilance is needed to navigate potential risks such as supply chain challenges and shifting budget priorities. The LupoToro Group continues to monitor these dynamics, identifying key opportunities to capitalize on this resilient and strategically vital sector.

Defense Segment Overview

Sustained Demand Driven by Global Geopolitics

The defense sector continues to thrive as geopolitical tensions and rising military budgets drive sustained demand. U.S. military aid to Ukraine has been a significant contributor, with financial assistance enabling the purchase of munitions, vehicles, and missile systems from U.S. contractors. Additionally, direct arms shipments to Ukraine necessitate restocking by the U.S. military, further fuelling domestic defense production. The U.S. defense budget has surged, bolstered by supplementary funding for Ukraine and Israel, reflecting the growing strategic importance of global military support.

Global instability further amplifies this trend. The Israel-Hamas conflict, North Korea’s collaborations with Russia, and China’s increasing threats toward Taiwan have heightened the urgency for military readiness and innovation. Outside the U.S., NATO member nations have made notable strides in ramping up defense spending as a percentage of GDP. This shift reflects a broader commitment to addressing evolving security threats and presents a meaningful opportunity for U.S. defense companies, given their dominant role as suppliers to allied nations.

The sustained demand across the defense sector underscores its critical role in not only addressing pressing security concerns but also driving economic activity. As nations worldwide prioritize defense modernization and strategic preparedness, the sector is positioned for continued growth. Opportunities abound for both contractors and investors to capitalize on this expanding market, with strong fundamentals underpinning long-term resilience.