Are There BizAv Opportunities for Private Equity Firms?

While the coronavirus-induced lockdown has had an unprecedented toll on Business Aviation, there could yet be opportunities for private equity in a sector that still has a promising long-term future, according to industry analysts.

Such investors are likely to move with caution, however. Any deals that were in progress pre-virus are now likely to have been put on hold, aviation analyst and consultant Brian Foley notes. Investors will want to reassess company valuations and reopen discussions on any agreements, which could be a lengthy process. “It will be difficult to forecast any company’s revenues for the rest of this year and next year,” Foley says.

Before the virus there was “pretty robust” interest from private equity and other investors in Business Aviation-focused companies, including “what would have been fairly high-profile transactions, had they gone forward”, he reflects. These covered various aspects of Business Aviation, from manufacturers to Fixed-Base Operators (FBOs) and Maintenance, Repair and Overhaul (MRO) specialists.

When the coronavirus and the subsequent lockdowns sparked a rout in global stock markets, Foley expected this private equity interest to simply vanish. So, he was surprised to find that while “a few of them are putting out brushfires in their own portfolios, attending to their own emergencies”, the investors in general remained open to potential deals.

Foley has even had one company come to him during lockdown and ask for his help in finding a buyer, “and we can still do that, because investors are still interested”. That’s not to say the picture is rosy, Foley stresses. “Most things are paused right now as people recalibrate the valuation of companies in the future.”

The Dust is Still Settling

The overall picture remains unclear. Sales of new aircraft – which are closely tied to overall economic activity – are likely to face a highly challenging 2020, says Adam Cowburn, managing director of Alton Aviation Consultancy.

In the pre-owned market, his company is hearing of increased interest from cash-rich buyers, but it is unclear whether this is a sustainable or substantial trend.

“Similarly on the MRO side, there has been a short-term burst of activity as operators take advantage of downtime to address maintenance items,” he adds. “If the economic recovery comes slowly, aircraft replacement cycles may also slow down, which could keep older business aircraft in service and support MRO demand.”

Prior to the pandemic, private equity firms were particularly interested in such companies, along with FBOs, aerospace suppliers to the Business Aviation OEMs, aircraft financiers and other niche service providers, Cowburn continues.

These sectors presented acquisition opportunities with strong and predictable cashflows, favourable growth prospects, and a defensible competitive position. These positives remain in place, he notes. “We expect those same sectors of the market that were attractive prior to COVID-19 will again be attractive now – private equity firms are hoping that the universe of receptive targets will expand, and seller valuation expectations will reset to more palatable levels.”

Internal Markets, Then International Business

The global lockdown is unchartered territory for business as a whole, not just Business Aviation. It is impossible to know what long-term impact it will have on the sector down the line, and this could make it difficult for private equity investors to arrive at valuations of particular companies.

The picture is likely to become clearer in internal markets ahead of the international business, says Bob Mann, president of R.W. Mann & Company, an aviation consultancy. Internal markets – such as the domestic US – will have a common strategy for relaxing stay-at-home orders.

International activity will depend on concurrence between bilateral parties and in some cases multilateral agreements on travel by foreign nationals, over such matters as demands for quarantine. This could have implications for private equity investors, Mann adds, as “a lot of the value is in the longer-haul journeys”.

While Business Aviation has clearly been significantly impacted by the lockdowns, Mann believes there are still long-term reasons for optimism, which is likely to keep investors interested in the sector. There has been a shift over more than a decade of premium-class travel from the Scheduled Airlines to Business Aviation, providing significant time savings for executives and other users.

Mann believes that Business Aviation will provide more opportunity for private equity investors in the long run, thanks to the appeal to high net worth individuals of a more point-to-point system, rather than a hub-and-spoke approach.

“One thing you can never do in the [hub-and-spoke] model is get people’s time back,” he said. “In the long term, Business Aviation – whether piloted as it is today or even autonomous as it may be decades from now – is a space that’s going to be highly valuable.”

‘Conviction’ – The Recurring Theme

Cowburn says there is one recurring theme in all of the conversations his company is having with private equity clients: conviction. No one has any degree of confidence in where the market is going, when it might hit the bottom, or how it could climb out from there.

Until investors see a clear and sustainable trajectory out of the current situation – which will likely rely on political and epidemiological outcomes rather than economics – most private equity firms are likely to study the market cautiously from the side-lines for the next several months.

“Traditional private equity firms are not in the business of ‘catching a falling knife’”, he concludes. “They would rather wait until there is a clear bottom of the market – even if that means missing out on some early upside – rather than mistime their entry into the market and watch an investment plummet in value in its early days.”

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