34 Aviation Business Journal | Fall 2020 Cash Flow Continued from page 33 I n recent years, the general aviation industry has been roiled by merger and acquisition (M&A) activ- ity, which has seen such iconic fixed base operators (FBOs) as Signature Flight Support and Atlantic Aviation change ownership through mega-billion-dollar deals financed primarily by private equity investor organiza- tions. But do deals of this magnitude represent the future of the general aviation industry, in which private equity companies will predominate, or are they more indicative of “striking while the iron is hot” at a time when a global pandemic has given general aviation a tailwind? To begin to answer that question, it is helpful to have some idea of how private equity investors work. According to Adam Guthorn, Managing Director of Alton Aviation Consultancy in New York, private equity investors normally prefer to invest in established and stable cash-flow generating businesses that have predict- able revenue streams. “Ideally that would be in underly- ing markets that are growing at a healthy rate,” he explained. Along with that, investors generally want to understand company positioning, market dynamics, growth prospects, and exit considerations. For com- pany positioning, investors seek to understand what Guthorn terms an acquisition tar- get’s “moat,” or how easy or difficult it would be for another player to disrupt that position and steal market share. “Ideally the company is positioned in a large and stable market that is growing in a predictable fashion,” Guthorn noted. “For many companies in business avia- tion, growth has been highly correlated with some com- bination of gross domestic product (GDP), equity market performance, and the number and aggregate wealth of high-net worth individuals.” Interestingly, said Guthorn, a declining market is not necessarily a “deal breaker” if investors can convince themselves that a target is well-positioned to be one of the last players standing in a market that may otherwise have positive attributes, such as increasing pricing power for the remaining players. “Organic growth—by riding the wave of a growing market—is one path to increas- ing a company’s value, but investors want to understand the inorganic paths to growth as well,” he noted. “That includes other acquisitions that can be bolted on to strengthen existing market position or to expand the breadth or reach of offerings.” Most private equity investors, Guthorn pointed out, are focused on a typical five- to seven-year hold period for their investment, but are also concerned about longer-term trends that may impact a future buyer’s view of the business when it comes time to exit. “Investors want to ensure that whatever they are buying, managing, enhancing, and possibly merging with other targets over time is sufficiently attractive to some future owner of the business, whether they are another financial investor or a strategic investor from industry,” Guthorn said. In aviation, he noted, private equity has been par- ticularly interested in FBOs; maintenance, repair and overhaul (MROs); and specialty manufacturing. “They exhibit the key characteristics sought by private equity, specifically defensible moats in growing markets,” he explained. “On the other hand, the charter, fractional, jet card markets are highly fragmented with low barriers to entry and no player has more than a 10% share of total flying hours. Accordingly, that space has failed to attract significant attention from most private equity firms.” In fact, the growth of the general aviation industry has been generally positive over a long timeframe. As Guthorn reported, from 2009—the end of the worst of “Private equity and infrastructure investors are turning their attention to business aviation given there is a compelling customer value proposition, strong long-term growth fundamentals, and declining barriers to entry.” $
