KKR Acquires Military Contractor Novaria Group

The private equity firm is purchasing an aerospace manufacturer to amp up its defense assets.

KKR announced Monday that it is acquiring Novaria Group, a manufacturer of aerospace products, from Rosewood Private Investments and Tailwind Advisors in a late-in-the-credit-cycle move to build up its defense portfolio at a time when military budgets are skyrocketing.

Few details of the transaction have been released. The deal is expected to close in the first quarter of 2020, subject to regulatory approvals, including clearance from the Committee on Foreign Investment in the US. Kirkland & Ellis, Deloitte, and AeroDynamic Advisory were advisors.

The deal comes at a time that the Trump administration is pumping up military spending. The 2020 defense budget is $738 billion, an increase of 3% from the previous year. While Trump’s foreign policy has limited military engagements overseas, the Pentagon has identified areas where the US military will be active, including efforts to oppose potential challenges from Russia and China.

The defense industry is highly regulated, but not at all transparent. As private equity is increasingly scrutinized and the economy slows, firms like KKR may seek shelter in more certain investments. The deal could be a hedge in a playing field that is somewhat limited amid stable, lucrative contracts.

“When you invest in certain industries, particularly industries that are suppliers to the US military or are related to critical infrastructure, the field of competitors gets narrower,” said Eric Talley, professor of law at Columbia Law School and co-director of the Millstein Center for Global Markets and Corporate Ownership. “The defense industry has not incurred significant reductions in its own budgets and that is likely to continue. The military is one part of the federal government that never gets reduced. It only gets increased.”  

KKR is well-positioned for lucrative government contracts from a Republican administration. Of the $2.7 million in political contributions during the 2016 election cycle, KKR’s top four donations primarily went to Republicans. The firm gave $993,007 to the Republican National Committee, $663,461 to the Right to Rise USA, a GOP-oriented super-PAC, and $150,100 to the National Republican Congressional Committee. The firm donated $115,550 to DNC Services Corp. Sixty percent of all 2016 contributions went to Republicans.

KKR’s assets under management in the third quarter were $208 billion, according to Q3 earnings results. Net income was $249 million, down 60% from the year-before period. The company attributed the slump to fewer holdings being sold, and predicted net income would pick up.  In the deal announcement, KKR touted Novaria’s “employee ownership and engagement model,” which will allow executives and non-executives to take equity stakes in the surviving entity.

Novaria manufactures complex engine parts, such as brackets and fasteners that are used in defense and industrials. Based in Fort Worth, Texas, the company supplies these components for the defense industry. In 2011, CEO Bryan Perkins founded the firm with the intent to make the aerospace supply chain more efficient with an emphasis on more streamlined technology. The company serves 500 customers.

Rosewood Private Investments and Tailwind Advisers of Forth Worth supplied the funding that founded the firm, which acquired Weatherford Aerospace, a chemical treatment and machining firm that produces equipment for airframes, in 2014 and Fitz Aerospace. In 2015, Novaria acquired John Hassall, a Long Island, New York, manufacturer of engine fasteners, bolts, blade locks, and other hardware.

The deal is occurring amid the late stages of a credit cycle. “We’ve had this unbelievable economic expansion for over a decade, so it’s not unusual for investors to be looking at more unusual sectors,” said Mayra Rodriguez Valladares, a bank regulatory and capital markets consultant in New York, referring to hospitals and private prisons.

For private equity, the Department of Defense is a safe, opaque bet. “It’s incredible how little we know of how Department of Defense decisions are made and how funds are channeled,” said Rodriguez Valladares.




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