🔒$1.8B Kaman Corp. deal reflects private equity’s growing interest in CT manufacturers

Connecticut manufacturers have become hot targets for one of the most aggressive capital investors in recent years: private equity firms.

The latest and most high-profile example is Nashville, Tennessee-based private equity firm Arcline Investment Management L.P. announcing plans to acquire publicly traded Bloomfield aerospace and defense manufacturer Kaman Corp. for $1.8 billion.

The deal, which still requires shareholder and regulatory approvals, comes as Kaman has been undergoing a major restructuring to focus on new products, like its unmanned aerial vehicle technology, and away from its long-established joint fuze program it supported through U.S. military contracts.

Other Connecticut manufacturers have also been targeted by private equity investors in the past year.

Waterbury contract manufacturer GEM Manufacturing, which serves the aerospace and other industries, was acquired in February 2023 by Chicago-based CORE Industrial Partners. A few months later, GEM, backed by Core Industrial, acquired two New Jersey companies that produce complex precision components for the aerospace, defense and other industries.

In March, Oxford chemicals manufacturer Catachem Inc. was acquired by Dallas private equity firm Generational Equity. In January, Bristol-based Barnes Group said it agreed to sell two of its business units for $175 million to private equity firm One Equity Partners.

According to accounting and advisory firm KPMG’s “Aerospace & Defense M&A 2023” report, private equity investors have “dominated” the buy-side of aerospace and defense deals since the pandemic.

Private equity buyers accounted for 41.7% of merger-and-acquisition activity in the defense and aerospace industries from 2020 to 2022, according to the report, up from 33.5% between 2013 and 2019.

“There’s been a lot of private equity acquiring mid- and larger-size companies here in the state — manufacturing primarily,” said Connecticut Business & Industry Association President & CEO Chris DiPentima, who is a former manufacturing executive. “There continues to be a lot of interest from private equity as well as strategic buyers, because the manufacturers we have in the state are true gems at the global level.”

$850B in capital

Private equity firms are always searching for middle-market companies that have strong financials, dedicated management and great growth prospects, said Ramsey W. Goodrich, managing partner of Southport investment banking firm Carter Morse & Goodrich, whose firm represented Gem Manufacturing in its deal last year.

Private equity firms are sitting on more than $850 billion in capital they’re looking to deploy, Goodrich said, “so demand for great companies will absolutely continue for a long, long time.”

However, the last 18 months have been challenging as rising interest rates have eaten into company cash flows and caused banks and other lenders to tighten credit availability.

“We are seeing that banks are starting to lend again, so that is a great sign — both for M&A markets and for operating companies looking for growth,” Goodrich said.

Paul Lavoie, Connecticut’s chief manufacturing officer, said anecdotally he’s heard firsthand from private equity firms interested in getting into Connecticut’s manufacturing market if opportunities arise.

He pointed to another recent deal: The acquisition of Connecticut manufacturers Whitcraft Group and Paradigm Precision by private equity firms Clayton, Dubilier & Rice and Greenbriar Equity Group. Whitcraft and Paradigm have since combined into a new company, Pursuit Aerospace.

Lavoie said these deals make sense because the aerospace and defense industry is capital intensive and the back-office functions at smaller manufacturers are duplicative.

“So, if I can take three or four companies and roll them up into one back office, but still have the manufacturing facilities, it frees up a lot of cash to invest in those facilities,” Lavoie said.

DiPentima said private equity firms offer publicly traded companies faster growth opportunities because they have fewer obligations and less strict guidelines for federal compliance, accounting and reporting.

“You often see that with private equity, the growth can happen quicker, and you could just be a little bit more nimble to pivot should an opportunity develop, or a headwind develop down the road,” DiPentima said. “When you’re not a publicly traded company, you don’t have to worry as much about the investor-shareholder return as you do about just getting the growth that private equity likes to see.”

Goodrich said many private equity funds traditionally deliver better returns that outperform the stock market.

“As a result, institutional investors continue to fund these private equity funds with more and more capital,” he said.

Kaman moving forward

Kaman Corp. was founded in 1945 by aeronautical engineer, business executive and philanthropist Charles H. Kaman, who pioneered rotary-winged flight. The company has gone through many changes throughout its history, including, at one point, making and selling Ovation guitars and other musical instruments (Charles Kaman was a guitar enthusiast).

Today, Kaman makes a variety of proprietary parts and components for the aerospace, defense, medical and industrial markets.

Its engineered products division, for example, makes aircraft bearings and springs, while its precision products unit focuses on helicopter work. It also makes medical device components.

In the last few decades, Kaman was perhaps best known for its heavy-lift K-MAX manned helicopter, which has been used by the U.S. military.

However, the company has been undergoing a major strategic shift, part of what CEO and Chairman Ian Walsh called a five-year transition plan, which hasn’t come without challenges.

Kaman has missed financial targets in recent years, and cut some staff. It previously announced plans to close a manufacturing plant in Orlando, Florida.

The restructuring includes winding down a long-established joint fuze program, which, at its peak, accounted for one-third of Kaman’s annual profit. The company lost out on a U.S. military contract to make the next generation of fuzes, which allow pilots to program weapons while in flight.

Kaman is also discontinuing production of K-Max helicopters due to lackluster sales and limited profitability.

Instead, it’s focusing on the development of the KARGO UAV, an unmanned aerial vehicle that can lift loads of up to 800 pounds.

Walsh told the Hartford Business Journal in December 2022 that the UAV has potential across a plethora of U.S. military and commercial markets.

“Strategically, what we’ve done is get out of the older programs that were relatively unprofitable, to win more profitable and complicated programs that have higher margins,” Walsh said at the time. “We really feel our strength and our future is going to be in the unmanned space.”

Kaman’s future parent company, Arcline, said it has $8.9 billion in cumulative capital commitments with offices in New York, Nashville and San Francisco. The company’s portfolio includes a half-dozen aerospace and defense companies, but none in Connecticut.

DiPentima said the acquisition could help grow Kaman’s local employment levels and revenue, since large private equity firms like Arcline have access to capital that can fund expansions and research and development.

However, private equity firms are also known to look for ways to cut costs, potentially in areas like back-office operations.

Kaman employed just over 1,000 people in Connecticut as of 2022, according to HBJ’s Book of Lists. In its 2022 annual report, the company reported 3,063 total employees, 73% of whom were in the U.S.

DiPentima said he expects to see a more flexible and “nimble” Kaman that reacts quicker to industry changes and trends, without having to answer to shareholders and public company regulators.

“Talking to (Kaman CEO Walsh) and the team over there, I think this is a great acquisition and transaction for Connecticut,” DiPentima said. “Arcline is really a high-growth-oriented group, so I think that’s going to spur a lot of investment into the Kaman facilities here in Connecticut.”

Lavoie said private capital could also help Kaman “significantly shorten the timetables to get new products to market.”

Representatives from Kaman and Arcline declined to comment for this story. When announcing the deal, Arcline said it will work closely with Walsh and his team “to drive further growth through accelerated investments in both new product development and strategic acquisitions.”