What was the mood among companies at the recent RBC Global Industrials Conference?
Vito Sperduto: I think clients felt good about their businesses. They felt like they had their house in order, and it was allowing them to think strategically about options.
Joshua Rosenbaum: There’s been significant progress since last year’s conference. We really didn’t have a functional LBO market a year ago; IPOs were hypothetical at best. No one’s ready to sound the all-clear today, but it does appear we’re at the onset of an easing cycle, coupled with healthy employment numbers, which is usually the recipe for a really good backdrop.
What are the features of the deals market now?
Rosenbaum: Today we have a vibrant M&A market. It’s still more a corporate environment than a private equity environment, but private equity is increasingly active.
Sperduto: The transactions we’re involved in today are generally transactions that have been going on for some time, that make good strategic sense. I’m not seeing people necessarily stepping out of their lanes; maybe we’ll see that change when people feel a bit more comfortable about the forward outlook.
Rosenbaum: Yes, there’s a green light for M&A, but it’s largely been in existing power lanes and near-neighbor adjacencies. In a similar vein, we’re seeing from large, diversified companies a continued trend towards portfolio simplification. Carrier streamlined its portfolio, Honeywell just announced the spin of their advanced materials business, Johnson Controls sold off sizable HVAC businesses.
How are different industrials sectors performing?
Rosenbaum: People in the construction-related sectors are very excited – this is the environment they’ve been waiting for. The flip side is that it takes a while for lower interest rates to trickle their way into the broader economy.
There’s been a big focus on defense, including next-generation technologies like autonomy, tactical communications and cybersecurity. The aftermarket for commercial aerospace has also been very strong after pent-up demand from the pandemic and limited ability for OEMs to increase production of new plans as a result of supply chain and other operational issues.
There’s been strong activity in services, especially where they touch upon secular themes related to sustainability, energy efficiency, water, infrastructure and technology. Diversified industrials have similar pockets of strength in secular winning categories, but many have also faced some headwinds related to global supply chain, de-stocking and higher rates crimping expenditure.
“People in the construction-related sectors are very excited – this is what they’ve been waiting for in terms of an easing cycle coupled with healthy employment levels.”
Joshua Rosenbaum, Global Head of Industrials, RBC Capital Markets
Are there signs of an LBO and IPO revival?
Rosenbaum: There is a functioning LBO market. Just in the past couple of weeks, we announced the take-private of Barnes Group for Apollo. We’ve also done LBO financings in the past few weeks for nVent and ArchKey.
While it’s a huge difference from last year, we are nowhere near the feeding frenzy of 2020 and 2021. There is private equity appetite, but it remains discerning.
Aerospace and defense has been a shining star in the IPO market. We’ve actually done two great IPOs in the sector, Loar and StandardAero.
Sperduto: It’s been great to see the market revive on the IPO side. StandardAero has had what I would call a very successful IPO so far. A shout out to our aerospace and defense franchise, which has been on 11 of the 14 equity offerings that have been done in the last two-and-a-half years.
Rosenbaum: In the rest of industrials, the market has been more muted. There is a real backlog forming. I think we are going to see much broader participation in the industrials IPO market heading into 2025.
“It’s been great to see the market revive on the IPO side – StandardAero has had a very successful IPO so far.”
Vito Sperduto, Head of RBC Capital Markets, U.S.
What’s the outlook for the U.S. election period and beyond?
Rosenbaum: If there is a deal where there are antitrust considerations, maybe you are waiting to see what happens after the election. Also, what tariffs may be put in place, how deep and broad they may go – for certain areas of industrials, that’s a big deal.
Sperduto: If you look at cash on balance sheets among S&P 500 companies, it’s now over 2x when you compare to the end of the global financial crisis in 2008. They’re sitting in a much better position from a leveraged perspective, cash on balance sheets, and so now it becomes a capital allocation question.
Rosenbaum: For larger deals in strategically important areas, I feel like the appetite is as strong as I’ve seen in the past 15 years. That long, dark shadow of the global financial crisis created a bit of a defensive mindset for M&A for a long time. No one is saying people should forget what happened during the GFC, but there is a bit of a different mindset now in industrials, which I think bodes well for increased M&A activity.
“For larger deals in strategically important areas, I feel like the corporate appetite is as strong as I’ve seen in the past 15 years.”
Joshua Rosenbaum, Global Head of Industrials, RBC Capital Markets