Investing in Aerospace & Defense: Strategic Insights

As global security challenges intensify and technological advances multiply, the Aerospace and Defense industry (A&D) offers strategic and resilient investment opportunities in the private sector.

In this article, we will explore strategic avenues for investors, guiding investors through the A&D sector's complexities, analyzing key opportunities, critical considerations, and emerging trends.

Introduction to A&D

The A&D industry plays a key role in shaping global security, technological advances and economic growth through its companies active in the construction of aircraft, spacecraft, weapons systems and related components. Valued at $884 billion in 2023, the industry is expected to reach $985.56 billion in 2024 and continue to grow at a compound annual growth rate (CAGR) of 8.2%, reaching $1.38 trillion in 2030. 

A number of key segments make up the space:

• Commercial Aviation - Includes private companies that design, manufacture and service commercial aircraft, helicopters, unmanned aerial vehicles, business jets, and personal aircraft. It represents the largest sub-segment, with a supply chain of over 20,000 companies, mostly small to medium-sized businesses.

• Military Aircraft - Encompasses combat and non-combat aircraft and related systems, such as fighter aircraft, patrol aircraft, helicopters, bombers, unmanned aerial vehicles (drones), and transporters.

• Space Systems - Includes satellites, space launch vehicles, spacecraft and ground systems for both commercial and government markets. The space industry has become one of the largest subsets of the A&D industry, accounting for $630 billion last year.

• Ground Defense - Provides ground-based systems and platforms for the armed forces, including tactical vehicles, tanks, personnel transports, communications and electronic systems, and high-powered personal armaments

• Shipbuilding - Comprises a small number of niche companies that design, develop, manufacture and service military seagoing vessels, such as amphibious assault vessels, aircraft carriers, cruisers, submarines, and destroyers.

The A&D sector serves as a pillar of global security and a catalyst for innovation. The companies develop highly complex systems, fueled by the latest technological breakthroughs, including artificial intelligence, quantum computing and sophisticated avionics, pushing back the boundaries of innovation. 

Global Demand Drivers

The global demand drivers for the A&D industry are primarily driven by technological advancements, shifting market trends, and evolving customer needs. Digitalization, in particular, is transforming every aspect of the sector, from R&D to production, supply chain, and service. At the core lies the adoption of advanced technologies such as artificial intelligence, blockchain and the Internet of Things (IoT).

Sustainability is also at the heart of the industry's evolution, namely decarbonization. This includes the development of alternative fuels, such as Sustainable Aviation Fuels (SAF), and the integration of green energy into manufacturing processes. 

Finally, a special mention must go to the fantastic boom in the space market, which we’ll be looking at in a moment. All these drivers are expected to continue shaping the A&D industry's growth and development in the coming years, with a focus on innovation, agility, and digitalization.

Investment Opportunities in Aerospace & Defense 

The A&D industry is highly concentrated, with a few large firms dominating production and pricing dynamics - Lockheed Martin and Boeing control altogether 37.32% of the market. However, many rising actors in A&D subsets are leveraging new technologies to create competitive advantages and capture market shares. Below are some examples:

• Commercial Aviation - Example: Boom Supersonic

  • Boom Supersonic focuses on developing supersonic passenger jets, leveraging advanced materials and aerodynamic designs. Their Overture aircraft aims to fly at Mach 2.2, significantly reducing flight times and offering a sustainable, net-zero carbon travel option.

• Defense Systems - Example: Palantir Technologies

  • Palantir Technologies specializes in data analytics and AI for defense applications. Their platforms, Gotham and Foundry, enhance decision-making and operational efficiency in intelligence, logistics, and mission planning, challenging traditional defense contractors.

These emerging companies are driving innovation in areas such as autonomous systems, artificial intelligence, and advanced materials. In our view, the ones adopting agile practices and focusing on niche markets can disrupt traditional models and contribute to the industry's dynamic evolution. 

Focus on Space: A Booming Subset

The space subset of the A&D sector is experiencing a true renaissance, fueled by both government and private sector investments. Satellite services, launch capabilities, space exploration, and related infrastructure are projected to reach new heights in the coming decades.

• Satellite Industry - Satellites play a critical role in global communications, navigation, and Earth observation. The miniaturization of satellite technology has led to the proliferation of small satellites (smallsats) and constellations, significantly reducing launch costs and opening up new market segments. 

• Space Launch Services - Private companies like SpaceX and Blue Origin have revolutionized space access with reusable launch vehicles, presenting opportunities in launch services and propulsion technologies.

• Space Exploration and Tourism - NASA’s Artemis program and the emergence of space tourism, led by companies like Virgin Galactic, offer exciting investment prospects in spacecraft design, lunar landers, and tourism services.

• Space Infrastructure and Services - The expanding scope of human activities in space necessitates infrastructure development, including space habitats, in-orbit servicing, and space debris management. Investment opportunities also exist in spaceports and ground-based infrastructure.

• New Business Models - Innovative business models such as space-based manufacturing, asteroid mining, and space data services hold transformative potential and significant returns for early investors.

Key private players in A&D

Given the concentration of the private A&D space, identifying the right private players can be challenging. We believe the following to hold the most potential: 

• SpaceX - Founded in 2002, SpaceX offers a unique opportunity to join a company leading the way in space exploration and innovation. With a focus on reducing the cost of space travel and enabling human settlement on Mars, SpaceX has gained global acclaim for successful launches, reusable rocket technology, and bold plans for future missions. The company is currently valued at $180 billion.

• Anduril - Founded in 2017, Anduril Industries is a standout investment opportunity in defense technology. Specializing in AI, autonomous systems, and cloud computing, Anduril has reshaped the defense industry with its Silicon Valley approach. With competitive pricing and advanced technologies, Anduril has secured significant contracts, raising $2.3 billion in funding and achieving a $10 billion valuation.

• Shield AI - Founded in 2015, Shield AI offers a compelling investment opportunity in autonomous aircraft and intelligent systems. Shield AI's innovative approach has driven significant revenue growth, reaching an estimated $165 million in 2023, up 94% from the previous year. The company's recent $200 million Series F funding round values Shield AI at $2.7 billion, underscoring its potential in the rapidly evolving field of autonomous aviation and defense technology. 

Emerging Trends and Strategic Insights

As we saw, the A&D sector is experiencing a major transformation. According to a very insightful report by Deloitte, heightened demand from both defense and commercial markets could significantly bolster revenue streams for A&D firms in 2024. In their view, in order to seize the potential growth opportunities within the industry, A&D companies may consider strategic positioning in the following key areas:

• Meeting evolving customer demands - With an increasing array of needs, A&D companies must demonstrate agility and innovation while maintaining their commitment to delivering high-quality products and services.

• Embracing technological innovation - Leading A&D firms will prioritize staying ahead of the curve in technological advancements to retain a competitive edge, optimize business processes, and attract top talent.

• Strengthening cyber resilience - As digital interconnectedness within the A&D industry grows, so does the risk of cyberattacks. Establishing a robust security culture and investing in cyber resilience measures will be essential for safeguarding against potential threats and ensuring a secure digital future.

Government Policies Impact

We cannot conclude without mentioning the direct impact that government policies have on the market, such as:

• Federal Spending and Initiatives - The U.S. Department of Defense’s (DOD) budget has grown substantially over the past decade, increasing from $560 billion in 2015 to $842 billion in 2024. This increase in defense spending is consistent with global trends, with global defense spending projected to reach $2.5 trillion by 2027.

• CHIPS and Science Act - The CHIPS and Science Act, passed in 2022, is another significant policy that is set to impact the A&D industry, aimed to accelerate the development and manufacturing of semiconductors and other technologies critical to the industry.

• Export Regulations - Export regulations, such as the International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and Defense Federal Acquisition Regulations (DFAR), govern the export and import of defense-related articles and services. These regulations ensure that sensitive technologies and materials are not exported to unauthorized countries or used for unauthorized purposes.

• Cybersecurity Standards - Cybersecurity standards, such as those developed by the National Institute of Standards and Technology (NIST), are essential for protecting the industry's sensitive information and systems from cyber threats.

Conclusion

The A&D sector undoubtedly harbors some of the most compelling investment opportunities today. It acts as a real catalyst for the latest technological advances, while offering a unique resilience compared with most sectors. However, navigating this industry is highly complex and therefore requires a great deal of expertise, which can have an impact on operations and profitability.

At Acquinox Capital, the A&D sector, and particularly the space industry, is a major focus of our investment strategy. Our team has a deep understanding of the dynamics of the sector and a track record of success, enabling us to guide our clients to capitalize on lucrative opportunities.