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Deal focus: CX Partners enters India’s burgeoning aerospace sector

India’s CX Partners has backed aircraft parts supplier JJG Aero amidst intense industry scrutiny and a crisis of confidence in Boeing. The thesis is about process and professionalism, not product per se 

Ever since one of Boeing’s 737 Max jets experienced a terrifying cabin panel blowout, grounding an Alaska Airlines flight last January, the aerospace giant and its parts suppliers have been in crisis mode. As Indian private equity firm CX Partners has discovered, this has applied to some more than others.

CX was in the thick of due diligence on India-based JJG Aero, a seating and landing gear supplier a couple links down Boeing’s supply chain. As the aircraft maker’s most direct, North America-based suppliers have scrambled to shore up quality, they’ve reassessed their downstream partners, looking to strengthen ties with the best subassembly players. JJG has been enjoying the attention.

“What went wrong with Boeing was the fuselage panel and the bolting on these not being done per SOP [safe operating procedures]. These are not high-tech components, but they are exactly the kind of stuff you need to document,” said Vivek Chhachhi, a managing partner at CX, who is joining the JJG board.

“Given the fact that JJG has a reputation of following SOPs, keeping records, and therefore not screwing up on what is seen as relatively lower tech, I think they’ll benefit.”

Boeing represents less than 15% of JJG’s revenue, but the relationship appears likely to deepen as the Indian company doubles down on key relationships in aerospace. A separate automotive business line serving the likes of Rolls Royce will be relatively deprioritized as India’s aviation industry snowballs global clout.

CX invested USD 12m in JJG this week, taking a significant minority stake in a smaller-than-average deal for the lower middle market investor. It typically writes cheques in a range of USD 40m-USD 50m, taking control positions across healthcare, financials, consumer, manufacturing, and outsourced services.

The PE firm is investing via is second fund, which closed on USD 300m in 2018; it currently claims USD 625m in assets under management. Fund II is now almost fully deployed, with one healthcare deal pending. Fund III has been launched, reportedly targeting USD 300m.

CX is going smaller than usual with JJG because, in addition to this being its first aerospace investment, it sees an unusual opportunity to access a business with the potential to grow revenue organically by 5x to USD 85m in the next four years.

The projected growth is underpinned by a base case scenario around simple parts supply. JJG specialises in small fittings and fasteners mostly under 1kg in weight, components destined to be part of larger assemblies. In addition to landing gear and seating, they are used in electrical and fluid systems. Expanding into more complex engine parts is part of a longer-term upside scenario beyond the 5x growth plan.

“There is no hero product. There are 900 products. What’s most important is how they manage the inventory, on-time delivery, and documentation – not so much the complexity of the parts they make. Technology is not a huge differentiator and therefore risk,” Chhachhi said.

“So, we can just enjoy a focus on customer service, getting it right each time, maintaining proper documentation, and delivering the right quality at the right price on the scheduled time. That’s a culture issue. We can underwrite that.”

Behind everything is an aerospace sector booming on the back of government encouragement for export-oriented precision manufacturing and domestic civilian aircraft production, as well as the establishment of India as a bona fide space power.

Recent private equity activity in the aircraft parts manufacturing segment alone includes a USD 54m round for Aequs and seed rounds for Jeh Aerospace and Redwing Aerospace Labs. In the past four years, India’s space-tech scene has grown from fewer than 10 to almost 200 start-ups.

As the capital and optimism pour in, so will the risk of paying too much for hyped assets. But Chhachhi takes comfort in the industry’s quality customer base and long sales cycles, which can span up to eight years in some cases.

“It’s going to be competitive, but they don’t have to worry about renegotiation and pricing pressure every year,” he said. “That’s something we watch like a hawk going into a B2B manufacturing business. In this case, I think we’re safe.”