Todd Dauphinais is featured in the B-Side section of the May/June issue of Middle Market Growth.
Drawing on extensive corporate M&A and operating experience, Todd Dauphinais in 2014 launched Clavis Capital Partners, a Dallas-based investment firm that targets industrial-oriented companies. Last year Clavis invested in Solair Group, a provider of aftermarket maintenance and ground support equipment products to the aircraft and aerospace industry.
Dauphinais spoke with MMG about the aerospace and defense industry and his firm’s investment in Solair. Below is an edited and condensed version of the conversation.
MMG: Can you talk about your investment in Solair—how you found the company and why Clavis decided to invest?
Todd Dauphinais: I was introduced to the company by a broker. I happened to be in Tampa for a meeting about another company and I had a day to kill. Solair is based in Miami, and I had never driven down the Florida coastline and through the Everglades. It was almost on a whim that I decided, “Well, I’ll go check this out.”
I really didn’t have the intention of investing in the company at the time, but I got there and I met the team and I toured the facility and was really tremendously impressed with both the team and the maturity of their process.
The company has grown 30 percent per year for the last four years, so they really have outgrown themselves. They don’t have the deep bench of talent that they need and will have, and part of our investment thesis was that we can bring that to them. I can certainly help in terms of my operating and particularly my manufacturing experience. And most of my network and rolodex from my previous president/CEO days are operating-type people, so part of our value-add is to be able to bring not only different resources, like being able to recruit a CFO, but even the ability to help them think through and put in place a really good long-term strategy and play book that we’re going to follow.
MMG: When pursuing an investment in the aerospace and defense industry, did you come across diligence issues that were unlike those you’ve faced in other industries?
TD: One of the unique things about this space, depending on where in the value chain you’re playing—you’ve got two huge companies that are either customers or competitors, or some combination of both, in Airbus and Boeing, so that’s a bit of a different dynamic than exists in other industries.
What’s interesting about Solair is that Boeing and Airbus are both customers and competitors, so trying to get our head around that was probably the biggest challenge. We got very comfortable that Solair has a very unique offering and has some very unique capabilities that allow it to compete effectively against much bigger companies.
If it was playing in a slightly different part of the value chain, I think the regulatory component would have been a big issue. But because what Solair makes does not go on the airplane, it’s not subject to FAA regulation, so that wasn’t a huge issue for us. But if it was making components that actually go on the airplane, and therefore was playing a more critical part in the actual operations of flight, we probably would have had a bigger issue to get over in diligence on the regulatory side.
MMG: From your perspective, how large is the opportunity for investment in the aerospace and defense industry?
TD: I am a big fan of the entire space, now having spent some time with Solair. The macro trends around the aerospace sector are just very encouraging. Even through the recession, airline miles flown and takeoffs certainly did not decline at the same rate as the general economy and they proved to be incredibly resilient. In fact, our research said that really they had one down year in 2009 and then resumed an upward trend of growth, both in airline miles flown and in departures and landings.
As more people globally fly, the more the industry is going to continue to grow. We particularly like the maintenance side of the equation because it’s not something that’s going away. Airlines are going to continue to need to be maintained no matter what happens in the economy.
The whole ground support equipment sector and the maintenance tooling sector are incredibly interesting to us, but the overall industry is, we feel, in a long-term upward trend. It will certainly cycle as the business cycle does, but we feel like it will grow overall at a much faster rate than the overall business cycle, so we’re very bullish on the aerospace market as a whole.
MMG: How do outside forces—turmoil in the capital markets or in oil and gas, for example—impact a business like Solair?
TD: On the oil side, the drop in oil prices really benefits Solair’s customers pretty substantially in terms of lower fuel prices. I read somewhere that airlines are going to save somewhere in the neighborhood of $100 billion this year in fuel—I mean, that’s a staggering number.
So low oil prices clearly benefit airlines and give airlines more money to spend on capital products. Whether that’s new airplanes—both Boeing and Airbus have put out some pretty significant new orders—or (spending) on things like ground support equipment or maintenance tooling, etc., it gives our customers more money to go procure things, so that’s a good thing for us.
One of the beauties of the business (Solair) that we invested in is, whether or not oil goes up or down, whether or not capital markets go up or down, or become looser or tighten, airplanes still need to be maintained, and as a long as people keep flying and as long as air miles continue to show an upward trajectory, those airplanes must get maintained. A lot of that is regulated, and a lot of that is just wear and tear on the airplane, so even as new airplanes get put into the market, there are still decades before the fleet of 22,000 aircraft gets overturned.
We really aren’t terribly sensitive to oil prices or the cyclicality in the business cycle, and part of what we really liked about this business is it’s really not very cyclical, and there will continue to be demand for its products. No matter what the price of oil is or what the capital markets do, those aircraft are still going to need to be maintained. //