Content Published Last Week

1. IP RESEARCH: Boeing, TransDigm & Commercial Aerospace: An Inverted Pyramid

2. Jet Parts Engineering, HEICO, & PMA Growth Opportunity

3. The Trade Desk: CTV Ecosystem, Netflix Ads, & Programmatic Buying

4. LGI Homes: Understanding Land Acquisition

5. Instalco, Bravida & Nordic Installation M&A

6. Brookfield Renewable: M&A Culture & Transaction Structures

7. Litigation Funding: Law Firm Contingency Fees, and WIP & ATE Insurance

8. ADESA, Manheim, & US Wholesale Auto Auctions

9. Carvana vs CarMax: Comparing Operating Models

10. Fortinet: GTM Structure, SD-WAN & SASE

Boeing, TransDigm & Commercial Aerospace: An Inverted Pyramid

This quote from one of our earliest interviews with a Former VP at TransDigm has stuck with us:

The supply chain in aerospace is actually an inverted pyramid. I recall this from early on in my career, when I was working with one of our legal partners. She said, really, aerospace contracts are an enigma to me. The way they’re written, basically, the supplier seems to be an indentured servant to the OEM. But yet, the supplier is the one that holds all the cards in the agreement so you almost want to be that indentured servant, because the OEM can’t get rid of you. - Former VP at TransDigm

The commercial aerospace value chain operates as an inverted pyramid: airframers design and certify the aircraft yet have increasingly relied on OEM suppliers to design and manufacture the parts to meet its type certification. The certification process inverts the bargaining power in the value chain: once a supplier is on a platform, it’s uneconomical to re-certify the parts to substitute the supplier. This supplier bargaining power is illustrated in higher, more consistent EBIT margins than airframers.

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As part of our recent work on TDG and HEI, this analysis shares a brief history of the commercial aerospace value chain as context to why OEM suppliers like TransDigm potentially enjoy pricing power across the aftermarket.

Jet Parts Engineering, HEICO, & PMA Growth Opportunity

A Former EVP at Jet Parts Engineering, a smaller PMA competitor to HEI, explores how JPE scaled its PMA portfolio and the potential risk of competent airline MRO shops insourcing PMA production:

Anecdotally, airlines in the Middle East have told me that leasing companies have no issue with Lufthansa's owner-operator part on their airplane due to its high-quality reputation. However, they don't want the PMAs. They believe they can do it themselves. Lufthansa Technik is a prime example. They don't want to buy a PMA company because they think they can have their own EPA company, which started as their own owner-operator system. - Former Director at Boeing & Jet Parts Engineering

It’s unclear what percentage of Lufthansa Technik’s reported revenue is from PMAs, but it seems the company is increasingly insourcing PMA production for lower-value, commoditised parts. Given airlines have owner-operator licenses, it’s possible to manufacture parts for their own fleet. If these parts meet quality and performance metrics, they can apply for an EPA / PMA to sell to third-parties. Given Lufthansa Technik and Delta TechOps’ scale and ambition, maybe airlines will think twice about which parts to insource vs partner with PMA shops? This is a potential risk to HEI that we plan to explore in the coming months.

The Trade Desk: CTV Ecosystem, Netflix Ads, & Programmatic Buying

The CTV ecosystem is undergoing significant changes with the deprecation of cookies and DTC streaming players adopting AVOD. In an interview with a large CTV media buyer, we explore the current state of the ecosystem, the opportunities for TTD, NFLX, AMZN, and DIS, and how CTV economics may evolve.

What I'm uncertain about OpenPath is whether it only supports The Trade Desk, which I believe is the case. If so, the SSPs will always have business, although it might be reduced. If publishers choose OpenPath as their preferred method of enabling inventory in The Trade Desk, their overall revenue might decrease. This is because The Trade Desk probably accounts for a significant portion of the impressions they're pushing to different DSPs. However, since an SSP is designed to enable or share availability across multiple DSPs simultaneously, there's still a role for them. This holds true even if The Trade Desk attracts a lot of publishers to support their solution for their demand. - Former Large CTV Media Buyer

The Trade Desk's OpenPath essentially cuts out the SSP and goes directly to the publisher. This presents a challenge to the SSP's who have a significant amount of demand coming from The Trade Desk. Some SSP's also own a DSP and might have more cards to play.

The situation varies depending on who you're talking to. Let's take Magnite as an example. Your pitch to publishers could change because you might have a good visibility into demand, eventually. You could approach a publisher and say, "I can't guarantee demand, but I know I can push a certain amount of demand to you. Let's negotiate a deal under these terms." However, in my personal opinion, it's challenging to say that a new DSP will enter the market and be competitive. The switching costs for advertisers and agencies to adopt a new DSP are enormous. Nobody wants to do it. - Former Large CTV Media Buyer

The executive suggests the demand side of the ecosystem might have gained better positioning.

I'm going to be optimistic with my response. I would say it's mostly favored advertisers, buyers, and media buyers because there are more players and more inventory due to increased consumer demand and time spent. These dynamics certainly favor the buyer. Maybe nobody's selling everything; there's not a single publisher that's 100% monetizing their inventory. If you're a smart buyer in the ecosystem, there are ways to get creative and acquire things cost-efficiently under the right circumstances. - Former Large CTV Media Buyer

The interview further explores TTD’s positioning and the monetisation opportunity for NFLX, AMZN, and DIS across CTV.

LGI Homes: Understanding Land Acquisition

In November, we started work on US homebuilders with a focus on LGI Homes (NASDAQ: LGIH), a founder-led US home builder that has compounded EPS 50% p.a for the past 9 years. We are looking to understand if and why the company has any structural advantage over other home builders. In this first interview, we explored how it sources and bids on land. One potential takeaway is that LGIH doesn’t isn’t as aggressive as peers when bidding for land. Although this may underpin ROIC, it potentially leads to LGIH winning less desirable land parcels:

They were generally less aggressive. When I was there, they underwrote their development projects to a gross margin of approximately 28.5%. However, this gross margin is somewhat inflated as it doesn't account for many soft costs. Other builders, like Century, underwrote to a 20% gross margin, but their pro formas were more refined and included all the soft costs. So, in principle, LGI Homes underwrote to a higher gross margin, which meant they often offered lower bids compared to other builders. - Former Senior Land Acquisition & Development Analyst at LGI Homes

Instalco, Bravida & Nordic Installation M&A

Instalco and Bravida are two Swedish acquirers of small construction and HVAC installation companies across Scandinavia. This interview with a Former Bravida Executive, who spent over a decade at the company, describes the key differences in each company’s growth strategy

When Bravida brings these companies under its umbrella, they no longer have to worry about administrative tasks such as deciding what kind of cars to buy for their staff or managing tax issues. All these mundane tasks are taken care of, which has proven to be a successful strategy. The procurement function in Bravida has consistently performed well. - Former Head of Business Development at Bravida

Bravida takes a centralized approach where companies are integrated within the wider system to generate scale efficiencies.

They promote good commercial performance by encouraging businesses to continue doing what they're doing. They also emphasize that this is a local business, meaning that if you're good at what you're doing, you're probably the best at it locally. Stockholm and Malmö may be different, but if you're good at what you're doing in a typical city in Sweden or Norway, you're the installation guy in that location. - Former Head of Business Development at Bravida

On the other hand, Instalco acquires companies and lets the original management team run it as they see fit with minor interference from headquarters. The interview further explores the pros and cons of Instalco’s strategy and the potential competitive risk from Bravida.

Brookfield Renewable: M&A Culture & Transaction Structures

A Former Finance VP at Brookfield Renewables explores its approach to M&A and typical transaction structures:

"Any asset that was acquired would be leveraged. They have a strong relationship with the capital markets community, including life insurance companies and sizable banks around the world. When I was with them, we had a renewable credit facility that consisted of 20 different banks from around the world. They have limitless capital to deploy. The challenge every year is to find acquisitions. They have teams of people looking for distressed assets and seizing those opportunities." - Former VP Finance at Brookfield Renewable

This anecdote is an example of Brookfield's unparalleled access to capital:

"That's where it gets interesting, because the Chief Investment Officer is really only working for Brookfield Renewable. He essentially heads it up. However, they expanded globally, so now there's effectively a CIO in each continent. They would be looking for and sourcing deals, and seeing what sort of fit. But then you have the larger Brookfield Asset Management team who would then identify distressed assets. Once these distressed assets are identified and they're on the radar, then the communication begins with whoever the owners are of that asset. They always seem to have a pipeline of activity because there are so many people around the world that, regardless of the portfolio they're part of, they can source deals more or less. This is interesting because all of this is being done without the use of investment banks. " - Former VP Finance at Brookfield Renewable

Litigation Funding: Law Firm Contingency Fees, and WIP & ATE Insurance

This interview with a Partner at Eversheds Sutherland, who is also a leader on the litigation finance team internally, explores how the firm thinks about taking cases on contingency. The firm is sharing risk in a majority of funded cases globally where it takes 25% of total fee volume on contingency. This aligns all parties within the case.

A potential challenge for funders is in the evolution of insurance around litigation. It seems various forms of insurance or insurance-like products are entering the market to offer law firms and funders cheaper forms of financing. This includes WIP, ATE, and other insurance products.

The other way that entrepreneurial litigation-based law firms are dealing with this is through WIP insurance cover. For instance, if I am a law firm with a track record in large consumer claims and I've got 20 of these big claims on my books, I might generate 10 million of WIP in a year. I'll go to an insurer and say I want to insure 70% of that, or seven million. The premium for insuring that seven million of WIP is going to be 1.5 million, but we want half a million upfront. I then have a choice. I can either fund that half a million myself if I have it, or I can go to a private equity house, not a traditional third-party funder, but that mid-market private equity market, and say I've got this bonded insurance policy for £7 million, I want to borrow against that. I don't want to borrow against the success of the claims. I'm already insured now. I then have a choice. I can either fund that half a million myself if I have it, or I can go to a private equity house, not a traditional third-party funder, but that mid-market private equity market, and say I've got this bonded insurance policy for £7 million, I want to borrow against that. I don't want to borrow against the success of the claims. I'm already insured now. So, I want to borrow against that seven million insurance policy. The risk for you is pretty low, almost nonexistent. And that means I'm going to be able to borrow money at 14%, 15%, not 300% to 400%. So, that's a growing market for law firms doing these types of claims and using that insurance wraparound. - Partner at Eversheds Sutherland

This interview further explores the risk of insurance to funders and, although it seems an early evolution in the market, is something we plan on covering further in the coming months.

ADESA, Manheim, & US Wholesale Auto Auctions

Online auctions enable car buyers to be digitally present at several locations simultaneously. This in turn is likely to increase competition online and thus attract more sellers to digital auctions, eventually leading to a natural decline in physical auctions over the long-term.

I believe they will eventually disappear, but I'm not certain if it will happen within 10 years. When Covid-19 hit, KAR Global saw it as an opportunity to accelerate their vision of going completely digital and eliminating physical auctions. They didn't want the moral responsibility of having people crowded in our lanes, potentially spreading the virus. So, they closed all their 63 physical auctions and fully embraced digital. Cox, on the other hand, decided to keep their auctions open, which led to a public dispute between our president and theirs. They accused Cox of being irresponsible and not being a good corporate citizen. Eventually, Cox had a Covid-19 outbreak at their auctions and had to shut down months later. This situation further pushed KAR Global towards digital. The founder, who has a significant influence, has always believed that physical auctions are unnecessary and dangerous. Every year, there are fatal and non-fatal accidents at these auctions. He believes that this is not the future of car auctions - Former Director at KAR Global

In this interview, a former Director at KAR (Openlane) sheds light on the evolution of the physical car auction market in the US and the positioning of the major online auction players.

Carvana vs CarMax: Comparing Operating Models

While CarMax has local production around major operational hubs, Carvana's production footprint pre-ADESA acquisition was much more dispersed and inefficient. The ADESA acquisition increased Carvana's network density,, enabling the company to move cars at a lower cost per unit as competitors:

It solves a significant number of their problems. It gives them the ability to alleviate many pressures and move cars much cheaper than before…Their initial transportation will be much more convenient and save them a lot of money. The problem they're going to have, though, and this always puzzled me, is why they didn't build their reconditioning centers in large metropolitan areas where they have a presence? - Former Senior Operations Director at CarMax

In this interview, a former director of operations at CarMax sheds light on the company's operating model and how it's adapting to the rise of Carvana.

Fortinet: GTM Structure, SD-WAN & SASE

Fortinet is moving beyond its dominant firewall product into other cybersecurity products. A former Fortinet Sales Executive explores the cybersecurity market structure and its differences to the typical enterprise SaaS segments:

In my sector, it was slightly different. We would sell to both the customer and the partner. Most of these partners are Managed Security Service Providers (MSSPs), often large telecommunications and IT companies. Some of them are technically capable, while others are more biased towards other vendors. It was our job to ensure that the customer understood why a Fortinet solution was better. There are reasons why they targeted specific sectors. - Former Major Accounts Manager at Fortinet

The interview further discusses Fortinet's SD-WAN and SASE products and customer unit economics.