Bank Spin-Out Graycliff Bullish On Aviation

Target: Skandia Inc.

Price: $5 million – $25 million (equity)

Sponsor: Graycliff Partners

Seller: Skandia Inc.

Financial Adviser: Sponsor: East West Bank, Brookside Mezzanine Partners

Most recently, on April 24, the New York-based firm announced it was buying Skandia Inc., a Davis Junction, Ill.-based company that offers flame-retardant foam and other flammability testing services to business jet manufacturers such as Gulfstream Aerospace Corp., Cessna Aircraft Co. and Bombardier Inc. Graycliff invested between $5 million and $25 million in the company.

And on April 18, its portfolio company Venture Aircraft LLC, a supplier of components to Boeing, Lockheed Martin and other companies in the aerospace industry, bought manufacturing facilities and other assets from Swift-Cor Aerospace Inc. and now does business as Impresa Aerospace. Graycliff, then under the HSBC banner, bought Venture Aircraft in November 2010. HSBC Capital had one other investment in the sector, DynaBil Industries Inc., now known as Ducommun Inc., which it exited in 2008.

The firm is looking for more add-on acquisitions for both Impresa and Skandia.

“From a macro standpoint, this market has stabilized in the last couple of years,” Duke Punhong, a principal with Graycliff, told Buyouts, adding that many industry analysts believe private aviation, in particular, to grow in the months ahead.

Total worldwide shipments of business jets plummeted 42 percent in the two years following a peak of 1,313 planes delivered in 2008, sister news service Reuters reported on Feb. 16, citing data from the General Aviation Manufacturers Association.

Graycliff’s timing could be fortuitous, as there are indeed indications of a rebound in the industry. In October, aerospace and defense titan Honeywell International forecast that deliveries of private jets would rise 3 percent to 5 percent in 2012. And aviation electronics company Rockwell Collins reported that sales to business and regional aviation manufacturers increased 19 percent in the fourth quarter. The business jet industry “appears positioned to begin another period of expansion in 2012,” Honeywell said in a recent outlook report on the industry, according to Reuters.

Skandia particularly attracted Punhong and his colleagues because its management team, led by President Gary Palmer, had successfully navigated the downturn.

“The management team’s been in place for a while, and they’ve been through various cycles,” Punhong said. “That gave us a lot of confidence.”

Graycliff executives see some downside protection with Skandia as well, lest the expected rise in business jet activity falls flat. About half of its business involves companies refurbishing used planes, rather than manufacturers building new ones, Punhong said.

The Skandia acquisition marks Graycliff’s first investment under its new name since spinning out of HSBC in December. The firm also recently left its office space with HSBC and opened new offices at 500 Fifth Avenue in New York. The firm also has an office in Sao Paulo.

Graycliff makes equity, mezzanine and real estate investments in lower mid-market companies. The firm has about 25 investment professionals, six of whom are based in Sao Paulo. It is looking to hire junior- and mid-level investment professionals, Managing Director James Marley told Buyouts.

Graycliff executives still plan on raising funds dedicated to U.S. and Latin America, possibly within the year. Its U.S.-based fund, HSBC Private Equity II LP, which closed in 2007 with more than $300 million in commitments, is more than 60 percent invested with the Skandia deal. The firm has invested a similar amount of its Latin America fund, HSBC Latin America Partners, which closed in 2009 with $200 million in commitments.