It will be structured in five Parts:

• Part 1: The Aviation Ecosystem Behind HEICO

• Part 2: Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3: Inside HEICO’s Crown Jewel

• Part 4 (today): The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

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👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

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9. Electronic Technologies Group (ETG): The Second Engine

ETG receives far less attention than FSG. Flight Support has an intuitive proposition and identifiable competitors: HEICO develops approved alternatives to expensive OEM parts. ETG is harder to summarize because it owns dozens of specialized businesses selling electronic, microwave, electro-optical, and power-related products into aerospace, defense, space, medical, and other high-reliability markets.

The variety can make ETG appear to be a collection of unrelated industrial assets. A laser-rangefinder receiver seems to have little in common with an underwater locator beacon, satellite power converter, cockpit display, or high-voltage connector used in a CT scanner. The common thread is the function these products perform and the environments in which they operate. They are generally small, highly engineered components embedded in much larger systems, where reliable performance matters far more than the cost of the individual part.

ETG is less visible than FSG but far from secondary. In fiscal 2025, it generated $1.41 billion of revenue and $325 million of operating income, for a 23.0% margin. The segment contributed approximately 30% of consolidated revenue and roughly 30% of segment operating income before corporate costs.

Its importance extends beyond reported numbers. ETG exposes HEICO to defense, space, and other markets that do not depend directly on commercial flying, generates cash that can be redeployed across the group, expands the acquisition universe, and provides technical and manufacturing capabilities that may support Flight Support companies.

Victor Mendelson has led ETG since its establishment in 1996. While FSG grew from HEICO’s original aerospace-parts business, ETG was deliberately assembled as a second platform through acquisitions and subsequent product development. It applies the same broad philosophy—niche products, demanding applications, high margins, and strong cash flow—to markets where the advantage does not depend on PMA.

9.1. A broad portfolio with a common economic logic

HEICO describes ETG’s strategy as designing and manufacturing highly engineered, mission-critical subcomponents for small niche markets. These products often operate under severe heat, vibration, radiation, pressure, or electromagnetic conditions and are integrated into much larger systems used for power, targeting, tracking, identification, testing, communication, medical imaging, and other essential functions.

The portfolio can be grouped broadly into data and microwave technologies, electrical products, and electro-optical systems. The categories overlap but provide a more useful framework than cataloging every subsidiary and product.

Data and microwave products include radio-frequency amplifiers, transmitters, receivers, filters, switches, antennas, electronic-intercept equipment, memory modules, and other components that transmit, receive, process, or store information. They are used in satellites, spacecraft, aircraft, unmanned aerial systems, electronic-warfare equipment, and communications platforms.

A microwave switch or amplifier may represent only a small fraction of a satellite’s value, but failure can compromise communication or the entire mission. The asymmetry is especially pronounced in space, where a defective component cannot simply be removed after launch. Established designs, extensive testing, and a proven supplier record therefore carry substantial value.

Electrical products include power supplies and converters, high-voltage connectors, cable assemblies, circuit protection, power-distribution systems, backup batteries, harsh-environment connectors, and fuel-system products. ETG companies supply satellite and military-avionics power converters, backup power for cockpit voice recorders and emergency aircraft systems, and high-voltage components for medical imaging and industrial equipment.

The end user rarely notices these products. A passenger never sees the backup power supply keeping a flight recorder active, and a patient never notices the high-voltage connection inside a CT scanner. Yet the larger system may fail if that component does not work.

Electro-optical products convert, detect, simulate, or process light and infrared signals. ETG manufactures laser-rangefinder receivers, photodetectors, infrared test systems, and related products used in targeting, reconnaissance, missile testing, medical lasers, and other applications. Infrared simulation equipment allows customers to test missile seekers and sensor systems in a controlled environment rather than repeatedly conducting expensive live-fire tests.

A laser rangefinder illustrates ETG’s role. A targeting system emits a pulse toward an object; the receiver detects the reflected light, allowing the wider system to calculate distance and confirm targeting accuracy. The receiver is only one component inside a much larger weapons or observation system, but its performance is essential.

HEICO describes ETG as “making the things that make things work.” The shorthand is apt. ETG does not generally manufacture an entire satellite, missile, aircraft, scanner, or communications system; it supplies selected components that enable those platforms to perform critical functions.

This positioning creates attractive economics. The component usually represents a small share of the customer’s total bill of materials, while failure or redesign can be costly. A defense prime contractor has little reason to save a small amount on a connector, converter, or microwave component if switching requires additional engineering, testing, qualification, and documentation.

The supplier’s position becomes particularly durable once the component is designed into the larger system. During development of an aircraft, satellite, missile, or medical device, the customer selects parts meeting defined requirements. The supplier provides samples, engineering support, test data, and production documentation. Once the design and larger platform are qualified, replacing the component may require part of that work to be repeated.

The switching cost therefore sits primarily in the surrounding system rather than in the physical difficulty of copying the part. A capable competitor may be able to manufacture a similar connector or power supply; the more important question is whether the customer wants to redesign, retest, and requalify a complex platform to save a relatively small amount on one subcomponent.

This is especially relevant in defense and space, where programs may remain active for decades. Once a HEICO component is incorporated and performs reliably, the company can supply it through production and, in some cases, the aftermarket. Unlike PMA, ETG can participate from the beginning of the platform lifecycle rather than waiting for an aircraft to mature.

Products also tend to be manufactured in relatively small volumes. A large defense prime may possess the engineering capability to produce many internally, but doing so across thousands of specialized part numbers would consume resources better used on the higher-level system. ETG occupies a layer in which individual products are too small to attract broad attention but collectively generate attractive revenue, margins, and cash flow.

Portfolio breadth is deliberate. Demand for a specific satellite component, medical device, or defense program may fluctuate, but ETG spans numerous products, platforms, and customers. Its resilience comes from owning many small positions inside long-lived systems.

Organic product development remains important even though ETG was largely assembled through acquisitions and is more sector-agnostic than FSG. Existing businesses must adapt products to new platforms, improve performance, and develop adjacent technologies. HEICO has historically reinvested a portion of revenue in new products across both operating groups:

“Significant ongoing new product development efforts are continuing at both Flight Support and ETG as we continue to invest between 3% 4% of each sales dollar into new product development in order to support our future growth strategies.” — Laurans A. Mendelson, Q3 2014 earnings call

An acquisition provides the initial technical capability, customer relationships, and portfolio; continued development allows the business to expand after the transaction.

ETG’s competitive position therefore rests on reinforcing elements: specialized engineering, product qualification, long platform lives, proprietary technology and processes, small but critical components, demanding operating environments, and customer reluctance to introduce unnecessary risk into a functioning system.

9.2. Defense and space

Defense and space form ETG’s core. In fiscal 2025, they generated approximately $717 million, or just over half of segment revenue. Aerospace contributed another $276 million, while approximately $421 million came primarily from medical and other electronic markets. HEICO also reports that roughly 51% of ETG revenue derived from military agencies, defense prime contractors, and commercial or defense satellite and spacecraft manufacturers.

The categories overlap substantially. An airborne antenna may be classified as aerospace but installed on a military aircraft; a microwave component may serve a commercial satellite or electronic-warfare system; and a high-voltage power supply can be used in both medical and defense imaging. ETG technologies often cross markets because reliability and performance requirements are similar.

Within defense, HEICO deliberately concentrates on technologically intensive applications rather than businesses tied primarily to troop deployments or the daily operating tempo of a military campaign.

Victor Mendelson described the focus in 2022:

“About defense. I’m also optimistic about our defense businesses. Long term, the world is not going to be a safer place, unfortunately, and that’s just a sad reality. Free people like we are in this country need to defend ourselves, and we need to help our allies defend themselves. The things that we do at HEICO generally focus on higher technology, defense products and systems, things like electronic warfare detection, threat detection, reconnaissance, surveillance and standoff warfare, as opposed to, let’s say, the operations tempo, the proverbial boots on the ground. And we think that that will continue to be important as we see some of these major nation state threats in addition to the terrorist threats that we were dealing with not long ago.” — Victor H. Mendelson, Fernway Insights interview, 2022

Electronic warfare involves detecting, disrupting, or protecting against electromagnetic signals. Reconnaissance and surveillance systems collect information from sensors, aircraft, satellites, or unmanned platforms. Standoff warfare allows targets to be detected or engaged from a distance rather than moving personnel directly into the threat area. These applications rely heavily on sensors, antennas, microwave systems, power electronics, computing, and communications—the types of components ETG produces.

HEICO therefore participates in defense spending without manufacturing the largest visible platforms. It need not win the contract for an entire missile, aircraft, or satellite; its companies supply selected components to government laboratories, OEMs, and prime contractors building those systems.

This position can create long revenue tails. Defense programs often require years of development before production, followed by many years of deliveries, upgrades, spares, and sustainment. Once qualified, a component supplier may remain associated with the platform as long as performance, quality, and delivery remain acceptable.

Low component cost relative to the total system reduces the incentive to switch. A prime contractor might replace a HEICO product to capture additional margin, but potential savings may be immaterial beside the cost of redesign, documentation, testing, and the technical and schedule risk of replacing a proven supplier.

Defense-contract structures may further reduce pressure to squeeze every subcomponent. Early development contracts can reimburse part of the contractor’s costs, while later production contracts often become more fixed. By the time cost incentives strengthen, components are already embedded in a qualified system. Re-engineering the platform to save a small amount on one part may offer an unattractive risk-adjusted return.

HEICO also benefits from a fragmented defense supply chain. Large platforms rely on thousands of specialist suppliers, many small and founder-led. These businesses may possess valuable intellectual property and long customer relationships but lack the scale, capital, or succession plan to remain independent indefinitely, creating a continuing acquisition universe for ETG.

The current defense environment provides an additional tailwind. Governments have increased procurement, expanded certain priorities, and sought to replenish equipment and munitions consumed or transferred in recent conflicts. This demand reaches ETG through the order books of prime contractors and platform manufacturers.

Management was seeing this directly by the second quarter of fiscal 2026:

“In defense, our country and its allies have recognized the need to invest more in defense and to replace depleted stocks. We are now experiencing this in our defense sales, in our defense orders, and in our defense backlog. We expect this to continue and to have a multi-year tail for which we are very well-prepared.” — Victor H. Mendelson, Q2 2026 earnings call

The effect varies by product and program. Higher national budgets do not translate equally into every HEICO subsidiary: funds can shift among programs, projects may be delayed, and inventory may move unevenly through the supply chain. ETG’s broad exposure reduces dependence on any one platform but does not eliminate program-level volatility.

Space follows similar economics with a different demand base. ETG supplies microwave equipment, memory modules, power converters, radiation-tolerant electronics, antennas, and other components used in satellites, launch vehicles, and spacecraft.

The operating environment imposes unusually demanding requirements. Products must withstand launch vibration, wide temperature changes, radiation, and long periods without physical maintenance; weight, power consumption, and size may also be critical. A failure after deployment may be impossible or uneconomic to repair.

HEICO components have appeared in prominent programs. Subsidiaries supplied critical parts for the Curiosity Mars Rover, while another ETG company provides power converters for newer GPS satellites. HEICO does not build the rover or satellite, but selected systems inside them depend on its technology.

Commercial space has broadened the customer base beyond traditional government programs. More launches, earth-observation systems, communications constellations, and privately developed spacecraft create additional demand for high-reliability electronics. The pace can be uneven, however, as launch delays, funding issues, and changes to constellation plans shift revenue between periods.

Victor Mendelson summarized the opportunity alongside defense:

“And then in space, space is a growing market, growing business. You see it all the time. New products, launches, satellites, earth sensing spacecraft as well. So that’s a nice growing business for us.” — Victor H. Mendelson, Fernway Insights interview, 2022

Defense and space are attractive because they combine structural demand, long product cycles, and high switching costs, but they are also political and program-dependent. The U.S. government is the ultimate end customer for a substantial share of ETG revenue, and changes in budgets, procurement priorities, export rules, or program schedules can affect individual businesses.

9.3. Growth and economics

ETG’s financial history reflects how the segment was built. Unlike FSG, which grew from an existing aftermarket business, ETG was assembled largely through acquisitions. Each transaction added a technical capability, product family, or customer relationship, after which the acquired companies continued developing organically under HEICO ownership.

By the second quarter of fiscal 2026, ETG generated approximately $460 million of quarterly revenue.

The long-term trajectory is striking but uneven. Early percentage growth partly reflects a small starting base, when one acquisition could double or triple quarterly revenue. Growth moderated as the segment became larger.

The history also illustrates ETG’s diversification value. Commercial aviation downturns have generally affected it much less than FSG. ETG weakened during the early-2000s downturn and Global Financial Crisis but did not collapse during COVID-19 because defense, space, medical, and other electronics demand followed different drivers and stabilized the segment.

Since fiscal 2018, HEICO has disclosed ETG revenue in two broad categories: defense, space, and aerospace equipment; and other industries.

Defense, space, and aerospace equipment represent the clear majority, recently contributing roughly 80% of ETG revenue. The remaining 20% comes primarily from medical, telecommunications, and specialized electronic and industrial applications.

The first category is broader than it appears. It includes products sold to military agencies, defense primes, aircraft manufacturers, satellite companies, and spacecraft programs. The same microwave component, power converter, or high-voltage connector may be used in a military aircraft, commercial satellite, or another demanding aerospace application.

“Other industries” is similarly diverse, including medical imaging, industrial electronics, telecommunications, and other markets requiring highly reliable power, sensing, interconnect, or electro-optical products. These activities are smaller but add customer and end-market diversification.

The growing share of defense, space, and aerospace revenue helps explain recent acceleration. Defense customers and primes have increased orders, space activity has expanded, and commercial aerospace production has recovered, exposing ETG to several structural growth markets at once.

Organic growth and acquisitions:

Reported ETG growth combines organic development, acquisitions, occasional divestitures, and foreign-exchange movements.

Acquisitions have played a larger and more persistent role in ETG than in FSG. In many periods, acquired growth equaled or exceeded the organic contribution because M&A created the platform and remains central to its development.

The extreme growth rates of the late 1990s and early 2000s require caution. ETG operated from a very small base, so modest transactions produced unusually large percentages. As the segment grew, acquisition contributions became less dramatic but remained frequent.

Organic growth has been more modest and volatile.

Based on the quarterly series, ETG’s organic growth has generally been in the mid-single digits and much more erratic than FSG’s. The arithmetic average appears to be approximately 5%. A reasonable normalized range is 5–7%, with individual years capable of materially stronger or weaker results.

This is below FSG’s roughly low-double-digit normalized rate. ETG depends more on new platform wins, production schedules, defense procurement, program timing, and customer order releases.

Organic growth is consequently uneven. Strong demand or a defense or space program ramp can produce double-digit growth, while project delays and weaker markets can push the figure below zero. The Global Financial Crisis produced the most severe historical decline, with organic revenue falling more than 20% in one quarter.

COVID-19 was much less damaging. Organic growth weakened and turned negative in some periods, but declines were comparatively modest and partly offset by M&A. This resilience supports ETG’s role in reducing HEICO’s dependence on commercial flight activity, although the segment remains exposed to economic and program-level cycles.

Recent quarters show renewed momentum. Defense, space, and aerospace demand have strengthened, while commercial aerospace production has recovered. Organic growth reached double digits in several periods and accelerated sharply in the second quarter of fiscal 2026.

Such quarterly strength is not a permanent baseline. Shipment timing for a relatively small number of customers can affect ETG’s organic growth, and strong periods may be followed by normalization. A mid-single-digit long-term assumption is more consistent with the broader history than extrapolating the latest result.

Acquisitions provide the second and historically more important growth layer.

The acquired contribution has appeared in repeated waves, with major increases around fiscal 2006, 2010, 2012, 2016, and 2023 and smaller additions in many other periods. Unlike Wencor in FSG, no single ETG acquisition dominates the chart. Growth has instead come from repeatedly adding specialized businesses over many years.

This pattern reflects fragmented target markets. Defense electronics, microwave components, connectors, power supplies, sensors, and other high-reliability products are often made by small, founder-led companies. No single acquisition must transform HEICO; the accumulation of niche positions gradually expands revenue, technology, and customer relationships.

Reliance on M&A also creates risk. ETG’s future depends partly on HEICO continuing to find specialized businesses at prices that produce attractive cash returns. Competition from private equity and strategic buyers can raise valuations, while technical complexity makes due diligence critical. HEICO must retain key engineers, managers, and customer relationships after closing.

Margin development:

ETG combines long-term growth with unusually attractive profitability.

The earliest margin figures are highly volatile because ETG was still small and a limited number of companies, products, or acquisition effects could materially change the result. From the mid-2000s onward, the profile becomes more representative of the mature platform.

For much of 2005–2022, ETG’s quarterly EBITDA margin remained around 30% or higher.

The margin reflects ETG’s position inside customer systems. Its products are usually small relative to the value of the aircraft, missile, satellite, medical scanner, or communications platform, yet may be critical to operation. Customers therefore focus less on absolute component price than on reliability, qualification, technical performance, and delivery.

Recently, a temporary slowdown in certain higher-margin satellite components weighed on ETG, partly offset by stronger growth in lower-margin defense products.

Once an ETG product is designed into a platform, replacement may require engineering, testing, customer approval, and documentation. Potential supplier-switching savings can be small relative to the cost and risk of requalifying the larger system. These switching costs support pricing and margins without requiring ETG to manufacture the end product.

The EBITDA margin recovered to approximately 32% in the second quarter of fiscal 2026 as revenue accelerated, demonstrating the operating leverage available when higher volume flows through ETG’s existing engineering and manufacturing base.

10. The HEICO Operating System: “Do the Right Thing”

HEICO’s operating system explains how the company expanded from one aircraft part into more than one hundred specialized businesses without losing the economics that made those businesses attractive.

“How was our 36 year, 23% compound annual growth rate and share price possible, especially when we were rarely leveraged at more than 2 times EBITDA? First, we have to thank God for these results. Second, we realized that Dad always had a saying, “Do the right thing,” which was our mantra 24/7, 365 for the past 36 years. It wasn’t just a saying, it was embedded in every single decision, every part sold or repaired, every company acquired, and simply everything we did. Obedience to the unenforceable became our DNA from the time Victor and I were small children to now, when we are 60 and 58 years old. Doing the right thing means making honorable choices when nobody’s looking.

It means spending tens of millions of dollars on quality systems, not because our customers or regulators require them, but because we know it’s a good investment that protects our brand. It means properly reserving for obsolete or excess inventory, not because our auditors require it, but because we know it’s needed and mistakes must be learned from, recognized, and never repeated, not swept under the rug in order to protect reported earnings. These are just two of the many things that HEICO has done routinely over decades, and why we’ve never had a one-time unusual charge to earnings, whereby the economic earnings of the upcycle are largely erased following a black swan event, and investors don’t realize much of the earnings never existed in the first place.

HEICO was built for long-term and sustainable cash generation, which permits our earnings and cash flow to compound decade after decade, not just year after year. We are not into programs of the year, buzzwords, or comparing ourselves to others, hoping to get a higher multiple on our shares. We’re designed for long-term, challenging, but sustainable earnings increases” — Eric A. Mendelson, Q1 2026 earnings call

The group combines family ownership, decentralized operating responsibility, subsidiary-level incentives, and centralized capital allocation. Acquired companies generally retain their identity, management teams, and customer relationships. Headquarters controls the balance sheet and allocates capital, while day-to-day decisions remain with the people closest to the product and customer.

Culture and structure are closely linked. Decentralization works only when managers are capable, properly incentivized, and trusted to act in the business’s long-term interest. HEICO’s acquisition process therefore screens not only for attractive products and financial characteristics but also for owners and management teams capable of operating with limited supervision after the transaction.

M&A reinforces this culture. HEICO generally acquires small entrepreneurial businesses, preserves their autonomy, and often leaves a minority interest with the seller. The group thus adds companies that already possess the small-business mentality it wants rather than trying to impose that mentality on a large centralized organization afterward.

This combination is the HEICO operating system. It allows a public company with more than 11,000 employees to retain many characteristics of a collection of family-owned businesses.

10.1. Ownership, culture and decentralization

The Mendelsons approached HEICO as owners from the beginning. The family invested a meaningful portion of its own capital, fought for control of the company, and remained exposed to the consequences of every major decision.

Family control is balanced by a demanding internal decision-making process. Although operating responsibilities are clearly divided within the family, major decisions are not made unilaterally:

“All major decisions must be unanimous.” — Laurans Mendelson, Forbes interview, 2020

Requiring agreement may occasionally slow decisions, but it also provides an internal check on large acquisitions, financing choices, and other commitments affecting the family’s capital alongside that of outside shareholders. Each major decision must withstand scrutiny from several owner-managers with different responsibilities.

The family’s principal financial outcome comes from the value of its HEICO shares rather than from maximizing annual salaries or bonuses. A transaction that increases reported revenue but destroys per-share value would therefore work directly against its interests.

“In our case, we own a large number of shares. So, if the stock goes up 10 points […], we make $140 million or $200 million in equity value. Now do I care if my salary goes up $3 million? Of course not. So, to answer your question, we will make transactions that generate cash flow, accretion and stock value.” — Eric A. Mendelson, Q4 2020 earnings call

The figures in that historical statement are no longer current, but the incentive remains: the family is rewarded primarily through long-term equity appreciation. Outside shareholders participate in the same outcome.

This ownership perspective also explains management’s focus on cash flow. Acquisition accounting, amortization, working capital, and other assumptions can influence reported earnings without necessarily reflecting the cash available to reinvest. HEICO follows the required accounting rules but evaluates internally whether its businesses are actually producing cash.

“So it’s to me and to us and our team, it’s all about the cash flow return. And that is more important than the earnings per share. Although we know if we have cash flow, we will have earnings per share. We can have earnings per share, but no cash flow, as you very well know. So that’s what we will continue to focus on that strategy.” — Laurans A. Mendelson, Q3 2020 earnings call

The ownership culture extends beyond the Mendelson family. HEICO consistently refers to employees as “team members,” reflecting the role it expects them to play. A team member should understand that individual decisions affect customers, colleagues, and the value of the wider company.

“And as always, we’ll continue to focus on intermediate and long term growth strategy with an emphasis on acquiring profitable businesses. And just one personal comment, what doesn’t appear in 10 ks’s, 10 Qs, financial statements and presentation is the incredible capability of our team members. These are the people that make these results possible. These are the people that strive for growth. Of course, we incentivize them with what we believe are great incentive plans, but these are exceptionally talented people.” — Laurans Mendelson, Q2 2017 earnings call

HEICO reinforces this culture through financial ownership. Its U.S. retirement plan has historically matched employee contributions with HEICO shares. Over decades, the appreciation of those shares has created substantial wealth for factory workers, shipping clerks, administrative staff, and other employees far below the executive level.

Victor Mendelson described the effect in 2018:

“But it’s also how you treat the team members, the employees. And I think you know this, a number of years ago, we sold a block stock to the 401(k). People defer 6%. They can defer 6% in the 401(k).

They have a whole menu of mutual funds that they invest in. And we match that annually with 5% in HEICO stock. And the thing that and the reason […] why I’m bringing this out and why it’s so important. We have […] approximately 4,000 U.S. employees. Most of them are in the 401(k). 10% or a little more have between $750,000 and $1,500,000 in their 401(k), principally as a result of their gift or of HEICO stock to the 401(k). Another 40 or 50 of them have between $1,500,000 $6,500,000 in their 401(k), principally HEICO stock. I am not talking about senior executives. I am talking about shipping clerks, factory workers, secretaries and people who work hard for manual labor for a living. Now what has happened is that we now have a good majority of those 4,000 people think of HEICO as their company. It’s no longer, ‘oh, yeah, well, we’re working for some rich guys on Wall Street and mutual funds and the CEO, he’s getting all this money, we’re getting nothing.’

When I retire, I have social security, I can’t even make ends meet and so forth. And the last thing I want to tell you is that about 6 months ago when I sent out the quarterly reports, I received an email back from one of our secretaries. And the comment, I’ll paraphrase, ‘Dear Larry, thank you so much for sending the report. We are doing so well.’ We meant she. It wasn’t HEICO. She didn’t write ‘HEICO is doing so well’. We are doing so well. And she further went on to say, ‘and it’s wonderful to know that someday when I retire, I will retire as a millionaire as a secretary’. So when you put that in perspective and understand that the people who are building this company and supporting it and doing the great things that we can do, they look at it as their company.” — Victor H. Mendelson, Q3 2018 earnings call

The most important part of this story is not the exact number of employee millionaires. It is the difference between asking employees to think like owners and giving them a meaningful economic reason to do so. When the value of a person’s retirement savings depends partly on the company’s long-term success, product quality, inventory management, customer satisfaction and operating cash flow become more personal.

Eric Mendelson explicitly connected HEICO’s incentive system to its willingness to deemphasize lower-margin business, while also making clear that higher profitability should not come at the expense of the customer value proposition:

“Our team members and our leadership are incentivized and focused on operating income. We try to keep things very simple. And they’re not focused on revenue. They don’t get compensated on revenue, they get compensated on earnings. So I think what we continue to see is a shift where we deemphasize lower margin products and we focus more on higher margin products. And I think that really is the driver of the improvement in the operating income that we’ve seen […] We continue to maintain a very low price increase model, so we make sure that our customers appreciate it and that they want to come back and want we’re the vendor of choice and they want to develop more items with us.” — Eric A. Mendelson, Q1 2020 earnings call

Ownership alone cannot create the culture. A widely distributed stock plan inside a heavily centralized organization would still leave most decisions far from the people who understand them. HEICO combines ownership with small operating units.

The typical subsidiary is far smaller than the consolidated company; many employ roughly 75 to 100 people. The president knows the products, customers, engineers, and production team. Employees know one another, and poor execution is difficult to hide inside a large bureaucracy.

Victor Mendelson explained how this preserves a small-business mentality:

“So as opposed to being an employee number 5722 at some big company, the team members are one of typically, on average, about 75 or 80 people at a subsidiary and facility, that team member is valued and known. Their opinions are important, they are close to the product, they’re close to the customer. The president of the business who sold us the company and in many instances still owns 20% or even more, is watching everything. They still have that ownership mentality. It’s that small business ownership mentality that’s shared across the enterprise, and they feel it. If a shipment is late, if it doesn’t go out, if there’s an issue of any sort, everybody feels badly because they’re letting someone else down in a small organization and there’s nowhere to hide.” — Victor H. Mendelson, Fernway Insights interview, 2022

This structure places operating decisions close to the relevant information. A subsidiary president generally understands the business’s demand outlook, customer relationships, production bottlenecks, and employee capabilities better than an executive at headquarters could.

HEICO therefore avoids building a large hierarchy of group executives between corporate management and the subsidiaries. Eric Mendelson described the organization as a collection of entrepreneurial business heads rather than a centralized company awaiting instructions:

“You know, that rather than having a highly centralized organization where people are waiting on instructions from the corporate office on what to do, we’ve got 60 decentralized, entrepreneurial, hardworking, aggressive business heads and their staff out in the field figuring out every day what they need to do.” — Eric A. Mendelson, Q1 2022 earnings call

The number of business heads has increased since that comment, but the principle remains. Local management decides how to serve customers, run production, manage inventory, hire employees, and invest in product development.

Headquarters still plays an important role. HEICO allocates capital, approves acquisitions, manages the balance sheet, establishes financial controls, and monitors performance. It also designs incentives, provides access to capital, and encourages cooperation where useful.

The same restraint is visible at HEICO’s headquarters in Hollywood, Florida. Despite overseeing a multibillion-dollar global group, the company operates from an unassuming office and manufacturing building rather than an elaborate corporate campus. The building alone does not prove financial discipline, but it fits a culture of limited overhead, little interest in prestige, and a preference for directing capital toward products, people, and acquisitions.

Headquarters provides resources and accountability rather than detailed operating instructions. The parent does not claim to understand every microwave component, repair procedure, PMA product, parachute system, and customer program better than the managers running those businesses.

This creates an unusual allocation of responsibility: corporate management decides which businesses HEICO should own, while local management decides how each acquired business should operate.

The model therefore depends heavily on selecting the right company. If HEICO acquires a weak business, the wrong management team, or an incompatible culture, decentralization offers fewer mechanisms for correcting the problem afterward. Management repeatedly returns to the principle that the best way to manage an acquisition is to buy the right one.

“We really don’t direct our companies to take actions. We expect them to do what’s right for the business. That doesn’t mean we don’t have discussions with them about it. But ultimately, we expect them to be the same companies they were pre acquisition. And you’ve heard us say that the key is buying right, that if you buy the right business and you buy the right kind of company that does the right things, then you don’t have to direct them post acquisition.” — Victor H. Mendelson, Q2 2020 earnings call

COVID-19 provided the clearest stress test of this structure. Commercial aviation demand collapsed with little warning, but the appropriate response differed across subsidiaries. Some businesses faced an immediate decline of approximately 80%, while defense, space, and other electronics operations remained relatively stable or continued growing.

A centralized response would have required headquarters to determine staffing, working hours, and cost structures for businesses facing very different conditions. HEICO instead allowed subsidiaries to respond locally through measures such as temporary furloughs, reduced hours, and shorter workweeks. Corporate executives and directors also reduced their compensation.

“And so what we’ve noticed is that these folks at these subsidiaries, because we allow them to operate in a decentralized fashion, they do make good decisions and they do tighten their belts when they need to. They’re very aware of and conscientious of working capital management, of listening to their customers, understanding demand as best that they can during this time period. And so we haven’t we don’t have a need or we haven’t felt the we haven’t felt it necessary that we’d be heavy handed in these circumstances. They have done the right things. It just so happens that with them doing what they need to do to manage their businesses, we have also contributed at the corporate level by taking some pay reductions by the executives and the corporate staff and also our Board of Directors.” — Carlos L. Macau, Jr. (CFO), Q2 2020 earnings call

HEICO made layoffs where management believed certain product lines would not recover, but it avoided the large-scale reductions implemented elsewhere in aerospace. Retaining technical and production capabilities allowed the businesses to respond more quickly when demand returned. The company also continued developing products during the downturn rather than protecting short-term profit by cutting investments needed for future growth.

Measures varied by business and included layoffs, temporarily reduced working hours, and pay reductions. The burden was not limited to operating employees: HEICO’s executive management team and Board of Directors also accepted a temporary 20% reduction in compensation.

This highlights another element of the culture: decentralization supports long-term decisions rather than merely lowering corporate overhead. Local managers can invest in inventory, employees, and product development when they believe the future return justifies the spending.

The model also creates trade-offs. Separate subsidiaries may duplicate administrative functions, and performance and culture can vary across businesses. HEICO may capture fewer immediate cost synergies than a centralized acquirer, while investors receive limited information about individual subsidiaries and depend heavily on corporate management to identify problems.

HEICO accepts these costs because it believes centralization would be more damaging. In niche businesses, local knowledge often matters more than the savings from standardizing every process. Central procurement or reporting systems can create efficiencies but may also distract managers, slow decisions, or weaken customer relationships.

Cooperation is encouraged rather than imposed. Subsidiaries can share suppliers, manufacturing capabilities, products, and customers when both sides benefit. Wencor can ask other HEICO businesses to quote manufacturing work, repair stations can use PMA parts produced elsewhere in the group, and distribution operations can introduce products to new customers. Each company nevertheless remains responsible for its own economics.

Even the positioning in this group photograph offers a small illustration of the culture. Victor, Eric, and Laurans Mendelson stand behind other team members rather than placing themselves at the center. A single photograph should not be overinterpreted, but the arrangement is consistent with HEICO’s emphasis on giving operating teams visibility, responsibility, and credit for the company’s success.

The operating system is built around trust, but it is not passive. Managers are measured, incentivized, and held accountable. Autonomy means the right to decide, not freedom from financial consequences.

10.2. The acquisition playbook

Since the Mendelson family took control in 1990, HEICO has completed more than one hundred acquisitions. M&A expanded the PMA catalog, created the Repair and Distribution groups, built ETG, and introduced HEICO to markets beyond its original aircraft-parts business.

Management focuses more on a business’s characteristics than on whether it fits within a narrowly defined sector.

Victor Mendelson explained this flexibility:

“So in the early days, we started making acquisitions. We would have a roadmap we’d lay out, but we couldn’t get the acquisitions in that roadmap, any one of a number of reasons. It could have been price, it could have been the seller wouldn’t sell, etcetera. So we had to look elsewhere and we look at adjacencies, and if the business met certain characteristics, we would acquire it. And I think that’s really been the key for us, has been the characteristics of the business.” — Victor H. Mendelson, Fernway Insights interview, 2022

Across industries and product categories, HEICO’s acquisition criteria remain consistent. Management seeks businesses that can be acquired at a sensible price, operate in defensible niches, and are led by people HEICO is prepared to support for decades:

“When we look to make acquisitions, we’ve got a number of criteria. 1, that they’re fairly priced. Number 2, that they’re in very good businesses with strong barriers to entry. And number 3, superior leadership teams. And the type of people who we want to be in business with and we want to work with for 3 decades.” — Eric A. Mendelson, Q2 2013 earnings call

These three criteria frame the rest of the acquisition process. The price must leave room for an attractive cash return, the business must possess durable competitive advantages, and the management team must be capable of operating with substantial autonomy after the transaction.

The preferred company usually sells a niche product or service that solves an important customer problem. High margins provide an initial indication that the business is doing something difficult or valuable. A company consistently earning an operating margin of roughly 20% is likely selling more than undifferentiated manufacturing capacity.

HEICO has repeatedly said that it generally looks for targets with operating margins of at least 20%:

“But we’ve said publicly we don’t make acquisitions typically unless there’s at least a 20% operating margin” — Victor H. Mendelson, Q1 2016 earnings call

A high-margin business can still be unattractive if it requires excessive capital, depends on a temporary program, or has poor customer relationships. HEICO looks for cash generation, modest capital requirements, defensible products, and a long runway for reinvestment.

HEICO focuses on the cash return generated by the purchase price.

“Also, I should point out that over the years, we bought companies with different growth rates, some on the fairly low side, but very strong and stable, and others that are faster growth. So what we’re looking at is within our typical mix in that regard. Howard, the key the bottom line key to this is number 1, strong cash flow return for what we invest.

I can go out and buy things that have big CapEx and working capital requirements and then go to the bank or go to the investment bankers and raise equity and to pay for it. That anybody can do that and some companies do to raise the top line and show, oh, we’re growing the top line. We don’t do that. We want to be since we’re the largest shareholders, it’s our money at stake and every investor in HEICO is our partner.

That’s our philosophy. That’s the basic philosophy. And if we see a great company and it’s 20% or 25% return on investment, hey, we’re going to buy that company because that’s a wonderful return. And if it doesn’t grow that much, okay, it doesn’t grow that much. But that’s a wonderful return and we take that money and put it towards acquisitions of faster growing ones as Victor said.” — Victor H. Mendelson, Q2 2015 earnings call

This leads to a broader point: growth is valuable only when purchased at an acceptable price and converted into cash. Management is willing to acquire a slower-growing company if the initial cash return is high and durable. The resulting cash can later be reinvested in faster-growing businesses or internal product development.

The desired businesses are generally small or medium-sized, founder-led, and technically specialized. Their advantages may lie in engineering knowledge, certifications, customer approvals, proprietary processes, intellectual property, or qualified positions on long-lived aerospace or defense platforms.

HEICO also looks closely at the people. During due diligence, management observes how owners treat employees and interact with the organization. A founder who understands the factory, knows long-serving employees, and values the company’s reputation is more likely to fit HEICO than one focused mainly on extracting the highest short-term profit.

“One of the things, for example, we look at when we look for acquisitions is when we walk through the facilities, how does the owner interact with his or her people? And are they looking to take care of their people, or are they looking to make money by slicing out a layer each time on their people? We like companies that look to make money by adding products and market share, as opposed to just squeezing the people.” — Victor H. Mendelson, Fernway Insights interview, 2022

HEICO therefore looks for evidence before the transaction that the seller shares its view of employees. Management assesses whether the owner genuinely knows and values the people who built the company rather than treating the workforce merely as a cost base.

“The first thing we do in acquisition, the most important, is really scrutinize, analyze, get to know the person who is selling the company to us and how he manages. If he treats his people well, this is very important. As an example, if he goes through the factory and he sees somebody, and they said, he tells us, ‘Oh, that’s a machine operator, that’s a this and that and that,’ that’s not very impressive. Some of these people go through the factory and they say, They stop at a machine and say, ‘Charlie, here, these are Mendelson’s. How’s Anne?’ Meaning his wife. ‘Family okay? Everything good? Charlie, how long have you been working for 22 years.’ This means an awful lot.” — Laurans A. Mendelson, Q4 2022 earnings call

The two parts of the quote belong together. HEICO prefers businesses whose owners know and value their employees, while offering those employees a structure in which they can participate financially in the company’s future. Culture therefore acts both as an acquisition filter and as part of the seller proposition.

This cultural diligence is economically important because HEICO often wants the seller to continue running the company. Attractive historical financials matter less if the founder leaves immediately and takes essential technical knowledge or customer relationships.

The process is deliberately thorough. HEICO uses internal teams to examine finances, customers, products, quality systems, management, and operating practices. It does not assume that the seller’s adjusted EBITDA or projected synergies will materialize.

Laurans Mendelson described the company’s approach in 2010:

“And we do, as you know, a very, very thorough due diligence with our own staff, our own in house staff, really scrubs the business, scrubs the financial. We go out and we speak to their customers and we really try to cover the waterfront.

We’ve been very successful in our acquisition program by being extremely thorough. Now the corollary to that is that when we dig and dig and dig, sometimes we find things we don’t like and then the deal collapses and we walk away” — Laurans A. Mendelson, Q3 2010 earnings call

Walking away is part of the model. HEICO has no acquisition quota and does not need to complete a specific number of deals to satisfy quarterly expectations. The existing businesses already generate cash and can continue investing organically, making no transaction preferable to buying a weak company at an excessive price.

“And then once we get into the due diligence and start kicking the tires and everything else, we probably drop we look at 100 companies and we may buy 1. We look we do a very thorough due diligence and most companies we drop after the due diligence because people as you very well know, people who promote the companies, they give you information, which is always a hockey stick and then when you go in and kick the tires and you discover there are a lot of pitfalls there.” — Laurans A. Mendelson, Q2 2013 earnings call

This selectivity means HEICO will let a transaction fail late in the process rather than compromise its standards. Management has repeatedly emphasized that neither market expectations nor the desire to support short-term results will cause the company to rush an acquisition:

“We’re spending a lot of time in the due diligence processes and we’re not going to rush a closing of an acquisition in order to meet Wall Street expectation or hope and try to financially engineer our results. We’re going to do due diligence in a very thorough manner the way we always do it and make sure that we’re not buying a pig in the poke.” — Laurans A. Mendelson, Q3 2014 earnings call

HEICO’s acquisition record provides evidence that the approach has worked. Management acknowledges that individual acquisitions have performed differently: some exceeded expectations, while others delivered less than anticipated. What the company says it has avoided is a major failure that forced it to conclude that the original investment thesis was fundamentally wrong:

“So some are better than others. Some are a little less than we expected. But we’ve never had a disaster where we had to say, oh my God, we just made a terrible mistake. So that is our strategy. And I think it’s from an acquisition point of view, it’s worked for us.” — Laurans A. Mendelson, Q3 2020 earnings call

The absence of a major failure does not mean every acquisition was equally successful. It suggests that extensive due diligence, conservative underwriting, and a willingness to walk away have limited the downside when individual businesses developed less favorably than expected.

Historically, HEICO often acquired businesses at mid- to high-single-digit cash-flow or EBIT multiples. Valuations have risen as private equity and strategic buyers became more active in aerospace and defense. Management has accepted higher multiples for exceptional companies but continues to reject transactions that do not produce an adequate return.

Acquisition valuations remain one of the clearest constraints on capital deployment. Private equity and strategic buyers can sometimes justify prices that do not fit HEICO’s return framework, particularly when their thesis depends on leverage, cost reductions, or a later sale at an equally high multiple. HEICO generally expects to own the asset indefinitely, so the acquired business’s cash flows must support the purchase price.

Laurans Mendelson explained both the limitation and the advantage of this model:

“We’re doing a lot of due diligence. I can tell you the big issue that we face is competition from, say, private equity or corporate buyers who will pay 17 times EBITDA. We can’t compete. Our model doesn’t work at 17 times EBITDA. We were with an investment banker who you probably know fairly well or you would know, and he came for a meeting to talk about an acquisition. In the conversation, he said, “You realize that 90% of all acquisitions are not successful.” You know, it’s easy to make acquisitions, it’s easy to buy, but it’s not so easy to make them work out. Our model requires us to buy a company, continue it, and keep it in the portfolio virtually forever. We don’t the old expression, we don’t buy a company, put lipstick on the pig and dump it in three years, so we make a profit on it because we increased the multiple or cut expenses by a few bucks. That’s not our model. We’re competing with people who have a different model than we do. Now, saying all that, we are still able to find companies who are very anxious to join HEICO because of the HEICO culture […] If they want the highest dollar, we tell them at the get-go, “We’re not your buyer.” I would say this is the most difficult part that we’re facing. However, there are many people, as I say, ‘cause look, we’ve made 89 acquisitions, and we give lists of people that sold companies to us. We give you lists to see if we’ve done what we said, how we’ve treated people, how we treated their team members and everything else, and that’s very positive.” — Laurans A. Mendelson, Q1 2022 earnings call

The quote captures the trade-off at the center of HEICO’s strategy. Its return requirements prevent it from winning auctions based solely on price, but its culture and permanent ownership can attract sellers who value more than the highest immediate consideration.

Management has historically described ordinary acquisition multiples in the range of approximately five to seven times EBIT and has said that ten to twelve times EBITDA often priced HEICO out of a transaction. Those ranges are not rigid limits; the appropriate price depends on growth, margins, capital intensity, strategic fit, and the durability of cash flow.

“We have a number of transactions that we are in active due diligence on. They are all priced within our normal pricing, 5-7x EBIT, not EBITDA. […] Unfortunately, because of our strategy, we are priced out of some of the very expensive opportunities where they want 10-12x EBITDA.” — Laurans A. Mendelson, Q3 2010 earnings call

HEICO repeated essentially the same range in 2012. Over time, however, the wider market became more expensive, and the multiples paid by HEICO increased as well. Victor Mendelson acknowledged this development in 2017:

“And multiples have moved up a bit and I think the multiples we pay are slightly higher than they were, let’s say, 10 years ago or 5 years ago. Although I think we pay a very fair price for businesses.” — Victor H. Mendelson, Q4 2017 earnings call

By 2021, management described approximately 8-10x EBIT as a fair initial purchase price. Yet HEICO does not evaluate the multiple only at closing. The company tracks how much of the original investment is subsequently recovered through cash generated by the acquired business:

“So we look at things as a return as you would as a wise investor, which you are, as return on investment. And we like to get our money back within, say 10 years. And our model is that and we pay fair prices, we’ll pay 8-10x EBIT. And what we want to see the cash flow coming back so that if we mentally say we pay whatever we pay for it by the time we’re into the 4th or 5th year of owning a company. We have received enough cash back to make that company costing us in our portfolio, say, 4-5x EBIT. So it becomes a no brainer. And that has been our strategy.

But if we have to pay prices that take us 20 years to do that, all of a sudden we wind up going to the banks and getting heavily indebted, which we don’t again, our strategy is to be relatively low leverage and we can’t do that if it takes us 20 or 25 years to recoup our investment.

So but there are a lot of companies going to 14-16x EBITDA, and you make all kinds of assumptions. I mean, you can justify any acquisition. You can justify a 20x EBITDA price if you assume that the synergies are going to be god knows what. We’re a little more conservative, and we don’t do that. I can’t tell you is that the smartest thing. I don’t know, except that we’ve done 80 some acquisitions and we’ve never had one blow up on us and our history is very clear.” — Eric A. Mendelson, Q3 2021 earnings call

Price discipline is especially important when capital markets encourage aggressive bidding. Paying a high multiple can convert an excellent business into a poor investment if future growth or margins fall short of expectations. HEICO regularly walks away from transactions priced at 14–20 times EBITDA. Such prices leave little room for disappointment and often depend on aggressive assumptions about growth, cost savings, or synergies. HEICO generally underwrites the existing cash-generating capability rather than assuming that restructuring or a later resale will rescue a high initial multiple.

This does not mean HEICO will never pay a double-digit multiple. Wencor carried a significantly higher headline valuation than the company’s traditional smaller transactions. Management acknowledged that the competitive auction pushed the price above the level HEICO initially wanted to pay because Wencor had previously been owned by private equity:

“We don’t feel that we paid a low price. We feel that actually, I feel that I paid a high price and much higher than we had really wanted to pay. The auction pushed us up, we paid what I consider and we consider a market price.” — Eric A. Mendelson, Q2 2023 earnings call

Wencor was an exception supported by its scale, strategic fit, complementary portfolio, and unusually large revenue-synergy opportunity. The transaction broadened the prices HEICO would consider for a unique asset, but management’s language makes clear that it did not establish a new norm for ordinary acquisitions.

HEICO usually funds acquisitions with internally generated cash and conservative borrowing. Equity is treated as expensive because issuing shares transfers part of the company’s future economics to the seller. Stock has been used selectively, particularly for a transaction as large as Wencor, but cash remains the preferred consideration for ordinary acquisitions.

Low leverage gives HEICO flexibility during weaker markets, when sellers become more receptive, private equity financing becomes less available, and strategic buyers may focus on protecting their balance sheets. HEICO can continue reviewing or closing transactions because it has not exhausted its borrowing capacity during the preceding boom.

Not every transaction follows the same post-acquisition structure. Victor Mendelson estimated in 2022 that approximately 20% of historical acquisitions had been consolidations, essentially asset deals. These involve purchasing a product line or troubled operation and placing it inside an existing HEICO company.

Most transactions, however, follow the decentralized model. The acquired company retains its management, employees, facilities, and identity. HEICO provides capital, governance, and access to the wider group without imposing a predetermined restructuring plan.

This distinction matters when assessing the historical record. HEICO can integrate and consolidate businesses when necessary, but cost reduction is rarely the primary thesis. The usual objective is to preserve a good business and allow it to continue compounding.

10.3. Why sellers choose HEICO

The seller proposition is one of HEICO’s most important competitive advantages in M&A, especially among programmatic serial acquirers.

“I would say at least four out of five leadership teams tell us that HEICO is their preferred acquirer.” — Eric A. Mendelson, Q3 2015 earnings call

A private business owner choosing a buyer evaluates more than the headline purchase price. The decision may determine what happens to the company’s employees, name, facilities, customers, and reputation after the transaction.

The founder may have spent decades building the company, working with many of the same employees, and serving customers who depend on its products. Selling to the highest bidder may maximize the immediate payment while placing the company’s future in the hands of an owner with very different priorities.

HEICO offers liquidity without requiring the founder to abandon the business. The seller can monetize most of the equity, remain as president or CEO, and frequently retain an ownership interest of approximately 20%.

Eric Mendelson described the typical structure:

“And you know the acquisitions that Eric’s referring to are companies where the seller wants to have a liquidity event, however, wants to remain active, is very knowledgeable about his industry. So he winds up with a minority interest of roughly 20% And it’s a win win for us. We’re normally not an acquirer that wants to buy a company and then take that and shrink it down and get rid of personnel and fire people and so forth. But that’s normally not our model. In a few cases, we have purchased companies or product lines and put them in, but we prefer to keep the personnel, keep the company, to keep the management and to work cooperatively.” — Eric A. Mendelson, Q3 2015 earnings call

The retained minority stake addresses an incentive problem that can arise after a sale. A founder receiving tens or hundreds of millions of dollars no longer needs the salary. If HEICO acquired 100% and removed the founder’s economic participation, the person most important to the business might have little reason to continue with the same intensity.

Retaining approximately 20% allows the seller to diversify personal wealth while continuing to benefit from the company’s growth. The founder remains an owner but gains access to HEICO’s capital, customer relationships, regulatory knowledge, and acquisition capabilities.

The arrangement also protects HEICO. It reduces the upfront cash requirement and keeps the seller financially exposed to the business’s quality and the accuracy of the projections. If the company performs well, both parties benefit; if expected growth fails to materialize, the seller shares part of the disappointment.

HEICO can offer this structure because it has no exit date. Private equity firms generally acquire a business expecting to sell it again within several years. That model can work, but it introduces recurring changes in ownership, financing, and strategic priorities. Management teams may face restructuring before the first sale and another transition when the next owner arrives.

HEICO instead presents itself as a permanent home:

“We’ve been disciplined to not, as we say, overpay for a business, to not get out of our lanes and to make sure that whatever we buy, we’re ready to own forever. We don’t have an exit strategy and we don’t have an exit strategy for our businesses, unlike a lot of private equity firms do. We are owners to own. We buy to own.” — Victor H. Mendelson, Fernway Insights interview, 2022

Permanent ownership changes the investment horizon. HEICO can fund product development that takes years to generate revenue without worrying that the expenditure will depress EBITDA immediately before an exit. It can retain inventory, employees, and technical capabilities through a downturn when those resources matter to the business’s long-term position.

Permanent ownership also allows the seller to make promises to employees with greater confidence. The company is unlikely to be sold again as part of a predetermined fund cycle, and its name, facilities, and operating approach can continue as long as the business performs.

HEICO does not promise complete freedom. A subsidiary must meet financial standards, maintain quality, comply with regulatory requirements, and generate cash. Capital expenditure and larger strategic decisions are discussed with the group. Autonomy operates within a framework of financial accountability.

The company also acknowledges that it is often not the highest bidder:

“I think that the right kind of company that we like to acquire does view us as the preferred acquirer because of the way we run the companies. When we compete with a private equity firm that buys and sells by the pound every 3 to 5 years, managements really find that very stressful. So when they have a say, as some input, we’re always preferred buyer. When a seller who wants to have a liquidity event wants to protect his employees, continue running very often continue in the position of President, CEO of his company, we are definitely the preferred buyer. And very often and we tell people we cannot be the highest price, But we and we’ll also do a transaction where we’ll buy 80.1%, leave somebody with roughly 20%. So if their projection of growth is correct over the next 3, 5, 7 years, they will benefit significantly by the growth of their own company, while at the same time pulling money out and having a liquidity event,” — Eric A. Mendelson, Q4 2015 earnings call

This creates a form of proprietary deal flow. A seller focused only on maximizing the immediate cash price will probably choose another buyer. A seller who also values employees, autonomy, legacy, and future participation may prefer HEICO even at a slightly lower valuation.

Decades of completed acquisitions provide evidence that the promise is credible. HEICO can introduce a potential seller to founders who previously joined the group. Those references can explain whether management retained autonomy, employees were treated as promised, and the minority interest continued creating value.

Laurans Mendelson highlighted this reputational advantage:

“Many private owners would rather sell to us at a slightly lower price than to sell to, say, one of the other companies or private equity guys, because they know that the culture. They will stay with the company. They will be able to share in the future profits.” — Laurans A. Mendelson, Q1 2022 earnings call

Reputation compounds in acquisitions much as trust compounds in customer relationships. Each successfully preserved company makes the seller proposition more credible to the next founder. That credibility can reduce competitive tension, improve access to businesses not broadly auctioned, and partly offset HEICO’s refusal to pay the highest multiple.

The proposition is also operationally self-reinforcing. The best founders are more likely to choose a buyer that preserves their autonomy. They then continue managing the subsidiaries, making HEICO’s decentralized model more effective. Their subsequent experience provides another reference for future sellers.

The acquisition process is therefore less about purchasing anonymous financial assets than about adding owner-managed businesses to a network of other owner-managed businesses.

Each successful acquisition strengthens HEICO’s reputation as a trusted long-term home for the next entrepreneur or management team.

“I think what’s becoming more and more consistent to us is that HEICO seems to be an acquirer of choice for these folks because of our operating style, because we treat people fairly, both customers and team members, shareholders.

I mean, that’s all part of our DNA. And when they have the opportunity to select with whom they are going to work, whether it is an entrepreneur who’s built up a business or a management team, they or even a private equity firm that feels that HEICO can write a check and close, we continue to be I think favored in that area. And we just got to make sure that we find businesses that match with our DNA and that can be acquired at fair prices where it’s fair for the seller, it’s fair for the seller’s leadership team and employees and also it’s fair for HEICO.”
— Laurans A. Mendelson, Q1 2013 earnings call

10.4. Can the model continue at a larger scale?

HEICO’s operating system has worked across more than one hundred acquisitions, two operating groups, and a wide range of aerospace, defense, space, medical, and industrial products. The central question is whether it can continue working as the company grows.

The acquisition opportunity remains substantial. Aerospace and defense supply chains contain thousands of specialized manufacturers, repair shops, distributors, and electronic-component companies. Many are small, privately owned, and exposed to founder succession. Their products may be attractive even when the businesses lack the scale or capital to remain independent indefinitely.

HEICO also has more resources than during the earlier stages of its acquisition program. Free cash flow, borrowing capacity, reputation, and an internal management network allow it to consider a wider range of targets. Subsidiary presidents can complete smaller acquisitions within their product markets, reducing the burden on the Mendelson family and headquarters.

The decentralized structure is scalable in one important respect: HEICO does not need a central organization capable of operating every acquired business. Each company arrives with management, technical knowledge, and customer relationships. Adding another subsidiary does not require headquarters to learn how to manufacture every product.

The model is not infinitely scalable, however. Capital allocation remains centralized, and every acquisition requires judgment about the people, products, financials, culture, and purchase price. Monitoring the quality of those decisions becomes more difficult as the number of subsidiaries grows.

The capital required to move consolidated results also rises with the company. A $20 million acquisition that once made a meaningful contribution now has limited impact. HEICO can respond by completing more small transactions, pursuing larger acquisitions, or combining both approaches.

More transactions increase demands on due diligence and management attention; larger transactions increase the financial consequence of a mistake. Wencor showed that HEICO can finance a transaction far larger than its traditional bolt-ons while preserving substantial operating autonomy, but it also raised the stakes. A poor outcome from a $20 million deal can be absorbed; a poor outcome from a transaction exceeding $2 billion would affect the entire group.

Valuations create another constraint. Private equity has become increasingly active in aerospace and defense supply markets, raising prices for attractive companies. HEICO’s reputation may help it win selected transactions without the highest bid, but not every seller values legacy or autonomy enough to accept less.

Management has repeatedly said it will wait rather than change the model’s economics. This discipline makes acquisition growth uneven: some years contain many transactions, while others contain few. Investors expecting smooth annual deployment may mistake patience for a lack of opportunity even when refusing to transact creates more long-term value.

Culture also becomes harder to preserve as the group grows. The direct connection between the Mendelsons and each subsidiary naturally weakens, new managers join without experience of the earlier years, and large acquisitions bring employees whose expectations were shaped under different owners.

HEICO must therefore institutionalize a culture that developed around three members of one family. Incentives, decentralization, and retained founder ownership help, while the subsidiary structure keeps local employees close to their immediate leadership. Future generations of corporate and subsidiary managers must nevertheless understand why HEICO operates this way rather than merely copying the visible mechanics.

The greatest risk would be preserving decentralization as a slogan while changing the incentives beneath it. If headquarters begins prioritizing consolidated revenue, short-term margins, or deal volume over cash returns and customer relationships, the operating system would gradually lose coherence.

The same applies to acquisitions. Paying too much because HEICO needs a larger transaction, replacing founders with centralized managers, or cutting investment to produce immediate accretion would make the company resemble the buyers from which it has historically distinguished itself.

Victor Mendelson’s comments on HEICO’s future show that management recognizes this danger:

“One, it isn’t easy. It’s never been easy. And just because we’ve had past success, we know that that’s not necessarily indicative of future success. And we keep that in mind every day here. And for us, we have to treat it as though today is the day we took over the company and we’re looking at a clean slate. And what happened and what we were successful with is not going to repeat itself. And that’s an important mindset for us to have. And we’ve got to be as hungry today. We always were. And I don’t believe for a moment that just because we’ve been fortunate so far, that we’ll automatically be fortunate. We have to make it each day and prove it each day. That’s number one, keep that mindset. Don’t become arrogant. Don’t think we’ve cracked the code.” — Victor H. Mendelson, Fernway Insights interview, 2022

HEICO’s acquisition model is sometimes summarized as buying high-margin niche businesses and leaving them alone. That description captures the visible structure but misses the work beneath it. HEICO must find the right people, pay an acceptable price, design the incentives, maintain financial discipline, and earn enough trust for local managers to use their autonomy responsibly.

The model works because its parts reinforce one another. Family ownership supports a long time horizon; employee and founder ownership spread that perspective through the subsidiaries; decentralization preserves local knowledge and accountability; and the seller proposition attracts businesses that already fit the culture. Those businesses generate cash, which management reallocates to product development and further acquisitions.

HEICO’s products may appear difficult to connect from the outside, but the operating logic is consistent. The company acquires specialized businesses, keeps decisions close to customers and products, measures success through cash generation, and holds assets for the long term.

That operating system may ultimately be more difficult to replicate than any individual product HEICO manufactures.

Part 4 explained how HEICO extended its model beyond aircraft parts through ETG, decentralization, and a disciplined acquisition playbook. The question now is what this compounding system has produced financially—and whether HEICO’s economics, competitive advantages, risks, and valuation still support attractive long-term returns. That is exactly what we will unpack in Part 5.

It will be structured in five Parts:

• Part 1: The Aviation Ecosystem Behind HEICO

• Part 2: Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3 (today): Inside HEICO’s Crown Jewel

• Part 4: The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

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👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

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7. HEICO Today: One Company, Two Segments, Dozens of Niche Businesses

Describing HEICO simply as a PMA manufacturer captures its origins but only part of the company it has become. HEICO now designs, manufactures, repairs, and distributes a broad range of aerospace, defense, and electronic products through dozens of specialized operations worldwide.

Its products range from FAA-approved replacement parts and component repairs to microwave equipment, power supplies, antennas, cockpit displays, parachute systems, and components used in satellites and missile-defense systems. HEICO generally targets small but important products in technically demanding markets where quality, reliability, certification, specialized knowledge, or established customer relationships make competition difficult.

Management has repeatedly said that it does not view HEICO primarily as an aerospace or electronics company. Laurans Mendelson instead described it as a cash-generating vehicle:

“Basically, our strategy has always been, I’ve said HEICO, I’ve said this many times at presentations, I perceive HEICO not as an aerospace or electronic technologies company. HEICO is a very strong, well managed vehicle for generating cash flow. And as I look at HEICO, I see a snowball of cash. That’s why we are in business.” — Laurans Mendelson, Q4 2017 earnings call

Eric Mendelson returned to the same idea during the COVID-19 crisis in 2020. The disruption placed unusual pressure on commercial aviation but did not change the criteria by which the family evaluated HEICO or allocated capital:

“I have said for many years that HEICO is not an aerospace or electronics company. It is a vehicle that generates strong cash flow and that’s what we do. And we will make decisions based upon our cash flow profitability. […] We are looking for constant cash flow and growth. That’s what HEICO is all about. Forget aerospace, electronic technology, whatever. HEICO is a vehicle to generate cash flow and we do it through those 2 divisions which normally has high margins. And I think if you understand that you’ll understand HEICO better.” — Eric Mendelson, Q2 2020 earnings call

7.1. One company, two operating groups

HEICO reports through two operating segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG). In fiscal 2025, the company generated $4.49 billion of consolidated revenue and slightly more than $1.0 billion of operating income. FSG contributed approximately 70% of both sales and segment operating income, with ETG providing the remaining 30%.

The Flight Support Group is the larger and older platform. It consists principally of HEICO Aerospace Holdings and HEICO Flight Support Corporation and their subsidiaries. FSG generated $3.12 billion of fiscal 2025 revenue and $750 million of operating income, for a 24.1% margin.

Its activities extend far beyond the PMA products most closely associated with HEICO. FSG reports three broad product lines. Aftermarket replacement parts generated approximately $1.92 billion in fiscal 2025, making them the company’s largest individual category. The line includes HEICO’s FAA-approved jet-engine and aircraft-component alternatives as well as replacement parts distributed by the group.

Repair and overhaul parts and services contributed another $749 million, including selected engine and aircraft-component repairs and overhauls, avionics, instruments, composites, and flight surfaces.

Specialty products generated $446 million and include thermal-insulation systems, complex composite assemblies, lightning-strike protection materials, precision-manufactured aerospace components, parachute systems, emergency-descent devices, and missile hardware.

FSG therefore serves several roles in the aviation aftermarket. It develops alternatives to OEM replacement parts, repairs components that might otherwise be replaced, distributes HEICO and third-party products, and manufactures specialized components for commercial aviation, defense, and space. Customers include airlines, cargo carriers, MRO providers, OEMs, business-aviation operators, the U.S. government, and allied foreign militaries.

The Electronic Technologies Group is smaller by revenue but similarly profitable. ETG generated $1.41 billion of fiscal 2025 revenue and $325 million of operating income, for a 23.0% margin. Approximately $1.14 billion came from electronic components used primarily in defense, space, and aerospace equipment, while roughly $271 million came from medical, telecommunications, industrial, and other electronics markets.

ETG’s portfolio includes microwave and radio-frequency products, power-conversion and distribution equipment, high-voltage interconnects, antennas, cockpit displays, memory products, infrared simulation and test equipment, locator beacons, fuel systems, surveillance equipment, and many other specialized components. Chapter 9.1 discusses these products in greater detail. For now, the important point is that ETG follows a different commercial model from PMA while preserving many of the same economics: its products are often technically complex, highly reliable, qualified for specific platforms, and inexpensive relative to the larger systems in which they operate.

The two groups also diversify HEICO’s end markets. Commercial aviation represented approximately 58% of fiscal 2025 consolidated revenue, defense and space another 31%, and medical, telecommunications, electronics, and other industrial markets the remaining 11%.

HEICO remains meaningfully exposed to commercial aviation but is no longer dependent on airline activity alone. Defense and space follow different cycles, while medical and industrial electronics provide smaller sources of diversification. This proved especially valuable during COVID-19, when the collapse in commercial flying sharply affected FSG while much of ETG continued operating close to normal levels.

The customer base is similarly broad. HEICO markets products and services in approximately 130 countries. In fiscal 2025, around 62% of revenue came from U.S. customers and 38% from elsewhere. No individual customer represented 10% of consolidated sales, while the five largest together accounted for approximately 20%.

This diversification matters because many subsidiaries operate in narrow niches. An individual business may depend heavily on one platform, program, or customer, but the consolidated group spreads that exposure across thousands of products, numerous aircraft and defense systems, and a broad range of customers and geographies.

FSG and ETG are distinct operating platforms but not isolated from each other. ETG companies may manufacture electronic or specialty products for Flight Support customers, while FSG’s airline, MRO, and distribution relationships can provide routes to market for ETG products. The Wencor integration has created additional opportunities for HEICO subsidiaries to quote products previously sourced outside the group. HEICO does not, however, force every operation into a centralized cross-selling system; cooperation is pursued where it creates practical value.

7.2. A collection of entrepreneurial businesses

The two-segment reporting structure can suggest two large, centrally managed divisions. Operationally, HEICO looks very different.

Since the Mendelson family took control in 1990, HEICO has completed approximately 112 acquisitions. These transactions added engineering capabilities, product portfolios, manufacturing facilities, repair stations, distribution operations, and customer relationships across aerospace, defense, space, and electronics. Most acquired companies retain their identity, management team, and operating responsibility. They join FSG or ETG for reporting and capital allocation but generally continue operating as decentralized businesses.

The subsidiary, rather than the consolidated group, is therefore the most useful unit for understanding HEICO. A typical company focuses on a narrow set of products and customers. Its president and local team remain close to engineering, manufacturing, inventory, employees, and demand, allowing decisions to be made by people who understand the product rather than by several layers of corporate management.

Victor Mendelson described the structure in 2024:

“We don’t believe in a structure where there are vice presidents and group vice presidents and assistant vice presidents. We don’t want anybody too far from the customer or from the engineering. And, you know, that’s panned out well. We’ve noticed that in a small business, if you look at HEICO, we’ve got about 10,000 people, but it’s not 10,000 people in some one location. You know, it’s about 100, 100-person operations, that kind of thing. And if you’ve got 75 or 100 people in a business, there’s nowhere to hide. If somebody doesn’t show up today, the boss knows.” — Victor Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

By the end of fiscal 2025, HEICO employed approximately 11,100 people, including around 5,300 in FSG and 5,800 in ETG.

The structure has several consequences. Local management remains directly accountable for customer service, quality, delivery, inventory, hiring, costs, and working capital. Managers can respond to market changes without waiting for headquarters, while their results remain highly visible. In a small operation, weak performance cannot easily disappear inside a large corporate organization.

Corporate management focuses on a narrower set of responsibilities: allocating capital, financing acquisitions, managing the balance sheet, establishing incentives, monitoring financial performance, and providing group-level governance. Capabilities, suppliers, and customers are shared where useful, but HEICO generally avoids centralization for its own sake.

The listed parent does not own 100% of every operation. Lufthansa Technik retains a 20% interest in HEICO Aerospace Holdings, preserving the ownership relationship established in 1997. Founders and other partners also retain minority stakes in several FSG and ETG subsidiaries.

These arrangements allow sellers to participate in the future growth of businesses they continue to manage, strengthen alignment, and make HEICO more attractive to entrepreneurs not ready to leave entirely. The accounting consequence is that part of the earnings of consolidated subsidiaries belongs to minority shareholders. In fiscal 2025, $55 million of net income was attributable to noncontrolling interests rather than HEICO’s listed shareholders (further explained in chapter 12.4).

Chapter 10.1 examines the decentralized model in greater depth. The central point here is that the HEICO name sits above a network of entrepreneurial operations. The parent provides capital, discipline, and a permanent home; subsidiaries provide products, technical knowledge, and customer relationships.

7.3. The Mendelson family

The Mendelson family links the HEICO that emerged from the 1990 takeover with the company today. This continuity is unusual because Eric and Victor Mendelson were involved from the beginning rather than joining decades later as second-generation successors. They helped identify the investment, fought for control, and built the two operating groups.

HEICO’s formal leadership structure changed twice in 2025. Laurans Mendelson, Chairman and CEO for more than three decades, became Executive Chairman, while Eric and Victor Mendelson became Co-CEOs and Co-Vice Chairmen. Laurans Mendelson died on September 27, 2025, at age 87. Under HEICO’s long-standing succession plan, Eric and Victor Mendelson immediately became Co-Chairmen while continuing to serve as Co-CEOs.

Eric Mendelson has led FSG since its formal creation in 1993 and was the principal architect of HEICO’s PMA development program. Victor Mendelson has led ETG since its formation in 1996. Both had served as Co-Presidents of HEICO since 2009.

Their responsibilities mirror HEICO’s structure. Eric Mendelson remains President and CEO of FSG, focusing on the aviation aftermarket, product development, customer relationships, and Flight Support acquisitions. Victor Mendelson remains President and CEO of ETG, bringing experience across electronics, defense, space, legal matters, and acquisitions.

Family influence is reinforced by continuing share ownership. HEICO has two publicly traded classes with virtually identical economic rights but different voting power. Each Common share, traded as HEI, carries one vote; each Class A share, traded as HEI.A, carries one-tenth of a vote.

As of January 2026, approximately 55.1 million Common shares and 84.3 million Class A shares were outstanding. The Mendelson Reporting Group beneficially owned approximately 9.23 million Common shares, equal to 16.47% of that higher-voting class, and approximately 974,000 Class A shares. Because the holdings are concentrated in Common shares, the family’s voting influence considerably exceeds its percentage of the combined economic share count.

The structure gives the family substantial influence without an outright majority of the economic interest. It also aligns a meaningful share of the family’s wealth with HEICO’s long-term value. The company’s performance affects the Mendelsons primarily through the same share prices and distributions that affect outside shareholders.

HEICO extends ownership beyond the family. Its U.S. savings and investment plan makes contributions in HEICO shares, giving many employees a direct economic interest. Chapter 10 discusses this broader ownership culture, an important part of HEICO’s effort to reproduce the mentality of a family-controlled small business across a much larger organization.

The current leadership arrangement combines continuity with a completed generational transition. Eric and Victor Mendelson jointly lead the listed company while continuing to oversee the two operating groups they spent decades building.

8. Flight Support Group (FSG): The Crown Jewel

FSG is the business on which modern HEICO was built. It began with one combustion chamber for a Pratt & Whitney engine and has grown into the world’s largest independent provider of FAA-approved aircraft and engine replacement parts, supported by component repair, overhaul, distribution, and specialty manufacturing.

8.1. The structure of the Flight Support Group

Every maintenance event begins with the same problem: an aircraft or component must return to service quickly, safely, and at a reasonable cost. HEICO built FSG to solve that problem in several ways—supplying approved replacement parts, repairing existing components, distributing urgently needed products, and manufacturing specialized aerospace equipment. Together, these capabilities address the customer’s underlying maintenance need rather than a single product or service.

Calling FSG a pure PMA business would therefore be misleading. PMA remains the foundation of its competitive position and its most distinctive capability, but the group increasingly presents itself as a provider of cost-saving aftermarket solutions. Depending on the component and customer situation, HEICO may offer a factory-new PMA part, an approved repair, an OEM product sourced through its distribution network, or a combination of these options.

Operationally, FSG comprises four principal groups:

• the HEICO Parts Group (HPG),

• the HEICO Repair Group (HRG),

• the HEICO Distribution Group (HDG), and

• the Specialty Products Group (SPG).

The groups are closely connected, but each addresses a different part of the aerospace value chain.

8.1.1. HEICO Parts Group (HPG)

HPG is the historical core of Flight Support. It designs and manufactures FAA-approved replacement parts for aircraft and engines and contains the engineering, regulatory, and manufacturing capabilities behind HEICO’s PMA portfolio. Several operating units focus on different aircraft systems, engine platforms, and product categories. The portfolio now spans virtually every ATA chapter—the standardized system used to classify aircraft equipment and functions—and includes engines, components, airframe structures, interiors, and avionics.

This part of FSG most closely resembles the HEICO described in Chapter 6. Customers identify expensive, poorly available, or otherwise unattractive OEM parts; HEICO evaluates the opportunity, develops an alternative, and seeks FAA approval to manufacture and sell it. The resulting product is sold directly to airlines and MRO providers or supplied through HEICO’s repair and distribution operations.

HPG’s reach bears little resemblance to the single combustion chamber with which the Mendelson era began. The group describes itself as the world’s largest independent provider of FAA-PMA-approved engine and aircraft-component parts, with approximately 20,000 approved products and roughly 400–550 new PMAs added each year.

Airlines incur technical and administrative costs when qualifying an alternative supplier. A small PMA company with only a few products may therefore struggle to justify the effort. HPG can offer an airline thousands of potential savings opportunities across engines, airframes, components, structures, interiors, and other systems. Once the customer has qualified HEICO and gained confidence in its quality systems, the same relationship can support many additional parts.

The products are sold factory-new. They are not used or refurbished substitutes but newly manufactured components produced under an FAA-approved quality and production system.

HPG’s role begins well before manufacturing. HEICO screens potential products using industry and customer information, analyzing demand, OEM pricing, availability, technical complexity, the expected life of the underlying platform, and the investment required to develop and stock the part. Only candidates combining technical feasibility with an attractive expected return enter development.

The operating units then perform the engineering needed to establish the replacement design. Depending on the product, this may include dimensional analysis, material characterization, coating development, manufacturing-process design, stress or performance testing, and preparation of the technical data required by the FAA. HEICO’s long approval history, engineering capabilities, and regulatory credibility allow it to process a large number of PMA applications more efficiently than a new entrant.

Manufacturing is another core capability. Design approval is insufficient if the company cannot repeatedly produce the component within approved specifications. HEICO has accumulated specialized knowledge in precision machining, forming, coatings, brazing, and other processes. It relies primarily on trade secrets, proprietary processes, software, and practical manufacturing expertise rather than a large patent portfolio.

Quality control connects design and production. Every batch must conform to the approved design and quality system. In aerospace, a defect can damage far more than one product’s economics; it can weaken confidence in the wider PMA portfolio. HPG’s technical record and consistent quality are therefore central to the group’s commercial value.

Once approved and manufactured, products are sold directly to airlines, cargo carriers, and repair and overhaul companies. They may also reach customers through other Flight Support businesses. HEICO repair stations can use HPG products when returning components to service, while distribution operations stock and deliver them alongside third-party products. HPG creates proprietary products; the wider FSG provides additional channels to the installed fleet.

HPG’s operating record reinforces this credibility. According to HEICO, the group has delivered more than 90 million parts without a service bulletin, Airworthiness Directive, or in-flight shutdown associated with its products. As discussed in Chapter 5.5.4, this history provides an important counterweight to longstanding safety concerns about PMA.

8.1.2. HEICO Repair Group (HRG)

HRG is Flight Support’s component maintenance, repair, and overhaul platform. According to HEICO, it is one of the world’s largest independent providers of component MRO and asset-management services, specializing in flight-critical equipment.

An important part of its offering is proprietary DER-approved repairs. As Chapter 3.10 explained, a Designated Engineering Representative is an FAA-authorized engineer who can approve certain technical data or recommend its approval. DER-approved data allow HEICO to use proprietary repair processes rather than relying exclusively on OEM instructions. In many cases, an airline can repair an expensive component instead of buying a new OEM or PMA replacement.

HRG is a specialized component MRO provider rather than a full-service maintenance organization. It does not perform heavy maintenance on complete airframes, overhaul entire jet engines, or provide airport line and base maintenance. Airlines and MRO providers instead remove accessories, line-replaceable units, and structural components from aircraft or engines and send them to an HRG repair station, where they are inspected, tested, repaired or overhauled, and returned to an airworthy condition.

HRG’s capabilities span avionics, electronics, electromechanical equipment, electrical harnesses and rewinds, fuel systems, hydraulics, power generation, pneumatics, aerostructures, wheels, and brakes.

Products range from valves and actuators to complex avionics and structural assemblies, fuel pumps, generators, fuel controls, pneumatic valves, starters, turbo compressors, constant-speed drives, hydraulic pumps, wheels and brakes, composite flight controls, auxiliary-power-unit accessories, and thrust-reverser actuation systems.

The work involves more than replacing visibly damaged parts. A component entering the shop is inspected and tested to determine the cause and extent of failure. Depending on the unit, the process may include disassembly, cleaning, nondestructive testing, replacement or restoration of internal parts, reassembly, and functional testing before an authorized repair station releases it to service.

The difference between repair and overhaul is primarily one of scope. A repair addresses a defined defect or restores a failed function. An overhaul is more comprehensive: the unit is disassembled, inspected, and restored to an approved technical standard so that it can return to service in a specified condition. In both cases, appropriately certificated facilities and technicians must perform the work using approved data.

HRG may follow OEM maintenance instructions, but it also develops proprietary alternatives approved through DER data or directly by the owner or operator where permitted. Such repairs can provide greater engineering flexibility and restore a component instead of requiring an expensive assembly replacement or a more restrictive OEM procedure.

DER repair development is economically similar to PMA development. In both cases, HEICO invests in engineering and regulatory work to create a lower-cost alternative to the OEM solution. A PMA substitutes a factory-new HEICO part for an OEM part, while a DER-approved repair preserves and restores a component that might otherwise be discarded or replaced.

The repair and parts businesses reinforce each other. HRG repair stations consume replacement parts during overhaul and may use products from HPG and third-party suppliers. Conversely, the shops provide practical information about how components fail, which internal parts are replaced most often, and where OEM procedures create unusually high costs.

A recurring failure observed across many shop visits may reveal an opportunity for a new PMA part or proprietary repair. HRG is therefore not merely a channel for existing products but an important source of technical information and development ideas.

HRG also provides component-exchange and asset-management services. Under an exchange arrangement, an airline receives a serviceable unit immediately and returns its unserviceable component as the exchange core. HEICO repairs the returned unit and places it back into the available pool.

This can be more valuable than waiting for the airline’s own component to move through the shop. The aircraft returns to service sooner, while HEICO manages inventory, the repair cycle, and unit availability. Exchange services position HRG as an alternative to spare-component pools and OEM support programs.

The proposition therefore combines repair price, turnaround time, availability, and technical capability. A low quote offers little value if the component remains in the shop for months and the aircraft cannot fly. HRG’s inventory, exchange pools, and relationships with other Flight Support businesses allow it to address the total cost and operational impact of the event.

Customers include airlines, regional operators, cargo carriers, asset-management companies, independent MRO providers, military operators, and government agencies. HRG covers commercial and military aircraft, including avionics, navigation systems, and instruments used by the U.S. government and allied militaries.

HRG competes with three principal groups:

• OEM-owned repair networks

• Airlines operating their own maintenance shops

• Other independent MRO providers.

Independence is part of HRG’s proposition. An OEM repair organization may be incentivized to maximize proprietary parts and procedures. HRG can compare repair, DER restoration, HEICO PMA, distributed OEM parts, and component exchange and select the most attractive approved outcome for the customer.

In sum, HRG broadens HEICO from a parts supplier into a maintenance partner. HPG creates proprietary factory-new alternatives, while HRG helps determine whether a unit should be repaired, overhauled, exchanged, or fitted with replacement parts. Together with distribution, these capabilities address a larger share of the customer’s maintenance problem rather than one component alone.

8.1.3. HEICO Distribution Group (HDG)

HDG is Flight Support’s global aircraft-parts distribution platform. HEICO entered the business through the 2005 acquisition of Seal Dynamics and expanded it through subsequent acquisitions. Today, HDG distributes FAA-approved components and OEM replacement parts for commercial and military applications through sales offices and stocking locations across the Americas, Europe, the Middle East, Asia, and Australia.

HDG differs fundamentally from HPG. It connects component manufacturers with airlines, MRO providers, aircraft manufacturers, and military organizations. HDG purchases or stocks parts, manages supplier relationships, handles documentation and logistics, and delivers the required component.

Products come from several sources. HDG distributes HEICO-manufactured PMA parts and replacement components supplied by unrelated third-party OEMs and specialist manufacturers. It remains useful even when HEICO offers no proprietary alternative—for example, when a part is too difficult or uneconomical to reverse-engineer, the platform is too new for meaningful PMA adoption, or the manufacturer prefers to reach a fragmented aftermarket through a specialist distributor.

The portfolio includes hydraulic, pneumatic, structural, interconnect, mechanical, and electromechanical components for commercial, regional, and general aviation. HDG also supplies military aircraft parts and support services to the U.S. Department of Defense, defense prime contractors, and allied foreign militaries.

HDG adds value because the aftermarket is highly fragmented. An airline or MRO may require thousands of part numbers from many manufacturers, often in small quantities and at unpredictable intervals. Buying each item directly would require numerous commercial relationships, purchase orders, quality checks, and logistics processes. HDG aggregates products from multiple manufacturers into a broader source of supply.

Inventory is central to the model. Maintenance demand does not follow a predictable production schedule: a component may fail unexpectedly, an aircraft may be grounded, or a shop may discover an additional need only after disassembly. Immediate availability then matters far more than a manufacturer’s theoretical ability to produce the part months later.

HDG holds inventory near major aerospace markets and provides urgent aircraft-on-ground (AOG) support. It also offers customized fulfillment programs, long-term supply agreements, and on-site customer support. Some businesses provide kitting, cable marking, technical assistance, and just-in-time delivery. These services reduce customer purchasing complexity and inventory requirements while preserving access to critical components.

Unlike an ordinary industrial distributor, an aerospace distributor must preserve each part’s documentation and traceability. Before installation, the customer needs evidence of source, condition, and regulatory status. HEICO supplies the relevant airworthiness and conformity documentation, combining physical availability with confidence in a controlled and traceable supply chain.

HDG includes several specialized businesses. Seal Dynamics, the original distribution platform, serves the commercial aerospace aftermarket and provides 24/7 AOG support. Air Cost Control specializes in electrical interconnect products, including connectors, cables, harness protection, electromechanical devices, and related accessories for aerospace, defense, and space.

Blue Aerospace serves the military aftermarket through parts distribution, supply-chain and program management, MRO support, and engineering services for platforms including the F-16, F-15, F/A-18, and C-130. Pioneer Industries represents manufacturers supplying the U.S. military and other government customers and manages procurement, inventory, military packaging, contract administration, and compliance requirements that many smaller manufacturers would struggle to handle independently.

The 2023 Wencor acquisition materially expanded distribution. Its activities cover high-use commercial and military aftermarket products including bearings, tooling, interiors, filters, hardware, lighting, electrical products, safety equipment, communications components, and seals. Wencor also brought a global logistics network, online ordering, and inventory-management programs.

Distribution is strategically important for three reasons:

• First, it gives HEICO a commercial relationship with customers even where no HEICO PMA exists. An airline may initially buy an OEM component through HDG and later adopt a HEICO replacement or HRG repair. Distribution therefore increases customer touchpoints across the group.

• Second, HDG provides information about actual aftermarket demand. Its businesses see which parts customers order repeatedly, where lead times are increasing, and which products are becoming difficult or expensive to source. That information can reveal opportunities for HPG to develop a PMA, HRG to create a proprietary repair, or HDG to secure another distribution agreement.

• Third, distribution supports parts and repair operations. HRG repair stations need replacement components to complete overhauls, including HEICO PMAs, Wencor products, and OEM parts sourced through HDG. Access to several supply channels can reduce turnaround time and help HEICO select the most economical approved solution.

Distribution may also be preferable to PMA development. Attractive rights to an existing product can generate a return without a multi-year engineering and approval process. HEICO can support the customer immediately while avoiding the technical, commercial, and inventory risk of developing a competing product. Management can choose among manufacturing, repair, and distribution based on each opportunity’s economics rather than treating PMA as the only solution.

Distribution nevertheless has a different economic profile from proprietary parts. The distributor shares economics with the manufacturer and has less control over the product and pricing. It must also purchase and hold inventory before receiving customer orders. That inventory may lose value if the aircraft is retired, grounded for an extended period, or supported by a different component.

HDG broadens HEICO’s proposition from selected proprietary alternatives to a much wider share of customer aircraft-parts requirements. HPG develops the alternative, HRG restores the component, and HDG makes the required product—whether made by HEICO, Wencor, or an OEM—available when and where the customer needs it.

8.1.4. HEICO Specialty Products Group (SPG)

SPG is the least intuitive of Flight Support’s four groups and often receives the least investor attention. It brings together specialized manufacturers of highly engineered, mission-critical mechanical solutions, including structural, thermal, and composite products for commercial aviation, defense, space, and selected industrial applications. SPG houses businesses that do not fit neatly into parts development, component repair, or distribution. Compared with the other groups, these companies generally sit further upstream and more often supply OEMs, original equipment suppliers, defense primes, and government customers.

The range is diverse. SPG manufactures personnel and cargo parachutes, heavy-airdrop platforms, and emergency-descent devices for pilots and crews in elevated cockpits. It also produces removable thermal-insulation blankets for engines and other high-temperature applications, conductive foil mesh protecting composite structures from lightning strikes, and complex composite assemblies for aircraft, defense systems, and spacecraft. Other activities include precision machining and missile hardware.

The products may appear unrelated but share similar economics. They are highly engineered, produced in modest volumes, and represent only a small portion of the larger aircraft or defense system’s value. Reliability, qualification, and delivery performance are nevertheless critical, giving customers little reason to switch merely for a small component-cost saving.

SPG therefore differs from the traditional PMA model. HPG enters the aftermarket as a lower-cost approved alternative to an OEM part, while SPG is often the original qualified manufacturer or subcontractor. Its position may begin during the design and production phase of an aircraft, spacecraft, or defense program and continue as long as the platform remains active.

The revenue profile also differs. PMA demand is driven largely by aircraft utilization, maintenance events, and the installed fleet. SPG depends more on OEM production rates, customer programs, defense procurement, and contract timing. Some products later generate replacement demand, but the relationship often begins with an OEM, prime contractor, or government customer.

Despite these differences, SPG fits the broader HEICO model. Its products occupy narrow technical niches, account for a small share of total system cost, and require capabilities that cannot be replicated quickly. Many are manufactured in modest volumes but must meet demanding specifications, supporting attractive economics without mass-market production.

The position is durable but not risk-free. An SPG business may depend on a limited number of customers or programs. Production delays, program cancellations, defense-budget changes, or lower aircraft deliveries can affect demand, while poor quality or delivery performance can cost future work. Consolidation across numerous products, customers, and platforms reduces some of this concentration.

SPG also strengthens Flight Support’s manufacturing base. Its machining, composite, thermal, and fabrication capabilities can support products developed elsewhere in HEICO. After the Wencor acquisition, management specifically identified SPG as an internal resource that Wencor could approach for new product quotations.

The four-group structure differs from external reporting. FSG is one operating segment, and revenue is divided into only three product lines: aftermarket replacement parts; repair and overhaul parts and services; and specialty products. The organizational groups and reported categories overlap but do not correspond exactly. Distribution, for example, is not separately disclosed and is largely included in aftermarket replacement parts (further explained in Chapter 8.8).

The interaction among the groups matters more than the labels. HPG develops proprietary alternatives; HRG brings HEICO into the maintenance event and consumes PMA and distributed products; HDG provides inventory, customer access, and market intelligence; and SPG adds manufacturing capability and exposure to additional aerospace and defense applications. Wencor spans several activities and materially increases their scale.

“With regard to PMA versus repair or distribution, again, I think what the airlines are looking for is reducing their total cost of ownership, producing their total costs. And whether we sell a product as a direct PMA or we embody it in a repair or we are able to structure something with the distribution deal, I think that they’re all very complementary and things are getting very fuzzy between our PMA and our repair, because there are all sorts of products, which perhaps in the past we would have sold as PMA and now we’re selling as repairs, because sometimes you’re able to salvage part of a unit and have the cost of the repair be lower than the cost of making a brand new part.” — Eric A. Mendelson, Q4 2015 earnings call

Recurring aftermarket demand should not be confused with long-term order visibility. The installed fleet, recurring maintenance events, and growing number of approved parts provide a durable demand base, but customers place orders relatively close to delivery. Visibility also differs among FSG activities:

“In our parts business, both PMA and distribution, we receive most of the orders in the month of shipment. So the visibility there is probably 30 to 60 days out. Within repair, it’s probably another 30 days on top of that. And in specialty products, it’s probably, say, another 60 days on top of that.” — Eric A. Mendelson, Q1 2020 earnings call

This creates an important distinction between structural demand visibility and near-term revenue visibility. HEICO can assess long-term drivers through utilization, maintenance activity, fleet age, and customer adoption, but has less visibility into exact quarterly timing. PMA and distribution are particularly short-cycle, with most orders arriving near shipment. Repair adds approximately one month of visibility, while specialty products generally add another two. Changes in demand can therefore appear in HEICO’s results quickly, as COVID-19 demonstrated.

8.2. From customer problem to approved product

HEICO does not develop products by searching randomly through an aircraft for technically replicable parts. The process begins with customer demand and then passes through financial, technical, and regulatory filters.

Airlines, repair stations, and MRO providers already know where the pain lies. They see which OEM products are purchased frequently, which prices have risen most aggressively, which components suffer from poor availability, and where a credible alternative could create meaningful savings. HEICO’s long-standing customer relationships provide this information before engineering resources are committed.

The Lufthansa partnership established the original model: Lufthansa Technik identified high-volume, high-value products, supplied technical knowledge, and provided demand after approval. Today, the network is much broader. HEICO serves every major airline, operates repair and distribution businesses, and receives product requests from across the aftermarket.

The first question is whether customers genuinely want the product. A technically attractive part has little value if airlines resist approving it, the installed base is too small, or expected volume cannot justify the engineering and inventory investment. HEICO also considers similarity to products it has already developed, sourcing and manufacturing speed, and the capital required before meaningful revenue begins.

Eric Mendelson described the decision process in 2025:

“We look at how similar it is to something that we’ve done before, how much the customer wants it, what the payback looks like, what the investment is, how quickly we can get it from the vendor. I mean, all of that stuff is put together, and basically that goes into an IRR analysis.” — Eric Mendelson, Q3 2025 earnings call

This discipline matters because regulatory approval alone does not make a product economically successful. HEICO must pay engineers, acquire and analyze OEM samples, create drawings, select materials, qualify processes, perform tests, prepare the submission, and build inventory. The product must then pass each airline’s qualification process before meaningful purchasing volume develops.

HEICO has historically focused on parts offering meaningful cost or availability benefits without imposing disproportionate customer risk. Less safety-sensitive articles are generally easier for airlines to approve than the most critical engine components, although the portfolio has become more technically demanding over time. Management has repeatedly said that HEICO now develops products whose complexity and criticality it does not disclose for competitive reasons.

“We continue to develop 300 to 500 new PMAs per year, similar number of DER repairs. […]. In addition, we’ve got a number of, you know, I would say, extremely complex, critical products which we offer, which we don’t publicly speak about for competitive reasons. Sometimes our competitors know about them, other times they don’t.” — Eric A. Mendelson, Q3 2022 earnings call

Once selected, the product must reproduce the required performance on a design and manufacturing basis acceptable to the FAA. As discussed earlier, equivalency does not mean merely looking similar; the product must preserve airworthiness and function correctly within the broader system.

HEICO may also improve a product while preserving its required form, fit, and function. An OEM design may have entered service decades before newer materials, coatings, and manufacturing methods became available, while operating experience may reveal recurring weaknesses. HEICO can incorporate those lessons provided the result remains fully compatible and satisfies FAA requirements.

Approval is followed by another capital commitment: HEICO must manufacture and stock enough parts to support customers reliably. A lower price loses much of its value if the part is unavailable when needed, so the company builds inventory before the full demand curve is visible.

Management describes development and commercialization as gradual. Depending on complexity, a product may take roughly a year from identification until sufficient inventory is available. Customer acceptance then builds over time, with the product typically reaching full commercial potential after three to four years. Revenue therefore ramps rather than appearing immediately upon FAA approval.

This creates a portfolio effect. Each product may be small and ramp slowly, but HEICO introduces several hundred PMAs and a similar number of DER-approved repairs in a typical year. Annual cohorts overlap: new approvals enter airline qualification, earlier cohorts gain adoption, and mature products continue serving aircraft that may remain in operation for decades.

Catalog breadth has also changed the offer. A small supplier with one or two PMAs asks an airline to undertake qualification for limited savings. HEICO spreads that effort across a much broader portfolio. Once an airline trusts its engineering, quality, and support, it can evaluate additional products without treating HEICO as a new supplier each time.

Wencor materially increased that scale. Before the acquisition, HEICO offered roughly 12,000 PMAs and Wencor about 7,000, creating a combined portfolio approaching 20,000 approved replacement parts. By early 2025, management also referred to nearly 10,000 DER-approved repairs.

The portfolio now extends far beyond HEICO’s historical engine focus. It expanded from one JT8D combustion-chamber product into additional engine parts and then fuel, hydraulic, pneumatic, electromechanical, wheel and brake, airframe, interior, and avionics products.

“You know, HEICO started out life as a JT8D engine parts manufacturer, and then we got into other engines and components, and as time has gone on, into structures and avionics.” — Eric A. Mendelson, Q3 2025 earnings call

FSG remained entirely dependent on engine products until the early 2000s, when HEICO deliberately began diversifying. By early 2026, approximately three-quarters of PMA sales came from non-engine products:

“When you look at […] the products that we’re doing, our sales in the PMA business are roughly 3/4 non-engine, which would be components, airframe, interior, and about 25% engine.” — Eric A. Mendelson, Q1 2026 earnings call

This diversification matters. Engine products can offer attractive savings, but OEM control through service agreements, licensed repair networks, and warranty pressure is strongest in the engine aftermarket. Non-engine categories expose HEICO to more customer pain points and often face fewer contractual barriers, while reducing dependence on individual engine programs.

HEICO has built a repeatable process for identifying customer problems, screening the economics, completing engineering and regulatory work, establishing supply, carrying inventory, and driving adoption. The process that continually produces new PMA parts is the strategic asset.

8.3. The customer value proposition

HEICO’s value proposition rests on three elements: cost, availability, and credibility. Cost attracts attention, availability may create the immediate reason to switch, and confidence determines whether an airline is willing to install the product.

8.3.1. Price

Price is the first element. OEMs often control the aftermarket for products designed into an aircraft or engine. Once certified as part of the platform, the operator may have no alternative approved source and must continue buying from the same supplier. HEICO enters as an approved second source without bearing the cost of developing the entire aircraft, engine, or system, allowing it to offer a substantial discount while still earning attractive margins.

HEICO commonly introduces parts at approximately 30–40% below the corresponding OEM price. The initial discount often widens because OEMs have historically raised prices much faster than HEICO. Over time, the gap can exceed 50% and, for mature products, may reach 70–80%.

HEICO and the OEM frequently pursue very different pricing strategies after the alternative enters the market. OEMs tend to exploit sole-source positions through substantial increases, while HEICO has generally raised prices only modestly. The price advantage can therefore compound for many years.

HEICO’s descriptions of this behavior have remained remarkably consistent. In early 2012, Eric Mendelson said airlines expected OEM pricing on newer platforms to become even more aggressive:

“I was just over in Singapore last week, and many people were commenting that on the newer platforms, they sense that the OEM prices are going to be even more egregious than they’ve seen in the past.” — Eric A. Mendelson, Q1 2012 earnings call

Later that year, management described repeated increases as a fundamental feature of the OEM aftermarket model and a source of customer frustration:

“They [=> the OEMs] have a distressed relationship with their customers because of their ability to maximize profit through pricing. And that’s the way unfortunately they have to do it. We on the other hand build up a lot of customer goodwill and we view it as an investment by keeping our prices reasonable” — HEICO management, speaker unclear, Q2 2012 earnings call

In 2013, Eric Mendelson quantified typical annual increases at approximately 5–7%. He linked the behavior to what Laurans Mendelson called the “expanding universe”: even as PMA suppliers gain share, the OEM aftermarket continues growing through price alone.

“But the reason it’s sort of staying at that level is, of course, the OEM, my dad always has spoken about the theory in the expanding universe. The OEM prices continue to go up by just say 5%, 6%, 7% per year and that frankly dwarfs the PMA percentage of the total market.” — Eric A. Mendelson, Q4 2013 earnings call

By 2017, the pattern was unchanged. Eric Mendelson cited examples of OEMs raising prices by 10–11% annually for several consecutive years. HEICO could theoretically have followed but deliberately chose not to:

“I mean I’ve heard examples. There are some OEMs out there that have raised prices 10%, 11% per year for the last number of years. And we’ve been clearly, we could have done the same and we didn’t. […] And HEICO has developed this reputation of not taking advantage of the customers when we can take advantage of the customers.” — Eric A. Mendelson, Q2 2017 earnings call

Independent reports on two major engine families appeared to support the broader observation. According to Eric Mendelson, CFM56 and CF6 parts prices had increased by roughly 8% annually over ten years:

“There have been many newspaper or many media reports on the increases coming on particularly the cost of engine parts. There’s been articles and independent reports that have come out, particularly on the CFM56 and the CF6 showing price increases over a 10 year period, roughly in the 8% per year area. And airlines see that, they’re not happy about it. And I think that there’s continued opportunity throughout the industry.”— Eric A. Mendelson, Q2 2017 earnings call

The pandemic did not materially change the behavior. In early 2021, management observed that some OEMs had increased prices particularly sharply to recover margins lost during the collapse in aviation activity:

“The Pricing umbrella does widen over time, and we can get to a point where if somebody has been buying a part from us for 15 to 20 years, our price could end up being 70%, 80% below the OEM price. […] The OEMs, I would say, this year in general, their price increase, I mean, they’ve been across the board. Some have decided to raise price substantially in order to make up all of the lost margin that they’ve Surrender due to the pandemic.” — Eric A. Mendelson, Q1 2021 earnings call

HEICO continued to view its share gains within a much larger and increasingly valuable OEM aftermarket. Even when customers adopt HEICO products, the OEM generally retains most of the market and benefits from continued increases on the remaining volume:

“And also, I want to point out that even though we will take market share, in no means should this be interpreted that OEM businesses will not do well because we take a minority of the market share. We leave a majority for the OEM. The OEMs have been pretty aggressive with price increases, and we’re just trying to take our little piece.” — Eric A. Mendelson, Q1 2021 earnings call

Victor Mendelson summarized the economics even more directly in 2024. His 6–13% range should not be read as a measured annual average for every product, but it illustrates the pricing power available to a sole approved source:

“So what do you do if you’re the only approved source? Of course, rational people raise prices, and they raise prices 6%-13% a year, regardless of economic conditions” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

Eric Mendelson cited one major OEM that raised prices twice in a year—first by 10% and then by another 18%—while HEICO remained far more conservative:

“So honestly, I think that our pricing has been a lot more conservative and gentle than it could be. Our competitors are substantially raising price. I just received an email last night from a I don’t want to call out the OEM, but it’s an OEM that everybody knows. And they increased price twice last year, once 10% and another time 18%.”— Eric A. Mendelson, Q1 2024 earnings call

These statements span more than a decade, several aviation cycles, and the industry’s largest disruption. Percentages differ by product, platform, OEM, and period, but management’s description has remained consistent: OEM replacement-part prices have generally risen much faster than HEICO’s.

How the price advantage compounds:

The following chart illustrates how a conventional initial PMA discount can widen into the 70% range. It starts with an OEM price index of 100 and a HEICO price of 70, a 30% discount. The OEM price then increases by 7% annually, while HEICO raises its price by 1%.

Under these illustrative assumptions, the OEM price rises from 100 to approximately 276 over 15 annual increases, while HEICO’s price reaches only about 81. The relative discount widens from 30% to roughly 71%. Even with 2% annual HEICO increases, it would reach approximately 66% after 15 years and more than 70% after 20 years.

The chart is illustrative rather than a reconstruction of one part’s history. It nevertheless shows why management’s claim that mature HEICO products may sell for 70–80% less than OEM equivalents is mathematically plausible. A modest annual pricing difference becomes enormous when compounded across a 15- to 20-year product life.

Eric Mendelson described this development in 2021:

“The Pricing umbrella does widen over time, and we can get to a point where if somebody has been buying a part from us for 15 to 20 years, our price could end up being 70%, 80% below the OEM price.” — Eric A. Mendelson, Q1 2021 earnings call

By 2024, HEICO’s prices as a percentage of the corresponding OEM price had reached their lowest level in company history:

“I can tell you that our prices that we sell as a percentage of OEM, I would say, are unfortunately at an all-time low. So, the OEMs have raised prices faster than we have raised prices.” — Eric A. Mendelson, Q2 2024 earnings call

The word “unfortunately” is revealing. A widening discount benefits customers and makes HEICO more attractive, but also shows how much pricing power the company chooses not to exercise. HEICO could retain more of the available savings while remaining far below the OEM price.

The restraint is deliberate. Management believes that maximizing every product’s price would weaken customer relationships, reduce incentives to approve additional HEICO parts, and potentially provoke a more aggressive OEM response. HEICO instead earns attractive margins while leaving a meaningful and visible share of the benefit with the airline.

Laurans Mendelson summarized the philosophy more directly:

“We don’t try to screw our customer.” — Laurans A. Mendelson, Forbes interview, 2020

The wording is blunt but captures HEICO’s long-term approach. Management could retain more savings through higher prices but believes fair treatment creates greater value through stronger relationships, higher volumes, and additional development opportunities.

HEICO was following the same approach in 2025. Eric Mendelson characterized increases as ranging from the low single digits to the upper end of that range and primarily intended to offset cost inflation:

“We could, frankly, I think our prices could be a lot higher, but we don’t do that. And our prices have been, as you know, sort of the increases have been sort of low single digits, maybe the high end of low single digits, but really sufficient in order to cover our cost increases.

We do have certain contracted customers where, as a result of fixed prices for a longer period of time, there could be more substantial price increases. But if you look at it on an annualized basis, it’s still that, I would say, low single digits up to the high end of the low single digits [=> of price increases]. So we have not, no, we’ve not pushed the pricing. We want to make sure that we’re very fair.” — Eric A. Mendelson, Q1 2025 earnings call

The commercial value extends beyond goodwill. Airlines can reward HEICO with more volume on existing products and ask it to develop further alternatives. Eric Mendelson described an unusually direct example after attending an MRO conference in Dallas:

“We believe that we’ve been able to successfully pass along our cost increases, along with maintaining our profit margin, while at the same time, keeping our customers happy. […] actually have to just add a little anecdote.

I was at the MRO conference in Dallas a couple of weeks ago, and actually we had a major airline that everybody would be very, very familiar with. I can’t mention the name. They brought all of their senior leadership to frankly thank HEICO. In all of my years, I’ve never had a meeting quite like this, where they brought their senior leadership to thank HEICO, one, for coming up with our new product solutions and helping them with all sorts of stuff that others wouldn’t. Number two, not taking advantage of them and not doing what other people are doing. They called out a number of other manufacturers, and they said that HEICO really differentiated itself and was going to be rewarded with not only increased business on products that we currently offer, but increased business on new stuff that they wanted us to develop for them. I think as a result of treating our customers right, this is gonna work.” — Eric A. Mendelson, Q2 2022 earnings call

The anecdote shows how pricing reinforces the development pipeline. Fair treatment strengthens relationships, increases volume from the existing catalog, and encourages customers to bring HEICO more parts to develop.

This supports a different growth model from that of many sole-source aerospace suppliers. By treating customers fairly, HEICO has historically been rewarded with unit growth. Much of FSG’s organic growth has therefore come from volume rather than price.

“Our organic growth comes primarily from volume, not from price. We tend to be very price friendly to our customers.” — Eric A. Mendelson, Q2 2016 earnings call

HEICO generally raises prices only to reflect underlying input-cost inflation.

HEICO benefits when an existing customer approves another product, installs it across more of its fleet, or adds product families to a long-term agreement. The company can outgrow the underlying aftermarket without relying on double-digit annual price increases.

Long-term agreements are an important part of the relationship. They give airlines price visibility and supply protection while providing HEICO the volume commitments needed to procure materials, build inventory, and organize production. In 2024, management estimated that well over half of the PMA business might be under contract:

“Our customers, with regard to PMA, they like the idea of having a long-term agreement, and we like that idea too, because we can go out and procure the product for them and protect them. You know, clearly, if they want to be protected on price, we’re happy to do that, but in turn, they’ve got to commit to us. So, you know, definitely on the PMA side, the percentage of contracts would be, you know, I’m guessing well over 50%.” — Eric A. Mendelson, Q2 2024 earnings call

These agreements commonly run for three to five years and may contain flat pricing or inflation-linked adjustments. They can temporarily limit HEICO’s ability to reprice during periods of rapidly rising costs, as in 2022 and 2023, but strengthen the relationship and shift value creation toward higher volumes and broader adoption.

Price protection generally applies only to products already covered. If the customer later adds another HEICO part, it is priced at the current level rather than the historical price granted to the existing portfolio. Airlines therefore have an incentive to qualify and contract products early:

“So if a customer is buying a product and it’s under contract, then obviously, they would have price protection for the terms of the contract, the duration of the contract, if that’s what it’s provided for. And of course, there are different things which matter to different customers, so we’re very accommodating there. However, if that customer wants to start buying a part that they haven’t purchased, then they would get a price based on the newest price as opposed to what the old price was. So there’s definitely a big incentive to get started and get locked in with us as early as possible.” — Eric A. Mendelson, Q1 2024 earnings call

Early commitment can lock in supply and a more favorable starting price, while HEICO gains longer-term volume and better procurement and inventory visibility.

The airline’s financial benefit becomes especially visible across several contracts and pricing cycles. HEICO may protect the customer through modest increases while the OEM raises list prices much faster, widening the gap even as HEICO continues earning attractive margins:

“When our customers commit to us long term, and we give them, you know, pricing protections, we can get into an area where our parts can be as much as 70% below the OEM after many years. We still drive a very nice margin, and the airlines save a lot of money.” — Eric A. Mendelson, Q1 2023 earnings call

The proposition is broader than a cheaper introductory price. HEICO offers an alternative pricing trajectory: the initial 30–40% discount creates immediate savings, while the difference in annual increases can multiply those savings over the remaining life of the aircraft or engine platform.

HEICO’s large advantage might suggest maximizing volume. Management has historically been more restrained, seeking an attractive minority share for each part while leaving the OEM most of the market.

HEICO described this approach in 2013:

“We only go for up to one third market share on each of the parts we provide. So we intentionally leave them [=> the OEMs] with two thirds. So, if you look at the economics of that, they can get two thirds at an aggressive price. And if they want to try to squeeze us on the one third that we’re going to take and compete on price, then we’re just going to have to go after some of the two thirds some of the other pieces that they’ve got in order to capture our target market share.” — Eric A. Mendelson, Q1 2013 earnings call

The logic is straightforward. If the OEM retains roughly two-thirds of volume, it can earn a high contribution on most of the market at its existing price. A reduction might recover share but would apply to every unit sold. The OEM must weigh contribution from recaptured volume against the margin sacrificed across its remaining installed base.

The following table illustrates the trade-off in a simplified 100-unit market. The OEM charges $100 per part with $50 of variable cost, earning $50 of contribution per unit. HEICO enters at $70, a 30% discount, and earns a 30% contribution margin. If the OEM responds, the model assumes a 15% reduction to $85 and recovery of the entire market.

At a 20% HEICO share, the OEM sells 80 units at $50 of contribution, or $4,000. Reducing the price to $85 and regaining all 100 units generates only $3,500, so the OEM is better off accepting the lost volume and preserving price.

At a 30% HEICO share, the alternatives produce the same result and the OEM is indifferent. Above 30%, the balance changes. At a 40% share, the OEM earns $3,000 at the original price versus $3,500 if it lowers the price and recaptures the market. The incentive to respond increases with HEICO’s share.

The intersection near 30% visualizes the strategic equilibrium. Below that level, maintaining the high price is more profitable; above it, a reduction becomes increasingly attractive under the model assumptions.

The threshold is not universal. It depends on variable cost, the required price reduction, and the volume recovered. If the OEM had to match HEICO’s $70 price fully, it would sacrifice far more contribution per unit and the break-even share would move to 60%, as the sensitivity analysis below shows.

The model nevertheless captures the logic behind HEICO’s stated one-third target. The company seeks enough volume to earn attractive returns but generally stops before its presence becomes painful enough to make the OEM abandon its high-price strategy.

Management described the same balance eight years later:

“And also, I want to point out that even though we will take market share, in no means should this be interpreted that OEM businesses will not do well because we take a minority of the market share. We leave a majority for the OEM. The OEMs have been pretty aggressive with price increases, and we’re just trying to take our little piece.” — Eric A. Mendelson, Q1 2021 earnings call

HEICO’s restraint extends beyond market share. It also largely avoids the engine OEMs’ most valuable parts. Rather than targeting life-limited parts—highly engineered, safety-critical components replaced after prescribed cycles—HEICO focuses primarily on expendables and selected repairables:

“Our expertise is in a certain area, and I would anticipate we continue to focus in that area. In general, we do expendables, parts which are replaced typically at every shop visit or at most shop visits. And then we also do certain repairables as well. So I think we’re going to continue to focus in those areas. We don’t do [life-]limited parts. And that really is the bread and butter for the original equipment manufacturers.” — Eric A. Mendelson, Q1 2019 earnings call

Life-limited parts are crown jewels of the engine aftermarket: highly engineered, safety-critical, replaced at mandatory intervals, and typically carrying some of the OEM’s highest margins. Avoiding them reduces the threat HEICO poses to core OEM economics.

This creates rational coexistence. HEICO earns attractive margins and gives airlines substantial savings on the minority share it captures. The OEM retains most volume and continues charging high prices across that larger base. Both can therefore earn attractive economics in the same product market.

The strategy also creates an implicit deterrent. If the OEM aggressively defends HEICO’s targeted one-third share, HEICO can pursue more of the remaining two-thirds. Leaving most of the market untouched is cooperative only while the OEM accepts the arrangement.

HEICO’s restraint therefore operates in two directions: it leaves substantial savings with airlines and substantial market share with the OEM. This supports goodwill, reduces destructive price competition, and allows HEICO to repeat the model across thousands of parts rather than maximize one product’s share.

The approach resembles Nick Sleep’s concept of “scale economies shared”, best known through Costco. Costco passes a meaningful share of its purchasing power and operating scale to members through lower prices, strengthening loyalty and volume. HEICO follows a similar principle. As engineering expertise, catalog breadth, and customer relationships expand, it could raise prices more aggressively; instead, it preserves a large discount. Customers save, HEICO earns attractive margins and gains volume, and the resulting trust supports further approvals. Shared savings therefore reinforce the scale advantages that made them possible.

These dynamics benefit HEICO in several ways. The widening discount makes mature products more compelling, supports additional approvals, and strengthens the company’s reputation as a long-term cost-saving partner. HEICO preserves attractive margins because its manufacturing costs do not rise nearly as fast as OEM list prices. Customers save more, HEICO earns a strong return, and the OEM retains most of an aftermarket that continues expanding through price increases.

8.3.2. Availability

Availability is the second element. Aircraft-on-ground costs can quickly exceed the price difference between components. During supply-chain disruptions, a product available today may be worth more than a cheaper one arriving months later. By ensuring immediate part availability, they are actively de-risking their customers’ supply chains.

HEICO’s PMAs provide a second source, while its inventory and distribution infrastructure make that source usable. Recent shortages have strengthened this proposition. Airlines must keep older aircraft operating while facing long lead times for parts and maintenance capacity. Even OEMs (!) have occasionally purchased HEICO or Wencor products when their own parts were unavailable and repaired units could not otherwise be shipped.

“I have to say, I don’t wanna mention which ones, but even OEMs have now moved to buying both HEICO and Wencor PMA products because if they don’t have the parts on the shelf, and they’ve got to ship even their own repaired units.” — Eric A. Mendelson, Q2 2023 earnings call

Availability can begin a relationship that later becomes permanent. A customer may first approve a HEICO part because the OEM cannot deliver. Once the alternative performs successfully, the airline has less reason to return to the higher-priced source.

8.3.3. Credibility

“You know, we’re not the small PMA company that we used to be many, many years ago. I think that credibility is very important.” — Laurans A. Mendelson, Q3 2020 earnings call

Credibility is the third requirement. An employee approving an alternative has less personal downside from staying with the OEM, even when it charges more. The savings belong to the airline; the perceived career risk sits with the decision-maker.

“It’s very hard to convince people to buy an alternative on an airplane.” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

HEICO has spent decades reducing that perceived risk. Its FAA approval record, technical capabilities, quality systems, Lufthansa relationship, and successful service history all contribute. Catalog breadth also matters: every successful product provides more evidence that HEICO can support the next.

This creates an asymmetric sales process. Winning the first product can be slow, but subsequent approvals become easier. HEICO already sells to virtually every major airline, so the main organic opportunity is no longer adding customer names but increasing the number of products each customer buys.

“So, it’s not so much getting new customers for us as it is selling customers more of our product line.” — Eric A. Mendelson, Q3 2020 earnings call

The relationship can deepen for years. An airline may begin with low-risk, non-engine products, gain confidence through operating experience, and then expand into additional systems, repairs, and distribution arrangements. Savings open the door; consistent quality and delivery determine how far it opens.

International adoption follows a similar path. Airlines receiving many new aircraft may receive more OEM attention and have less immediate need for alternatives. As fleets mature, maintenance costs rise, OEM support becomes less generous, and PMA’s financial value becomes clearer. HEICO has observed this pattern across North America, South America, Europe, and Asia.

External validation helped overcome early skepticism, but partnerships and regulatory approvals could only open the door. Lasting credibility had to be earned through product performance. In aerospace, reputation builds slowly over many years and can be damaged by one serious quality failure.

Victor Mendelson described quality as an existential requirement rather than another operating objective:

“Another is an absolute commitment to quality. And in our industry, by the way, you’re probably going to be out of business if you don’t have complete quality because this is either a high-reliability, harsh-environment business in everything that we make.” — Victor H. Mendelson, Fernway Insights interview, 2022

This principle has tangible economic consequences. Higher testing standards, additional inspections, stronger quality systems, and conservative manufacturing controls all cost money. HEICO accepts those costs because protecting its reputation is more valuable than maximizing the margin on one part.

“Quality is absolutely number one, and we will overspend to get that quality. That’s very, very important to us.” — Laurans A. Mendelson, Q2 2012 earnings call

Spending beyond the minimum standard is central to HEICO’s credibility with airlines, MRO providers, regulators, and other customers. A lower-priced alternative creates value only if customers trust its reliability. Quality is therefore more than a defensive requirement; it is the foundation for winning approvals, expanding into more complex products, and earning additional customer responsibility over time.

8.4. Cyclicality: short-term volume pressure, long-term share gains

HEICO is exposed to the commercial aviation cycle, but downturns affect it more subtly than through a simple demand decline. Lower flight activity initially reduces wear, parts consumption, and repair volume. In a severe disruption, as COVID-19 demonstrated, this near-term volume effect can outweigh the benefit of greater customer cost consciousness. HEICO is therefore neither recession-proof nor conventionally countercyclical.

Over time, however, financial pressure can strengthen its competitive position. When airline economics deteriorate, management teams scrutinize every source of savings. PMA parts, alternative repairs, and independent distribution solutions receive more attention than during periods of strong profitability, when qualifying a new supplier feels less urgent.

Management has consistently described this mechanism:

“Yes, what we say is that typically when the economy turns down, airlines get more focused on their cost savings, whether it’s parts, repair, distribution—basically all of our offerings—and we get, if you will, spec’d in on additional products as the economy is getting weaker. […] I think HEICO’s credibility at the airlines is at a level that we’ve never seen before. I mean, I’ve been with the company now almost 22 years, and I’ve never seen this level of acceptance at the airlines and desire to continue to develop more new parts. I think we’ll continue to see new parts to new customers and take market share that way.” — Eric A. Mendelson, Q2 2011 earnings call

The reference to being “spec’d in” is important. Before using a new PMA part or alternative repair, an airline generally completes its own technical, engineering, procurement, and quality approvals. That requires time and internal resources. During favorable periods, potential savings may not justify the effort; a downturn moves the same opportunity higher on the priority list.

The mechanism is not limited to demand-driven recessions. Rising fuel prices can create similar pressure by compressing airline profitability and increasing the need to reduce other costs:

“Yeah, there’s no question that whenever fuel prices go up, the airlines get more serious about cutting their costs, and they become much less complacent and much more aggressive. I think that is a good medium- and long-term driver for our business.” — Eric A. Mendelson, Q1 2012 earnings call

The immediate benefit may be modest because qualifying more products does not instantly offset lower industry volume. The more important effect is that each approval expands HEICO’s position within the customer’s maintenance system. Once the airline has completed the work, used the product successfully, and gained confidence in its performance, the approval does not ordinarily disappear when traffic and profitability recover.

After completing the approval process and gaining confidence in a PMA part, a customer has little reason to return to the more expensive OEM alternative. The relationship is highly sticky, helping HEICO emerge from downturns with deeper customer penetration and a stronger competitive position.

“I think normally we always say that we gain market share in financial downturns. That’s when airlines realize they’ve got to focus on cost.” — Eric A. Mendelson, Q3 2014 earnings call

The same dynamic applies when uncertainty rather than an outright recession prompts airlines to reassess costs. Concerns about passenger demand, fuel prices, financing costs, supply-chain reliability, or general industry conditions can all increase willingness to consider alternatives to established OEM solutions:

“I think one of the other things that’s important to note is that whenever there’s angst or concern, anxiety, whatever, with regard to commercial aviation, airlines realize that they’ve got to get more serious and cut costs. That always helps us in the long term. There ends up being more interest in our products. We get approved in more spaces, and that, in turn, leads to greater future revenue and earnings.” — Eric A. Mendelson, Q2 2026 earnings call

This creates an attractive through-cycle pattern. In the short term, HEICO remains exposed to flight activity and maintenance volume. Over the longer term, financial pressure can accelerate customer approvals, broaden the applications in which HEICO products are accepted, and increase its share of airline maintenance spending. When traffic recovers, HEICO participates in higher industry volume from a stronger commercial position.

2.5. Wencor

HEICO’s August 2023 acquisition of Wencor differed from its typical transaction. Most targets are small specialists adding a product line, manufacturing capability, or customer relationship. Wencor was already a substantial aftermarket platform and the second-largest independent PMA provider.

HEICO paid $1.9 billion in cash and $150 million in Class A shares, for total consideration of approximately $2.05 billion. It was the largest transaction in company history by purchase price, acquired revenue, and acquired income.

The strategic appeal lay in complementarity rather than simple share consolidation. HEICO began in engine products and later built a broad non-engine offering; Wencor was particularly strong in non-engine PMAs, value-added distribution, and component repair. The catalogs contained surprisingly little overlap.

“You know, HEICO started out over in the PMA area focused on engine parts. Wencor has focused on non-engine parts. HEICO also does non-engine parts, but there are actually very little similarity in the product that we do. As a matter of fact, the HEICO component repair stations purchase all of the Wencor PMAs because HEICO doesn’t offer those PMAs. We’re very excited about the complementary nature there. With regard to component repair, Wencor overhauls a lot of components and is in a lot of market niches where HEICO is not in. We think that that’s gonna broaden us. Likewise, in distribution, we focus in different areas. Wencor is, for example, has a very large position over in the bearings area, whereas HEICO basically isn’t involved in the bearings business” — Eric A. Mendelson, Q2 2023 earnings call

HEICO’s repair stations were already buying Wencor products, providing direct evidence that the portfolios were complementary.

Wencor also brought a developed e-commerce platform, distribution relationships, and customer positions that differed from HEICO’s. Each company could introduce products where the other had stronger relationships, while a combined catalog approaching 20,000 PMAs made HEICO relevant across more of an airline’s maintenance spending.

The acquisition expanded development capacity as well. HEICO and Wencor had experience with different product types, and engineering or regulatory knowledge from one category could shorten the path in another. HEICO manufacturers can quote work previously outsourced by Wencor, while Wencor’s distribution infrastructure can carry additional HEICO products.

Cultural fit was another part of the thesis. Although Wencor had been private-equity-owned, its organizational structure and customer focus resembled HEICO’s decentralized model.

“They’ve got a DNA so similar to HEICO. They’re very focused on the customer, very focused on efficiency, getting it done, jumping through hoops for the customers, so there couldn’t be a better marriage” — Eric A. Mendelson, Q3 2023 earnings call

HEICO did not respond to the transaction’s size by fully absorbing Wencor into a centralized organization. It preserved the business as an operationally separate unit with its existing management structure.

“Wencor continues as an individual autonomous business. No plan to change that.” — Eric A. Mendelson, Q1 2024 earnings call

Autonomy does not mean disconnection. The objective is cooperation without destroying local responsibility: Wencor remains autonomous in day-to-day operations while the businesses work together where the economics are clear.

By the third quarter of 2024, management provided a detailed list of collaborative initiatives:

“Some examples of how we’re now working together include: one, utilization of all HEICO and Wencor PMAs and DERs at all of our repair stations. Two, commercial and defense aftermarket sales cooperation. Three, Wencor e-commerce platform lists all HEICO non-competitive PMAs. Four, Wencor is utilizing HEICO’s manufacturing base, in particular, our Specialty Products and Electronic Technologies Group, to quote new products. Five, engineering and regulatory cooperation. Six, sharing best-in-class vendors. And seven, driving various back-office synergies, such as payroll and export compliance, that will help offset the cost of additional regulatory compliance, such as Sarbanes-Oxley and HEICO’s FAA ODA program.” — Eric A. Mendelson, Q3 2024 earnings call

The most important opportunities are likely on the revenue side. Cost savings can offset some expense of operating Wencor within a public company, but they were not the reason to pay more than $2 billion. The larger prize is selling more products through the combined customer, repair, and distribution network.

Each repair station can use the full range of HEICO and Wencor PMAs and DER-approved repairs. The e-commerce platform can expose customers to unfamiliar products, sales teams can introduce the combined catalog through their strongest relationships, and shared engineering can increase the number and speed of development opportunities.

HEICO’s balance sheet may also allow Wencor to pursue opportunities that were difficult under private-equity ownership. Management argued that lower leverage would provide more freedom to invest in sales, product development, and inventory—especially important in a constrained market where having the product on the shelf can determine who wins the order.

The initial customer response was strong:

“Yeah, we both HEICO and Wencor performed very well in terms of new PMA generation. We’re continuing to invest, continuing to find new opportunities. So I mean, without doubt, this is going to be a record year in terms of PMA generation and the number of parts that we can come out with. I can tell you that I’ve met with a number of customers since Wencor has closed, and they are really excited and enthusiastic, unlike I’ve ever seen, concerning our product, our product line. They want us to do more. You know, again, there’s going to be plenty of business for the OEMs.

You know, there’s more than enough business to go around, but they clearly have seen, after going through a supply chain constraint like we’ve seen over the last couple of years, not only does HEICO bring cost savings, but we also bring availability” — Eric A. Mendelson, Q4 2023 earnings call

Wencor has changed HEICO’s position with customers. The combined company is no longer merely a specialist offering selected alternatives; it can address a much larger share of parts, repair, and distribution requirements.

“I think in speaking with our customers, we are viewed as a much more complete supplier.” — Eric A. Mendelson, Q3 2024 earnings call

The transaction still carries risk. HEICO paid a price management described as high, and Wencor was far larger than any previous acquisition. Value creation depends on preserving its entrepreneurial culture while realizing cooperation across product development, repair, distribution, and customer relationships. Excessive centralization could weaken the model; insufficient cooperation could leave much of the strategic value unrealized.

Management’s comments so far indicate that integration has progressed well. The larger catalog, complementary capabilities, and customer demand were visible almost immediately, but the full effect should develop over years because product approvals, airline qualifications, and cross-selling require time.

8.6. Market size and HEICO’s position

Market-size estimates vary widely because sources often measure different parts of the aerospace value chain. The global MRO market, replacement-parts market, and PMA market are sometimes treated as interchangeable, although each is a narrower subset of the preceding one.

For context, Fortune Business Insights valued the global commercial-aircraft original-equipment market at approximately $118 billion in 2025 and projected roughly $240 billion by 2034, implying annual growth of about 8%.

A rough cross-check suggests that the estimate is plausible. Airbus generated about $60 billion of commercial-aircraft revenue in 2025, excluding Helicopters and Defence and Space, while Boeing reported approximately $41 billion from Commercial Airplanes. After adjusting for the undisclosed aftermarket portion of those revenues and adding smaller OEMs, the industry falls into a similar range. This is only a high-level check, not a precise market calculation.

Roughly 50–60% of this spending supports fleet growth, while the remaining 40–50% replaces retired aircraft.

Replacement deliveries have an obvious negative aftermarket effect. Once an old aircraft is permanently retired, it stops generating maintenance, repair, and replacement-parts demand. HEICO products tied exclusively to that platform will eventually decline as the fleet reaches the end of its life.

Retirements are only one side of the equation. Most of the installed fleet remains in service and ages by another year. As aircraft age, warranties expire, components accumulate flight hours and cycles, and inspections, repairs, and replacement needs generally increase. HEICO summarized the balance as follows:

“So, when we look at the number of aircraft that are being delivered, roughly half of them are for new growth, half of them are for replacement. So the ones that are for replacement, obviously, that takes away opportunity for us. But on the other hand, we’ve got roughly 95% of the fleet is aging by 1 year every year and the parts become even more expensive.” — Eric A. Mendelson, Q3 2014 earnings call

The installed fleet is constantly changing: older aircraft leave at the back end, new aircraft enter at the front, and the much larger group in between continues aging. New aircraft initially create little HEICO opportunity but gradually enter the addressable aftermarket as platforms mature and airlines seek alternatives to original suppliers:

“But the way we look at it is, it’s a fairly complex equation in that you’ve got the base fleet aging obviously 1 year per year and then the older aircraft dropping out at the back end and of course the new aircraft coming in at the front end. The airlines have been flying the older aircraft beyond what everybody originally anticipated. […] And if the airlines continue to fly these older aircraft, they’re going to have to put some dollars into it.” — HEICO management, speaker unclear, Q3 2015 earnings call

The analysis below provides a useful cross-check. Between 2020 and 2025, approximately 7,241 aircraft were delivered and 3,702 retired. The resulting 3,539 net additions exactly reconcile the increase in the global fleet from 30,547 aircraft at the beginning of 2020 to roughly 34,086 at the end of 2025. Retirements absorbed approximately 51% of deliveries over the period, although 2020 skews the result. Measured against the beginning fleet, only about 1.4–2.3% of aircraft retired in any individual year. Between 97.7% and 98.6% therefore remained and aged another year. New deliveries expand and partially renew the fleet but do not prevent the much larger installed base from continuing to age.

This also explains why demand for an individual HEICO product eventually declines without undermining portfolio growth. HEICO typically enters a platform several years after introduction—often around ten years—builds sales as the installed fleet matures, and continues supplying it as aircraft retire gradually. At the same time, HEICO introduces products for other platforms and benefits from aging across the broader fleet:

“I mean, one of the phenomenon in the sort of the history of our business is we get on a platform a number of years into the program and then we ride it until the sunset. So, there’s always aircraft that are coming out of the fleet. So, we do see on certain products reduction in demand. But of course, you’ve got the majority of aircraft that are just continuing to age and stay in the fleet, so we see an increase there. So yes, we are seeing an increase combined with our new part sales.” — Eric A. Mendelson, Q3 2016 earnings call

The aftermarket therefore loses demand from retired aircraft but gains from fleet growth, maturation of newer platforms, and rising maintenance needs across the fleet that remains in service.

Beyond investing in new aircraft, airlines spend annually to maintain and repair the installed fleet. Global commercial MRO demand reached approximately $136 billion in 2025, up 8% from $126 billion in 2024. Oliver Wyman expects annual spending to approach $193 billion by the end of the decade as the fleet grows, aircraft remain in service longer, and operators contend with supply constraints and durability problems on newer platforms.

On this basis, I estimate that airlines spent roughly $189 billion maintaining the existing fleet through replacement capital expenditures and MRO expenses, versus about $65 billion expanding it. The comparison provides a clearer sense of where revenue and economic value are generated and helps explain why the aftermarket profit pool can exceed that of original equipment.

The full MRO market is not HEICO’s addressable market. It includes labor, line maintenance, heavy airframe checks, complete engine shop visits, life-limited parts, modifications, logistics, and many other products and services FSG does not provide.

Engine and component MRO represented approximately 68% of global MRO spending in 2024, according to IATA and Oliver Wyman, but even this figure is far too broad. HEICO does not overhaul complete engines, manufacture most life-limited parts, or participate in every component category. FSG addresses selected replacement parts, component repairs, distribution, and specialized manufacturing within the wider ecosystem.

The market can therefore be viewed as a series of progressively narrower layers:

1. Global commercial MRO spending

2. Maintenance material, components, and replacement parts

3. Categories addressed by HEICO through parts, repair, and distribution

4. Approved alternative material

5. Independently developed PMA parts

PMA is only the final and narrowest layer. FSG’s practical addressable market is broader because it also earns revenue from proprietary repairs, distributed OEM and third-party parts, component exchange, and specialty products.

No exact industry figure exists for annual PMA market value. Commercial research estimates currently differ by more than fourfold: one places the global commercial-aircraft PMA market at approximately $2.6 billion in 2025 and $2.8 billion in 2026, while another estimates $11.8 billion in 2025. The studies are evidently measuring different scopes.

Some estimates appear to focus on factory-new, independently developed commercial-airline PMA parts. Others may include licensed PMAs, general and business aviation, military applications, PMA content embedded in larger repairs or components, and other forms of alternative material.

A PMA issued under a licensing agreement may use the authorization and design data of the original type-certificate holder. Economically, this differs fundamentally from HEICO independently developing a lower-cost competitor, yet both appear in FAA PMA records.

Raw approval counts therefore do not measure the independent alternative-parts market, and approvals differ greatly in commercial value. One may cover a low-priced part used on a small or aging fleet; another may relate to an expensive, frequently replaced component installed across thousands of aircraft.

A rough comparison with TransDigm illustrates the difference. TransDigm’s portfolio is estimated at more than 300,000 parts—roughly 15 times HEICO’s approximately 20,000—yet its commercial aftermarket parts business generates only somewhat more than $2.8 billion of aftermarket revenue, versus an estimated roughly $2 billion for HEICO including HDG. Although necessarily approximate, the comparison suggests that HEICO generates substantially more revenue per portfolio item on average.

This also helps explain why the companies compete less directly than their aftermarket exposure suggests. Much of TransDigm’s portfolio consists of low-volume or low-revenue parts for which PMA development and certification would offer limited returns. Airlines likewise have little reason to qualify a second source when potential savings are small. HEICO concentrates development on products where installed volume, replacement frequency, and OEM pricing create an attractive opportunity.

For these reasons, I would not anchor the investment case to a precise PMA market estimate. The evidence supports a multi-billion-dollar market growing faster than the commercial fleet, but published figures are too inconsistent to justify one definitive total addressable market.

HEICO’s market position:

HEICO calls HPG the world’s largest independent supplier of FAA-approved engine and aircraft-component replacement parts. Its portfolio contains more than 20,000 FAA-approved products, and the group develops more than 500 additional highly engineered parts annually.

Dividing an estimated $2.0 billion of aftermarket revenue by any published PMA market estimate would be misleading. The $2.6 billion estimate implies a share approaching three-quarters—a figure often cited by investors—while the $11.8 billion estimate implies roughly one-sixth.

Management’s comments provide a more useful view of market structure. Victor Mendelson has described PMA as only a very small part of the broader replacement-parts market:

“PMA parts constitute somewhere around 1%-2%, we believe, of the market, so it’s tiny.” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

Because the denominator was not formally defined, the 1–2% figure should be treated as a broad management estimate rather than a measured statistic. The message matters more than the precise percentage: OEM parts continue to dominate the commercial aerospace aftermarket.

Three market-share concepts must therefore be kept separate:

• First, PMA’s share of the entire replacement-parts market remains in the low single digits according to HEICO management, leaving the overwhelming majority with OEMs.

• Second, HEICO is clearly the leading independent PMA supplier, but no reliable public dataset allows its share of that market to be calculated.

• Third, HEICO’s share of an individual part market after introducing an approved alternative is a separate concept. Management has historically targeted an attractive minority rather than complete OEM displacement.

HEICO’s approximately 20,000 approved part numbers might appear to cover roughly 3–4% of the parts installed on a modern aircraft, but this is only a rough indication and not a reliable measure of penetration. HEICO’s approvals span many aircraft, engine, and component platforms, whereas aircraft part-count estimates include every physical item, many of which have no PMA relevance. One HEICO part number may be installed several times on an aircraft or approved for multiple platforms, while only a fraction of the portfolio applies to any one aircraft type. The percentage therefore illustrates the enormous remaining product universe rather than HEICO’s share of the economically addressable aftermarket.

8.7. The remaining growth runway

HEICO already sells to virtually every major airline and has built the dominant independent PMA platform, which can make FSG appear mature. Its remaining runway differs from that of a young company still seeking its first customers.

Growth should come primarily from selling more to existing customers, adding products to the catalog, entering adjacent technical categories, and making the combined HEICO-Wencor platform more useful across customer maintenance activities.

The first opportunity is product breadth. A modern aircraft contains an enormous number of components, while HEICO’s catalog remains selective. Even after decades of development and acquisitions, the company addresses only a fraction of the aftermarket. It can continue expanding into structures, avionics, interiors, and other component categories where customer demand and expected returns justify the investment.

“But again, we just continue to broaden the capabilities. Ten years ago, nobody would have ever thought that HEICO would control the Aircraft Information Management System of the 737NG or the 777. And we couple that with our 20,000 PMAs and whatever it is, nearly 10,000 DERs, and it’s a pretty broad offering, which just continues to grow step by step every quarter.” — Eric A. Mendelson, Q1 2025 earnings call

The second opportunity is penetration. An airline may already be a HEICO customer while buying only a small share of the products available for its fleet. Adding one approved part across a large installed base can create meaningful recurring revenue without winning a new customer.

The sales organization is therefore critical. Product development creates the opportunity, but airline approvals and purchasing decisions convert it into revenue. Sales teams must understand each customer’s fleet, maintenance program, contracts, and technical concerns. A broad catalog gives them many reasons to continue the conversation.

The third opportunity is fleet age. New aircraft typically generate little PMA revenue during their first years because OEM support is strongest, maintenance needs are lower, and contractual restrictions are more common. The addressable opportunity expands as platforms mature and operators focus more closely on maintenance economics.

The aircraft shortage extends the lives of older platforms. Delayed deliveries force airlines to retain aircraft that might otherwise retire, higher utilization accelerates wear, and supply constraints increase the value of a second source. These dynamics support both parts and repair demand.

The fourth opportunity is international adoption. HEICO already operates globally, but acceptance still varies by airline, region, ownership model, and product category. Historically lower penetration outside established markets leaves additional room for growth:

“Historically, we had less penetration in the international markets. So we saw that there was a bigger opportunity for us there and we’re continuing to mine that opportunity” — Eric A. Mendelson, Q3 2010 earnings call

Adoption is closely linked to fleet maturity. Airlines receiving many new aircraft generally receive greater OEM attention, face lower maintenance requirements, and initially need fewer alternatives. As deliveries slow relative to the installed fleet and maintenance costs rise, PMA’s economic value becomes clearer.

Eric Mendelson described how this pattern repeatedly turned initial resistance into substantial customer relationships across all major regions:

“What we found with PMA acceptance is directly correlated to the sort of the age of the airline, the age in sophistication. When airlines are taking a lot of deliveries of new equipment, they get a lot of attention from the OEMs and they don’t really see the need or the value proposition in the beginning. And then of course as those deliveries as a percentage of the fleet go down, they sort of get less attention and they realize that these machines are extraordinarily expensive to maintain. And that’s where we get in there and we’re able to show our value. So, I history over the last 30 years that’s absolutely been the case. I mean, without mentioning names, but I can tell you that airlines in all regions of the world, whether it’s North America, South America, Europe, Asia, where in the beginning they were refusing and not interested in using PMA parts. And then as time went on, we go in and show why this makes sense and they become very good customers.” — Eric A. Mendelson, Q2 2019 earnings call

International expansion is therefore less about entering entirely new regions than gradually deepening penetration as individual airlines become more receptive. Once an operator understands the approval process, recognizes the savings, and gains positive operating experience, a cautious initial relationship can become a meaningful recurring source of demand.

Emerging markets offer additional long-term potential:

“The majority of our business comes out of the Americas and Europe, and we expect that to continue for, you know, quite some time. We are picking up a nice chunk of business in the emerging markets as well. There’s a lot of interest in our products, and I anticipate further growth there.” — Eric A. Mendelson, Q4 2018 earnings call

The fifth opportunity is availability. Supply-chain problems have pushed customers to qualify alternatives they might otherwise have postponed. An airline unable to obtain an OEM part may undertake the internal work required to approve HEICO; successful use can turn an emergency purchase into a recurring relationship.

Wencor adds another layer to each opportunity by increasing the products, repair capabilities, distribution lines, customer relationships, and engineering categories available to the combined group. HEICO can grow before developing anything new simply by placing existing Wencor products with HEICO customers and vice versa.

Execution still constrains the runway. HEICO cannot develop every product at once; engineering and regulatory capacity is finite, airlines approve alternatives gradually, and inventory must be built before demand is certain. The company must continue selecting opportunities that earn acceptable returns rather than pursuing catalog size for its own sake.

OEM behavior is another constraint. HEICO has benefited from rational competition and its small share of the overall aftermarket. An OEM can selectively reduce prices, use contractual leverage, or make a particular product less attractive to copy. HEICO must continue choosing its battles carefully.

Taken together, these drivers should allow the relevant commercial aftermarket to grow at a mid-single-digit rate. Fleet expansion increases the installed base, while higher utilization, aging, and rising maintenance requirements increase spending per aircraft. PMA should grow somewhat faster as airlines seek lower-cost, more available alternatives, supporting approximately 6–8% annual growth in HEICO’s addressable aftermarket opportunity. Continued product introductions, broader adoption, and market-share gains may allow HEICO to grow organically around 8–10% over a full cycle, broadly consistent with history. This is a directional framework rather than a precise forecast because the drivers overlap and annual performance will fluctuate.

2.8. Growth and economics

FSG’s long-term development shows how far HEICO has moved beyond its original engine-parts business. Quarterly revenue was below $10 million in the mid-1990s; three decades later, it is approaching $1 billion.

The path was not linear. FSG experienced weaker periods after 9/11, during the Global Financial Crisis, and in the collapse of commercial aviation during COVID-19. Each downturn was followed by renewed growth, with the revenue base eventually moving well beyond its previous peak.

The COVID-19 impact is especially visible. Flight activity collapsed, causing revenue to fall sharply over the following three quarters, with the trough extending into early fiscal 2021. As utilization recovered, so did demand for replacement parts and component repairs. By fiscal 2022, quarterly revenue had exceeded its pre-pandemic level.

The next major step change came in the fourth quarter of fiscal 2023, when HEICO began consolidating Wencor. Quarterly FSG revenue rose from approximately $405 million to around $600 million. This was primarily an acquisition-driven expansion rather than a sudden acceleration in legacy operations. Wencor added a large PMA catalog, repair capabilities, and a substantial distribution platform, permanently raising FSG’s scale.

Revenue mix:

Since fiscal 2018, HEICO has disclosed quarterly FSG revenue in three product categories, making changes in segment composition more visible.

The reported categories do not correspond exactly to FSG’s four organizational groups, but the following simplified mapping is useful:

• Aftermarket replacement parts broadly include PMA products developed by HPG and comparable Wencor activities, together with OEM and third-party replacement parts sold through HDG and Wencor distribution.

• Repair and overhaul parts and services broadly correspond to HRG and Wencor’s component-MRO activities, including replacement parts consumed during repairs and overhauls.

• Specialty products largely reflect SPG.

The mapping is only approximate. Distribution is not disclosed separately, Wencor spans several activities, and products developed by one group may be sold or consumed through another. HEICO reports by product and service category rather than internal organizational unit.

Aftermarket replacement parts have consistently been the largest and fastest-growing category, recently contributing around 61% of FSG revenue. Repair and overhaul account for approximately 24%, with specialty products representing the remaining mid-teens percentage. Replacement parts remain FSG’s financial center.

COVID-19 affected all three categories, although not equally. Lower utilization most directly reduced replacement-parts and component-repair demand. Specialty products were somewhat less dependent on airline activity because they also serve original-equipment, defense, and space customers. Recovery spread across the portfolio as aircraft returned to service and supply constraints increased the value of alternatives and independent repair capacity.

Organic growth and acquisitions:

The following chart separates revenue growth into its components.

The organic-growth series confirms strong underlying expansion, recently supported by record demand. Drivers include higher utilization, fleet aging, new PMA and DER-approved repairs, broader customer adoption, greater use within existing fleets, increased repair activity, and the gradual ramp of earlier product cohorts. Distribution can also grow organically through new product lines, deeper relationships, and more inventory to support demand.

Organic growth was strong before the Global Financial Crisis, turned negative during the aviation downturn, and then recovered. COVID-19 produced a far more extreme cycle: quarterly organic growth fell by approximately 45% as flight activity collapsed before rebounding above 30% during the recovery.

These swings distort a simple average. Based on the quarterly series, arithmetic average organic growth from fiscal 2006 through the second quarter of fiscal 2026 was approximately 8%. The median was higher at roughly 11%, because a small number of exceptionally weak COVID-19 quarters pulled down the mean.

Excluding the acute decline and unusually strong reopening comparison—from approximately the second quarter of fiscal 2020 through the second quarter of fiscal 2022—the average was close to 10%, with a median of roughly 11–12%. A reasonable cycle-normalized interpretation is therefore that FSG has historically generated organic growth of approximately 10%, or low double digits, over time.

M&A contributions have always been lumpy. Some periods show almost no acquired growth, while individual transactions create large temporary increases. This is consistent with HEICO’s discipline: management does not transact on a fixed schedule and walks away when price, business quality, or the leadership team fails to meet its requirements.

Clusters of higher acquired growth reflect distinct waves. Transactions completed from 2006 to 2008 made a meaningful contribution, followed by further additions during the 2010s. The contribution increased again from fiscal 2022 and reached a different scale with Wencor in fiscal 2024.

A large acquisition contributes to reported year-over-year growth for four quarters and then disappears mechanically from the bridge, even though its revenue remains permanently within the segment.

Margin development:

Growth has been accompanied by attractive profitability. The exceptionally high late-1990s margins are not a useful baseline for today’s FSG because the business was still small and concentrated in a limited number of engine PMAs. Until 2001, HEICO’s PMA activities were entirely engine-focused; it then deliberately broadened the portfolio.

The subsequent normalization should not be attributed primarily to the move from engine to non-engine PMAs, whose profitability management describes as broadly comparable. The more important shift was FSG’s expansion beyond proprietary replacement parts into component repair, specialty manufacturing, and, more meaningfully after the 2005 Seal Dynamics acquisition, distribution.

Distribution has a different economic profile from proprietary PMA manufacturing. It can add substantial revenue because the distributor records the full value of products sold, but margins are generally lower because the manufacturer retains part of the economics.

The decline from the unusually high margins of the late 1990s therefore reflects a broader change in business mix rather than deterioration in HEICO’s core PMA economics.

For much of 2002–2020, FSG’s quarterly EBITDA margin remained in the high teens to low twenties, roughly 17–23%. This is attractive for a business that manufactures physical products, operates repair facilities, carries substantial inventory, and includes lower-margin distribution. The margin reflects the value FSG creates: PMA parts can be sold at substantial discounts to OEM products while still generating attractive profitability.

Business mix nevertheless matters. Proprietary PMA parts generally carry stronger economics than third-party distribution, while repair and specialty-product margins depend on quarterly work and product mix. Changes in relative contribution can therefore move segment margins even when each operation performs well.

The recent 29.4% record should not automatically be treated as a permanent baseline. Quarterly margins fluctuate with product mix, customer demand, acquisition integration, and the relative contribution of PMA, repair, distribution, and specialty products. The current aviation environment is also unusually favorable, with high utilization, limited aircraft availability, and persistent supply-chain constraints.

Part 3 explained how HEICO turned the aircraft aftermarket into the crown jewel of its business. The question now is how the company extended that model beyond replacement parts—and how ETG, decentralization, and a disciplined acquisition playbook became the second engine of the compounding machine. That is exactly what we will unpack in Part 4.

It will be structured in five Parts:

• Part 1: The Aviation Ecosystem Behind HEICO

• Part 2 (today): Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3: Inside HEICO’s Crown Jewel

• Part 4: The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

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👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

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4. The Aircraft Aftermarket: Aircraft Maintenance, Repair, and Overhaul

4.1. Why MRO demand is recurring

An aircraft sale is the beginning of a long aftermarket life. Every flight hour, takeoff, landing, pressurization cycle, brake event, engine run, cabin cycle, and environmental exposure creates incremental maintenance demand. MRO services keep the aircraft airworthy, reliable, and safe to operate.

Aircraft maintenance is driven by several clocks at once, as the following table shows. Some tasks become due after a defined number of flight hours; others depend on flight cycles, calendar time, landings, engine cycles, APU hours, or specific operating conditions. A short-haul aircraft may accumulate many cycles through several daily takeoffs and landings, while a long-haul aircraft accumulates more flight hours but fewer cycles. Maintenance profiles therefore vary materially by aircraft type and operating pattern.

As discussed in Chapter 3.4, the CAMO tracks far more than aircraft age. It monitors checks due after specified flight hours, components approaching cycle limits, Airworthiness Directives with fixed compliance dates, and engine life-limited parts nearing retirement. The maintenance organization performs the required work within its approved scope and releases the aircraft or component to service.

MRO is both predictable and unpredictable. Many tasks are scheduled years in advance, while defects, inspection findings, corrosion, cracks, and component failures create nonroutine work.

Maintenance, repair, and overhaul. The boundaries can blur in practice, but the basic distinctions are straightforward.

Maintenance is the broad activity of keeping an aircraft, engine, or component in an airworthy condition. It includes inspections, functional checks, lubrication, servicing, adjustments, cleaning, monitoring, and scheduled replacement tasks. The objective is to limit wear and prevent the asset from becoming unsafe or unreliable.

Repair is narrower: it restores a damaged, worn, or defective item to a serviceable condition. The work may be simple, such as replacing a seal, or highly engineered, such as restoring a worn engine part under approved repair data.

Overhaul is more comprehensive. A component or engine is removed, disassembled, cleaned, inspected, repaired as necessary, reassembled, tested, and released to service. It is the deeper shop-visit form of repair.

Repair and overhaul therefore restore an aircraft or component to an approved serviceable condition, rather than necessarily to a literally new state.

Historically, aircraft maintenance programs were far less data-driven than they are today. Reliable operating data were limited, so programs relied heavily on the judgment of mechanics and engineers and often followed a “more is better” philosophy.

That began to change as regulators and the industry adopted condition-based and reliability-centered maintenance methods. Planning moved away from purely experience-based routines toward more analytical programs.

Modern maintenance asks not only how often a part may fail but also what happens if it does. A benign failure does not require the same treatment as a safety-critical one. Economics matter as well: airlines seek to avoid unnecessary shop visits, downtime, and premature parts replacement without compromising airworthiness. The maintenance program balances sufficient intervention to preserve safety and reliability against unnecessary removal from service.

Modern programs generally distinguish among three maintenance concepts:

Scheduled and preventive maintenance is planned in advance and includes tasks due after defined hours, cycles, days, months, or years. The airline performs these tasks before a failure occurs.

Predictive maintenance uses operating data, trend monitoring, sensors, reliability information, and condition indicators to determine when work should be performed. The objective is to prevent failures without removing parts prematurely.

Unscheduled maintenance arises when something fails or an inspection reveals an unexpected finding. A pilot may report a defect, a warning message may appear, a leak or crack may be found, a component may fail a test, or a part may be outside approved limits.

4.2. How MRO became an industry

For most of aviation history, maintenance was not a separate aftermarket industry. Airlines performed much of the work internally: they owned the aircraft, employed the mechanics, controlled the manuals, operated the shops, and treated maintenance as a necessary operating function. Manufacturers primarily supplied products and technical documentation rather than seeking to capture the entire aftermarket through long-term service contracts, proprietary repair networks, or bundled support solutions.

This model worked when large flag carriers had enough scale to support internal maintenance divisions. Heavy maintenance, however, was expensive, technical, and scale-dependent, encouraging airlines to share capacity. One example was ATLAS, the 1970s Boeing 747 maintenance cooperation among Air France, Alitalia, Lufthansa, Iberia, and Sabena Technics. Specialized widebody capability was valuable, but no individual airline always had sufficient scale to utilize it efficiently.

Over time, the internal maintenance departments of large legacy carriers became businesses in their own right. Lufthansa Technik, Air France Industries KLM Engineering & Maintenance, Delta TechOps, Turkish Technic, and others grew out of airline maintenance organizations and began serving third-party customers. Internal cost centers became external businesses that spread fixed costs, improved hangar and labor utilization, and generated revenue. Independent MRO providers added another layer of competition, often specializing in base maintenance, components, engines, landing gear, or inventory support.

Today’s MRO market reflects that evolution. Airlines retain selected capabilities, particularly line maintenance and strategically important work; airline-affiliated MROs sell services to third parties; independent providers compete on cost, specialization, flexibility, and turnaround time; and OEMs seek a larger aftermarket share through parts, repairs, licenses, long-term service agreements, and control of technical data. HEICO enters a layered ecosystem in which airlines, MRO providers, OEMs, lessors, and alternative suppliers compete over cost, availability, control, and certification.

Historically, MRO was often regarded as a necessary cost center. Airlines needed maintenance to keep aircraft safe and compliant, but generally treated it as an operating expense rather than a strategic source of value. The traditional approach was closer to “break it, fix it” than to today’s reliability-centered maintenance model.

That view has changed. In an asset-intensive airline business, maintenance directly affects safety, reliability, aircraft availability, punctuality, and cost. A grounded aircraft generates no revenue, while a delayed aircraft can disrupt the entire network. Airline capacity is also perishable: once a flight departs, an empty seat cannot be stored and sold the following day. Passenger transportation must be delivered when scheduled.

This makes maintenance particularly important in aviation. A missing part can turn a minor technical issue into a grounded aircraft. Technical problems may not account for most delays, but the disruptions they cause can be lengthy and expensive.

Punctuality is therefore an important driver of airline profitability. Recent industry estimates put the broader cost of disruption at up to 8% of airline revenue—a substantial burden in a structurally low-margin industry. Delays can cascade through the network, affecting crews, gates, passenger connections, airport slots, and subsequent aircraft rotations. Effective maintenance supports profitability by reducing technical disruptions and keeping aircraft available for service.

4.3. How maintenance works: checks, locations, and parts

A check is a bundle of tasks grouped into a planned maintenance event. Rather than performing every inspection, lubrication, functional check, component removal, and structural task separately when due, airlines combine work into line checks, A-checks, C-checks, heavy checks or D-checks, and customized maintenance packages.

Terminology and intervals vary by aircraft type, operator, maintenance program, utilization, and regulatory framework. The traditional A, B, C, and D labels remain useful for orientation, but modern programs are more modular. Tasks once included in a heavier C-check may be redistributed into smaller overnight, weekly, or A-check packages.

Airlines seek to perform as much maintenance as possible during natural downtime—particularly overnight or during lower-demand periods—while preserving aircraft availability during peak flying hours.

The intervals shown are indicative rather than universal; the approved maintenance program governs each aircraft.

Line maintenance. Line maintenance comprises recurring, relatively minor tasks designed to preserve airworthiness without materially disrupting the flight schedule. It is commonly performed between flights or overnight and may include walk-arounds, troubleshooting, servicing, minor repairs, tire changes, cabin fixes, fluid servicing, MEL-related follow-up, and defect clearance. Typical categories include transit checks, daily, 48-hour, and weekly checks, and A-checks.

Base maintenance. Base maintenance—also-called airframe or heavy maintenance—is hangar-based work performed while the aircraft is removed from its normal schedule. It includes major inspections, corrosion checks, structural repairs, modifications, cabin work, and heavier C-check- or D-check-style events. On newer aircraft, modular work packages have reduced the size and frequency of traditional base-maintenance visits.

Base maintenance is more labor-intensive than engine or component MRO. The aircraft is large, complex, and customized, and many tasks require access, inspection, disassembly, reassembly, testing, and coordination across large teams. Materials matter, but labor hours, hangar capacity, planning quality, and turnaround time often matter more.

This makes base maintenance economically different from selling high-value replacement parts. It is operationally demanding and essential, but generally more price-competitive and more exposed to regional labor-cost differences. Key performance indicators include turnaround time (TAT), on-time performance (OTP), quality, and the avoidance of unexpected findings. A low-priced heavy check that returns the aircraft late may prove expensive overall.

Parts vocabulary: rotables, repairables, expendables, and life-limited parts. Some parts are repeatedly removed, repaired, and returned to service; others are consumed and replaced; and some carry hard certified life limits.

These terms are practical commercial categories rather than a perfectly uniform legal taxonomy across every manual, contract, or airline system.

A rotable can circulate through the system repeatedly. It is removed, repaired or overhauled, certified as serviceable, and reinstalled on the same or another aircraft. Depending on the item, avionics boxes, pumps, actuators, landing gear components, wheels, brakes, and APUs can follow this model. Airlines and MRO providers maintain rotable pools so that a serviceable unit can be installed immediately while the removed unit is repaired.

A repairable is similar but generally has a more limited economic or technical life. It can be repaired and returned to service, but not indefinitely. Eventually, wear, repair cost, or approved limits may make further repair uneconomic or impossible, at which point the item is scrapped and replaced.

Expendables and consumables are lower-value items that are generally used once or replaced rather than repaired. Expendables include filters, seals, gaskets, fasteners, and certain cabin or interior parts. Consumables include materials used during maintenance, such as lubricants, adhesives, sealants, chemicals, and cleaning products.

A life-limited part (LLP) has a hard certified limit expressed in flight cycles, flight hours, or calendar time. Once the limit is reached, the part must be removed even if it appears serviceable. LLPs are common in critical areas such as engines and landing gear, where fatigue and accumulated stress matter, and they create predictable replacement demand.

The removal-and-replacement loop. The practical MRO flow becomes clearer by following a single component.

Suppose a pilot reports a system fault or line maintenance identifies a defect during an overnight check. The airline first determines whether the aircraft may still be dispatched. If the item is not immediately safety-critical and the Minimum Equipment List permits continued operation, the defect may be deferred for a limited period under controlled conditions. Otherwise, the aircraft remains grounded until the issue is fixed.

If the component must be removed, the airline or MRO may install a serviceable replacement from inventory, an exchange pool, or a supplier. The unserviceable unit then goes to a component shop, where it is inspected, tested, repaired or overhauled if possible, tested again, documented, and released to service with the appropriate certificate. It can then return to inventory or be installed on another aircraft.

That flow contains several economic choices: buy a new OEM part, use used serviceable material (USM), install an eligible PMA part, repair the existing component, use an exchange pool to reduce downtime, wait for the OEM, or send the item to an independent shop.

The mechanic does not make this decision alone. The maintenance organization performs and releases the work, while the airline’s CAMO, engineering, reliability, planning, and procurement functions define the policy framework. Lessors may also restrict acceptable materials and repairs. Any installed item must be eligible, documented, acceptable to the operator, and compatible with the approved maintenance data and aircraft configuration.

Four common situations drive the decision:

1. First, a defect is identified. The airline determines whether the aircraft may continue operating under the MEL, whether the part must be removed immediately, what replacement is available, and whether that replacement is eligible and properly documented.

2. Second, a life limit is reached. Once an LLP reaches its approved limit, replacement is mandatory.

3. Third, an Airworthiness Directive or other mandatory instruction requires action. The operator may have planning flexibility within the compliance window, but the requirement itself is not optional.

4. Fourth, an economic choice exists. A worn or damaged item may be replaced with a new OEM part or USM, repaired under approved data, exchanged through a pool, or replaced with an eligible and accepted PMA part. This is where alternative parts and repair solutions create value.

Once a part is removed, the airline or MRO generally has several paths:

1. A new OEM replacement part is often the simplest option. Acceptance is high, documentation is straightforward, and internal policy approval is usually easiest. It is also often the most expensive route, may carry long lead times, and reinforces dependence on the OEM.

2. Used serviceable material (USM) can be attractive when available. These previously installed parts have been inspected and, where necessary, repaired or overhauled before being released to service with the required documentation. USM can be cheaper and faster than new material, but it must have proper traceability, sufficient remaining life, and acceptable documentation.

3. An approved repair avoids replacement by restoring the existing item under approved repair data. It can materially reduce cost, but only when technically feasible, approved, and economically worthwhile. The shop also needs the appropriate capabilities, tooling, test procedures, and return-to-service authority. Turnaround time remains critical: a low-cost repair offers little value if the aircraft or component waits too long.

4. Exchange pools address speed. The airline receives a serviceable unit immediately and returns the unserviceable part to the pool for repair, keeping the aircraft moving. The trade-off is a combination of access fees, eligibility rules, availability constraints, and return conditions.

5. PMA parts are approved alternatives to OEM articles. For suitable applications, they may offer lower prices, better availability, or both. Adoption still requires certification, technical confidence, and customer acceptance; some airlines and lessors are more receptive than others, and not every part is equally suitable.

When an OEM part is expensive, unavailable, or burdened by long lead times, a certified PMA alternative gives airlines and MRO providers another way to keep the aircraft flying without accepting the OEM’s full economic terms.

4.4. The four MRO markets

The MRO market is commonly divided into four service categories:

• Line maintenance (discussed in Chapter 4.3)

• Base maintenance / airframe MRO (discussed in Chapter 4.3)

• Engine MRO

• Component MRO

The four categories are not perfectly separate physical events. Line and base maintenance describe where and how aircraft-level work is performed, whereas engine and component MRO describe what is maintained or repaired. A component may be removed during line or base maintenance and later repaired in a specialized shop. The discussion below therefore focuses on engine and component MRO.

Fragmentation differs sharply across the MRO market. Engine MRO—particularly full overhauls—is generally the most concentrated and OEM-controlled segment, although control changes over a program’s lifecycle. Airframe and component MRO are more fragmented and leave greater room for airline-affiliated providers, independents, and specialist repair shops.

Engine overhaul. Engine MRO includes off-wing work performed on a removed engine, while engine-related tasks completed on-wing are generally classified as line maintenance.

An aircraft engine does not have a single mileage threshold after which it is “finished.” It can remain in service for decades and pass through several shop visits. A Lufthansa CFM56-5C, for example, exceeded 100,000 flight hours and had been fully overhauled four times—equivalent to roughly 22 years at an assumed 12 flight hours per day. Depending on engine size and work scope, a single overhaul can cost several million dollars, while a heavy visit including life-limited parts can approach $10 million.

The process begins with workscoping. The shop reviews flight hours, cycles, previous repairs, performance trends, borescope findings, and the remaining life of LLPs. The customer and MRO then determine the required depth of the visit. A light performance restoration differs materially from a heavy visit involving major module work and LLP replacement. The engine is disassembled into modules and, where necessary, individual parts, which are cleaned and inspected for cracks, wear, corrosion, heat damage, and fatigue. Repairable parts return to service; others are replaced. The engine is then reassembled and tested in a test cell before release with the required documentation.

Engine overhaul is among the most controlled and material-intensive parts of the aftermarket. OEMs perform some work directly and also rely on joint ventures and licensed shops, but the economics often remain tied to OEM-controlled parts and approved repairs. Materials are estimated to represent roughly 60% of the direct cost of a typical narrowbody overhaul, with repairs adding another 20–30%. When significant LLP replacement is required, a shop visit may cost twice as much or more, and materials can rise to 65–80% of total overhaul cost.

Market participation, however, changes materially over an engine program’s lifecycle.

OEM control is generally strongest early in an engine program. The installed base is young, technical knowledge is concentrated with the manufacturer, repair schemes are immature, spare-parts supply is tightly controlled, and independent alternatives are limited. This supports recovery of development costs. The OEM designed the engine, owns much of the repair data, controls many critical parts, and often determines which shops may participate through licenses, joint ventures, or long-term service agreements. For airlines, the result can be expensive and highly dependent maintenance.

That control tends to weaken as the fleet matures. More engines enter the aftermarket, shop-visit experience accumulates, USM becomes available, and independent MRO providers build capability. The addressable opportunity for PMA parts and alternative repairs expands accordingly.

A young engine program may offer superior fuel efficiency while leaving airlines highly dependent on the OEM in the aftermarket. HEICO therefore tends to focus on PMA parts used later in an engine’s lifecycle, when the installed base and customer demand for alternatives are more mature.

Component MRO. Component MRO covers the non-engine systems that keep an aircraft functioning, including avionics, APUs, wheels, tires, brakes, landing gear, hydraulics, electrical power, fuel systems, flight controls, cabin systems, environmental systems, and many smaller categories. It includes repair, replacement, and testing and is less concentrated than engine MRO because the market spans numerous component families, OEMs, aircraft configurations, and specialist shops.

OEMs retain strong positions in complex categories because they designed the equipment and often control repair instructions, test equipment, technical publications, and spare parts. Their participation is especially strong in avionics, landing gear, APUs, thrust reversers, and other high-value systems. Independent repair and alternative supply are generally more competitive in simpler or more fragmented categories.

This is the opportunity investors should understand. HEICO does not need to dominate the entire MRO market. It can compound by solving numerous narrow problems across the installed base: an expensive OEM replacement, a long-lead-time component, a recurring consumable, or a specialized article for which an approved alternative offers better economics.

Airframe and line maintenance. These activities are essential to aviation but are not the primary lens through which to assess HEICO’s moat.

Airframe MRO keeps the physical aircraft structure airworthy through scheduled inspections, corrosion prevention, structural repairs, modifications, and heavy checks. The business is operationally intensive, requiring hangars, labor planning, tooling, quality systems, engineering support, and disciplined turnaround execution. Competition is often regional and cost-driven because labor represents a large share of the value added.

Line maintenance sits closest to daily operations: the mechanic at the gate, the overnight troubleshooting team, the outstation contractor, the MEL decision, the tire change, the cabin issue, and the rapid component swap that protects the schedule. Airlines often retain a large share of hub line maintenance because dispatch reliability is too closely tied to the customer promise to outsource indiscriminately.

4.5. Market structure: who controls what

The MRO market is a network of overlapping competitors and partners. Unlike aircraft manufacturing, which is highly concentrated around a few airframers and engine OEMs, the MRO market is more dispersed. It is not one market controlled by one type of player, but a mix of airline-affiliated MROs, independent specialists, OEM-owned service businesses, repair shops, distributors, lessors, and alternative parts suppliers.

The chart below is useful in that sense, even though it should not be read as a current market-share table. It is a 2016 estimate, and MRO revenues are not reported consistently across OEMs, airline-affiliated MROs, and independent providers. But directionally, it shows the point well: the MRO market is much more fragmented than aircraft manufacturing, with engine OEMs, airframers, system suppliers, airline-affiliated MROs, and independent providers all competing in the same broad aftermarket.

First, OEMs participate directly. Engine OEMs, airframers, and system suppliers seek a larger aftermarket share because repairs and spare parts can be more profitable than the original-equipment sale. The model is straightforward: sell the asset, then capture recurring service and parts revenue over its life.

Second, airline-affiliated MRO providers participate. Lufthansa Technik, Delta TechOps, AFI KLM Engineering & Maintenance, Turkish Technic, and others originated from their airline parents’ maintenance needs but now serve third parties. Their advantages include operator knowledge, fleet experience, scale, and a practical understanding of downtime, reliability, and parts availability.

Third, independent MRO providers participate. They may specialize in engine overhaul, component repair, airframe maintenance, line support, or narrow technical niches. Their advantages often include flexibility, independence from OEM spare-parts incentives, and the ability to use approved alternatives when customers permit them.

Fourth, specialist component, piece-part, and accessory shops provide the hidden plumbing of the aftermarket. A large MRO may hold the airline contract while subcontracting selected repairs, and a component may pass through several organizations before returning to service.

Why independent alternatives exist despite OEM control. At first glance, the OEM appears positioned to own the aftermarket: it designed the system, wrote the manuals, knows the original part, and may control tooling, test equipment, service bulletins, repair schemes, and spare-parts pricing. Yet aviation regulation also creates formal paths for approved competition.

This is also where OEM pricing power comes from. If there is no approved competitive alternative, the OEM is effectively the only supplier. The customer does not have a normal procurement choice between competing products. The airline, MRO provider, or component shop either buys the OEM replacement part at the quoted price, delays the maintenance event, or keeps the aircraft on the ground. And an aircraft on the ground produces no revenue. The bargaining position is therefore obvious.

The rules do not reserve support of the aircraft indefinitely for the OEM. They require the aircraft to remain airworthy and the parts, repairs, maintenance data, organizations, and releases to be approved or acceptable. This distinction creates room for PMA parts, DER-approved repairs, EASA-approved repair data, USM, independent component repair, and airline-approved alternative-sourcing policies.

This does not mean PMA adoption is automatic. Lessors may prefer OEM parts and repairs to preserve residual value and transferability; airlines may restrict PMA use on selected systems; engineers may need time to build confidence in a supplier; procurement requires a credible business case; and every part must be eligible, documented, compatible with the aircraft configuration, and reflected correctly in the maintenance records. Chapter 5 examines these barriers in detail.

Once those hurdles are cleared, the value proposition is powerful. An approved, traceable, supported, eligible, and accepted PMA article can reduce replacement cost. An approved repair can return an existing item to service instead of forcing a new OEM purchase, lowering material cost and improving availability. Both options operate within—not outside—the regulatory system.

The current aviation cycle discussed in Chapter 1 makes MRO alternatives more valuable. Delayed deliveries keep older aircraft in service; engine issues and parts shortages ground assets; turnaround times lengthen; and airlines carry more spares to protect operations. The aftermarket is absorbing stress that fleet renewal would normally relieve.

Availability can therefore matter as much as price. A cheaper part that arrives too late does not solve the airline’s problem. An approved alternative available during an OEM shortage may create value even before the price discount is considered. In a tight supply chain, HEICO’s proposition broadens from “the OEM is expensive” to “the OEM may also be slow or unable to supply the required part on time.”

The following chart summarizes the aircraft and MRO value chain. Airframers, system and lower-tier suppliers, MRO providers, airlines, and alternative sources are linked through product flows, service flows, and contractual relationships.

5. PMA Parts: The Opportunity and Its Limits

Before turning to the practical debate around PMA, it is useful to connect the themes discussed so far.

PMA sits at the intersection of several themes: aircraft parts are heavily regulated, much of the aerospace profit pool lies in the aftermarket, and airlines face constant pressure to control maintenance costs. A replacement part cannot be installed merely because it looks identical, fits the same slot, or costs less than the OEM version. The relevant question is whether it is approved for the specific aircraft, engine, system, or component on which it will be used.

Parts Manufacturer Approval (PMA) is one route that makes such alternatives possible. It allows a company other than the original OEM to manufacture and sell approved replacement or modification articles for type-certificated products. PMA is not merely permission to manufacture a part; it combines design approval with approval of the production system. The article must be technically acceptable for its intended use, and the manufacturer must be able to produce it consistently under an approved quality system.

Aircraft remain in service for decades, OEM replacement parts can carry high margins, and airlines have a strong incentive to reduce maintenance costs. Maintenance is one of the few major expense categories they can influence directly, while many other costs remain largely outside their control.

Adoption nevertheless involves friction because aviation is conservative, documentation-heavy, safety-critical, and relationship-driven. Even when a PMA part is approved, airlines must be comfortable with the supplier, engineering work, quality system, documentation, installation eligibility, warranty implications, and, in some cases, the lessor’s view of aircraft transferability.

Without the PMA industry, many replacement-part categories would effectively remain under OEM control. Where the OEM is the only practical source, it can exercise substantial aftermarket pricing power and has historically pushed through repeated spare-parts price increases. These high-margin sales represent a major OEM profit pool, as discussed in Chapter 2.5.1. PMA suppliers compete for part of that pool, while OEMs naturally try to defend it.

This chapter examines how PMA acceptance has developed, why airlines use PMA, why OEMs resist it, why some operators remain cautious, and why the resulting tension has created an attractive niche for HEICO.

5.1. From obscure approval route to strategic sourcing tool

PMA is not new. The concept has existed for decades and originally supported replacement parts for older aircraft, including World War II-era models. For many years, however, it remained a niche approval route rather than a mainstream airline sourcing strategy. Depending on the source, PMA existed for roughly 50 years before beginning to “take off” commercially in the 1990s.

That timing matters. During the 1990s and 2000s, airlines became more cost-focused, maintenance organizations grew more professional, and OEMs increasingly treated the installed base as the principal profit pool. Airlines gradually recognized that replacement parts were not always an unavoidable cost accepted on the OEM’s terms; in selected applications, they could source an approved alternative.

PMA acceptance had to be earned over many years. Aviation is conservative for good reason: no airline engineer wants to be responsible for installing the wrong part—the industry equivalent of “no one ever got fired for buying IBM.” A poor decision can create enormous technical, operational, reputational, and career risk. Maintenance organizations therefore need more than the absence of an obvious problem; they need evidence that the entire approval, quality, and documentation chain is sound.

PMA adoption has therefore been gradual. Formal FAA approval is only the first step; airline adoption requires a second layer of internal acceptance. Engineering must understand the part, quality assurance must trust the supplier, procurement must establish the business case, records and maintenance documentation must remain clean, and lessors may need to accept the installation. The part must also be eligible for the specific aircraft, engine, or component configuration, and the paperwork must be correct.

Acceptance has nevertheless broadened. Early resistance often reflected unfamiliarity and OEM arguments about safety, warranty, and support. Over time, industry education, operating history, airline references, and the FAA’s own position helped establish PMA as a legitimate sourcing tool.

A recent IATA survey illustrates that normalization. In November 2025, IATA presented responses from 46 airlines about PMA use in their fleets. Thirty-four airlines, or 74%, already used PMA parts. PMA is also no longer a purely U.S.-centric discussion: among users, Europe represented the largest share, followed by the Americas, Africa and the Middle East, Asia-Pacific, and China and North Asia. The FAA approval framework may remain the center of gravity for PMA, but the commercial use case has spread well beyond its home market.

The survey also shows why adoption remains uneven. If almost three-quarters of respondents already use PMA, the more revealing question is why some airlines still avoid it or use it only selectively.

The answer is revealing. The principal obstacles are not technical reliability concerns. Leasing agreements were cited by 82% of respondents, followed by OEM contracts at 50% and warranty concerns at 32%; PMA reliability was cited by only 12%.

Remaining resistance is often less about whether a part can perform than about who controls the aircraft, what the lease permits, how OEM contracts are structured, how warranties are interpreted, and how comfortable the airline is with alternatives. The regulator may approve the part, but the commercial ecosystem must also accept it.

The supply-chain environment discussed in Chapter 1 may accelerate acceptance. Airlines are not operating in a normal aftermarket: deliveries are delayed, older aircraft remain in service longer, and engine reliability problems and parts shortages are extending turnaround times.

In a normal environment, PMA is primarily a price argument. Today, it is also an availability argument. When an OEM part is expensive but available, the PMA alternative must justify itself mainly through savings. When the OEM part is expensive, slow, or unavailable, the value proposition becomes considerably stronger.

5.2. Why small savings matter in a low-margin industry

The strongest commercial case for PMA begins with airline economics. Airlines are essential to the global economy, but they have historically struggled to earn attractive returns. The industry combines high fixed costs, volatile demand, low customer switching costs, powerful suppliers and distribution channels, and a product often perceived as a commodity. Over long periods, this has produced weak returns on invested capital. According to IATA and McKinsey, airline ROIC remained below WACC from at least 1996, although the gap narrowed materially during the post-pandemic recovery.

Weak profitability is not simply the result of poor management; much of it is structural. Airlines sell perishable, just-in-time capacity: once a flight departs, an empty seat can never be sold. The marginal cost of one additional passenger on an existing flight is low, encouraging aggressive pricing. Customers can compare fares easily, switching costs are low, and online platforms have made pricing highly transparent. Meanwhile, many of the largest cost categories are difficult to negotiate. Fuel prices are set globally, while airport charges, landing fees, taxes, security costs, and air traffic control fees are often outside an airline’s direct control. Aircraft and engine OEMs are concentrated, airports may act as local monopolies, and labor can hold substantial bargaining power, particularly in network operations.

The long-term history of RASK and CASK illustrates the point. Real revenue per available seat kilometer (RASK) has declined dramatically, but cost per available seat kilometer (CASK) has had to fall almost in parallel. Technological improvements, deregulation, widebody aircraft, and higher load factors reduced the cost of flying, yet much of the benefit passed to passengers through lower fares. The industry became vastly more efficient without becoming equally more profitable. Intense competition creates persistent price pressure, and passenger growth often cannot fully offset yield deterioration. Airline revenue has therefore tracked unit costs closely, while temporary pricing premiums have usually been competed away quickly.

That is the core problem for airlines Efficiency gains often do not remain with airlines for long; competition transfers them to customers. When one carrier lowers its cost base, another can lower fares. Greater transparency allows customers to capture more of the surplus, while weaker demand quickly exposes the fixed-cost structure. Airlines therefore seek cost savings that are real, repeatable, and not immediately competed away.

Airlines operate in a structurally difficult industry, with pressure from almost every direction:

• High bargaining power of suppliers: The airline supply chain is dominated by concentrated supplier groups. Aircraft and engine manufacturing are oligopolistic, airports often operate as local monopolies, air navigation service providers are difficult to replace, and labor unions can be powerful. Fuel is another major expense largely outside the airline’s control, while the manufacturing and service supply chain has become increasingly concentrated.

• High bargaining power of distribution channels and customers: Global distribution and computer reservation systems are concentrated among a small number of providers, giving them meaningful market power. Customers increasingly view air travel as a commodity: switching costs are low, price transparency is high, and comparison websites make it easy to select the lowest fare.

• Medium threat of substitutes: Air travel is difficult to replace on many routes, particularly long-haul services, but alternatives have improved. Video conferencing can substitute for some business travel, while high-speed rail can compete on shorter routes where city-center-to-city-center travel times are attractive.

• High threat of new entrants: Barriers can be lower than they appear. Aircraft can be leased, distribution channels are accessible, customer switching costs are low, and incumbency advantages may be limited on individual routes. A new entrant need not replicate a global network to pressure fares in selected markets.

• High rivalry among existing airlines: A seat is perishable: once the aircraft departs, unsold capacity is lost. High fixed costs and low marginal costs per additional passenger encourage aggressive pricing, while limited differentiation makes yields difficult to protect.

The result is intense rivalry, particularly on routes where several carriers compete for the same passengers.

Airlines consequently have few easy cost levers. Many large expenses are effectively non-negotiable: fuel is priced in global markets, while taxes, landing fees, airport charges, security costs, and air traffic control fees are largely imposed rather than negotiated. The remaining controllable categories therefore become especially important.

Maintenance is one of those categories. Airlines cannot choose whether to maintain an aircraft, but they can influence how the work is performed, which suppliers they use, how aggressively they develop repairs, how they manage inventory, and whether they approve alternatives such as PMA parts.

In that environment, every dollar saved matters. At a 5% operating margin, one dollar of cost reduction has the same operating-profit effect as roughly twenty dollars of additional revenue. Unlike new revenue, savings do not require selling more seats, adding capacity, or accepting greater operational complexity.

The illustrative London-to-New York flight demonstrates this operating leverage. It generates roughly $174,000 of revenue against about $153,000 of cost, leaving approximately $21,000 of profit and a 12.2% operating margin. Maintenance is one of the categories in which an airline can still make active choices. Fuel, airport costs, air traffic control, taxes, and many ownership expenses are market-driven or contractually fixed.

This is where PMA becomes economically relevant for airlines. The answer is not to underinvest in maintenance, which keeps the aircraft flying and generating revenue, but to reduce the cost of approved material without compromising airworthiness. PMA fits that logic. If an approved PMA part performs the required function at a materially lower price, the savings can be highly valuable in an industry with thin margins and permanent cost pressure.

Airlines carry a large share of the industry’s invested capital but have historically captured weak returns on that capital. Other parts of the ecosystem often occupy structurally stronger positions through greater concentration, pricing power, or more defensible niches. Airlines are squeezed between powerful suppliers and price-sensitive customers.

This is why the OEM aftermarket model is so painful for airlines. OEMs may accept attractive—or even weak—upfront economics to win the installed base, then earn the profit through spare parts, repairs, manuals, licenses, and technical control. For the OEM, the aftermarket is a high-quality recurring profit pool; for the airline, it is a recurring cost pool. PMA exists within that tension.

A PMA supplier need not replace the OEM across the entire aircraft. It only needs to identify parts for which OEM pricing is high, the installed base is large enough, technical risk is manageable, and the approval path is feasible. In those applications, PMA offers airlines lower material costs, greater supplier diversity, and sometimes better availability.

In a structurally low-margin industry, a 30% saving on one replacement part may appear small in isolation. Across a large fleet, repeated maintenance events, and thousands of part numbers, however, the effect can become meaningful. Because airline margins are thin, even modest material savings can have an outsized impact on operating profit.

Industry sources have estimated that DER-approved repairs and PMA programs focused on engine gas-path components can save several hundred thousand dollars per shop visit and, in some cases, more than 50% relative to OEM catalog pricing.

5.3. Availability can be as important as price

The PMA debate is often framed as “OEM part versus cheaper PMA part.” In aviation, however, the most expensive part is sometimes the one that is unavailable. A missing component can ground an aircraft, delay a flight, disrupt the network, force the airline to lease replacement capacity, or require last-minute sourcing at unattractive prices. In an asset-heavy, just-in-time industry, availability directly affects profit.

The current cycle is therefore particularly favorable for alternative sourcing. Delayed deliveries keep older aircraft in service, increasing maintenance and parts demand just as the supply chain remains constrained. Turnaround times lengthen, more inventory becomes trapped in the repair loop, and airlines must carry additional spares or accept poorer operational performance.

PMA is therefore also a supply-chain resilience tool. If a PMA supplier has inventory when the OEM does not, the airline may value availability even before considering the discount. This is especially relevant for mature platforms with large installed fleets, long remaining service lives, and OEM production priorities increasingly focused on new programs, constrained capacity, or higher-margin channels.

5.4. Patents and the boundaries of the PMA opportunity

One obvious question is whether OEMs can use patents to close the market to independent replacement parts. The concern is understandable: OEMs incur substantial upfront costs to develop, test, and certify an aircraft or engine, while a PMA supplier enters later, after the original part has established its commercial relevance. Patents provide one way to protect the technical advances created through that initial investment.

Patents matter, but they do not invalidate the PMA model. They influence which parts HEICO can address, when it can enter, and whether it must develop a technically distinct design.

The first distinction is between regulatory approval and intellectual-property rights. The FAA determines whether a replacement article complies with the applicable airworthiness requirements and can be produced under an approved quality system. It does not determine whether the applicant is free to manufacture and sell the article under patent law. The FAA assesses airworthiness, not whether manufacture or sale infringes third-party intellectual-property rights. If HEICO can develop a technically distinct part—for example, through a different manufacturing process, material, or design feature—it may be able to design around relevant patent claims while still satisfying the FAA’s requirements.

For the products HEICO typically targets, utility patents are more relevant than design patents. A design patent protects ornamental appearance rather than technical function. That can matter for visible products such as cabin interiors but is generally less relevant to seals, filters, combustion components, blades, and other functional parts. A utility patent, by contrast, can protect how a component works or is constructed, the materials or coatings it uses, or the way it is manufactured.

Functionality does not make a part unpatentable. A new cooling structure in a turbine blade, a novel heat-resistant coating, a particular alloy, or an improved manufacturing process may all qualify for protection. What an OEM cannot do is obtain a new patent merely on a component that has already existed in substantially the same form for decades. Among other requirements, a utility-patent claim must be new and non-obvious. Obtaining a new patent on a turbine blade or hydraulic seal that has existed for decades in essentially the same form and performed the same function is therefore difficult.

HEICO may be free to develop an alternative turbine blade while remaining unable to use a patented cooling geometry, coating, or production method. It can wait for the patent to expire, obtain a license, abandon the opportunity, or design around the claims with a different technical solution. Independent development alone does not prevent infringement: a product can infringe a valid patent even if it was created without access to the patent holder’s confidential information.

The long lives of commercial aircraft and engines nevertheless favor PMA suppliers. Patents generally last up to 20 years from the relevant filing date, while aircraft and engine platforms can remain in service for several decades. Patents filed during a platform’s original development therefore do not necessarily cover its entire economic life. This timing matters because HEICO usually becomes interested only after a platform has built a meaningful installed base and entered its heavier maintenance phase. New aircraft are initially protected by warranties, require relatively little maintenance, and may not yet generate enough replacement demand to justify PMA development. The opportunity improves as the fleet matures, warranties expire, maintenance events increase, and airlines seek lower aftermarket costs. By then, some original-development patents may have expired or be approaching expiration.

A mature platform is not necessarily free of IP protection. OEMs can patent later improvements involving new materials, coatings, geometries, production processes, and component designs, creating layers of protection with different expiration dates. Nevertheless, the pool of technology no longer covered by the original patents tends to expand as the platform matures.

Reverse engineering also requires a legal distinction. HEICO may lawfully purchase an OEM part, disassemble and measure it, analyze its composition and performance, and use the findings to develop its own design and substantiation data. U.S. trade-secret law generally recognizes reverse engineering of a lawfully obtained product and independent development as legitimate means of acquiring information. HEICO may not, however, use stolen drawings, improperly obtained manufacturing instructions, confidential software, or technical information disclosed in breach of a nondisclosure agreement.

Finally, PMA serves an important economic and supply-chain function. Airlines have historically operated on thin margins and often earned returns below their cost of capital, as discussed in Chapter 5.2, making maintenance costs and parts availability especially important. Restricting the aftermarket to OEM-supported parts would reduce price competition, increase dependence on a small number of suppliers, and risk materially raising the cost of maintaining the global fleet. From a public-interest perspective, a fully closed aftermarket would be difficult to justify.

The legal risk is not merely theoretical. In 1989, United Technologies Corporation, then the parent of Pratt & Whitney, sued HEICO and Jet Avion over certain engine parts and coatings, alleging patent infringement, misappropriation of trade secrets, and unfair competition. The litigation continued for more than a decade before the parties settled in 2000. HEICO received a permanent license to manufacture and sell the relevant parts and paid UTC an agreed amount for that license.

HEICO states that FSG holds no material patents covering the proprietary techniques, software, and manufacturing expertise developed for engine and aircraft-component replacement parts. It instead relies primarily on trade-secret protection, continuous process improvement, technical expertise, and safeguards against misappropriation or obsolescence. HEICO also identifies the development of patents or methodologies that prevent it from manufacturing certain replacement parts as a business risk.

Product selection is therefore critical. HEICO does not need to replace every aircraft component; it can direct engineering resources toward parts with manageable intellectual-property positions, designs that can be independently analyzed and substantiated, sufficiently large installed bases, recurring replacement demand, and meaningful customer savings. A heavily protected or technically inaccessible part can be passed over for another opportunity.

Patents can narrow or delay HEICO’s addressable market, particularly on the newest and most complex platforms, but they do not eliminate the broader opportunity. Aircraft often remain in service far longer than the patents filed during their development, and the number of potentially addressable components is enormous. HEICO need not gain access to every part; it needs a steady flow of commercially attractive opportunities that can be independently developed without infringing enforceable rights. The breadth of its PMA portfolio further reduces the risk to FSG as a whole.

5.5. Why PMA penetration remains limited

The bullish PMA case is clear: lower costs, more competition, better availability, and less dependence on OEM-controlled aftermarket economics. Yet adoption is not automatic, because airlines consider far more than the lowest purchase price.

5.5.1. Lessors worry about transferability and residual value

Leasing is one of the most practical constraints on PMA adoption and was the largest obstacle in IATA’s recent survey. When airlines were asked what prevented their companies from using PMA, 82% cited leasing agreements.

Leasing has become the dominant ownership model in commercial aviation. According to IATA and Cirium, leased aircraft represented roughly 58% of the global commercial fleet at the end of 2023, up from about 10% in the 1970s.

The airline may want the PMA savings, and the part may be fully approved, but the aircraft is often owned by another party. That changes the decision.

Lessors generally worry about two issues. The first is transferability. Every lessor fears an aircraft returning from lease that cannot be placed quickly with another operator. The lessor continues carrying the asset while receiving no lease revenue. PMA may raise concerns because airlines, regulators, and jurisdictions differ in their acceptance, particularly for complex or sensitive applications. If a future lessee refuses an aircraft with certain PMA parts installed, the lessor may face additional cost, delay, or reconfiguration before transition.

The second concern is residual value. Lessors view an aircraft both as an operating asset and as collateral with future value. Replacing expensive OEM parts with lower-cost PMA alternatives may improve the airline’s immediate economics, but the lessor may worry that the aircraft or engine will be worth less at lease end. The same question arises during part-out: will a used OEM turbine blade, valve, or component command a higher surplus-market price than a PMA equivalent?

HEICO’s comments over the years suggest that lessor positions are far from uniform. Some have restricted PMA because of marketability and residual-value concerns, while others increasingly view sourcing flexibility as part of their own customer proposition.

In 2010, HEICO identified GECAS, then General Electric’s aircraft-leasing business, as the most vocal PMA opponent. Management argued that the position reflected GE’s broader interests as an engine manufacturer rather than evidence that HEICO parts materially impaired aircraft marketability:

“When leasing companies look at PMA parts, they look at it in multiple areas. And I would say that the leasing company that has been the most vocal about not wanting to use PMA, surprise, surprise, it’s been General Electric, GECAS. However, I can tell you that GECAS has got many competitors out there and those competitors do permit the use of our parts when requested by their customers. And we have had success in getting these competitors to realize that there is a strategic advantage that they can offer their customers. Specifically, GECAS has come out with the argument that if a PMA part is used, that may restrict the marketability of the aircraft after they take it back. And we say that that is just sheer nonsense. When you look at 19 of the world’s 20 largest airlines are our customers and accept our parts, this is not a valid argument. It’s really just an argument for, frankly, General Electric to try to gouge their customers and sell more overpriced engine parts.” — Eric A. Mendelson, Q3 2010 earnings call

The quote highlights a potential conflict of interest. An OEM-affiliated lessor may have an additional incentive to preserve demand for the manufacturer’s own replacement parts. Independent lessors can view the issue differently, particularly when customers value the freedom to reduce maintenance costs.

HEICO has therefore spent considerable time educating both operators and owners. By 2013, management was reporting progress in persuading lessors that approved alternatives did not necessarily damage the underlying asset:

“We have seen we have had success with certain lessors permitting their lessees to use our parts. And we think that we’ve got to continue to educate and make sure that the operators understand the benefit and understand the lessors understand that this is not detrimental to the value of their aircraft or engines. So yes, I would say we made continued progress on that front.” — Eric A. Mendelson, Q1 2013 earnings call

Some lessors have moved beyond merely accepting PMA and recognized that greater sourcing flexibility can make their aircraft more attractive to potential lessees:

“There are some very progressive lessors out there that want to give their customers competitive advantage to be able to use alternative material and we see that as a very positive trend.” — Eric A. Mendelson, Q3 2014 earnings call

Management reiterated the point several years later:

“A lot of other leasing companies have viewed it as a competitive advantage to permit the use of alternative material. And we’ve got many examples where the world’s biggest lessors do permit the use of HEICO parts.” — Eric A. Mendelson, Q1 2019 earnings call

For airlines, the leasing barrier is therefore largely contractual. An airline need not decide at lease inception that it will use PMA; the important point is to preserve the right to evaluate and use alternatives later if the economics become attractive:

“We have had success with lessors approving the use of our parts. I think it’s also more of an education process for the airlines, so they know upfront that they should not enter into contracts that prohibit the use of alternative material. They don’t need to decide upfront when they sign a lease that they’re going to use it. But I think just to have the flexibility to be able to use it is what’s so important.” — Eric A. Mendelson, Q1 2014 earnings call

The ability to obtain this flexibility depends partly on the airline’s negotiating leverage. Large carriers with substantial fleets can generally influence lease terms more than smaller operators. HEICO has also highlighted IATA’s role in defending airlines’ freedom to consider alternatives without recommending any particular PMA part:

“There are a number of who permit the use of PMA parts on their aircraft. And a number of airlines worldwide will not sign leasing contracts without having the opportunity to do that. And of course, the airlines that have larger fleets are the ones who are typically able to get that, if you will, restriction lifted. The smaller airlines, it’s been an issue of education and frankly, a market power of the lessors. But I think there are a number of things going on in the international airline community, in particular, IATA has been very vocal in this area, not telling airlines that they should or should not use PMA material, but instead wanting to maintain the option for them. And it’s not a good thing when they have a particular manufacturer who can dictate prices. So we’ve been successful working with a number of lessors. As a matter of fact, if any customers are on this call and want to know the names of lessors, our salespeople would be more than happy to give them the names of those people who are cooperative in this area.” — Eric A. Mendelson, Q1 2016 earnings call

PMA restrictions carry a measurable economic cost. An airline accepting an OEM-only clause gives up one of the few tools available to reduce maintenance material expense. In HEICO’s view, a lessor insisting on such a restriction should compensate the airline through a lower lease rate:

“And it is important that the airlines negotiate with their lessors to get relief to be able to use alternative parts so they’re not put at a competitive disadvantage. Certainly, if a leasing company does not want to permit the use of alternative parts, then they need to have a materially lower lease rate to offset the damage that they’re causing to their lessees. And most lessors don’t want to do that.” — Eric A. Mendelson, Q1 2019 earnings call

The issue therefore becomes a total-cost calculation. The airline must compare the lease rate with the additional maintenance spending caused by surrendering sourcing flexibility. A contract that appears attractive before maintenance costs may become far less competitive if it requires higher-priced OEM material throughout the lease.

Some large carriers have reportedly made this position explicit. A 2016 Aviation Maintenance Magazine article named Delta Air Lines and Copa Airlines as operators that had said they would not sign leases containing “no PMA” clauses. HEICO has likewise observed that more airlines insist on retaining the option to use alternative material.

The residual-value argument can also be reversed. Lessors worry that PMA parts will make an aircraft or engine less attractive to the next operator, yet an asset may also lose value if its maintenance economics become excessively dependent on a single supplier:

“I would say the probably the change with regard to the engine market is that lessors and owners of assets including airlines realize that there’s not going to be much residual value if there isn’t competition in the aftermarket.” — Eric A. Mendelson, Q1 2014 earnings call

Victor Mendelson illustrated the weakness of attributing an entire asset’s value to the brand on each replacement component with a deliberately simple automotive analogy:

“So it’s like if somebody’s got a fancy car and they use some other air filter than the, I don’t know, Rolls-Royce air filter, then somehow your car is no longer worth $500,000 or something like that. People are seeing through that logic and or lack of logic, and increasingly, that’s not an issue for us.” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

The analogy is intentionally simple, but the underlying point is clear. Aircraft value and transferability depend primarily on technical condition, maintenance status, operating economics, and remaining useful life—not on whether every approved replacement component carries the original manufacturer’s name.

Lease restrictions remain a genuine obstacle, particularly for smaller airlines with limited bargaining power. The market has nevertheless become more flexible: major lessors permit HEICO parts, some present that flexibility as a competitive advantage, and more airlines preserve the option during lease negotiations. As PMA usage and operating experience expand, the claim that approved alternatives automatically impair marketability or residual value becomes harder to sustain.

5.5.2. OEM contracts can limit PMA adoption without banning it

Another major hurdle is the structure of OEM agreements. In IATA’s 2025 survey, 50% of respondents cited OEM contracts as an obstacle—the second-largest barrier after leasing. PMA adoption is therefore often constrained less by regulation than by the commercial architecture surrounding the aircraft, engine, or component.

OEM contracts can influence PMA use in several ways. Engine maintenance agreements, flight-hour or “power-by-the-hour” contracts, component support agreements, long-term service agreements, material supply arrangements, warranty terms (see Chapter 5.5.3), and technical support contracts may contain restrictions or incentives that make PMA difficult, unattractive, or costly. The restriction need not be an outright ban; the airline may lose price concessions, warranty comfort, technical support, repair access, or maintenance flexibility if it selects non-OEM material.

This is especially relevant in engine MRO. Engine OEMs often maintain contractual relationships with airlines that extend far beyond the engine sale and may include maintenance, spare parts, service bulletins, engineering support, fleet-hour agreements, and shop-visit planning. Once inside that ecosystem, an airline’s theoretical right to use PMA becomes less valuable if the contract steers it back toward OEM material.

For airlines, PMA therefore becomes a negotiation issue. The question is not only whether a part is approved and economically attractive but also whether OEM agreements allow the airline to capture the savings. A contract preserving the right to use approved alternatives can be valuable; one that quietly limits flexibility may protect the OEM’s aftermarket economics for years.

5.5.3. OEMs threaten to withhold warranty support if PMA parts are used

Warranty is another common deterrent. Airlines may hesitate to use PMA if they fear that the OEM will no longer honor its warranty. No operator wants to risk contractual protection on an aircraft, engine, or major component merely to save money on an alternative part.

Warranty practices also became part of a wider dispute over competition in the engine aftermarket. After airlines raised concerns about OEM practices, IATA filed a formal complaint with the European Commission in 2016. The dispute with CFM was settled through an agreement signed in 2018, under which CFM published Conduct Policies covering warranties, servicing, technical support, repairs, licensing, and contracting. Most importantly, CFM committed to assessing warranty claims on a nondiscriminatory basis rather than rejecting them merely because an engine contained non-OEM parts or repairs. CFM also agreed that the presence of such alternatives would not, by itself, justify refusing to service an engine. The agreement applied directly to CFM and did not constitute a formal finding of wrongdoing, but it limited the use of warranty and service access to discourage non-OEM competition.

In practice, the warranty argument is often less threatening than it sounds. The most valuable protection is usually the new-product warranty, during which the OEM typically replaces failed components at no cost. Airlines then have little reason to purchase PMA parts. No operator will replace a free OEM part with a paid alternative merely to make a point. The real cost issue appears later, when the warranty expires and the airline must absorb the full maintenance cost.

The warranty discussion therefore becomes a financial comparison rather than a fear-based decision. The airline must weigh the warranty’s actual value against the maintenance savings available from PMA. In some cases, OEM protection may be worth preserving; in others, avoiding PMA may cost far more than the protection is worth.

A second point is often overlooked: PMA parts also carry warranties. A credible supplier stands behind its product, and the airline should compare PMA and OEM warranties part by part.

5.5.4. OEMs claim that PMA parts pose safety risk

Safety is a central argument against PMA, but PMA is not a shortcut around airworthiness. Approval is evidence-heavy and technically demanding and requires the applicant to substantiate both the part and the production system. When the FAA approves a critical PMA article, it may scrutinize that article more directly than the original OEM part was reviewed on a standalone basis, because the OEM part was often approved within a broader aircraft, engine, or system certification.

The tension is easy to understand. Airlines cannot control fuel prices, airport charges, taxes, or air traffic control fees, while maintenance remains one of the few large cost categories with room for active decisions. PMA is therefore economically attractive. OEMs can turn that economic argument into an emotional one by asking the billion-dollar question: is an airline really willing to risk lives, litigation, and its reputation merely to buy “cheaper” parts? Framed that way, PMA sounds less like disciplined cost control and more like unnecessary risk.

If an aircraft crashes, the public usually hears the aircraft model, airline, and perhaps engine manufacturer—not the nuanced account of which replacement part may have contributed. From the OEM’s perspective, any non-OEM part therefore creates potential reputational exposure, because the aircraft or engine brand may be damaged even if the problem originated elsewhere in the maintenance chain.

The FAA’s role, however, is not to protect an OEM’s aftermarket position. It must determine whether the article complies with the applicable airworthiness requirements and whether the manufacturer can produce it reliably. If an alternative supplier follows the required process and demonstrates acceptability, the regulator has no safety basis to block competition.

The available evidence also does not support the claim that PMA parts are inherently less safe. EASA’s former head of product safety, Yves Morier, was quoted as saying that there was no statistical evidence supporting safety concerns about PMA.

In a more recent analysis, the Modification and Replacement Parts Association (MARPA) reviewed Airworthiness Directives for transport-aircraft engines from 1992 onward, a period chosen because PMA approvals had begun growing rapidly and engines contain many critical and important parts. The review identified 287 turbine-engine ADs: 286 arose from OEM problems. Three ADs involved PMA parts, two of which had replicated the OEM design problem and were therefore included among the OEM-related ADs. MARPA also identified one non-engine PMA case linked to a fatal helicopter accident, again involving a part that replicated an OEM design problem.

The evidence strongly supports PMA, although OEM material represents a much larger share of the installed base and the comparison must therefore be interpreted carefully. The available record suggests that PMA parts have performed at least in line with OEM parts and, in some cases, arguably better. Airlines do not have to sacrifice safety to use PMA; the historical performance record has been very strong.

PMA acceptance often improves once airlines understand the process behind the part. Greater transparency makes PMA look less like a “cheap alternative” and more like an approved sourcing tool. British Airways provides a useful example: industry accounts describe BA as initially skeptical, but its view changed after HEICO explained the approval process and economic benefits.

British Airways had historically been cautious about PMA parts, but its position changed after HEICO explained the regulatory process and economic benefits. The airline subsequently began expanding its use of PMA alternatives.

As a result, British Airways entered a long-term strategic alliance with HEICO Aerospace in May 2007 for parts development and management, becoming the seventh major airline to partner with HEICO. At the Royal Aeronautical Society’s “Great PMA Debate,” Ameet Bhalla, then BA’s Technical Manager for Airframe Systems, summarized the shift: “Through this deal with HEICO, we will actively seek PMA opportunities going forward. We will no longer be the cash machine for OEMs.”

HEICO’s operating record provides another reference point. According to the company, HEICO Parts Group has delivered more than 90 million parts without a service bulletin, Airworthiness Directive, or in-flight shutdown associated with its products. This does not prove that every PMA supplier offers the same engineering and quality control, but it provides strong evidence that properly designed, approved, and manufactured PMA parts can operate safely across a very large installed base, as the following quote illustrates: [1]

“And simply HEICO warrants its products and has also insurance backup to that and the OEMs warrant their products. And if there is an incident, then there is an airline sponsored failure investigation and HEICO has participated in those failure investigations repeatedly. I mean, we’ve been involved in many, many, many of them. And fortunately, never has a HEICO product been found to have caused any of those failures. We’ve shipped, I don’t know, 65 million parts in the last roughly 20 years or so and not a single in flight shutdown or service both and has resulted as a result of HEICO parts. So we warrant our products, the OEMs warrant their products and that’s how that works.” — Eric A. Mendelson, Q3 2017 earnings call

5.5.5. OEMs claim that PMA parts are inferior to OEM parts

OEMs have historically promoted a simple message: the original part is the safest part. One industry anecdote captures the argument. Before the FAA’s 2008 response to anti-PMA rhetoric, an unnamed engine OEM reportedly ran an advertisement showing a tired Elvis Presley impersonator beneath the headline, “Let’s face it, lookalikes never perform quite like the original.” The campaign is difficult to verify today, but the message was clear: PMA parts were portrayed as second-rate lookalikes and OEM parts as the only reliable choice.

The FAA responded through a Special Airworthiness Information Bulletin (SAIB). Unlike an Airworthiness Directive, an SAIB is a nonmandatory communication used to alert, educate, or recommend action when the FAA considers information important but does not believe mandatory corrective action is warranted. SAIBs usually address technical concerns, service experience, inspection recommendations, or maintenance issues.

It is unusual for the FAA to enter what appeared to be a commercial marketing dispute. The agency reminded the market that airworthiness approval is determined by compliance, not branding. Once a PMA or STC part is approved for installation on a certificated product, it is a valid replacement under the FAA system. An OEM may prefer and promote its own part, but marketing claims cannot overrule an FAA approval.

The bulletin’s message was clear: once the FAA approves a PMA part, the industry should recognize that approval. An engine manufacturer may prefer its own part, but it cannot declare an FAA-approved alternative invalid.

The OEM argument is emotionally effective but technically incomplete. A PMA supplier cannot merely copy a part’s shape and sell it into aviation. It must substantiate the design, demonstrate compliance with the applicable airworthiness requirements, obtain production approval, and support continued operational safety. Complex or critical PMA articles may face more focused part-level scrutiny than the OEM article did on a standalone basis because the original was typically approved within a broader aircraft, engine, or system certification.

The argument also assumes that the original design is always best. Operating history shows otherwise. New engine programs often mature for years after entry into service as field experience reveals failure modes not fully visible during certification. If OEM parts were perfect from day one, the industry would not need so many service bulletins, redesigns, replacement campaigns, and Airworthiness Directives. PMA suppliers can use accumulated operating experience, newer materials, improved manufacturing methods, and targeted testing to produce a part that performs at least as well as the original and sometimes better.

5.5.6. OEMs claim that PMA designers do not understand system effects

A more subtle version of the quality argument concerns “system effects.” An engine is an extremely complex system, and a small change in one part may create unintended consequences elsewhere. The OEM designed the product and understands its interfaces, the argument goes, whereas an independent PMA supplier designing one replacement part supposedly does not.

The concern is reasonable: engines are highly engineered and tightly integrated, and unintended effects cannot be dismissed. The argument nevertheless overstates how modern aerospace production works. OEMs often act as system integrators rather than vertically integrated manufacturers of every part. Engine development and production involve multiple companies, suppliers, facilities, and countries, and many articles are manufactured externally even within OEM-controlled programs.

PMA suppliers are therefore not as foreign to the system as the argument suggests. They generally do not receive the OEM drawing and must develop their own through reverse engineering. That is more difficult, but it also forces close study of the article. In some cases, reverse engineering and modern manufacturing can produce tighter tolerances or greater durability than the original design.

The relevant question is not whether the PMA supplier designed the entire engine but whether it has demonstrated that the specific replacement article performs its required function safely in the intended environment without unacceptable effects on the next higher assembly. The PMA process therefore addresses failure modes, criticality, testing, installation eligibility, production controls, and continued operational safety. System effects are real, but they are also precisely what the approval process is designed to evaluate.

5.5.7. Outsourced maintenance can block access to PMA parts

Outsourced maintenance is another practical obstacle. Airlines may favor PMA savings in principle, but the maintenance provider often controls the actual sourcing decision. An airline performing work in-house has more direct control over which parts are evaluated, approved, stocked, and installed; outsourcing weakens that control.

This is especially important in engine MRO. If the maintenance provider is also the engine OEM, PMA savings become much harder to capture because the OEM has little incentive to install an alternative that competes with its own profit pool. Only very large customers may have enough leverage to insist on PMA; otherwise, the default is usually OEM material.

Control over maintenance channels is one of the most effective ways to defend the aftermarket without banning PMA outright. If the OEM owns the shop, controls the manuals, sets repair standards, supplies material, and manages the work scope, it can strongly influence what is installed. The PMA article may be approved and the airline willing to use it, yet the maintenance arrangement can still block access to the engine.

PMA adoption is therefore partly a contracting issue. Airlines must decide in advance how much sourcing freedom to retain when outsourcing maintenance. A contract granting the provider full control over material selection may eliminate PMA savings; customer-directed material, approved vendor lists, PMA review rights, or shared-savings mechanisms improve the airline’s ability to capture them.

Outsourced maintenance can therefore slow adoption even when the regulatory and technical case is sound. Approval alone does not create savings; the part also needs access to the maintenance event. In engine MRO, where OEMs have increased their aftermarket control, that access may be the real bottleneck.

6. From One Aircraft Part to HEICO

Understanding HEICO first required understanding the market around it: the unusually long lives of aircraft, the economics of the aerospace aftermarket, the PMA regulatory framework, and the considerable barriers independent suppliers must overcome. Against this backdrop, HEICO’s history shows how regulatory complexity, customer cost pressure, and persistent resistance to alternative parts were transformed into an exceptional business.

Today, HEICO is a diversified aerospace, defense, and electronics group with thousands of products, global operations, and two major operating segments. None of this was apparent when the Mendelson family took control in 1990. The investment case then rested on one aircraft part, a small balance sheet, and a simple question: if HEICO could make one valuable product, why could it not make more?

6.1. The Mendelsons take control

HEICO’s origins bore little resemblance to the company it would become. When the Mendelson family took control in 1990, HEICO had already existed for more than three decades, passed through several owners and strategic directions, and discovered the aerospace product that would form the foundation of the modern group.

HEICO was founded in 1957 as Heinicke Instruments Company. Its original business had little to do with aviation: Heinicke manufactured products for medical laboratories. Only three years later, the company completed its initial public offering in 1960, beginning a public-market history that already spanned three decades when the Mendelsons took control. The decisive move into aerospace came in 1974, when Heinicke acquired Jet Avion, a manufacturer of jet-engine replacement parts.

In the early 1980s, acquisition-driven industrial conglomerate Tyco Laboratories accumulated a 46% interest in Heinicke and took control. Tyco intended to use Heinicke as a platform for expanding in medical supplies rather than building a focused aerospace business. It installed Chester Warner as CEO, who reorganized the company and revitalized its product offering. Heinicke later repurchased Tyco’s shares and regained its independence.

By 1986, Heinicke generated $46 million in sales and $7.6 million in earnings, with Jet Avion already accounting for roughly two-thirds of revenue. Aerospace had moved from an acquired side activity to the company’s economic center.

That year, the company changed its name from Heinicke Instruments Company to HEICO Corporation. The new name prompted litigation in 1989 from an unrelated manufacturing holding company, Heico Inc., which argued that it created “unnecessary confusion in the trade and financial communities.” HEICO successfully defended its right to keep the name.

HEICO also became more visible in the capital markets. In early 1987, it completed a stock offering on the American Stock Exchange. Earnings reached $7.6 million in the fiscal year ended October 1987, but conditions in the jet-engine parts market subsequently weakened.

The combination attracted outside investors. HEICO owned a valuable aerospace franchise, but control was unsettled and strategic direction remained unclear. In 1988, H Acquisition Corporation, an investor group led by George Fox, offered $75 million, or $30 per share, for the company.

By then, the Mendelson family was building its own position. As the takeover battle developed, the group led by Laurans “Larry” Mendelson increased its stake from 9.9% to 13.6%.

The family’s interest began at Columbia University, where Laurans Mendelson’s sons, Eric and Victor Mendelson, studied business and economics. Fascinated by the leveraged-buyout boom of the 1980s, the brothers searched for a publicly traded industrial company their family could acquire and develop. Victor Mendelson discovered HEICO through a stockbroker and studied its annual reports and financial statements in Columbia’s library.

Laurans Mendelson brought a complementary background. He had worked as an accountant before becoming a successful Florida real estate investor, allowing the family to combine Victor and Eric Mendelson’s search for an industrial investment with Laurans Mendelson’s financial experience and capital.

They found a profitable company rather than a classic distressed turnaround. The aerospace operation had performed strongly in the middle of the decade, the balance sheet carried no debt, and the company held cash. Yet HEICO was strategically unfocused, exposed to management and ownership disputes, and failing to exploit the opportunity implied by its aerospace product.

The absence of meaningful insider ownership was particularly striking.

“The board owned nothing—it didn’t own stock. They weren’t motivated.” — Laurans Mendelson, Forbes interview, 2020

The core aerospace franchise centered on a combustion chamber used in a Pratt & Whitney jet engine. HEICO had obtained the rights and technical data needed to manufacture the component from the original producer. The part served one of the most widely operated jet engines of the period, making it economically important despite the narrow product line.

For the Mendelsons, this concentration represented both risk and opportunity. HEICO had shown that an independent manufacturer could occupy a valuable position in the jet-engine aftermarket but had barely attempted to repeat the model across additional components.

Victor Mendelson later explained what attracted the family:

“One, it had a unique product in a niche segment of a market and they really essentially only had one of these products. And it was a very important jet engine part, in the most prolific jet engine in service at the time. And we thought, well, gee, if they have this one part, why can’t they make more?” — Victor Mendelson, Fernway Insights interview, 2022

The idea appears simple in retrospect, but the family still had to gain control. In 1989, the Mendelson group offered $42 million, or $21 per share, for the remaining shares and prepared a proxy fight to secure board representation.

The contest was difficult. Victor Mendelson was completing his senior year at Columbia when the family launched and initially lost the proxy fight. The Mendelsons then sued the company. Victor Mendelson entered law school while the dispute continued, and the litigation reached trial before the parties settled.

By December 1989, the Mendelson group controlled four board seats. The transition from shareholder activism to operating control was completed in 1990, when the family became HEICO’s largest shareholder and assumed management of the business.

Forbes later captured how unrealistic the plan appeared to many observers:

“Everyone told us it was impossible.” — Victor Mendelson, Forbes interview, 2020

“It couldn’t be done.” — Eric Mendelson, Forbes interview, 2020

“That we were going to fail.” — Victor Mendelson, Forbes interview, 2020

By then, the Mendelsons had invested approximately $3 million in HEICO stock, financed equally with cash and debt. The thesis rested on more than the combustion chamber. HEICO had no financial debt, giving the family room to invest without immediately answering to lenders, and it held a useful cash position. It also owned its historical laboratory-products division, which the Mendelsons believed could be sold to release capital and sharpen the strategic focus.

The laboratory division was sold to Varlen Corporation for $17 million around the time control changed hands.

Victor Mendelson later summarized the other factors behind the investment:

“Second, they had no debt, and that was very important because it would allow us to do what we needed to do without this overhang of debt. And third, they had a decent cash position, which was helpful. And fourth, they had a line of business making laboratory products and lab equipment that we felt should and could be sold, which we did immediately after taking over the company.” — Victor Mendelson, Fernway Insights interview, 2022

Location also mattered. HEICO was based in Hollywood, Florida, less than an hour from the family’s home. That proximity allowed Laurans, Eric, and Victor Mendelson to immerse themselves in a small manufacturing company despite their limited aerospace operating experience, rather than managing the investment from a distance.

The situation they inherited was more difficult than it had appeared. The family’s investment initially fell by approximately 30% and remained underwater for several years. More importantly, HEICO faced a legal threat directed at the product on which its aerospace franchise depended.

United Technologies Corporation, then the parent of Pratt & Whitney, sued HEICO in 1989, alleging that Jet Avion had infringed patents covering heat- and corrosion-resistant coatings used in combustion chambers for Pratt & Whitney gas-turbine engines. These highly profitable coated products represented roughly one-tenth of HEICO’s sales.

According to Victor Mendelson, United Technologies sought both an injunction preventing HEICO from manufacturing the part and $100 million in damages—approximately four times HEICO’s market capitalization. After a long battle for control, the family now faced a much larger aerospace company seeking to stop HEICO from producing what Victor Mendelson described as its only significant part.

“So we had just been through a very difficult battle to get control or start running the company, and we’d actually had a proxy fight my senior year in college, which we lost, and we had to sue the company. And so my first year in law school, we had a trial and company settled, and we took over managing the business. The mindset at that point was one, a war footing, if you will.” — Victor Mendelson, Fernway Insights interview, 2022

Survival was the immediate priority. HEICO had to defend the existing product, stabilize the company, and create additional revenue sources. Dependence on one component left the business exposed to litigation, changes in the underlying engine fleet, and the decisions of a single OEM.

The existing part also showed why the opportunity was worth pursuing. It served a valuable niche, generated high margins, and competed in a market protected by demanding technical and regulatory requirements. HEICO’s weakness was closely related to its potential: the company had already found one attractive aerospace product but had not built an organization capable of finding and developing the next.

The early Mendelson years were not a straight line toward today’s HEICO. Weak aviation markets in the early 1990s pushed the company to seek growth outside its core. HEICO formed MediTek Health Corporation to enter medical imaging, temporarily returning to a market closer to its laboratory roots. The short-lived venture was sold to U.S. Diagnostic Labs in 1996 for $23 million.

The episode shows that the strategy was not yet fully formed. The Mendelsons knew the financial and operating characteristics they wanted—high margins, strong cash flow, valuable niche products, and a conservative balance sheet—but did not arrive in 1990 with a fixed blueprint for a global aerospace and electronics group.

Their first strategic commitment was broader: create shareholder value, invest in products and people, preserve financial flexibility, and follow attractive opportunities as they emerged.

“We couldn’t become wedded to any single strategy or dogma other than producing excellent products, investing in the products and people, and emphasizing cash flow.” — Victor Mendelson, Fernway Insights interview, 2022

In sum, the family took over a small, contested public company with a valuable aerospace niche, a strong balance sheet, one dominant product, and several unresolved problems. Their first achievement was gaining control and preserving the opportunity. The harder challenge was proving that HEICO could develop another approved part and turn a single-product franchise into a repeatable model.

6.2. Proving that the model could scale

The combustion chamber had not yet demonstrated a repeatable product-development model because HEICO already possessed the rights and data needed to manufacture it. Building the modern company required a different capability: identifying an attractive OEM part, developing an alternative design, proving equivalency, establishing controlled production, and obtaining FAA approval.

As Chapter 3 explained, the regulatory route is demanding. Reverse engineering alone was insufficient. HEICO had to understand the part’s dimensions, materials, coatings, manufacturing processes, interfaces, and operating environment, then demonstrate that the alternative could perform safely and consistently. The manufacturing system also had to satisfy the FAA.

HEICO approached the process with a level of detail that would become central to its culture. Eric Mendelson spent so much time navigating the approval process in Washington that Forbes described him as practically living in the halls of FAA headquarters.

The burden was especially heavy for a small company. HEICO could not spread engineering and regulatory costs across a broad catalog and lacked decades of approval experience, established airline relationships, and a large installed base of its own products. The next approval had to be built almost from scratch.

Quality had to be treated as existential. A failed product would have cost far more than the revenue attached to that part; it could have ended HEICO’s effort to become a credible independent aerospace supplier.

“We carry out metallurgical inspection on all batches of parts that we produce.” — Eric Mendelson, Forbes interview, 2020

“The reason we do this is because we can’t afford to fail.” — Eric Mendelson, Forbes interview, 2020

The first year under the Mendelsons provided early evidence that the opportunity extended beyond one combustion chamber. According to HEICO, the company obtained FAA approval for five parts that year. One of its first independently developed products was a tube used in a jet engine. HEICO had begun to demonstrate a repeatable ability to move products through engineering, testing, regulatory approval, and controlled production while building internal expertise in materials, manufacturing, and quality assurance.

Each approval also made the next one slightly easier. Engineers gained experience with materials and production processes; the regulatory team learned how to prepare evidence and work with the FAA; manufacturing accumulated knowledge across batches and product categories; successful airline use strengthened HEICO’s reputation; and customers became more willing to discuss other expensive or difficult-to-source components.

Development remained slow. Victor Mendelson later acknowledged that the family might have viewed the original opportunity differently had it understood how many years the next approval would require. Yet the same work that delayed HEICO also protected the market by discouraging competitors without the patience, capital, or technical commitment to complete the process.

HEICO initially expanded around the engine it already understood. It developed additional parts for that engine, then for other engines from the same manufacturer, and eventually for engines from other OEMs. Airlines that had successfully used one HEICO product began asking the company to solve more problems.

“When we came to the company 28 years ago, we were 100% engine. And it was basically a particular part, pretty much one part for one type of engine. And then our customers asked us to develop more parts for that engine and they asked us to develop more parts for other engines manufactured by that original equipment manufacturer and then they asked us for more parts for other original equipment manufacturers’ engines. And then I would say about 20 years ago, they started asking for component parts because of course the fuel, hydraulic, pneumatic, electromechanical, avionics, wheels and brakes, all this other stuff is also a tremendous market.” — Eric Mendelson, Q3 2017 earnings call

This progression established a pattern HEICO still follows. The company rarely needs to invent demand: customers already operate the aircraft, buy the OEM product, experience its price and availability, and understand the value of a credible alternative. HEICO must select the right opportunities and execute the engineering, regulatory, and commercial work needed to address them.

Customer relationships therefore became integral to product development. Every successful product created the possibility of another request. HEICO did not need to predict the entire aftermarket from headquarters; airlines and MRO providers could point directly to the components causing the greatest cost or supply-chain pain.

This also explains why expansion did not remain limited to traditional engine PMA parts. Customers cared about the total cost of keeping aircraft flying. Their problems could involve an expensive replacement part, a repairable component, an unavailable item, avionics, or a non-engine component. Following those problems gradually pulled HEICO into a much broader part of the aftermarket.

6.3. Lufthansa and the transformation into a global supplier

Developing approved products was only half the challenge; HEICO also had to persuade conservative airline engineering and procurement departments to install them. As Chapter 5 explained, FAA approval establishes legal installation eligibility but does not force an airline to approve the supplier, change its internal maintenance policy, or accept the perceived career risk of moving away from the OEM.

Credibility is therefore a major bottleneck for a young PMA supplier. HEICO could explain the regulatory process, present test results, and offer a meaningful discount, yet a large airline still had to trust that the company would deliver consistent quality, support its products, and remain in business for the long term.

The Lufthansa relationship changed that equation.

In the mid-1990s, Eric Mendelson met Wolfgang Mayrhuber at an industry trade show. Mayrhuber was then Chairman and CEO of Lufthansa Technik, Lufthansa’s MRO arm, and later became CEO of Lufthansa Airlines. Eric Mendelson described HEICO’s lower-priced replacement parts as an alternative to OEM products. Mayrhuber became interested, and in 1997 Lufthansa Technik invested approximately $26 million in HEICO Aerospace for a 20% interest in the aircraft-parts business.

The investment mattered far beyond the capital. Lufthansa Technik was one of the world’s leading maintenance organizations and closely associated with German engineering quality. Its willingness to invest in HEICO and use HEICO PMA parts provided powerful validation. Other airlines could see that a highly respected technical organization had reviewed and accepted the products and was willing to install them in its own operations. Lufthansa also brought the perspective of a sophisticated airline-affiliated MRO, giving HEICO practical maintenance experience and a clearer view of frequently purchased parts, unusually high OEM prices, and operator availability problems.

This improved product selection. HEICO could focus engineering resources on identifiable customer needs rather than developing products and hoping airlines would buy them. Lufthansa helped identify high-volume, high-value candidates, while HEICO supplied approved alternatives that lowered Lufthansa’s maintenance costs.

The partnership also gave new products an anchor customer. Once HEICO completed engineering and approval, it had a sophisticated airline partner with a direct economic interest in using the product, shortening the distance between regulatory approval and commercial revenue.

Most importantly, Lufthansa provided external validation. HEICO could make many claims about its own engineering and quality, but a major airline and MRO investing its own capital carried far more weight. For other customers, Lufthansa’s involvement signaled that HEICO had passed extensive technical and commercial scrutiny.

The relationship reinforced several parts of the model at once. Better customer information improved product selection; better selection increased returns on development spending; anchor demand improved the economics of each approval; successful use strengthened HEICO’s quality record; and association with Lufthansa made it easier to approach additional airlines, generating more product ideas.

The late 1990s marked HEICO’s expansion beyond its original product base. It acquired businesses in jet-engine parts, component and composite repair, and aircraft ground-support equipment, then added broader repair and overhaul capabilities, distribution, avionics, and other aircraft components.

A second electronic-technologies platform would later extend the same niche-product philosophy into defense, space, medical, and industrial applications.

After years on the American Stock Exchange, HEICO transferred to the New York Stock Exchange in January 1999. It was no longer merely a small Florida supplier built around a narrow PMA portfolio but an acquisitive public company with broader ambitions, a stronger shareholder base, and access to growth capital. Revenue had grown by more than 50% annually over the previous five years, and management was already discussing a path toward $1 billion of annual sales.

HEICO’s second operating platform began with the 1996 acquisition of Trilectron Industries, a manufacturer of ground-support equipment such as ground-power and air-conditioning units. Initially organized as the Ground Support Group and later renamed the Electronics and Ground Support Group, it expanded into specialized electronics through acquisitions such as Radiant Power in 1999, whose products included onboard backup power supplies and batteries, and Leader Tech, a manufacturer of circuit-board shielding. These businesses established a second growth platform focused on niche electronic and electrical products for demanding aerospace and industrial applications. Over time, it became today’s Electronic Technologies Group (ETG).

The Mendelsons were not merely building a PMA company. They were learning to apply the same pattern across adjacent markets: small but critical products, technical expertise, specialized customers, long product lives, attractive margins, and acquisition opportunities in fragmented niches.

The Lufthansa partnership also began compounding commercially. Once airlines saw that a respected maintenance organization would invest in HEICO and use its products, the conversation changed. HEICO could approach customers not merely as a cheaper OEM alternative but as a validated supplier backed by a major airline-affiliated MRO.

HEICO subsequently replicated elements of the Lufthansa model with other major airlines. In March 2001, it formed a joint venture with American Airlines to develop, design, and sell FAA-approved jet-engine and aircraft-component replacement parts. American partly owned the venture and agreed to provide technical services and worldwide marketing support.

Further relationships followed with United Airlines in May 2002, Delta Air Lines in February 2003, Air Canada in March 2003, and Japan Airlines in March 2004. These partnerships provided technical knowledge and operating experience, helped identify attractive development opportunities, and created committed customers for newly approved parts. Partner airlines agreed to purchase products developed through the relationships, as well as much of HEICO’s existing FAA-approved portfolio, exclusively from HEICO.

Across North America, Europe, and Asia, major airlines were increasingly willing to work directly with HEICO to develop and manage alternatives to OEM parts. When British Airways entered its agreement in May 2007, it became the seventh major airline to establish such a strategic relationship.

British Airways became the most visible later example. Industry accounts describe BA as initially skeptical of PMA, but its view changed after HEICO explained the approval process and economics. In May 2007, British Airways entered a long-term strategic alliance with HEICO Aerospace for parts development and management, becoming the seventh major airline to partner with HEICO.

HEICO entered another important aftermarket activity through the 2005 acquisition of Seal Dynamics, a distributor of aircraft parts and related products. Distribution gave Flight Support another route to customers, greater visibility into what airlines and MRO providers were buying, and a broader ability to solve availability problems. Distribution made HEICO more useful even when the best solution was not a newly developed HEICO PMA part.

This step helps explain the reinforcing network effects within Flight Support:

• PMA gave airlines a lower-cost, approved alternative to OEM parts.

• Repair and overhaul created technical touchpoints and practical insight into failed components.

• Distribution of proprietary PMA parts and third-party OEM products added inventory, availability, and customer access.

• Airline partnerships supplied product ideas, validation, and demand. Each capability strengthened the others.

The company that began the Mendelson era with one Pratt & Whitney combustion chamber had become a broad aerospace aftermarket platform. It now combined a growing library of approved replacement parts, repair capabilities, distribution, international airline partnerships, a developing electronics business, and a public-market profile that provided capital and visibility.

Today, every major airline is a Flight Support Group customer, and the PMA portfolio extends far beyond engines into a broad range of aircraft components. Including acquired products, HEICO has developed approximately 20,000 FAA-approved PMA parts and currently adds roughly 400–550 each year. In fiscal 2025, the company generated $4.49 billion of revenue and $690 million of net income attributable to HEICO. Since the Mendelsons took control in 1990, revenue has compounded from $26.2 million at approximately 16% annually, while net income has grown from $2.0 million at roughly 18%. What began with one combustion chamber has become the world’s largest independent provider of FAA-approved jet-engine and aircraft-component replacement parts, complemented by repair, distribution, and a second platform in specialized electronic technologies.

Part 2 explained why the aircraft aftermarket creates such an attractive structural opportunity. The question now is how HEICO built the world’s largest independent platform around that opportunity—and turned lower-cost alternatives, customer trust, and continuous product development into a compounding engine. That is exactly what we will unpack in Part 3.

[1] A service bulletin recommends technical action, an airworthiness directive makes corrective action mandatory, and an in-flight shutdown refers to an engine being shut down during flight because of a technical issue. Making it a particularly important reliability indicator for engine parts.

It will be structured in five Parts:

• Part 1 (today): The Aviation Ecosystem Behind HEICO

• Part 2: Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3: Inside HEICO’s Crown Jewel

• Part 4: The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

9.73MB ∙ PDF file

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👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

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1. The State of Commercial Aviation

Commercial aviation connects people, businesses, and supply chains across continents. In 2024, airlines carried roughly 4.8 billion passengers, equivalent to about 4.1 billion origin-destination journeys because connecting passengers are counted on each flight leg. The industry operated more than 37 million flights. It also transported around 68 million metric tons of freight. This equates to more than 100 commercial takeoffs and landings per minute. On exceptionally busy days, flight-tracking services have recorded more than 24,000 simultaneous flights.

Airbus estimates that air transport supports roughly 86.5 million jobs and $4.1 trillion of economic activity worldwide, equivalent to about 3.9% of global GDP. According to Airbus, 89% of revenue passenger kilometers (RPKs[1]) have no convenient alternative. Much of this travel cannot be replaced by rail, road, or sea without materially increasing travel time or reducing convenience.

1.1. A growing industry constrained by aircraft supply

Demand has recovered after COVID, but aircraft shortages, engine constraints, and broader supply-chain bottlenecks limit the capacity airlines can deploy. In a normal cycle, airlines can respond to strong demand by ordering new aircraft, retiring older models, improving fuel efficiency, and optimizing their fleets. Today, supply constraints interrupt that renewal cycle.

The International Air Transport Association (IATA), the global airline trade association, describes the aircraft shortage that began building in 2019 as the industry’s most pressing challenge. It is limiting traffic growth, forcing airlines to keep older, less efficient aircraft in service, raising costs, and slowing emissions reductions. Although production has recovered somewhat, IATA does not expect the shortage to normalize before 2031–2034 because the industry is missing the equivalent of several years of aircraft deliveries.

As of June 2025, IATA counted 35,550 commercial aircraft worldwide, of which 30,300 were active and 5,250 were in storage. Aircraft manufacturing is highly concentrated: Boeing and Airbus account for about 80% of the active fleet, while the five largest manufacturers account for nearly 92% of all aircraft in service.

Such concentration limits the industry’s ability to work around shortages. Commercial aircraft are certified platforms with long production cycles, specialized suppliers, extensive regulatory oversight, and decades-long aftermarket lives. If Boeing, Airbus, engine OEMs, or major Tier 1 suppliers cannot ramp production, the entire industry is affected.

Narrowbody jets are single-aisle aircraft used mainly on short- and medium-haul routes, with the Airbus A320 and Boeing 737 families as the leading examples. They account for roughly 61% of the active commercial fleet and 56% of global available seat kilometers (ASK[2]), reflecting their versatility, lower unit costs on shorter routes, and high utilization.

By contrast, widebody jets are twin-aisle aircraft used mainly on long-haul routes, including the Boeing 777 and 787 and the Airbus A330, A350, and A380. Although they represent only about 19% of the active fleet, they account for nearly 40% of global ASK because they carry more passengers over longer distances.

Regional jets and turboprops make up the remaining roughly 20% of the fleet but only about 3% of ASK.

On average, widebody flights carry about 60% more seats and cover more than three times the distance of narrowbody flights.

According to IATA, aircraft in storage—those not in regular operational service—represented 15% of the global fleet in June 2025, above the 2010–2018 average of 11.8% despite the industry-wide fleet shortage. A further 2% of the fleet was grounded by engine-related issues. Returning a parked aircraft to service may require maintenance, engine work, inspections, cabin modifications, regulatory approval, and a viable economic case.

Aircraft in storage declined sharply from the COVID-19 peak but remained well above pre-pandemic levels. The total was broadly stable at 19–24 thousand aircraft between 2010 and 2019, rose to roughly 97 thousand in 2020, and then fell to 78 thousand in 2021, 57 thousand in 2022, 48 thousand in 2023, and 47 thousand in 2024. The 2024 level was still almost twice the 2019 level. In other words, even after passenger demand recovered, the amount of aircraft sitting in storage remained structurally elevated.

(The absolute numbers should not be interpreted as unique aircraft parked at a single point in time. A 47k figure would clearly exceed the size of the global commercial fleet. The chart appears to use an annualized or cumulative storage measure rather than a simple point-in-time aircraft count. If the 47k figure for 2024 is divided by twelve months, it implies an average monthly storage level of roughly 3,900 aircraft. That is a much more realistic order of magnitude and broadly consistent with industry data showing several thousand aircraft in storage, not tens of thousands of unique aircraft parked at one point in time.)

1.2. The aircraft shortage is not a short-term disruption

The shortage is not merely a temporary post-COVID-19 disruption. It began building in 2019 and reflects structural constraints across the aerospace supply chain. The pandemic then disrupted complex just-in-time production networks.

Many suppliers downsized or exited the market, while labor shortages, cost inflation, and limited supplies of engines, avionics, and specialty metals slowed the recovery in production capacity. Quality-control problems and tighter regulatory oversight have also constrained output at major airframers.

One measure compares actual deliveries with the pre-pandemic trend. Based on delivery growth from 2010 to 2018, roughly 16,004 aircraft would have been expected to enter service between 2019 and 2026. Including the forecasts for 2025 and 2026, cumulative deliveries are expected to reach only around 10,720, implying a shortfall of about 5,284 aircraft.

The backlog points to a similar shortfall. Historically, the global backlog equaled about 40% of the active fleet; by mid-2025, the ratio had reached a record 58%. Using the historical relationship between backlog and fleet size, IATA estimates the resulting shortage at 5,352 aircraft.

This imbalance will take years to unwind. IATA does not expect the shortage to normalize before 2031–2034, even if deliveries improve, because the industry must absorb the accumulated delivery shortfall, deferred retirements, and record backlog.

1.3. Order books are full, but deliveries take longer

The aircraft shortage is not caused by a lack of airline demand for new aircraft. Quite the opposite: Airlines have placed record orders, but manufacturers cannot convert them into deliveries quickly enough. The bottleneck is production capacity, supply-chain reliability, certification, and delivery execution.

The commercial aircraft backlog rose from roughly 4,900 aircraft in 2000 to 8,300 in 2010 and continued climbing through the 2010s. It exceeded 17,000 aircraft in 2024 before easing to around 15,800 in 2025.

Measured in years of production, the backlog is even more stretched. It reached 12.7 years in 2024, well above both the historical average and previous downturn peaks.

A large order book signals strong demand, but it also constrains airlines when delivery slots stretch over many years. An airline may want to renew its fleet, reduce fuel burn, add capacity, or replace aging aircraft, yet still wait years for delivery. The constraint is manufacturing capacity, not airlines’ willingness to invest.

The average order-to-delivery lead time reached 6.8 years in 2024, up from 4.5 years in 2018. Longer waits delay fleet renewal, constrain capacity growth, and postpone fuel-efficiency gains, forcing airlines to keep older aircraft in service.

1.4. Delayed deliveries keep older aircraft in service

In a normal market, airlines retire older, less efficient aircraft as new models arrive. Newer aircraft offer better fuel efficiency, lower emissions, higher reliability, a better passenger experience, and lower unit costs. Supply constraints have disrupted this replacement cycle.

Missed delivery targets and longer lead times have forced airlines to retain older aircraft. The average fleet age has risen from roughly 13 years before COVID-19 to around 15 years, the highest level in the series shown below.

For HEICO, an older fleet means more component repairs, replacement parts, inspections, overhauls, and supply-chain workarounds.

The same dynamic is visible in retirement rates. IATA estimates that the lower retirement rate between 2019 and 2025 kept 2,397 aircraft from leaving the fleet. Many remained in service; others were retained in storage for possible reactivation.

Storage figures therefore overstate the capacity that airlines can readily reactivate. Many parked aircraft are old, awaiting maintenance, constrained by engine issues, or unlikely to return to service. Airlines are therefore short of usable capacity: flyable aircraft are being used intensively, while many grounded aircraft require maintenance, parts, engines, inspections, or a viable economic case before they can return to service.

1.5. Higher utilization masks the shortage

The shortage appears less severe because airlines are extracting more capacity from the existing fleet. Fleet utilization reached record levels in 2024 as airlines maximized the hours flown by available aircraft.

Airbus estimates that passenger aircraft with more than 100 seats were around 50% more productive in 2024 than in 2004. Over that period, the fleet grew from 12,800 to 22,380 aircraft, average daily utilization rose from 8.2 to 10.2 block hours, seats per flight increased from 162 to 185, and the load factor climbed from 73% to 83%.

Higher utilization spreads fixed costs across more revenue and helps airlines serve demand with fewer aircraft, but it also accelerates wear. More flight hours and cycles bring inspections forward and increase demand for repairs and spare parts.

1.6. The fleet shortage slows efficiency gains and raises costs

The aircraft shortage affects fuel efficiency and emissions as well as capacity. Airbus states that the latest-generation aircraft can reduce fuel burn and CO₂ emissions by up to 25% compared with previous-generation models.

Delayed fleet renewal has stalled the industry’s long-term efficiency gains. According to IATA, fuel consumption per available tonne-kilometer (ATK[3]) was flat year over year in 2024 after improving almost continuously since the early 1990s.

Fuel is one of airlines’ largest expenses, and newer aircraft reduce fuel burn per seat. Delivery delays therefore create a double burden: airlines cannot add capacity as quickly as planned and must keep operating older aircraft that burn more fuel, require more maintenance, and may be less reliable.

1.7. Long-term demand remains strong

Airbus expects passenger traffic to grow at a CAGR of roughly 3.6% and the global in-service fleet to reach 49,210 aircraft by the end of 2044. Meeting that demand would require 43,420 new passenger and freighter aircraft between 2025 and 2044.

The passenger-aircraft forecast comprises roughly 34,250 single-aisle aircraft and 8,200 widebodies.

Near-term supply constraints do not change the long-term expansion of the installed fleet. As the fleet grows, so does demand for parts, repairs, inspections, and inventory support, creating more opportunities for approved alternative suppliers.

HEICO therefore benefits from both time horizons. In the near term, airlines are flying existing aircraft more intensively, delaying retirements, and facing longer OEM lead times. Over the long term, a larger installed fleet expands the addressable aftermarket. Together, these trends increase the value of certified, trusted, readily available, and lower-cost alternatives.

Growth will be uneven across regions. Mature aviation markets will continue to expand, but emerging markets are expected to grow faster as incomes rise and air travel remains far less common than in Europe and North America.

Boeing expects passenger traffic within emerging markets to grow by about 5% annually between 2024 and 2044, compared with roughly 3% within advanced economies. Traffic between emerging markets is expected to grow even faster, at about 6% per year, versus around 2% between advanced economies.

Airbus’s route-level forecast points in the same direction. Domestic traffic in India is expected to grow by 8.9% annually through 2044, while domestic traffic within Emerging Asia and traffic between Emerging Asia and China are forecast to grow by 7.6% and 8.5%, respectively. By comparison, domestic U.S. traffic is expected to grow by 1.6% and traffic within Western Europe by 1.7%.

The gap reflects the much lower starting point in emerging markets. In 2024, China recorded about 0.6 air trips per capita and India just 0.1, compared with 1.9 in Europe and 2.2 in the U.S. By 2044, Airbus expects these figures to rise to 1.8 in China and 0.5 in India, while Europe and the U.S. approach three trips per capita.

Even then, travel intensity in China and India would remain below today’s levels in developed markets. Given their vast populations, even modest convergence would generate substantial additional passenger traffic, support further fleet growth, and expand the aerospace aftermarket.

For HEICO, this is primarily a long-term installed-base tailwind. Its commercial aerospace business remains concentrated in the Americas and Europe, while new aircraft entering emerging-market fleets are initially more likely to remain tied to OEM warranties, service agreements, and leasing restrictions. As these fleets expand, mature, and pass through more maintenance cycles, however, they should create a much larger installed base requiring parts, repairs, and lower-cost aftermarket alternatives.

2. The Aerospace Value Chain: A System of Systems

2.1. The commercial aviation value chain

Commercial aviation is not a simple value chain in which one manufacturer builds and sells a finished product. It is a multi-layered ecosystem of airframers, engine manufacturers, system and component suppliers, lessors, airlines, airports, regulators, maintenance, repair, and overhaul (MRO) providers, distributors, travel platforms, freight operators, labor providers, fuel suppliers, and financial intermediaries.

Airlines sit at the center of this ecosystem because they provide the transport service to passengers and cargo customers. Their ability to operate, however, depends on external parties that finance aircraft, provide airport infrastructure and fuel, supply labor and services, manufacture aircraft and parts, and distribute tickets. Regulators set the safety, security, air traffic control, and operating requirements within which the entire system functions.

This structure helps explain why airlines have historically struggled to earn attractive returns despite long-term traffic growth. They bear much of the operating and commercial risk, while several critical inputs are controlled by counterparties with strong bargaining power. Aircraft and engine manufacturing are highly concentrated; airports often have local monopoly characteristics; fuel prices are largely outside airlines’ control; labor is operationally critical and often unionized; and distribution intermediaries influence customer access and pricing transparency.

For HEICO, the relevant part of the map is the upstream aerospace supply chain, where the company sits among parts suppliers. Aircraft manufacturers—so-called airframers or OEMs—such as Boeing and Airbus design, certify, assemble, and sell aircraft, but rely on a deep network of engine manufacturers, avionics providers, aerostructure companies, component specialists, and aftermarket parts suppliers.

2.2. A commercial aircraft is highly complex

A commercial aircraft consists of hundreds of thousands to several million components, subcomponents, and individual parts. A Boeing 737 contains roughly 400,000 parts, compared with about 4 million for an Airbus A380 and 6 million for a Boeing 747-8. These figures illustrate the extraordinary complexity of modern commercial aircraft.

Technically, an aircraft is a system of systems. Its main building blocks include the airframe—such as the fuselage, wings, and stabilizers—secondary structures such as fairings, doors, and nacelles, engines, the auxiliary power unit, landing gear, avionics, and hundreds of other systems and components. The aircraft is then fitted with seats, galleys, inflight entertainment systems, carpets, and other cabin equipment before being painted, inspected, tested, and delivered.

The graph above provides a useful way to think about this complexity. A commercial aircraft is organized around several major system families that are integrated into the final aircraft by the airframer.

At the top, the airframer is responsible for aircraft design, final assembly, and sales. Below it are three broad Tier 1 categories: onboard avionics systems; propulsion systems; and airframe structures, subassemblies, and subsystems. These, in turn, divide into more specialized Tier 2 layers. Avionics depend on electronic and electrical components, systems, and subsystems. Propulsion includes engines, engine components and submodules, starting systems, and electrical power sources. Airframe-related systems include fuselage structures, cabin interiors, environmental controls, fuel systems, landing gear, and hydraulics.

The hierarchy shows that the airframer acts as the system architect and final integrator of a broad supplier ecosystem. Many suppliers deliver complete systems or subsystems that become embedded in the aircraft’s design, certification, operating performance, and maintenance requirements.

This structure also makes aerospace supply chains difficult to scale quickly. A missing or delayed subcomponent can prevent a larger system from being completed, ultimately delaying aircraft assembly and delivery. In aviation, a single weak link in the certified supply chain can hold up an entire aircraft.

This complexity has two important economic consequences:

· First, suppliers with strong positions in critical systems can become highly valuable. Once a system is selected for an aircraft program, it may remain tied to that platform for decades. The original-equipment sale is only the beginning: the installed system later generates demand for spare parts, repairs, documentation, testing, service bulletins, upgrades, and technical support.

· Second, aircraft complexity creates a long tail of aftermarket demand. Every system contains components that wear, fail, or require inspection, replacement, or repair throughout the aircraft’s operating life. This is where HEICO operates.

2.3. From vertical integration to a tiered aerospace supply chain

Aircraft manufacturers were historically far more vertically integrated. In the 1960s and 1970s, airframers such as Boeing and Douglas produced more aerostructures, systems, and interiors in-house, while suppliers focused mainly on individual parts and subassemblies with limited design responsibility.

That model gradually changed as trade liberalization, the end of the Cold War, globalization, digital design tools, and mounting cost pressure encouraged airframers to outsource more design and production. In the 1990s, Bombardier and Embraer advanced the risk-sharing partnership model, transferring more development work and financial risk to Tier 1 suppliers. The model later spread across the industry and reshaped the aerospace supply chain.

Today, the commercial aerospace value chain has a tiered structure. Suppliers at different levels produce parts, components, subassemblies, and complete systems; airframers integrate them into finished aircraft; regulators certify the aircraft; and airlines and lessors place them into service. Throughout their operating lives, airlines and maintenance, repair, and overhaul (MRO) providers keep aircraft airworthy and preserve their value.

The supply chain begins with raw materials and castings. Tier 3 suppliers process these inputs into detailed parts and basic components. Tier 2 suppliers combine them into larger components and subassemblies, while Tier 1 suppliers deliver major systems, aerostructures, and assemblies for integration by the airframer.

Airframers such as Airbus, Boeing, and Embraer perform final assembly and integrate the systems into the aircraft. Finished aircraft are delivered to airlines, cargo operators, or lessors. The aftermarket then supports them throughout their operating lives through airline, independent, OEM-affiliated, and joint-venture MRO providers, as well as distributors and trading platforms.

This interdependent structure helps explain why the aircraft shortage discussed in Chapter 1 is so difficult to resolve. A commercial aircraft is not produced by a single factory that can simply increase output; it depends on a certified network of specialized suppliers with long production cycles, strict quality requirements, and limited redundancy. Shortages of forgings, castings, engines, landing gear, seats, avionics, wiring, interiors, or skilled labor can delay an entire aircraft.

This complexity also helps explain why commercial aircraft manufacturing is so concentrated. Building an aircraft requires vast engineering capability, certification expertise, capital, supplier coordination, and decades of customer support. These demands create formidable technological and financial barriers to entry. The widebody market is effectively a duopoly between Airbus and Boeing, whose rivalry has at times led to aggressive pricing for major orders.

Below the main Airbus-Boeing market, regional aircraft have historically been supplied by a smaller oligopoly including Bombardier (Canada), Embraer (Brazil) and Avions de Transport Régional (ATR), a French-Italian Joint Venture. This segment is economically different from the mainline narrowbody market.

2.4. Where the value in an aircraft sits

The value of a newly built commercial aircraft is concentrated in a few major systems. Oliver Wyman estimates that engines account for roughly 25% of the average aircraft value, while wings and fuselage each account for around 15%.

For example, a single Rolls-Royce Trent 900 engine for the Airbus A380 is estimated to cost around $25 million. With four engines per aircraft, this implies total engine costs of roughly $100 million per A380, compared with the aircraft’s overall list price of approximately $450 million (i.e. slightly below 25%).

2.5. The aerospace supplier landscape

Aircraft manufacturers rely on a broad supplier base that produces everything from complete engines and major systems to subassemblies and individual parts. For this discussion, the supplier landscape can be divided into three groups:

• Engine manufacturers (engine OEMs)

• Tier 1 Original Equipment Suppliers (OES)

• Lower-tier suppliers of parts, components, and subassemblies to higher-tier suppliers

Each group differs in its economics, bargaining power, and exposure to the aftermarket.

2.5.1. Engine OEMs

Engine manufacturers occupy a unique position in the aerospace value chain. Engines combine technological complexity, advanced materials, and a direct influence on aircraft performance, fuel burn, reliability, and operating economics.

The commercial aircraft engine market is highly concentrated. GE Aerospace, Rolls-Royce, and Pratt & Whitney are the principal manufacturers capable of developing complete large commercial turbofan engines. Joint ventures such as CFM International and Engine Alliance complement them in specific market segments.

New engine programs require enormous upfront investment. Older industry estimates often put development costs at around $1 billion, while recent programs can require several billion dollars. Rolls-Royce’s next-generation UltraFan program, for example, has been described as a roughly $4 billion project. Combined with long development cycles and payback periods of 15–20 years, these economics explain why engine manufacturers often use joint ventures and risk-sharing partnerships to spread cost and technological risk.

• CFM International is a 50/50 joint venture between GE Aerospace and Safran Aircraft Engines.

• Engine Alliance is a joint venture between GE Aerospace and Pratt & Whitney that developed the GP7000 engine for the Airbus A380.

Engine choice varies considerably by platform. The A320neo family offers CFM’s LEAP-1A and Pratt & Whitney’s PW1100G-JM, while the Boeing 787 offers GE Aerospace’s GEnx-1B and Rolls-Royce’s Trent 1000. By contrast, platforms such as the A220, 737 MAX, A330neo, A350, and 777X have only one engine option. Many aircraft platforms are therefore effectively sole-source from an engine perspective.

Engine selection is not merely a technical procurement decision. Once an engine is certified and installed on an aircraft platform, it becomes embedded in the platform’s operating economics and maintenance ecosystem for decades. This creates high visibility for future spare-parts and service demand.

The chart above highlights the different competitive structures of the narrowbody and widebody markets. In narrowbodies, CFM International accounted for 56% of 2024 new-build turbofan engine value, followed by Pratt & Whitney at 41% and GE Aerospace at 3%. The direct GE Aerospace share understates its economic exposure because the company also owns 50% of CFM International alongside Safran Aircraft Engines. In widebodies, Rolls-Royce accounted for 64% of new-build engine value, followed by GE Aerospace at 32% and Pratt & Whitney at 5%.

The initial engine sale can be heavily discounted, particularly when an OEM is seeking a platform position or a major airline customer. Development costs and initial losses are then recovered through aftermarket revenue from spare parts, shop visits, repairs, life-limited parts, long-term service agreements, and technical support.

Oliver Wyman estimates that engine OEM gross margins on original-equipment production typically range from negative 5% to positive 10%, compared with 20% to 35% in MRO. The aftermarket is therefore the principal engine-industry profit pool.

The pattern extends beyond engines. As the following illustration shows, original-equipment production has a finite program window, while aftermarket revenue can continue for decades.

Rolls-Royce’s Civil Aerospace segment provides a useful illustration. The company does not disclose gross profit separately for original equipment and aftermarket services, but the revenue mix already shows their relative economic weight. In 2025, aftermarket services generated £7.1 billion, or 69% of Civil Aerospace revenue, compared with £3.2 billion from original equipment.

An illustrative allocation of reported segment gross profit reinforces the point. Assuming that total Civil Aerospace gross profit remains unchanged, a negative 5% original-equipment margin would require aftermarket services to contribute more than 100% of segment gross profit. Even at original-equipment margins of 5% and 10%, aftermarket services would contribute approximately 94% and 88% of gross profit, respectively. Across every scenario, the aftermarket remains the core profit pool.

This is where the opportunity for PMA suppliers such as HEICO begins. PMA parts do not compete with the original engine sale; they compete for selected parts of the aftermarket profit pool. HEICO has historically entered the market at prices roughly 30–40% below the OEM alternative, allowing airlines and MROs to capture meaningful savings while HEICO still earns attractive returns. Because HEICO has generally raised prices more slowly than OEMs, the discount can widen further over the life of a product. Airlines benefit from lower maintenance costs and better availability, while HEICO gains access to a large, recurring profit pool supported by the long life of the installed fleet.

PMA parts cannot replace every OEM part. Technical feasibility, certification, customer acceptance, warranties, lessor restrictions, and safety considerations all matter. Nevertheless, high OEM aftermarket margins give airlines a strong incentive to evaluate alternatives that are approved and operationally acceptable, while leaving trusted PMA suppliers room to offer savings profitably. Chapter 5 examines the airline value proposition and the remaining barriers to adoption in detail.

Engine OEMs therefore have a strong incentive to defend their installed-base economics.

2.5.2. OES and lower-tier suppliers

The second major group consists of original equipment suppliers (OES), which provide major aircraft systems or modules, including avionics, flight controls, APUs, landing gear, cabin interiors, aerostructures, nacelles, hydraulic systems, and electrical systems. Examples include Honeywell, Collins, Safran, Liebherr, Spirit AeroSystems, GKN, and other system-level suppliers. Many are Tier 1 suppliers because they deliver complete systems or major assemblies directly to the airframer.

Their role extends far beyond manufacturing individual parts. A Tier 1 supplier may be responsible for design, engineering, certification support, manufacturing, integration, documentation, testing, and subsequent aftermarket support. Once a system is selected for an aircraft program, the supplier can remain tied to that platform for decades (see Chapter 2.6). Its economics may therefore include both original-equipment sales and a long aftermarket tail of spare parts, repairs, manuals, testing equipment, and service support.

Lower-tier suppliers generally do not deliver complete aircraft systems directly to Airbus or Boeing. Instead, they provide the inputs that Tier 1 and Tier 2 suppliers use to build those systems.

Landing gear provides a simplified example. At the bottom of the chain, raw-material and forging suppliers provide aerospace-grade metals and forged structural inputs. Tier 3 suppliers turn these inputs into detailed parts such as machined components, bearings, seals, pins, and fittings. Tier 2 suppliers combine the parts into larger mechanical or hydraulic subassemblies. At the Tier 1 level, suppliers such as Safran, Collins, Liebherr, and Héroux-Devtek deliver complete landing gear systems or major landing gear assemblies to the airframer, which then integrates them into the aircraft.

The supplier base also explains the high switching costs in aerospace. Suppliers cannot be replaced overnight. A new supplier must be qualified, audited, tooled, documented, approved, and integrated into the relevant quality system. In many cases, a component is tied to a specific aircraft program, certification basis, production configuration, or proprietary technical design. Aerospace supply chains are therefore far less flexible than ordinary industrial supply chains.

2.6. Aircraft program lifecycle

A commercial aircraft is a multi-decade industrial platform whose program lifecycle begins long before the first delivery. During the early definition phase, the manufacturer develops the initial concept, defines the target market, evaluates customer requirements, sets broad performance goals, and determines whether airline demand justifies the enormous investment. This phase can take at least five years, during which the aircraft remains largely conceptual and its mission profile, size, range, payload, fuel efficiency, technology choices, and customer value proposition are defined.

The first major milestone is the go-ahead decision, at which point the manufacturer formally commits to the program.

The aircraft then enters a development phase that typically lasts four to five years. During this period, the design is engineered in detail, prototypes are built, suppliers are coordinated, and testing begins as the program moves toward certification. The first flight is a crucial milestone, while certification is the final gate before the aircraft can enter commercial service.

Once the aircraft enters service, production begins in earnest and can continue for decades. A typical aircraft production program can last 20 to 30 years or even longer. The Boeing 747 is a striking example: production of the legendary “Jumbo Jet” ran for roughly 56 years, from 1967 until early 2023, when the program ended.

The Airbus A380 illustrates the other side of lifecycle risk. Airbus developed the ultra-large aircraft as airline demand increasingly shifted toward smaller, more flexible long-haul twinjets such as the Boeing 787 and Airbus A350. Airbus launched the program in 2000, began manufacturing the first components in 2002, and delivered the first aircraft in 2007. Yet the decision to discontinue the program came in 2019, only 12 years after the first delivery, and the final aircraft was delivered in 2021. The resulting 14-year delivery run was far shorter than that of the A380’s iconic predecessor and closest conceptual counterpart, the Boeing 747.

During production, manufacturers continue to introduce enhancements, launch variants such as stretched versions, and expand successful platforms into broader product families. The A320 illustrates this platform logic: the original aircraft was followed by the A319 and A321 and later evolved into the neo variants.

This platform logic is central to aircraft economics. The initial development cost of a new aircraft is enormous, and manufacturers need long production runs to amortize that investment. Recovering these costs often takes more than a decade, creating substantial financial, technological, and market risk. If customer demand falls short, technology choices prove problematic, or production costs exceed plan, the economics of the entire program can remain impaired for years.

The lifecycle does not end when production stops; the aftermarket continues for as long as the fleet remains in service. Even after the final aircraft leaves the production line, manufacturers and suppliers remain tied to the installed fleet. Manufacturers must continue supporting their aircraft as long as the fleet remains operational.

Because aircraft typically remain in service for 20–30 years, this long operating life is the key point. The initial aircraft sale is a one-time event, but each delivery enters the installed base and creates two to three decades of recurring aftermarket demand. Across the full production and operating cycle, an aircraft platform can therefore generate parts and maintenance demand for 35 to more than 40 years. This longevity makes the aftermarket structurally attractive. The production chain creates the installed base; the aftermarket keeps it productive.

To put these cycles into perspective, the Boeing 737 was already a well-established platform in 1996—11 years before Apple introduced the first iPhone. The family has since evolved through the 737 MAX and remains a major part of the global fleet.

The lifecycle also explains why supplier selection during the original aircraft program matters so much. If a supplier’s system is selected for a major platform, it can generate revenue not only during production but also through decades of aftermarket activity. The original-equipment relationship can create future demand for spare parts, repair instructions, test equipment, technical documentation, and service support. This is why aerospace suppliers compete aggressively to be designed into aircraft programs and why aftermarket access becomes an important strategic battleground.

At the same time, long lifecycles create opportunities for alternative suppliers. Early in a platform’s life, OEMs typically hold the strongest position: the aircraft is new, warranties remain active, airline technical teams are still gaining experience, and lessors often prefer OEM-supported configurations to protect residual values. As the platform matures, however, the installed base grows, operators accumulate operating data, warranties expire, and airlines become more receptive to cost-saving alternatives that are legally and technically acceptable. PMA parts, DER repairs, used serviceable material, and independent repair solutions can therefore become increasingly relevant; each is discussed in detail later.

This lifecycle perspective is essential to understanding HEICO. Unlike an engine OEM or Tier 1 system supplier, HEICO does not need to win content at the beginning of an aircraft program. HEICO’s opportunity grows with the installed base: the more aircraft are delivered, operated, aged, repaired, and kept in service, the larger the addressable aftermarket becomes. Because aircraft can remain in operation for decades, a single program can create a long runway of recurring parts and repair opportunities.

3. Regulation, Airworthiness, and the Right to Keep Flying

Aviation is not a typical industrial market. In most industries, a replacement part is acceptable if it fits, performs as required, and is competitively priced. In commercial aviation, that is not enough. A part must also be approved, traceable, documented, eligible for installation, installed and maintained under approved procedures, and accepted within the aircraft’s airworthiness framework.

Airworthiness is the legal and technical condition that allows an aircraft to fly. It links design, production, maintenance, documentation, repairs, inspections, parts traceability, operator responsibility, and regulatory oversight. Without it, even an expensive aircraft is merely a grounded asset.

For HEICO, this is the central regulatory point. The company operates within a system in which every part, repair, and maintenance action must fit into a defined approval chain. This raises barriers to entry but also increases the value of approved alternatives. Once a supplier has the necessary approvals, engineering capabilities, quality systems, customer trust, and installed-base knowledge, regulation becomes part of its moat.

3.1. Initial and continuing Airworthiness

Aviation regulation can be understood through two related concepts: initial airworthiness and continuing airworthiness.

Initial airworthiness concerns whether an aircraft, engine, propeller, part, or system has been designed and manufactured in accordance with the applicable certification requirements. It encompasses type certificates, design and production approvals, approved design data, manufacturing controls, conformity, and certification testing. Before an aircraft enters service, its design and production system must be approved, and the completed aircraft must conform to the approved type design.

Continuing airworthiness begins when the aircraft enters service and covers the ongoing process of keeping it airworthy throughout its operating life. It includes maintenance programs, inspections, repairs, component replacements, airworthiness directives, reliability monitoring, records, service experience, and release-to-service documentation. Initial certification does not make an aircraft automatically airworthy for its entire lifecycle. The operator must ensure that it remains in an approved and airworthy condition every day it flies.

One important continuing-airworthiness mechanism is the Airworthiness Directive (AD). An AD is a legally binding safety instruction issued by an aviation authority to address an unsafe condition in an aircraft, engine, propeller, system, component, or appliance. It may require operators to inspect, repair, modify, or replace the affected item, restrict its use, or complete another specified action within a defined timeframe. Unlike a manufacturer-issued service bulletin, an AD is mandatory. Until the required action has been completed, the affected aircraft may no longer be considered airworthy.

By contrast, a Service Bulletin (SB) is issued by an aircraft, engine, or component manufacturer rather than the regulator. It informs operators about recommended inspections, modifications, repairs, software updates, or operating improvements. Unlike an AD, an SB is generally not legally binding on its own. It may nevertheless become mandatory if an aviation authority incorporates it by reference into an AD, if it becomes part of the approved maintenance program, or if compliance is required under leasing, warranty, or service-agreement terms. Service Bulletins also allow OEMs to feed technical experience from the installed fleet back into maintenance and operating procedures.

The Minimum Equipment List (MEL) illustrates the difference between certification and day-to-day airworthiness. Even a properly certified aircraft may develop defects in service. The question is not only how the defect will be repaired but also whether the aircraft may continue operating temporarily until it is corrected.

The starting point is the Master Minimum Equipment List (MMEL), which is developed for a specific aircraft type and approved by the aviation authority. It defines which equipment items may remain temporarily inoperative and under what conditions. Based on the MMEL, each operator develops its own MEL for the relevant aircraft type, equipment configuration, and operating conditions. The operator’s MEL must be approved by the competent authority and may not be less restrictive than the MMEL.

If an item may remain inoperative, the MEL specifies the conditions and timeframe for continued operation. The defect must still be recorded, monitored, and corrected within the permitted period.

For example, an aircraft may be dispatched with a noncritical galley oven, a reading light, or certain passenger-service equipment inoperative, provided the defect is recorded and corrected within the permitted timeframe. A safety-critical system, by contrast, may be subject to much stricter conditions or provide no dispatch relief at all.

3.2. Who regulates what?

Aviation regulation is international but not governed by a single global authority. At the highest level, ICAO (International Civil Aviation Organization) provides the international framework and standards for civil aviation. National and regional authorities implement and enforce the applicable safety rules within their jurisdictions. In the U.S., the principal authority is the FAA (Federal Aviation Administration); in Europe, EASA (European Union Aviation Safety Agency) works alongside national aviation authorities.

Aircraft are global assets. A Boeing aircraft may be designed in the U.S., contain engines or systems from several countries, be delivered to a European lessor, operated by an Asian airline, maintained by an MRO in Singapore, and later sold into another jurisdiction. The regulatory framework must allow this global system to function while preserving safety and traceability.

The regulatory frameworks governing aviation organizations in the U.S. and Europe are broadly similar. Harmonization and the mutual recognition of certificates and approvals have steadily advanced in recent years, particularly through bilateral aviation safety agreements (BASAs).

“In general, the FAA approval is accepted around the world and it’s due to the bilaterals.” — Eric A. Mendelson, Q2 2019 earnings call

The global nature of aviation raises a practical question: which authority is responsible when an aircraft is designed in one country, registered in another, operated by an airline in a third, and maintained elsewhere? The answer begins with the distinction between the State of Design and the State of Registry.

The State of Design is the jurisdiction whose authority is responsible for the original aircraft or product design. For Boeing aircraft, that authority is typically the FAA; for Airbus aircraft, EASA. It plays a central role in type certification, design changes, service bulletins, airworthiness directives, and the continued safety of the type design.

The State of Registry is the jurisdiction in which the individual aircraft is registered. Its authority oversees whether that aircraft remains airworthy, properly maintained, correctly documented, and operated under the applicable rules.

The operator connects these jurisdictions. It may fly an aircraft designed and certified under one framework, registered under another, and maintained by organizations located in a third. This makes bilateral agreements, recognized release certificates, approved maintenance organizations, and harmonized standards essential.

3.3. Design, production, and maintenance require separate approvals

Aviation regulation separates three rights that are often bundled together in conventional industrial markets: the right to design a part, the right to manufacture it, and the right to install, maintain, or repair it on a certified aircraft.

This distinction is crucial. A company may be highly capable of manufacturing a component without holding the regulatory approval to design it. Another company may own the approved design data, but that does not authorize every factory to produce the part. Similarly, a maintenance organization may be qualified to install or repair the component, but it must use approved or acceptable data and release the work with the required documentation.

In practical terms, the approval chain must answer three questions:

• Who approved the design?

• Who is authorized to produce the part?

• Who is authorized to install or repair the part and release it to service?

The terminology differs across regulatory systems. EASA describes these functions through organizational approvals such as Design Organisation Approval and Production Organisation Approval. The FAA uses a different structure, including Type Certificates, Supplemental Type Certificates, Parts Manufacturer Approvals (PMA), Technical Standard Order Authorizations, and production approvals. The underlying principle is the same: a physical part is useful only when its design, production, installation, maintenance, and release documentation all fit within the approved airworthiness system. Chapters 3.8 and 3.9 examine these approval paths in more detail.

Aerospace therefore cannot be treated like a conventional spare-parts market. In many industrial sectors, a replacement part can compete if it fits, performs as required, and costs less. In aviation, it must also be legally eligible for installation, tied to approved data, produced under an approved quality system, traceable, properly marked, accompanied by acceptable release documentation, and maintained in accordance with the applicable instructions.

The regulatory chain therefore extends beyond the physical part to the complete data and documentation chain behind it.

3.4. How continuing airworthiness is maintained

Once an aircraft enters service, the regulatory focus shifts from initial certification to continuing airworthiness.

Continuing airworthiness requires the operator to ensure that the aircraft remains in a condition for safe operation throughout its service life. This includes scheduled maintenance, defect rectification, component control, reliability monitoring, compliance with Airworthiness Directives, tracking of life-limited parts, maintenance records, and implementation of an approved maintenance program.

In practice, this responsibility must be managed through an approved organization rather than by individual mechanics. In the European system, this function is performed by a Continuing Airworthiness Management Organisation (CAMO). The CAMO plans, manages, monitors, and documents the aircraft’s continuing airworthiness.

The airline operates the aircraft, the CAMO manages its continuing airworthiness, and the maintenance organization performs the physical maintenance work. The competent authority, such as EASA or a national aviation authority, sets the rules, approves the relevant organizations, and audits their compliance.

For many commercial airlines, the CAMO function is embedded in the technical organization. It serves as the airline’s airworthiness control center. Its role is to ensure that every aircraft in the fleet remains legally and technically fit to fly. The CAMO tracks upcoming inspections, components approaching their life limits, compliance with Airworthiness Directives, updates to the maintenance program, defect rectification, and the proper recording of all maintenance actions.

The CAMO does not wait for something to break; it continuously manages the aircraft’s technical status. Every flight hour, landing, component change, inspection, defect, and maintenance release becomes part of its technical history. The aircraft remains airworthy only if that history is controlled, documented, and kept aligned with the approved maintenance requirements.

Airlines can outsource maintenance work, but they cannot outsource regulatory responsibility. A maintenance organization may perform the physical work, but the operator must still ensure that the aircraft’s continuing airworthiness is properly managed. The operator’s airworthiness-management system must ensure that the correct work is planned, performed, documented, and released properly. Outsourcing MRO does not outsource responsibility: the operator remains responsible for ensuring that the aircraft is maintained correctly and remains airworthy. When specific activities are outsourced, they fall under the subcontracting of continuing airworthiness management tasks (SCAMT).

Consider an airline operating an Airbus A320. The CAMO identifies a scheduled inspection due in 200 flight hours and receives a new Airworthiness Directive affecting a specific component installed on part of the fleet. It must determine which aircraft are affected, plan the required work, coordinate with the maintenance organization, ensure that the correct approved data and parts are used, review the completed documentation, and update the aircraft records. The mechanics perform the task, while the CAMO ensures that the aircraft remains in a controlled and airworthy condition.

The FAA system has no direct equivalent to the EASA CAMO. For U.S. air carriers, continuing-airworthiness management is embedded in the certificate holder’s maintenance organization, maintenance program, manuals, records, and Continuing Analysis and Surveillance System (CASS). The terminology differs, but the principle is similar: the airline remains responsible for the airworthiness of its aircraft and must operate a controlled system to plan, monitor, document, and continuously evaluate maintenance performance, including work performed by contracted maintenance providers.

In Europe, organizations performing aircraft or component maintenance for commercial air transport generally require approval under EASA Part-145. A Part-145 organization must demonstrate that it has the facilities, tools, qualified personnel, training systems, planning processes, quality assurance, and organizational controls required to perform maintenance within its approved scope. The regulator therefore considers not only whether the maintenance is performed but also who performs it, where it is performed, which tools are used, which qualified personnel carry it out, and which documented procedures govern the work.

Maintenance work must also be performed in accordance with approved maintenance data. Mechanics and MRO providers do not independently decide how an aircraft, engine, or component should be maintained; they follow approved manuals and instructions such as the Aircraft Maintenance Manual, Component Maintenance Manual, Engine Manual, Structural Repair Manual, and other Instructions for Continued Airworthiness (ICA). These documents are typically provided by the aircraft, engine, or component manufacturer and form the technical basis for the maintenance task.

The closest U.S. equivalent to an EASA Part-145 maintenance organization is an FAA-certificated repair station under 14 CFR Part 145. Although the terminology differs, the principle is similar: the organization must be approved for a defined scope of maintenance, repair, overhaul, inspection, or alteration work; have the required tools, data, facilities, and qualified personnel; and approve work for return to service only within its certificate and ratings.

3.5. The aircraft maintenance program

Continuing airworthiness turns maintenance from a simple repair activity into a regulated lifecycle process. An aircraft must be designed and produced correctly before entering service and remain under continuous control throughout its operating life. The next step is the aircraft maintenance program—the document and planning system that translates this continuing-airworthiness obligation into concrete maintenance tasks.

This is the role of the Aircraft Maintenance Program (AMP). The AMP is the operator-specific document that lists the maintenance tasks to be performed throughout the aircraft’s service life. It defines what must be inspected, tested, lubricated, repaired, replaced, or monitored and at what intervals. In practical terms, the AMP translates the obligation to keep the aircraft airworthy into a defined set of tasks, intervals, checks, responsibilities, and records.

Defects must be rectified when they occur, but much of aviation maintenance is preventive and planned. The aircraft structure must be inspected for fatigue, corrosion, cracks, and accidental damage; systems must be functionally checked; engines and APUs must be monitored and maintained; and components with life limits must be tracked. Other parts must be removed, inspected, repaired, or replaced after defined flight hours, flight cycles, calendar periods, or operating conditions. Tasks are grouped into maintenance events so the airline can plan downtime, labor, materials, tooling, and aircraft availability.

The AMP is therefore the planning and control framework that defines the aircraft’s maintenance schedule throughout its lifecycle. It serves as the aircraft’s maintenance calendar and task list, while the detailed procedures are contained in documents such as the Aircraft Maintenance Manual and Component Maintenance Manual.

From MSG-3 to MRB Report:

For large commercial aircraft, the initial maintenance-planning foundation is developed during the aircraft development and certification process rather than independently by each airline. The key methodology is MSG-3, historically derived from the Maintenance Steering Group process and formally titled Operator/Manufacturer Scheduled Maintenance Development.

MSG-3 is a structured, preventive, and task-oriented methodology based on the consequences of failure. Rather than asking only, “Can this part fail?”, it asks, “What happens if it fails?” A failure affecting flight safety is treated differently from one affecting only passenger comfort. The standardized decision-tree logic then derives concrete maintenance tasks such as lubrication, functional checks, inspections, and replacements.

Applying MSG-3 to a new aircraft program involves representatives from the airframer, engine manufacturer, major suppliers, airlines, and, in some cases, major maintenance organizations. Aircraft-specific working groups develop proposals that are reviewed through an industry and regulatory process. The result is the Maintenance Review Board Report (MRBR).

The MRBR is the first major maintenance-planning foundation for a new aircraft type. It defines the minimum initial scheduled maintenance and inspection tasks and intervals derived through MSG-3. It is especially important early in a program, when operators have limited service experience with the new type. However, the MRBR is not static: accumulated service experience can lead to updates and revisions.

The MPD: turning the MRB Report into a practical planning document:

The MRBR is essential, but it is generally not detailed enough to serve as an airline’s sole day-to-day maintenance-planning tool. It establishes the baseline scheduled requirements, while operators need a more detailed document for practical planning and execution.

This is the role of the Maintenance Planning Document (MPD). Boeing commonly uses the term Maintenance Planning Data, while Airbus uses Maintenance Planning Document. Both serve the same broad purpose: the MPD translates and expands the MRBR into a more usable planning document for operators.

The MPD is the central manufacturer document used to develop an airline’s maintenance program and provides more detail than the MRBR. It may include the structure and sequence of maintenance tasks, references to maintenance manuals, required tools and equipment, information on access panels and doors, and requirements for components not fully covered by the MRBR. It may also contain additional manufacturer requirements or recommendations.

The operator’s Aircraft Maintenance Program:

The final step is the airline’s own Aircraft Maintenance Program (AMP), which draws on the MRBR, the MPD, applicable Instructions for Continued Airworthiness, mandatory requirements, and operating experience. It must be tailored to the operator’s aircraft configuration, operating environment, utilization pattern, maintenance concept, and fleet experience.

Two airlines may operate the same aircraft type in very different ways. One may fly short, high-cycle routes with many takeoffs and landings each day, while another uses the same type on longer sectors with fewer cycles. One may operate in humid, salty, or dusty environments, while another operates mainly in temperate conditions. These differences affect maintenance planning.

The AMP must therefore be operator-specific. It defines the full maintenance scope for the aircraft the airline actually operates, rather than for an abstract aircraft type.

At a minimum, the AMP defines maintenance tasks and intervals for the aircraft structure, systems, engines, components, and parts, as well as the scope and frequency of checks. A “check” is a bundle of maintenance tasks grouped into a planned maintenance event. Rather than performing every task separately when it becomes due, airlines package tasks into line checks, A-checks, C-checks, heavy checks, or other customized maintenance events. The names and intervals vary by aircraft type, operator, and maintenance program, but the underlying principle remains the same: maintenance tasks are planned, grouped, scheduled, and controlled.

Under the EASA framework, operators must establish, apply, and keep current an approved maintenance program for each aircraft. In practice, one program may cover a fleet of the same type, reducing administrative work and making operating and maintenance experience easier to compare across the fleet.

The following chart summarizes the development of an AMP and the responsibilities at each stage:

3.6. Maintenance organizations and release to service

While the CAMO manages continuing airworthiness, an approved maintenance organization performs the physical maintenance, repair, inspection, overhaul, and component replacement. In Europe, this is typically an organization approved under EASA Part-145; in the U.S., the closest equivalent is an FAA-certificated repair station under 14 CFR Part 145.

An approved maintenance organization is far more than an ordinary repair shop: it may perform only the work covered by its approval. It must have the required facilities, tools, equipment, qualified personnel, procedures, planning systems, quality controls, and access to current maintenance data. Because the approval is scope-specific, authorization for certain aircraft types, engines, components, instruments, accessories, or repair categories does not extend to every maintenance task or aircraft.

Aviation authorities also regulate who performs maintenance, where it is performed, which tools are used, which qualified personnel carry it out, and which approved procedures govern the work. In aviation, a repair is not valid merely because a mechanic has rectified the defect; it must be performed and released within an approved maintenance system.

Maintenance organizations cannot independently decide how an aircraft, engine, or component should be maintained. They must use approved or acceptable maintenance data, including:

• Aircraft Maintenance Manual (AMM): The primary manual for aircraft-level maintenance. It covers inspections, system tests, troubleshooting, lubrication, component removal and installation, and required post-maintenance checks. For example, when a mechanic removes and reinstalls a pump, valve, or avionics unit on an Airbus A320, the AMM specifies the required steps, safety precautions, access panels, and post-installation tests.

• Component Maintenance Manual (CMM): The manual governing an individual component after its removal from the aircraft. It specifies how the component is inspected, disassembled, cleaned, repaired, reassembled, tested, and released to service. For example, a hydraulic pump, actuator, valve, generator, brake unit, or avionics box may be sent to a component shop, where the work is performed in accordance with the relevant CMM.

• Engine Manual: These cover engine inspections, troubleshooting, module work, limits, repairs, tests, life-limited parts, and shop-visit procedures. Depending on the task, engine work may draw on several related documents, including engine maintenance manuals, shop manuals, illustrated parts catalogs, and service bulletins.

• Structural Repair Manual (SRM): The manual for assessing and repairing structural airframe damage. It defines allowable damage limits and approved repair methods for the fuselage, wings, doors, panels, frames, stringers, fairings, and stabilizers. For example, if a technician finds a dent, crack, or corrosion in the fuselage, the SRM helps determine whether the damage is allowable, requires monitoring, or needs an approved structural repair.

After maintenance, the aircraft or component is not automatically ready to return to operation. It requires a formal release to service. This confirms that the work was performed in accordance with the applicable rules, maintenance data, and documented procedures. Under EASA rules, aircraft maintenance is certified through a Certificate of Release to Service (CRS); the FAA uses an approval for return to service. Both confirm that the relevant work has been properly completed and that the aircraft may resume operation.

For components, release certificates serve the same function. They may be used to approve engines, propellers, appliances, and component parts for return to service. Depending on the context, these documents confirm either that a component was manufactured in conformity with the applicable design data or that maintenance such as repair, overhaul, or inspection was performed under the relevant approval. Without the required release documentation, a technically functional component may still be unusable for an airline.

Consider a component removed from an aircraft during maintenance. The CAMO or airline technical organization tracks the requirement, the Part-145 maintenance organization removes the part, and, if necessary, an approved component shop repairs it. The shop follows the relevant maintenance data, documents the work, and releases the component with the appropriate certificate. Only then may it be reinstalled, provided it is eligible for the aircraft and its configuration.

This is where the CAMO, MRO, and release processes connect. The CAMO ensures that the correct work is planned, controlled, and recorded; the maintenance organization performs it within its approved scope; the maintenance data define how it must be done; and the release documentation confirms its proper completion. Only when these elements align can the aircraft or component return to service in a controlled and airworthy condition.

Traceability is therefore essential in MRO: the records must show what work was performed, by whom, under which approval and maintenance data, and with which release documentation.

3.7. FAA manufacturing approvals: the routes to approved aircraft parts

Before examining PMA in greater detail, it helps to understand the broader FAA framework for production approvals. The central point is simple: aviation products and articles must be manufactured under a recognized approval path.

The FAA framework distinguishes several ways in which aviation products can be produced under approval. Hinsch summarizes four important FAA manufacturing approval routes:

• Production Certificate,

• Approved Production Inspection System,

• Parts Manufacturer Approval, and

• Technical Standard Order Authorization.

3.7.1. Production Certificate (PC)

A PC authorizes a manufacturer to produce duplicate products under an FAA-approved type design, such as a Type Certificate or Supplemental Type Certificate. Boeing, for example, does not need to recertify the design each time a new 737 leaves the production line. Once the type design has been approved and Boeing holds the corresponding Production Certificate, it may repeatedly manufacture aircraft conforming to that design under an FAA-approved quality system.

Put simply:

Production Certificate = FAA approval for serial production under an approved design.

This approval is primarily relevant to manufacturers of complete aircraft, aircraft engines, or propellers.

3.7.2. Approved Production Inspection System (APIS)

An APIS is a more limited form of production approval. Under this framework, the manufacturer has to operate an FAA-approved production inspection system demonstrating that each product conformed to the approved type design and was in a condition for safe operation. Following the 2009 revision of Part 21, however, the FAA required existing APIS holders to transition to Production Certificates. APIS should therefore be understood as a historical predecessor rather than a current, more limited alternative to a PC.

Put simply:

APIS = an approved production and inspection system, usually narrower than a full Production Certificate.

APIS is far less relevant to HEICO than PMA, but it illustrates an important principle: approval of a design does not by itself authorize uncontrolled production. The manufacturer must also operate an approved system that ensures each product or article consistently conforms to the approved design.

For individual articles such as components and replacement parts, the two current approval routes most relevant to the following discussion are PMA and TSOA.

3.7.3. Parts Manufacturer Approval (PMA)

A PMA is the principal FAA approval route for replacement and modification articles produced outside the original Type Certificate holder’s production system.

It allows a manufacturer, including a company other than the original OEM, to produce and sell approved articles for installation on type-certificated products. For HEICO, PMA is the regulatory foundation that makes certified non-OEM replacement parts possible.

A PMA is not merely permission to manufacture a part. It combines two regulatory approvals. First, the article’s design must comply with the applicable airworthiness requirements. Second, the manufacturer must operate an FAA-approved quality system capable of producing the article consistently in conformity with that approved design.

Put simply:

PMA = FAA approval for alternative replacement or modification parts, combining design approval and production approval.

This is the route through which qualified suppliers can offer certified alternatives to selected OEM spare parts. A PMA article is therefore not an unregulated “copy.” It is manufactured under an FAA-approved quality system and has defined eligibility for installation on specified aircraft, engines, or propellers. The applicant must either establish that the design is identical in all respects to an article covered by an approved type design or demonstrate through tests and computations that it complies with the applicable airworthiness requirements.

In practical terms, PMA articles can therefore serve as FAA-approved alternatives to parts originally supplied by the aircraft, engine, or component OEM.

Importantly, PMA is formally an FAA approval. Europe does not operate a simple parallel “EASA PMA” system. However, FAA-PMA parts can be accepted for use on EASA-certified or EASA-validated products under the EU-U.S. Bilateral Aviation Safety Agreement (BASA) and the applicable Technical Implementation Procedures (TIP). Non-critical PMA articles approved through identicality or tests and computations can generally be accepted without a separate EASA validation. Independently developed PMA articles installed on critical components, by contrast, generally require EASA validation through an equivalent Supplemental Type Certificate. In every case, the applicable approval basis, release documentation, marking, and installation eligibility must be satisfied.

The same logic extends beyond Europe. The FAA maintains a network of Bilateral Aviation Safety Agreements and older Bilateral Airworthiness Agreements with civil aviation authorities around the world. These agreements facilitate the reciprocal certification and acceptance of approved products, articles, and technical data across jurisdictions. They reduce duplicative certification work while preserving the conditions and safeguards established by the participating authorities.

Acceptance nevertheless remains specific to each bilateral arrangement; an FAA PMA article is not automatically eligible for installation in every country. Where the relevant agreement covers PMA, the article may be accepted once the applicable design, documentation, export, and installation conditions have been met. Critical articles may require additional validation. PMA therefore remains a U.S. approval, but the FAA’s bilateral framework has materially expanded its practical reach across the global aviation market.

In short, PMA rests on a mature U.S. design and production approval framework whose international relevance has expanded through bilateral aviation safety agreements between the FAA and other airworthiness authorities, as illustrated below.

3.7.4. Technical Standard Order Authorization (TSOA)

A TSOA is a combined FAA design and production approval for an article that has been shown to meet a specified minimum performance standard.

A Technical Standard Order, or TSO, defines the minimum performance standard for a specified category of civil aviation article. Examples include avionics, instruments, seats, safety and oxygen equipment, navigation units, communication equipment, and other standardized articles.

Crucially, a TSOA approves the design and production of the article itself; it does not automatically approve its installation on every aircraft. Installation on a specific aircraft must still be covered by the aircraft’s approved type design, an STC, or another applicable installation approval.

Put simply:

TSOA = FAA approval to manufacture a standardized aviation article that meets a defined minimum performance standard.

But:

Approval of the article under a TSO does not automatically constitute installation approval for a specific aircraft.

1.8. Approved alternatives: why “generic” does not mean unregulated

When investors hear the word “generic,” they may think of generic drugs: a cheaper alternative to a branded product. In aviation, the idea is somewhat similar, but the regulatory reality is very different. A non-OEM aircraft part is not useful simply because it looks the same, fits into the same place, or costs less. It must be approved.

Simply put, PMA is the regulatory route that allows a qualified alternative supplier to compete with the OEM in selected replacement and modification articles.

But a PMA is not merely permission to manufacture a copy. It combines two inseparable elements: design approval and production approval.

• The PMA Design Approval answers the first question: does the proposed article comply with the applicable airworthiness requirements for its intended application? The applicant must define the article’s design and substantiate compliance either by demonstrating that it is identical in all respects to an article covered by an approved type design or through applicable tests and computations. The FAA regulator must accept that this part can safely perform its intended function in the specific aircraft, engine, or system context.

• The PMA Production Approval answers the second question: can the manufacturer reproduce the approved design consistently under an FAA-approved quality system? An acceptable design alone is not enough. The manufacturer must control materials, suppliers, production processes, inspections, testing, documentation and other quality procedures to ensure that every completed article conforms to the approved design and is in a condition for safe operation.

A simple example makes the distinction clearer. Suppose HEICO develops an alternative replacement article for a specific OEM component. First, HEICO must demonstrate that the article’s design complies with the applicable airworthiness requirements for that particular application. That is the design side. HEICO must then demonstrate that it can manufacture the article repeatedly and reliably under an FAA-approved quality system. That is the production side. A compliant design without controlled production is not enough, and controlled production without an approved design is equally insufficient.

This is why PMA parts should not be confused with unregulated copycat parts. A PMA article is an FAA-approved article produced under an approved quality system and with defined installation eligibility. Its approval is not universal: the article is eligible only for the aircraft, engine or propeller models and applications identified in the approval, while acceptance outside the U.S. remains subject to the applicable bilateral and national requirements.

That regulated approval path creates the opening for companies such as HEICO. OEM parts can be expensive, lead times can be long, and the installed fleet generates recurring demand for replacements and repairs. PMA allows qualified suppliers to compete for selected parts of that aftermarket without bypassing the aviation safety framework. Regulation does not eliminate competition; it defines who may compete, for which applications and under what conditions.

3.9. PMA approval pathways and the role of equivalency

The simplest approval route is identicality with a license agreement. In this case, the PMA applicant has access to the OEM’s design data through a license or other agreement and can therefore demonstrate that the PMA part is identical to the already approved OEM part. From a regulatory perspective, this is the most straightforward case because the approval is based on original design data. Commercially, however, this route is less accessible to independent PMA suppliers because OEMs usually have little incentive to license their most valuable replacement-part data to competitors.

PMA design approval can be obtained through different methods, depending on how the applicant demonstrates that the proposed part is acceptable for its intended application. The central question remains the same: can the part safely perform its required function on the specific aircraft, engine, propeller, appliance, or component on which it will be installed?

In practice, this is often described in terms of “form, fit, and function.” The PMA part must fit its intended application, interface properly with the surrounding assembly, and perform the required function without compromising airworthiness.

The FAA requires detailed evidence that a PMA design complies with the applicable airworthiness requirements and performs safely and reliably in its intended application. The hurdle is meaningful but well established: more than a thousand PMA manufacturers have reportedly cleared it, many of them repeatedly.

The most straightforward approval route is identicality with a license agreement. Here, the PMA applicant has access to the OEM’s design data through a license or another agreement and can demonstrate that the proposed part is identical to the approved original. From a regulatory perspective, this is the clearest case because it relies on original design data. Commercially, however, the route is less accessible to independent PMA suppliers because OEMs generally have little incentive to license valuable replacement-part data to competitors.

A second route is identicality without a license agreement. The applicant again argues that the proposed part is identical to the approved original but lacks a licensing agreement with the design approval holder. It must demonstrate that the design is the same in every relevant respect, including dimensions, tolerances, materials, processes, and specifications. In practice, this is difficult without access to original design drawings and production specifications. Reverse engineering, dimensional measurement, material analysis, testing, and technical substantiation can help develop and evaluate an alternative design, but reverse engineering alone will not normally establish identicality. If true identicality cannot be demonstrated, the applicant must use the test-and-computation route instead.

A third route is based on a Supplemental Type Certificate (STC). An STC approves a change to an existing type-certificated product. If a modification to an aircraft, engine, or system is approved through an STC, the articles required for that modification can also be produced under PMA. The STC approves the design change, while the PMA provides production approval for the associated articles.

The fourth route, and often the most important for independent PMA suppliers, is approval based on Test Reports and Computations (T&C). The PMA supplier typically reverse-engineers the OEM part and then uses analysis and testing to demonstrate that the proposed part is equivalent for its intended application and complies with the applicable airworthiness requirements. Depending on the part and its safety significance, the evidence may include load testing, vibration testing, fatigue analysis, temperature testing, material comparisons, functional testing, or other forms of substantiation.

Once the proposed part, approval basis, and applicable airworthiness standards have been defined, the detailed substantiation work begins.

The process begins with a safety and criticality assessment. The applicant must determine how a part failure could affect the continued airworthiness or performance of the aircraft, engine, component, and next higher assembly. This is generally assessed through a failure modes and effects analysis that identifies potential failure modes and their consequences. Some industry materials summarize the resulting categories as critical—potentially affecting aircraft airworthiness—important—potentially affecting aircraft or engine performance—or neither critical nor important. Most PMA parts fall into the final category.

The applicant must also review whether the original part is subject to Airworthiness Directives or unresolved service difficulties. The FAA will not approve a replacement that reproduces a known unsafe condition. PMA approval therefore goes beyond showing that the proposed part resembles the original; the applicant must demonstrate that it is safe and suitable in its intended operating context.

For critical, life-limited, influencing, or technically complex articles, the FAA may require a Part Specific Certification Plan (PartSCP). The plan aligns the applicant and the FAA on the certification basis and testing approach before significant time and money are committed. It sets out the test purpose, the physical and functional description of the test article, the number of units, test conditions, duration, success and failure criteria, instrumentation, data collection, safety controls, and applicable procedures. The FAA may require additional testing if the plan does not sufficiently address the relevant risks.

Once the test plan has been agreed, the applicant must execute it and generate evidence that the part performs its intended function. This often begins with representative samples of OEM parts. The PMA supplier analyzes them to establish a benchmark that the proposed part must meet or exceed. Dimensional analysis helps define tolerances, while chemical and metallurgical testing identifies the materials and processes used in the original part. Functional testing then determines whether the PMA design can withstand the relevant operating environment. In some cases, the PMA supplier may even improve on the OEM part by using newer materials, better processes, or lessons learned from airline experience with the original part.

Equivalency does not necessarily require every detail of a PMA part to match the OEM part exactly. The central question is whether the PMA part performs the required function and preserves the airworthiness of the aircraft, engine, or system in its intended application. A seal, bracket, valve, or cabin component may require less substantiation than a critical engine or hydraulic component. The greater the complexity or safety significance of the part, the more demanding the approval process becomes.

Design approval is only one side of the process; the applicant must also demonstrate that it can manufacture the part consistently. This requires an approved quality system that ensures each completed article conforms to the approved design and is safe for installation. Materials must meet the design specifications; quality-affecting processes must be controlled; finished articles must be inspected for conformity; current drawings must be available to manufacturing and inspection personnel; major design changes must be controlled and approved; rejected materials must be segregated; and inspection records must be maintained. After design approval, the FAA’s certificate-management organization assesses the production facility and quality system before issuing the PMA production approval and continues its oversight thereafter.

The obligations continue after approval. Where required, the PMA holder must provide inspection and repair instructions as part of the Instructions for Continued Airworthiness. It must also maintain a Continued Operational Safety (COS) plan covering problem prevention, service monitoring, and corrective response. In practice, this includes retaining detailed manufacturing records throughout the life of the part, monitoring service experience, isolating potentially affected part populations, identifying possible failure modes, and defining corrective actions when field issues arise.

PMA therefore creates both an opportunity and a barrier to entry. OEM spare parts can be expensive, lead times can be long, and airlines have a strong incentive to evaluate lower-cost alternatives. Yet the approval path is demanding. A credible PMA supplier needs engineering capabilities, testing discipline, regulatory experience, quality systems, documentation, manufacturing controls, and post-approval monitoring. The part may cost less than the OEM equivalent, but the process behind it is anything but simple.

As of December 21, 2023, the FAA database contained approximately 1.5 million PMA articles. The largest share, 62%, had been approved through identicality with agreement, meaning the applicant had access to licensed or otherwise agreed design data. Another 23%, or about 350,000 articles, had been approved through test reports and computations—the route most closely associated with independently engineered or reverse-engineered PMA parts. STC-related PMAs accounted for approximately 10%, while identicality without agreement represented only 5%.

Approvals issued during 2023 followed a similar pattern. Of 18,958 PMA articles approved during the year, 65% were based on identicality with agreement, 20% on test reports and computations, and 15% on STC-related approvals. Identicality without agreement was effectively negligible.

3.10. DER-approved repairs: an alternative to replacement

PMA parts offer one way to reduce aftermarket costs: an airline or MRO can use an approved alternative instead of buying an OEM replacement part.

Most routine maintenance and overhaul work follows existing technical instructions, such as the OEM’s Component Maintenance Manual or other approved maintenance data. In these cases, the MRO applies an established procedure. An FAA-authorized Designated Engineering Representative (DER) becomes relevant when the existing manuals provide no suitable solution, the damage falls outside the published repair limits, or the repair station develops a more economical proprietary repair method. Within the scope of the DER’s authorization, the DER reviews the technical data and may approve it or recommend its approval before the repair station performs the work.

DER-approved repairs address the same aftermarket pain point from a different angle: instead of replacing a damaged or worn component with a new part, the existing component is restored using approved repair data and returned to service.

A DER is an FAA-authorized engineering expert who, within a defined discipline and scope, can approve technical data or recommend its approval to the FAA. DERs may specialize in structures, engines, powerplant installation, mechanical or electrical systems, materials, or other technical fields.

An MRO cannot repair an aircraft part merely because the work appears technically feasible. The repair must have an approved technical basis. If the Aircraft Maintenance Manual, Component Maintenance Manual, Engine Manual, or Structural Repair Manual contains an approved procedure, the MRO can perform the repair using that manual. If the damage falls outside the published limits or no suitable procedure exists, however, a new engineering repair may be required. This is where DER-approved repair data becomes valuable.

Consider an airline that removes an expensive engine or component part because it is worn or damaged. The OEM may recommend replacement, but the new part may be expensive, unavailable, or subject to long lead times. An independent repair provider can instead ask whether the existing part can be safely repaired. If the standard manual provides no suitable procedure, an engineering repair solution can be developed. A DER then reviews the technical data and, within the scope of the applicable authorization, may approve it or recommend its approval. Once the data has been approved, a qualified repair station can perform the repair accordingly and approve the part for return to service.

The conventional path is:

damaged part → buy new OEM/PMA replacement part

A DER-approved repair creates an alternative:

damaged part → approved repair → return to service

For airlines, an approved repair can reduce costs, shorten turnaround times, and improve availability. This is especially valuable when OEM spare parts are expensive, lead times are long, and aircraft utilization is high. The relevant question is not only what the replacement part costs but also how quickly the aircraft, engine, or component can be returned to a serviceable condition.

HEICO is not only a PMA parts company; it also participates in repair solutions. In some cases, a PMA replacement part may offer the best answer for the customer; in others, repairing the existing component under approved repair data may be preferable. The underlying customer need is the same: lower costs, better availability, and less operational friction without compromising airworthiness.

A DER is an individual engineering designee under the U.S. FAA system, not the repair shop that performs the work. A DER may be employed by a company or work as an independent consultant and, within the applicable authorization, may approve technical repair data or recommend its approval to the FAA. The repair station then performs the physical repair using the approved data.

Europe has no direct one-to-one equivalent to the FAA DER system. The EASA framework is more organization-based. Repair and modification data may be approved by EASA, by the relevant Type Certificate or Supplemental Type Certificate holder, or by a Design Organisation approved under Part-21 acting within its privileges. The closest European equivalent is therefore an approved Design Organisation authorized to develop and approve certain repair or modification data.

Part 1 explained why commercial aviation creates such unusual economic conditions. The question now is how recurring maintenance demand, strict regulation, and OEM pricing power turn those conditions into a structural aftermarket opportunity. That is exactly what we will unpack in Part 2.

[1] RPK measures passenger traffic: the number of revenue passengers multiplied by the distance flown. For example, 100 passengers traveling 1,000 kilometers generate 100,000 RPK. RPK is therefore a better measure of demand than passenger numbers alone, because it also captures flight distance.

[2] ASK measures available passenger capacity: the number of seats offered multiplied by the distance flown. A 200-seat aircraft flying 1,000 kilometers generates 200,000 ASK.

[3] ATK measures available passenger and cargo capacity by weight, multiplied by the distance flown. Unlike ASK, it captures total carrying capacity rather than passenger seats alone.

It will be structured in three Parts:

• Part 1: From Lifco to Röko: The Blueprint Behind the Ambition

• Part 2: How the Röko Machine Works

• Part 3 (today): The Economics of Compounding: Financials, Valuation and much more

All parts are now available in one PDF. You can download it below.

Deep Dive Röko AB

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👔 Company Name: Röko AB (“Röko”)

🔎 ISIN: SE0023950795

🔧 Business model: sector-agnostic serial acquirer

🌍 Geographic exposure: mainly Sweden, UK (sales in Europe)

📈 Stock Price: SEK 1,534

💰 Market Capitalization: SEK 22.4 billion (~$2.4 billion)

👨‍💼 Number of CEOs since foundation: 1

👨‍👩‍👦 Founder-/Owner-operator: Yes

📅 CEO tenure: Since 2019

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: N/A

🔁 Reinvestment profile: High

💸 Capital intensity: Capital-light

🏰 Moat: Seller proposition, Simplicity, experienced management team around Fredrik Karlsson

🧨 Main risks: Execution, macro pressure, key-person risk

🌳 Slow Compounding fit: Yes – high-quality serial acquirer

Business Model in a Nutshell: Röko is a Sweden-based serial acquirer that has completed 33 platform acquisitions and in a variety of industries across Europe. The Company’s ambition is to be the perpetual owner of small and medium-sized businesses. Röko’s organization has more than 100 years of combined experience working with founder- and entrepreneur-led companies in a wide range of industries and the individuals in executive management positions have worked at the Company since its first year of operation (2019).

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6. Financials: The Underlying Economics

Revenue contribution. The following chart shows the development of revenue on a quarterly basis since 2021.

The next chart shows the composition of year-over-year revenue growth since 2022. What stands out clearly is that growth rates have slowed, mainly because the M&A contribution has become smaller.

Organically, Röko grew at a high single-digit rate in 2022, driven primarily by inflation-related price effects. In 2023, organic growth turned slightly negative. Since then it has recovered, although in Q4 2025 it was slightly negative again for the first time.

The following two quotes provide a better sense of how Fredrik Karlsson thinks about organic growth:

“Even Constellation Software doesn’t have high organic growth. It is better to have secure cash flow than high growth, that way you can buy new businesses.”
(Fredrik Karlsson, InPractice interview, 21.04.2023)

And:

“Sometimes people say our organic sales growth is too slow, only 2%. And people want to see higher organic sales growth. But our organic EBITA growth for the last 2 years has been 9% and 4%. That is 6% on average. And the reason for that we are growing faster the profits than the turnover is that we aim for higher margins. And of course if there’s a product with low margin […] and you get rid of that product or service or customer, so we will always have a lower sales growth than EBITA growth. The big plus for a serial acquirer with high EBITA growth is they release cashflow. Basically, the best thing would be if we only had EBITA growth […], because sales growth eats cash.”
(Fredrik Karlsson, Redeye Serial Acquirers Conference 2026)

Looking at M&A, growth rates have decelerated to 7-15% in the aftermath of the high-intensity capital deployment phase 2019-2022. And that’s a more sustainable and common level for serial acquirers. The high growth shown during 2022 and the first half of 2023 is due to the base effect (growing from a low base) and the high cash deployed into acquisitions.

“We have had an extra tank, you could say, given that we have had committed capital from our shareholders, so we have had money to invest; it’s not that we have needed to be self-funded from day one. We have had that cash available, so we have actually been able to go after a large set of potential opportunities, and relatively large companies as well, from the start.”
(Johan Bladh, InPractice interview, 03.04.2023)

Gross margin. The chart points to two developments. First, Röko has gradually improved its gross margin year over year, from 37.9% in 2021 to 44.7% in 2025. That trend is encouraging, as it suggests Röko has been adding businesses with stronger underlying economics, whether through better pricing power, more favorable product mix, or higher value-added offerings. Second, since 2023, the quarterly pattern has become more seasonal, with Q1 and Q4 consistently stronger than Q2 and Q3. That seasonality is worth bearing in mind when assessing Röko’s quarter-to-quarter margin development.

EBITA (margin). Röko’s earnings growth has been driven by both scale and quality.

Absolute EBITA has increased sharply across the period, with each quarterly run-rate moving materially higher from 2021 to 2025. Even allowing for seasonality, the trend is clear: Röko is not just growing revenue, but converting that growth into a steadily larger earnings base. Q1 EBITA, for example, rose from roughly SEK 57m in 2021 to almost SEK 400m in 2025, while Q4 increased from just above SEK 100m to around SEK 355m over the same period.

The EBITA margin chart indicates that profitability has improved alongside that growth. Quarterly margins were still relatively mixed in 2021–2022, but since 2023 the picture has become more consistent, with margins mostly ranging between the high teens and low 20s. The strongest datapoints are increasingly seen in Q1, which reached about 23% in 2025, while Q4 has also trended upward to above 21%. In other words, Röko is not only earning more in absolute terms, but appears to be doing so at a gradually improving level of operational quality.

A third observation is that a seasonal pattern has become more visible over time. Since 2023, Q1 tends to be the strongest quarter both in absolute EBITA and margin terms, while Q3 is usually the weakest. That matters for interpretation: short-term quarterly fluctuations should not be mistaken for structural deterioration, as part of the movement appears to reflect recurring seasonality in the underlying portfolio.

Worthwhile to mention that Röko grew EBITA organically by 6% per year over a 2 year period despite slugghish organic revenue growth. Including acquired EBITA growth, Röko grew EBITA 15% per year excluding a 2% FX headwind. 15% EBITA growth is the inofficial target they use internally.

Taken together, the message from these charts is encouraging. Röko has expanded EBITA rapidly while also nudging margins higher, which suggests that growth has not come at the expense of profitability. If anything, the data points to a business mix that has become larger, more profitable, and somewhat more seasonal as the group has matured.

Working Capital. The chart shows two things at once. In absolute terms, Röko’s working capital has risen materially over time, from roughly SEK 300m in Q2 2021 to around SEK 1.4bn by 2025. That is hardly surprising given the company’s rapid growth and continued acquisition activity. More important, however, is that working capital as a percentage of LTM revenue has trended down, from the mid-20s in 2021–2022 to roughly 20–21% more recently. That is an encouraging sign, as it suggests that scale has not come with a proportional increase in working capital needs.

Leverage. The next chart shows how Röko’s leverage has evolved, depending on what you count as “net debt.”

• Interest-bearing net debt (IBND) isolates the “pure” financing position: borrowings from credit institutions minus cash.

• Financial net debt (FND) then adds the most economically relevant non-bank obligation for a serial acquirer: earn-out liabilities and deferred consideration. Conceptually, this is deferred purchase price. It’s a claim created by acquisitions, and it behaves debt-like because it represents a contractual or contingent cash outflow tied to past capital allocation.

• Financial net debt incl. leasing adds lease liabilities on top.

The net debt chart makes an important point: Röko looks only modestly levered if one focuses on interest-bearing net debt alone, but meaningfully more levered once the full acquisition-related obligations are taken into account. Interest-bearing net debt rose to roughly SEK 1.7 billion by early 2023, but then fell sharply and has remained comparatively low since, mostly in the SEK 0.1–0.6 billion range. On that basis, leverage looks very manageable, with IBND / EBITDA falling from around 1.8–1.9x at the peak to well below 0.3x currently.

Financial net debt, which includes acquisition-related obligations such as put/call liabilities and earn-out considerations, stayed much higher throughout the period. It peaked at around SEK 4.0b illion in early 2023 and, while it has come down since, still remained in the area of roughly SEK 2.5–3.3 billion in 2024–2025. As a result, FND / EBITDA has declined materially from about 4x+ at the peak to currently 2.0x.

That distinction matters. Röko’s acquisition model is built around taking control first and full ownership later, which means part of the purchase price is effectively deferred into future obligations rather than funded entirely with bank debt on day one. The chart therefore highlights why Röko’s leverage should not be assessed purely on a traditional net debt basis: the balance sheet may look lightly geared in bank-debt terms, but the economic reality is more levered once one includes the staged buyout of minority interests. Encouragingly, even on that broader measure, leverage has trended down meaningfully since 2023 as EBITDA has grown into the liability base.

Capital base. The next chart tracks how Röko’s capital base has grown over time, shown as capital employed and invested capital. I define them as follows:

• Capital employed = non-current assets + working capital (i.e. inventories + accounts receivable – accounts payable)

• Invested capital = equity + financial net debt + lease liabilities

In addition, I show both metrics at book value (bars) and at cost (lines). The “cost” lines are higher because they add back cumulative depreciation and amortization to better reflect the total capital that has been put to work.

The chart illustrates how quickly Röko has built its capital base since 2021. Both capital employed and invested capital have risen sharply, reaching roughly SEK 12 billion. Just as important, cost-based measures sit consistently above book values, highlighting why return metrics based purely on book capital can overstate the economics. For a business like Röko, which grows through acquisitions and purchase accounting, the cost view is the more conservative anchor: it better reflects the actual capital deployed and therefore provides the cleaner denominator for judging capital allocation.

Capital base expansion has slowed since late 2022 / early 2023. Growth in capital employed and invested capital has continued, but at a slower pace than in the earlier build-up phase as a result of the slower acquisition spree.

Capital allocation. The following capital allocation chart shows, year by year, how Röko uses the cash it generates. Adjusted gross cash flow equals operating cash flow before changes in working capital, less IFRS 16 lease liability repayments.

The adjusted gross cash flow (grey bars) rises steadily over time, reflecting Röko’s rapid scaling and improving underlying cash-generation capacity. From a very modest level in the early years, adjusted gross cash flow has grown to roughly SEK 1.0bn by 2025. Against that internal cash generation, the stacked bars show very clearly how management allocates capital.

M&A is by far the dominant use of cash in almost every year. That is exactly what one would expect from a company built as a serial acquirer. Röko is not designed to harvest mature assets and distribute excess cash; it is designed to recycle capital into new acquisitions.

Capex, by contrast, remains small and fairly stable throughout the period, which fits well with the portfolio’s generally asset-light character (lately only 1% of net sales). The subsidiaries may require working capital and some reinvestment, but they do not appear to demand heavy ongoing capital expenditure. As a result, most of the group’s incremental cash can be redirected into external growth rather than being absorbed by the existing asset base.

One notable difference versus some other serial acquirers is the role of payments to non-controlling interests. These are not trivial in Röko’s case and become increasingly visible from 2022 onward. That makes sense given the acquisition model: Röko often acquires control first while leaving a minority stake with founders or managers. Economically, this means part of the group’s cash generation is also shared with minority owners rather than being fully available to the parent. So while M&A clearly remains the primary destination for capital, the chart is also a reminder that Röko’s structure involves a meaningful secondary cash claim from NCI (that of course cannot be reinvested into additional growth).

Two periods stand out. First, 2021–2022 marks the major step-up in acquisition spending, with M&A outflows accelerating sharply as Röko scaled the platform. That was the phase in which the company moved from building the foundation to deploying capital at much greater pace. Second, 2024–2025 looks more balanced: acquisition spending remains high, but adjusted gross cash flow has now grown into a much larger number, making the capital-allocation profile look more self-funded than in the earlier expansion phase. In other words, Röko is still very much in reinvestment mode, but it is increasingly doing so from a stronger internal cash-generation base.

Overall, the chart reinforces the core Röko thesis: this is a company that directs the overwhelming majority of its available cash toward acquisitions, while keeping capital intensity low at the subsidiary level. The main nuance is that Röko’s model also includes a structurally relevant minority component, so not all internally generated cash is economically equivalent to cash fully available to the parent. Even so, the broad picture is clear: Röko remains in compounding mode, not harvest mode.

ROIC. The following chart shows the development of ROIC on a rolling basis, using EBITA over invested capital, and distinguishes between invested capital at book value and at cost, with the latter reflecting cumulative amortization and therefore the actual capital deployed more conservatively.

What stands out is not just growth, but improving capital productivity. Since late 2021, Röko’s rolling return on invested capital has climbed from roughly 9% to around 12.5% on a cost basis (what can be expected when acquiring for 8x EBITA on average), with book-value returns approaching 15% by 2025. While book-value returns flatter the picture somewhat, the more conservative cost-based series tells the same story: Röko’s earnings base has grown faster than its invested capital. For a company scaling primarily through acquisitions, that is an encouraging sign.

As the following calculation shows, Röko increased invested capital at cost from SEK 1,047 million in 2019 to SEK 10,725 million by 2025, an increase of SEK 9,678 million. Over the same period, EBITA rose from SEK -3 million to SEK 1,340 million, an increase of SEK 1,343 million. That implies an ROIIC of 1,343 / 9,678 = 13.9%.

At the same time, cumulative EBITA from 2019 to 2024 amounted to SEK 3,579 million, which implies a reinvestment rate of 9,678 / 3,579 = 270%.

Over the long run, a sustainable reinvestment rate should likely settle around 100% if ROIIC remains in the 12-15% range.

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7. Management & Ownership

Röko’s management and ownership structure is one of the clearest reasons why the company invites comparison with the best founder-led compounders. The group was founded in 2019 by Fredrik Karlsson and Tomas Billing, two executives with unusually relevant backgrounds for the model they are trying to build. Fredrik Karlsson previously served as CEO of Lifco, while Tomas Billing was formerly CEO of Nordstjernan. That combination matters: one brings direct experience from one of the Nordics’ most successful decentralized serial acquirers, the other from a long-standing Swedish investment group with a broader ownership tradition. Together, they give Röko a blend of operational compounder DNA and investment-company thinking that is hard to replicate.

The broader management team is also worth highlighting. Johan Bladh has served as Deputy CEO since 2019 and as CFO and Head of B2C since 2022.

On March 8 2026 the company – unexpectedly – released that the “Board of Röko has decided, in consultation with CEO Fredrik Karlsson, to appoint Johan Bladh as the new CEO. Johan replaces Fredrik Karlsson, who will remain operational in the company, including as Deputy CEO. The transition takes place on April 22, 2026, the day after Röko’s annual general meeting.”

Fredrik Karlsson will remain operational in the group as Deputy CEO, Chairman of the Investment Committee and an active participant in acquisition evaluation. At the same time, Douglas Kressner, currently Group Financial Controller, will take over as CFO. In other words, the transition does not look like a handover to an outsider, but more like a planned internal succession within the same acquisition culture.

Johan Bladh was the first person Fredrik Karlsson and Tomas Billing hired after founding Röko and has been involved in all transactions except the very first one. He has been working in finance-oriented companies since he graduated from Stockholm School of Economics. He spent 5 years in private equity, working for a few different firms in Stockholm and partly based in London and then he moved on to Röko.

What stands out in Johan Bladh’s own telling is how quickly he was convinced. He was not actively seeking a new role, but after meeting Karlsson and Billing, he signed his employment agreement within days — a sign of how compelling he found both the people and the opportunity.

I do find the timing a little awkward and the step somewhat early. At this stage, Röko is still young, still scaling, and still closely associated with Fredrik Karlsson’s judgment, so an April 2026 CEO handover inevitably feels at least slightly premature.

There is also a slightly awkward tension in the handover when set against Karlsson’s own words. In an interview, he said he would keep doing Röko “until I die” — provided he continued to perform — and added that his “retirement position” would be a seat on the investment committee rather than a clean break. Admittedly, he never said that this commitment had to be expressed through the formal CEO title. Still, it reinforces the impression that the current transition is less a true withdrawal than a redistribution of roles: Karlsson may no longer be the one signing every document, but he does not appear remotely close to stepping away from Röko in substance.

That said, viewed over the long run, it probably still makes sense to start transferring real responsibility to the next generation early and continue shaping that person from within rather than waiting until the succession becomes urgent. Importantly, Karlsson is not disappearing operationally: he will remain Deputy CEO, chair the Investment Committee, and stay actively involved in evaluating acquisitions

Johan Bladh’s age is another reason why the succession looks compelling. Born in 1989, he is still in his mid-30s, yet has already spent seven years inside Röko. In that sense, the setup is reminiscent of Fredrik Karlsson’s own trajectory: Karlsson, born in 1962, was elected to the board of Lifco in 1998, implying he was also roughly 36 at the time. If Johan Bladh turns out to be similarly capable, he may still have decades of value creation ahead of him. Will he become Fredrik Karlsson 2.0?

That continuity is reinforced by the broader team structure. Röko still runs with a relatively small headquarters, but the key roles are clearly mapped by geography and business type: Anders Nordby has been Investment Manager for the UK and Norway since 2019 and Head of B2B since 2022, while Johan Bladh has led B2C since 2022. Röko’s emphasizes that the team has more than 100 years of combined experience working with owner-managed businesses. For a company whose model depends on sourcing, judging, and structuring acquisitions rather than centrally operating subsidiaries, that kind of concentrated transaction and ownership experience matters at least as much as traditional operating scale.

Ownership is equally important. Röko has a dual-class share structure, where A shares carry ten votes and B shares carry one vote. After the March 2025 listing, the company had 2,487,508 A shares and 12,136,500 B shares outstanding at year-end 2025. Based on holdings disclosed by the company as of 31 December 2025,

• Fredrik Karlsson owns 9.53%

• Tomas Billing owns 8.99%

• Johan Bladh owns 2.66%

Taken together, the two founders controlled roughly 18.5% of the economic interest but about 54.5% of the votes; including Bladh, that rises to roughly 21.2% of the shares and 64.6% of the votes. That is a meaningful point for the underwriting case:

The board structure reflects that same balance between control and outside oversight. Tomas Billing serves as chairman and Fredrik Karlsson remains on the board, and both are classified by the company as not independent in relation to the company, executive management, and major shareholders. At the same time, the remaining directors — Peter Sterky, Lilian Fossum Biner, and Angela Langemar Olsson — are classified as independent. That gives Röko a governance structure that is still founder-controlled, but not purely founder-populated. The setup is therefore not unusual for a newly listed founder-led compounder: decisive insider control at the top, paired with an increasingly formal public-company governance framework underneath.

Finally, the IPO itself reinforced the impression of long-term alignment. In connection with the March 2025 listing, Karlsson, Billing, and Bladh agreed to 1,080-day lock-ups, while other board and management members were subject to shorter lock-up periods. That matters symbolically as much as mechanically. Röko did not come public as a business where the key people immediately monetized large stakes and stepped back; it came public with the founder-operators and their closest lieutenant still firmly tied to the long-term outcome.

8. Moats & Risks

Röko’s moat is its ability to repeatedly buy small and medium-sized, niche businesses, sourced through trust-based relationships and structured conservatively, while keeping subsidiary autonomy intact. The main risks are a recession and key-person risk (Karlsson, Billing or Bladh leaving Röko).

8.1. Moats: The Durable Edge

1. Seller proposition

   Röko’s biggest edge is probably not industry expertise or central synergies, but the offer it makes to owner-managers. The pitch is unusually attractive: sellers can take money off the table, keep running the business, remain minority shareholders, and continue operating independently inside a long-term, decentralized home. Fredrik Karlsson explicitly contrasts this with private equity, where sellers often fear aggressive short-term intervention. That is reinforced by Röko’s willingness to let even second-level management co-invest. Röko is not just buying companies; it is offering a structure that many founders actively prefer.

2. Transaction certainty

   A second advantage is process credibility. Fredrik Karlsson says brokers “love working” with Röko because the company does much of the heavy lifting before signing the LOI, avoids renegotiating prices later, and closes with high reliability. Fredrik Karlsson notes that over a three-year period there had been only one case where a transaction failed after LOI, and that was due to seller-side issues rather than Röko walking away. For a serial acquirer, that matters enormously: once intermediaries and sellers start viewing you as a serious, fast, low-drama buyer, your reputation itself becomes an asset that compounds.

3. Decentralization and simplicity are organizational moats

   The biggest difference versus private equity is Röko’s insistence on decentralization and simplicity. Subsidiaries are not forced onto common ERP, HR, or operating systems; the key requirements are modest, i.e. monthly reporting, an approved auditor, and participation in the group cash pool. The point is to preserve the nimbleness of small and medium-sized businesses rather than smother them with central bureaucracy. That is a subtle but important advantage: for the right type of company, Röko can be a more attractive and less disruptive owner precisely because it does less.

4. Portfolio diversification

   A multi-subsidiary structure naturally diversifies end-markets, customers, and cycles. That doesn’t eliminate downturn risk entirely, but it can soften it. However, HQ needs to spot issues early to prevent a handful of weak subsidiaries from becoming a disproportionate drag. Röko’s ambition to build more “uncorrelated” risk across the portfolio is directionally right and, over time, can make the group more resilient than any single one-exposure operating company.

5. Management team

   Röko’s management team is arguably a moat in its own right. Fredrik Karlsson, Tomas Billing, and Johan Bladh bring deeply relevant experience in acquisitions, ownership transitions, and decentralized company building — exactly the capabilities on which Röko’s model depends. In a serial acquirer, the quality of management is everything, and Röko benefits from having unusually experienced decision-makers at the top.

6. Simplicity can be a moat

   Röko’s emphasis on simplicity may sound unremarkable, but it is arguably one of the more important safeguards in the model. The company looks for understandable businesses, avoids unnecessary complexity at the subsidiary level, and keeps the central organization lean. That simplicity can itself become a moat: it sharpens capital allocation discipline, reduces the risk of overestimating one’s own ability to “improve” businesses, and makes it easier to stay consistent across many acquisitions. In a serial acquirer, complexity is often where mistakes creep in. Röko’s insistence on simple, decentralized structures therefore does more than preserve agility; it also helps protect returns. If the company can keep adding businesses that are easy to understand, cash-generative, and operationally self-sufficient, the model becomes self-reinforcing: simple businesses are easier to govern, better governance supports better capital allocation, and better capital allocation funds the next wave of acquisitions.

   That preference for simplicity is not accidental. Fredrik Karlsson has said that he learned “the power of simplicity” from Carl Bennet at Lifco, where he spent roughly two decades as CEO. Röko’s emphasis on simple goals, decentralization, and limited interference therefore reflects not just philosophy, but a deeply internalized operating lesson from one of Sweden’s most successful compounders.

8.2. Risks: What Could Break (or Delay) the Compounding Story

1. Röko’s underwriting model is a strength — but also a hidden risk

   Because Röko is sector-agnostic, it cannot rely on deep vertical expertise in every niche it buys into. Its answer is to lean heavily on pattern recognition: consecutive profit growth, high margins, cash flow conversion, low capital intensity, and management continuity. That is a sensible filter, and Karlsson explicitly says that if a business has grown profits consistently, it must be doing something right. But there is a flip side: the model depends on judgment. Röko is effectively betting that strong historical financial patterns are a reliable proxy for moat quality across many different industries.

2. The biggest operating risk is succession and people-dependence

   If there is one risk management itself highlights most clearly, it is people. Karlsson says the main non-macro risk is that management makes a bad decision, moves too slowly, or damages the culture. That is especially relevant in a sector-agnostic model, because much of the real know-how sits inside the acquired company rather than at HQ. He makes the contrast explicitly: if you own 30 dental companies, you can more easily move talent around; if you own businesses across 20 different sectors, succession is harder. Röko’s model deliberately keeps founders and managers invested, which helps alignment, but it also means the quality of local leadership remains central to the investment case.

3. The biggest macro risk is a recession

   Karlsson is unusually direct on this point: in a diversified company like Röko, Lifco, or Indutrade, the big risk is a recession. He references 2008, when Lifco’s profits fell by around 30%. That is worth taking seriously. Röko is diversified, but it is not recession-proof. A broad macro slowdown would likely hit order volumes, consumer-facing subsidiaries, and industrial activity across parts of the portfolio at the same time. So while diversification clearly helps, it does not remove cyclical risk; it merely spreads it.

4. Röko is still young, which is both a weakness and an opportunity

   Karlsson acknowledges that Röko is still “a bit too young” when it comes to the long-tail benefits of relationship-driven add-ons. Established serial acquirers have years of accumulated contact networks and processed deal flow behind them; Röko is still building that machine. The flip side, of course, is that this immaturity also points to runway: if the organization keeps building relationships and institutional memory, the deal engine could still strengthen materially over time.

5. Leverage risk

   Even if leverage is manageable, it amplifies execution risk. Net debt rises immediately when acquisitions close; EBITDA follows with a lag. If earnings disappoint, leverage can deteriorate quickly. That also matters for optionality: if Röko ever needed to raise equity under pressure, dilution could become a real cost.

6. Key-person risk

   Röko’s model relies on a small number of people for acquisition filtering, governance discipline, and culture. If key individuals (Karlsson, Billing, Bladh) leave, lose focus, or misjudge the trade-off between deal pace and absorption capacity, outcomes can change quickly. Professionalization helps, but key-person exposure remains a real risk to monitor.

7. Acquisition cadence is inherently lumpy and hard to predict

   One structural risk in Röko’s model is that acquisitions are naturally erratic rather than smooth or easily forecastable. Even if the long-term pipeline is healthy, deal timing depends on many external factors — seller readiness, financing, diligence, negotiations, and closing mechanics — which means there can easily be stretches of several months with no announced acquisition at all, followed by periods where multiple deals are signed within just a few weeks. Economically, that lumpiness is not necessarily a problem if the underlying opportunity set remains intact. But in the public market, it can still matter. Because Röko is widely understood as an acquisition-led compounder, longer-than-expected dry spells may be interpreted as pipeline weakness, valuation discipline problems, or internal bandwidth constraints. That can put short-term pressure on the share price, even if the underlying issue is simply timing rather than a deterioration in the model itself.

9. Valuation

Röko’s first trading day on the Nasdaq Stockholm Main Market (Large Cap) was a little over one year ago, on March 11, 2025, just a few days before Trump’s tariffs sent markets sharply lower. Röko’s share price fell to SEK 1,690 on April 7, 2025, down 17% from the IPO price. The stock then recovered and had already returned to its IPO level by early May, before reaching a high of SEK 2,886.5 on July 21, 2025, up 41% from the IPO price and 71% from the April low. After that, the share price reversed and has now been in a downtrend for more than eight months. It currently trades at around SEK 1,500, or roughly 30% below the IPO price.

Accordingly, the drawdown chart looks severe, with a drawdown of more than 45% from the high. A volatile first year as a listed company.

The relative valuation of the big four Swedish serial acquirers - Lifco, Indutrade, Lagercrantz, and Addtech - together with Röko shows a strong multiple deflation since 2025. Right after the IPO, Röko briefly traded at the highest relative valuation, but that premium disappeared. Based on analyst consensus, currently only two analysts, the shares now trade at roughly 22x 2026 net income, the lowest in the group.

Röko currently trades at roughly 22.4x forward earnings, versus about 25.9x for Indutrade, 28.8x for Lifco, 31.5x for Lagercrantz, and 35.2x for Addtech. So Röko is no longer priced like a premium-quality serial acquirer with a fully established public-market track record. In fact, it trades at a meaningful discount to the better-regarded Swedish peers. That discount is understandable. Röko is much earlier in its public life, has a shorter disclosed history as a listed company, and still has to prove that its acquisition process, capital allocation, and decentralized operating model can deliver over a full cycle in public markets.

Valuation matters of course. Over short periods, the multiple can dominate returns. Over longer periods, however, business quality and reinvestment capacity matter far more. In simple terms, shareholder returns are driven by three engines: underlying earnings growth, the change in the valuation multiple, the change in the number of shares outstanding, and cash returned along the way. For a company like Röko, the first engine should do most of the heavy lifting.

As Röko does not fund acquisitions with equity, I’m not expecting meaningful dilution from rising share count. That simplifies the return framework. You can think about expected returns as being driven by two levers:

• Earnings growth, and

• Multiple change (rerating or derating).

Earnings growth is where the 3-Engines model becomes practical. Long-term, earnings growth is primarily a function of how much capital Röko can reinvest and how attractive the returns on that reinvestment are. Mathematically, that relationship is simple:

If a company can reinvest large amounts of capital at high incremental returns, value creation compounds quickly. A business earning 20% on incremental capital and reinvesting 100% of earnings compounds intrinsic value at roughly 20%. A business earning 25% and reinvesting 100% compounds at 25%. Even combinations that sound less heroic still lead to very attractive outcomes: 30% ROIIC with an 80% reinvestment rate still implies roughly 24% value compounding, while 35% ROIIC with a 60% reinvestment rate still gets you to 21%. That is the real prize in this model. If the machine works, the business can outrun a lot of valuation noise over time.

The following matrix visualizes exactly that. The columns show different ROIIC assumptions; the rows show different reinvestment rates. Each cell shows the implied earnings growth rate (IVCR). The red area highlights scenarios with ≤10% earnings growth.

The hefty valuation deflation over the last 8 months also means the stock no longer requires a heroic valuation case to work. At ~22x forward earnings, the multiple is not distressed, but it is far from euphoric. If Röko can prove that it deserves to be discussed in the same sentence as the best Nordic compounders, there is clear room for multiple expansion. Even a move back toward the mid-20s would help returns. Yet the more important point is that such a re-rating is not necessary for the investment case to work. If Röko can compound earnings at a high rate through disciplined acquisitions and continued reinvestment, most of the return can come from the business itself.

The second matrix shows the annualized tailwind/headwind from multiple change, depending on (a) the target multiple and (b) how many years it takes for the rerating to happen. If the multiple stays flat, the multiple contribution is ~0%. If the multiple expands (or contracts), it adds (or sub-tracts) from annual returns. I use the 22x Forward P/E multiple for 2026 as a baseline entry valuation multiple.

For instance, assuming an entry multiple of 22x earnings, a re-rating to 40x creates a huge one-year tailwind of 82%, but over ten years that annualized boost falls to just 6.2%. The reverse is equally important: a de-rating from 22x to 15x hurts a one-year return by 32%, but over ten years the annualized drag shrinks to only 3.8%. In other words, valuation absolutely matters at the entry point, but its importance fades the longer the holding period and the stronger the underlying compounding.

To make this tangible, here’s one example (not a base case):

Assume the reinvestment rate comes in at 100% over the next 10 years while Röko can earn 15% ROIIC. That would imply:

Earnings growth (IVCR) = 100% × 15% = 15% p.a. (before any multiple change)

Now assume Röko’s P/E moves from 22x to 30x over 10 years. That multiple expansion would add roughly ~3% p.a. as a rerating tailwind. Combined, that would imply an annual return of roughly:

~15% (earnings growth) + ~3% (multiple tailwind) ≈ ~18% p.a.

The point is not that exactly this scenario will materialize. The point is that Röko’s setup creates a wide range of plausible outcomes, and you can stress-test your own assumptions transparently. Some investors will anchor on conservative reinvestment and ROIIC assumptions and assume limited rerating.

I’m deliberately not selecting base scenario here. The matrices are meant to let each reader decide what they view as realistic.

It will be structured in three Parts:

• Part 1: From Lifco to Röko: The Blueprint Behind the Ambition

• Part 2 (today): How the Röko Machine Works

• Part 3: The Economics of Compounding: Financials, Valuation and much more

All parts are now available in one PDF. You can download it below.

Deep Dive Röko AB

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👔 Company Name: Röko AB (“Röko”)

🔎 ISIN: SE0023950795

🔧 Business model: sector-agnostic serial acquirer

🌍 Geographic exposure: mainly Sweden, UK (sales in Europe)

📈 Stock Price: SEK 1,534

💰 Market Capitalization: SEK 22.4 billion (~$2.4 billion)

👨‍💼 Number of CEOs since foundation: 1

👨‍👩‍👦 Founder-/Owner-operator: Yes

📅 CEO tenure: Since 2019

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: N/A

🔁 Reinvestment profile: High

💸 Capital intensity: Capital-light

🏰 Moat: Seller proposition, Simplicity, experienced management team around Fredrik Karlsson

🧨 Main risks: Execution, macro pressure, key-person risk

🌳 Slow Compounding fit: Yes – high-quality serial acquirer

Business Model in a Nutshell: Röko is a Sweden-based serial acquirer that has completed 33 platform acquisitions and in a variety of industries across Europe. The Company’s ambition is to be the perpetual owner of small and medium-sized businesses. Röko’s organization has more than 100 years of combined experience working with founder- and entrepreneur-led companies in a wide range of industries and the individuals in executive management positions have worked at the Company since its first year of operation (2019).

3. Röko: The Economic Model

3.1. How Röko Makes Money

Röko is a Sweden-based serial acquirer that has completed 33 platform acquisitions and in a variety of industries across Europe. The Company’s ambition is to be the perpetual owner of small and medium-sized businesses. Historically, Röko has primarily acquired small and medium-sized businesses headquartered in the Nordics and Northern Europe. Röko’s organization has more than 100 years of combined experience working with founder- and entrepreneur-led companies in a wide range of industries and the individuals in executive management positions have worked at the Company since its first year of operation (2019).

Röko invests in stable and consistently profitable companies with strong market positions in their respective niche markets and with the potential to deliver long-term earnings growth and good cash flows. The investment philosophy is based on a long-term and active ownership, independent management and proven ability to achieve results. Röko is results-oriented and aims to create shareholder value and growth by improving the performance of the group companies long term. Röko’s strength is that it can offer safe ownership for small and medium-sized businesses, as opposed to private equity.

For that reason, Röko avoids companies that are exposed to industries with rapid technological development, businesses that can already be seen to be in a downward trend, and regional markets that lag behind the development of other regions. Röko avoids companies with risks from regulatory exposure, dependence on any major customers or key persons.

Röko is organized on a decentralized structure. Preserving the unique brand, identity and independence of the subsidiaries is central to Röko’s business philosophy, where the strength of entrepreneurship, flexibility and proximity to customers are crucial factors in achieving financial results. The main purpose of the centralized management is, among others, to support those companies that, for example, face new market conditions or can benefit from centralized expertise to solve internal challenges.

Röko carries out two types of acquisitions:

• Platform acquisitions = New business units are added to the Group

• Add-on acquisitions = Existing subsidiaries strengthen their competitiveness and broaden their offering by acquiring complementary businesses

Generally, Röko sources its acquisitions through internal research, incoming contacts and external channels such as brokers.

“We have maybe 1,000 brokers because there are so many in Europe. We have close relationships with some of them and others we have only met once..”
(Fredrik Karlsson, InPractice interview, 21.04.2023)

Röko looks for committed entrepreneurs or other sellers and leaders who continue in their role even after the acquisition has been completed. In order to align incentives between Röko and the local management teams, Röko often allows them to become a shareholder of the subsidiaries and own a minority stake. This ensures that all parties work towards the same goal.

Röko buys its subsidiaries with no intention to exit an acquired company at a later date. Röko buys and holds forever.

1.2. The Financial Ambition

The financial targets also fit Röko’s overall picture very well. They are formulated briefly, but the logic behind them is revealing. The company has set itself three goals.

• Growth: first, adjusted EBITA should increase every single year.

• Profitability: second, the adjusted group EBITA margin should remain sustainably above 15%.

• Leverage: third, leverage should remain below 3.0x adjusted EBITDA, although Röko explicitly discloses that this threshold may be exceeded temporarily after acquisitions.

When it comes to leverage, Röko does not look only at classical financial debt, but also includes liabilities from put and call options, which we will discuss in more detail later. That is complemented by a deliberately cautious dividend policy: only 0-20% of net income is intended to be distributed, and so far no dividends have been paid to shareholders.

Taken together, these targets say a lot about how the company sees itself. Röko does not primarily want to be viewed as a dividend stock, but as a platform that retains capital in order to continue growing through acquisitions. At the same time, growth is not meant to come at the expense of quality: the 15% profitability threshold signals that Röko does not want to accept a dilution path in which each new acquisition adds size but gradually worsens the economic quality of the portfolio. And the leverage target shows that acquisitions may be the core of the model, but not at the price of a permanently overstretched balance sheet. Put differently, the targets are set in a way that reflects the nature of the model itself - growth, but disciplined; high margins, but not at the expense of reinvestment capacity; and leverage, but only within a range that does not endanger the next acquisition cycle.

4. M&A Playbook

4.1. Inside Röko’s M&A Playbook

Röko’s compounding story ultimately comes down to acquisition quality and return on incrementally deployed capital, as typically for serial acquirers, organic growth is a minor contributor to growth.

Investment decisions are made by the Investment Committee (IC) which is established by the Board of Directors. The IC’s sole task is to make decisions to carry out acquisitions. Additionally, the decision to carry out an acquisition must also be taken by the Board, if at least one of the following criteria is met (acting as a safety net):

• Enterprise Value > SEK 500 million

• EV / EBITA (rolling twelve months) > 9

• The company in question operates in an industry that the IC reasonably considers to be sensitive from an ethical or sustainability perspective or operates in an area that can be identified as particularly sensitive

The IC is appointed by the Board of Directors and the CEO shall be Chairman of the IC. Currently the IC consists of Fredrik Karlsson, Tomas Billing, Johan Bladh and Anders Nordby.

Röko’s acquisition process looks less like a classic auction-driven PE workflow and more like a highly structured owner-selection process. The company screens roughly 400-500 businesses per year across Europe, sourcing ideas through internal screening, its subsidiaries, business brokers, existing networks and direct outreach.

“In total, I look at something around 300 to 400 opportunities per year. Maybe 100 of those get through to Fredrik and Tomas for further review. I would say that we meet, maybe, 30 or 40 companies, per year, in a Teams or physical meeting.”
(Johan Bladh, InPractice interview, 03.04.2023)

What stands out is how concentrated decision-making is: Tomas Billing, Fredrik Karlsson and Johan Bladh are involved in every process, and Röko explicitly tries to meet owners and management early in order to build mutual trust.

“I am the first filter. I filter things before they reach Fredrik and Tomas. Initially, we looked at everything and, as we have progressed as a firm, we are becoming more and more stringent about our criteria. It is helpful that we also have a bit of a better deal flow, today. I would say that I only send things to them where I think it’s likely that we would want to have a physical meeting with that company. They review information, memoranda or financial information ahead of those meetings with management teams.”
(Johan Bladh, InPractice interview, 03.04.2023)

The first step is usually a remote evaluation, followed by a deeper assessment of the relationship with the seller and a more granular review of the business. That review is not limited to historical numbers. Röko also tries to understand the target’s position in the value chain through discussions with owners, management, suppliers, customers and industry experts, while screening every opportunity against its responsible-investment framework and excluding certain sectors altogether. The idea is straightforward: before even making an offer, Röko wants to know both whether the business is good and whether the people behind it are the right long-term partners.

“If you have seen good development over the last five years, we would like it if the management team who is there today, is the same management team that delivered that, so that we can get a better understanding of what’s really behind the numbers. Then to do that assessment, at least Fredrik, Tomas and myself, but normally also Anders, we attend those management presentations; we meet all the management teams in the companies that we invest in.”
(Johan Bladh, InPractice interview, 03.04.2023)

Once the commercial logic is established, Röko typically signs a letter of intent only after the main deal terms and the key risks have already been identified.

From there, the process moves into a more formal diligence phase with carrying out three different types of due diligences (DD):

• Legal / Financial DD: The aim is to review the company’s contracts and financial conditions. This DD usually lasts six to eight weeks and Röko outsources it to an external legal advisor. For example, as part of this review, Röko ensures, in accordance with its investment criteria, that the company’s largest customer accounts for less than 12 percent of net sales. The legal DD is outsourced to an external legal advisor while the financial DD is usually carried out externally by one of the Big Four auditing companies (i.e. EY, KPMG, PwC, Deloitte).

• Commercial DD: It’s always handled internally by Röko’s experienced team. The overall purpose of this DD is a review around customers, products and sustainability of the business. Röko analyzes the target company’s earnings capacity and tries to identify any risks. Röko analyzes, among other things, the company’s position in the market, the value chain and competitive advantages as well as the company’s books and records and agreements, as well as the company’s culture, working methods, working conditions and some ESG aspects.

Röko emphasizes that its final agreements are intentionally kept relatively simple and focused on the main risks identified during diligence rather than loaded with unnecessary complexity. What happens after closing is just as important. Röko preserves the subsidiary’s operational independence, usually wants the selling owner to retain some equity, appoints a new board with senior Röko representatives, establishes regular reporting routines and works with management on a short- and long-term strategic plan. In other words, Röko is not trying to “integrate away” what made the business attractive in the first place. It tries to combine local autonomy with tighter financial discipline, clearer governance and a permanent-owner framework.

Acquired companies’ independence and local decision-making are safeguarded and the starting point is that the selling owner should retain some ownership in the subsidiary. After the acquisition, Röko usually implements the following:

• Joint development of short and long term strategic plan together with the management team of the acquired company

• Review of staff remuneration

• Review of the company’s reporting system

• Appointment of new Board of Directors with senior representatives from Röko

• Increased financial awareness with a focus on profitable growth, working capital retention and financing the right growth opportunities

Additionally, while the companies stay independent and retain their original identity, they get access to the Group’s collective experience, knowledge and financial strength. Röko advocates that the subsidiaries focus on value-creating initiatives by, for example, outsourcing accounting, IT service and certain parts of manufacturing.

The only thing that changes after an acquisition is the requirement for monthly reports and centralized cash management:

“The biggest difference is that we really strive for decentralization and simplicity in everything that we do. Obviously, this is something where it is difficult to always excel, especially when it comes to things such as reporting, for instance. But we always try to focus on key and core things and do things as simply and as fast as possible, to ensure that the small and medium-sized companies that we have acquired and invested in remain or retain their competitive advantage, which is normally nimbleness and swiftness in operations and decision making. […] We get a monthly report, full income statement balance sheet.”
(Johan Bladh, InPractice interview, 03.04.2023)

And:

“No; we don’t engage in any of those things [centralized HR]. The only thing that we ensure that they do in a similar way is that we require all of them to use an auditor that is approved by us and, technically, by our group auditor. We require them to do monthly reporting according to a template that we have. We require the companies to be enrolled into our cash pooling system so that we can handle liquidity in a more efficient way.”
(Johan Bladh, InPractice interview, 03.04.2023)

Johan Bladh describes Röko HQ as an internal bank:

“it’s almost as if we are a little bit like an internal bank. Every once in a while, there is a company that requires a bit of a revolver, for net working capital purposes. Maybe they need to place a large order for inventory, for instance. Most of the time, all of the companies are in a different bucket, so they have excess cash that they need to deploy somewhere, instead of having it sitting in their local bank account, with low interest. We facilitate the smooth and efficient transition between those companies, so the one that is in need of liquidity can access it, and the one who is over liquid can get something for it.”
(Johan Bladh, InPractice interview, 03.04.2023)

One of the most critical aspects for serial acquires is the alignment of interests between the headquarters and the subsidiaries’ management teams. For that reason, these management teams are often incentivized based on profitability development and capital employed, effectively implementing ROIIC as a benchmark.

The day-to-day responsibility for running and developing a business unit is delegated to the subsidiary itself to ensure that decisions are made close to customers, product development, staff and suppliers. Although an individual CEO is independent and skilled, the opportunity to discuss certain issues, such as important choices or organizational development issues, is often appreciated.

Scaling M&A is a key question for any serial acquirer, but Röko’s answer is notably less daunting than in models such as Constellation’s. Management argues that Röko does not need to industrialize acquisitions at extreme scale; it only needs to acquire roughly six to twelve companies per year over the next decade, which looks well within the capacity of the current setup. Johan Bladh has indicated that the team can comfortably handle at least the pace seen so far, including years with seven platform acquisitions, while Fredrik Karlsson has gone even further, arguing that Röko already has essentially the same investment organization Lifco had at a much larger scale and could grow profits roughly fourfold before needing to rethink the structure. In other words, Röko does not appear close to hitting organizational limits in M&A. For now, the more relevant constraint is likely not internal capacity, but the company’s ability to keep finding attractive targets at sensible prices.

“I think we are certainly capable of continuing to do the same level as we have done up until today, and even a bit more. Just for reference, up until today, I think the most we did was in 2021 when we bought nine companies. Two of them were add-ons, but call it seven platforms, and last year we bought six companies. I think that’s a level that we can continue to work with without any issue or running into problems with just managing the processes.”
(Johan Bladh, InPractice interview, 03.04.2023)

And:

“We have the same investment organization as Lifco today. We can run with our current organization and increase the profits 4X before we have to think about it.”
(Fredrik Karlsson, InPractice interview, 21.04.2023)

4.2. Acquisition Criteria

At first glance, Röko’s acquisition remit looks broad: the company is sector-agnostic, evaluates opportunities across a wide range of industries, and does not tie itself to a narrow thematic lane. But beneath that broad surface sits a fairly specific framework. Röko is ultimately looking for mature, profitable niche businesses with strong market positions, proven resilience, and asset-light companies with limited exposure to technological disruption.

“We are fully sector agnostic, which is a little bit different from others. Maybe then to paraphrase a little bit, given the use of agnostic, we are almost religious, you could say, in our view on financial characteristics and criteria of the businesses. We assess and subsequently, hopefully acquire, provided that they meet those criteria. The thing about sector agnosticity means that we can always have a relatively wide net and see quite a lot of opportunities, and then we can make a decision where we can invest our resources – both our time and our money – when it comes to trying to acquire what we think are attractive companies.”
(Johan Bladh, InPractice interview, 03.04.2023)

Röko lays out seven acquisition criteria, three of which are treated as core.

1. Röko wants continuous earnings growth, assessed over the last ten historical years. More specifically, a target should not have experienced prolonged earnings declines or a period of falling profits lasting more than two years.

   “If your business has ahigh marign, you are doing something well because your customers accept paying a high price.”
   (Fredrik Karlsson, InPractice interview, 21.04.2023)

2. The business should generate an EBITA margin above 15%, adjusted for any normalization needed to reflect post-acquisition economics. It was updated from 10% some time after the IPO. That said, Röko had already communicated a group-level profitability target of more than 15% earlier, so one should be careful not to conflate the original acquisition filter with the company’s longer-standing financial targets. But currently both targets are the same (what makes sense).

3. Röko wants management in place that is willing to stay on after closing. That last point is not a soft preference but a central part of the model: Röko is not buying companies to rebuild them from scratch, but to back capable operators who can continue running the business within a decentralized structure. For that reason, Röko often acquires founder-led companies.

The remaining four criteria are also telling.

1. Röko prefers companies that are market leaders in their niche. As Röko acquires small and medium-sized businesses that often operate in international markets, this criterion is not met in every acquisition. However, Röko assesses whether the company has the potential to influence the pricing towards its customers in line with, or above, the prevailing cost inflation.

2. Röko strives for asset-light companies with Capex < 5 % of net sales and with a proven ability to control working capital, i.e. working capital as a ratio of net sales should be stable over time. These companies tend to have a high organic return on capital employed themselves, which in turn enables an efficient cash conversion for the Group

3. The largest customer accounts for less than 12 % of net sales, as that minimizes dependency on major customers.

4. Röko strives to acquire companies of a certain size, namely EBITA of EUR 2-10 million, as smaller companies tend to involve a higher risk, as they are often highly dependent upon one single senior executive and if it becomes necessary to replace this person, it can be challenging to find a qualified external candidate.

What makes the framework interesting is that Röko does not present it as a rigid checklist. The company explicitly says the company may still pursue an acquisition even if not all criteria are met, provided the deal is strategically or financially attractive. That flexibility matters, because it tells you the criteria are best understood as a compass rather than a rulebook. Still, Röko also notes that its three core criteria were met in all acquisitions completed over the last four years (until March 2025). So while the perimeter may be flexible, the center of gravity appears fairly stable: profitable companies, with decent margins, recurring earnings power, and managers who remain invested in the outcome.

However, it is necessary that it should not deviate from more than a few of these criteria.

There is also an eighth criterion hiding in plain sight: valuation discipline. Röko says this is not formally listed as an acquisition criterion, but it clearly treats it as essential to making the model work. The company states that acquisitions should generally be completed at up to 8x EV/EBITA, and that historically it has acquired businesses at an average multiple below that level. That matters because Röko’s model is not just about buying good companies; it is about buying good companies at prices that still leave room for attractive incremental returns on capital. Without that discipline, even a well-curated target universe would not necessarily translate into value creation.

“I told you about our average being around 8 times. It’s not that we always bid 8 times and we are happy. We go a bit above and a bit below sometimes. But I would say that we bid what we think is attractive for any opportunity. The likelihood that you would see us buying a business and paying above 15 times EBITDA, I don’t think it’s going to happen. Every once in a while, we pay a bit more than 8, and every once in a while, we pay a bit less than 8.”
(Johan Bladh, InPractice interview, 03.04.2023)

8x EV/EBITA implies a 12.5% unlevered pre-tax return on capital (roughly 10% unlevered after-tax) excluding any additional organic growth. Add on top roughly 4-5% organic growth and Röko ends up compounding at 14-15% on an unlevered after-tax basis.

The scale of the funnel is also worth highlighting. Röko says it has evaluated roughly 500 investment opportunities per year in recent years and estimates its addressable universe at around 50,000 high-quality small and mid-sized businesses across its focus regions. Most of the opportunities it evaluates are generated by brokers, but the company also sources deals through networks, inbound inquiries, subsidiaries, and direct outreach. That breadth of sourcing helps explain why Röko can be selective on underwriting while still maintaining a large enough opportunity set to deploy capital over time.

4.3. How Röko Structures its Acquisitions

4.3.1. Put/call Options

Röko’s standard deal structure begins with control rather than full ownership. The company always acquires a majority stake, which secures control and allows full consolidation, but it leaves a meaningful minority stake with the seller. The rationale is explicit: Röko wants the seller to remain financially exposed to the business so that incentives stay aligned after closing. In roughly half of the acquired companies, members of the management team who previously did not own shares have also bought into the minority stake at the time of the transaction.

“The acquisition model is based on only buying smaller family businesses that are asset-light with strong market positions, and always keeping the management as shareholders. At Lifco, we more often acquired 100%. The companies we bought in my later years at Lifco that had minorities performed very well. It has worked. And at Röko, we have chosen to focus on that model exclusively.”
(Fredrik Karlsson, InPractice interview, 21.04.2023)

And:

“We could acquire 100% of a company, but what we have seen up until today is we have focused a lot on buying founder family owner managed businesses, and quite often, the sellers who are then also the entrepreneurs, want to retain a stake as part of the transaction. In certain instances, it’s because the only reason for them to do the transaction is that they want to take some money off the table, not selling the company, and then it’s natural that they obviously retain a stake. In certain instances, they are starting to think about succession planning, then they want to make sure that they still have an engagement in the business. […] We normally have a discussion with them in terms of how much they want to retain, how much we would want to buy. I would say that we have crept up a little bit over time. If you were to look at this from the start, we normally bought between 60% and 70% in the first one or two years, whereas now it’s more common that we buy between 70% and 80%.”
(Johan Bladh, InPractice interview, 03.04.2023)

That retained-minority model is usually paired with mandatory call and put options. Röko receives the right to buy the remaining minority, while the seller receives the right to sell that same stake to Röko at a later date. In other words, Röko does not simply acquire a majority and hope to negotiate the rest later; it contractually stages its path to full ownership from day one. The company notes that these options are handled separately for each subsidiary, and the term was it usually between five to ten years.

Johan Bladh explained it as follows:

“It’s never less than five years; normally somewhere between five and 10. It is tied to an individual shareholder, so it could be the case that, in one company, we have several put call options with several different dates, but it is always one date in advance for each individual, and normally between five and 10 years.”
(Johan Bladh, InPractice interview, 03.04.2023)

The following chart shows all platform acquisitions since inception. The green bar represents Röko’s initial equity interest, while the pink bar adds the equity interest later acquired through the put/call structure. As we can see, Röko has already increased its stake to 100% in two cases (Arboritec and Silk-ka) and has raised its ownership in seven others. Because the acquisitions are shown in chronological order, it also becomes clear that Röko initially tended to buy 60-80%, whereas later transactions more often fall in the 70-90% range.

Economically, the seller is therefore paid in two steps: part in cash upfront, and part later based on what the business actually delivers. Röko explicitly presents this as a way to align incentives, reduce short-termism, and arrive at a more balanced purchase price.

Röko continuously remeasures that liability as expected cash flows change.

Importantly, the company also includes these obligations in its own financial net debt definition. For valuation purposes, that means Röko’s acquisition model carries more embedded leverage than the plain bank debt figure would suggest, because part of the purchase price is effectively deferred into future buyouts of minority shareholders. But we’ll cover that later in more detail.

“We treat the put call debt as financial debt in our reporting, in our leverage or debt ratios for instance, and our banks accept it like that. That means when we have the cash outflow to settle or exercise the option, we can basically just replace it with bank debt, because it has no impact on any ratio or debt like instrument in our reporting.”
(Johan Bladh, InPractice interview, 03.04.2023)

Röko consolidates 100% of subsidiary EBITA while still owning less than 100%. Röko usually pairs those minority stakes with mandatory put and call options, so the remaining ownership is effectively part of the purchase price from day one. In other words, Röko does not just consolidate earnings it does not yet fully own; it also recognizes the expected buyout obligation through put/call liabilities that flow into financial net debt. And that means, Röko does not account for minority stakes in the P&L and Equity. The liability captures the future cost of acquiring the minority.

The put/call liability is measured as the expected cash outflow required to settle the options, based on the specific formula agreed in each contract. In practice, that usually means taking the subsidiary’s average adjusted EBITA prior to exercise, applying an agreed multiple, and then adjusting for net debt or net cash at the subsidiary level. Changes in the value of the liability are recognized in equity as owner transactions without affecting profit & loss (as opposed to the change in the Earn Out liability that we’ll cover below).

The following example shows that the liability had to be increased by SEK 239 million through revaluation between December 31, 2023 and December 31, 2024. At the same time, SEK 142 million was actually paid out.

We see this amount in equity, where it reduces retained earnings.

At the same time, equity also shows dividend payments to NCI of SEK 148 million. This amount also appears in financing cash flow. Dividends to NCI are cash distributions paid by Röko’s subsidiaries to minority shareholders. They are not an operating expense, but a financing outflow and a reduction of non-controlling interests in equity. Economically, they represent cash that does not accrue to Röko shareholders.

The following chart shows the bridge, or rather the change in put/call option liabilities by component. As can be seen, paid purchase prices only start to become visible from 2023 onward, which explains the time lag of roughly five years. On that basis, one would expect a higher level of exercise activity in 2027/2028.

One interesting metric that Röko has disclosed since 2024 is that 25.9% of EBITA in 2024 was attributable to minorities. Applied to reported EBITA of SEK 1,228 million, that corresponds to roughly SEK 318 million. As of December 31, 2024, the put/call option liability was carried at SEK 2,679 million on the balance sheet, implying an EBITA multiple of roughly 8.4x – broadly in line with Röko’s stated ambition to acquire businesses at around 8x EBITA on average.

1.1.2. Earn-Outs

Earn-outs, by contrast, appear to be the exception rather than the rule. Röko has used contingent consideration only on a couple of occasions, and none of the acquisitions completed in 2024 included an earn-out component. The majority of contingent consideration stems from acquisitions from 2020-2022.

Earn-outs are used in situations where it is difficult for sellers and buyers to meet, usually due to high expectations of profit growth or due to external disruptions that create uncertainty in the company’s performance.

“Earn outs tend to be shorter in nature. You could technically have an earn out which lasts five or 10 years. We have decided to use the put call option for two reasons, I would say. First and foremost, a put and call gives two opportunities; it’s both a put and a call, so both parties can actually use to exercise it, or to not exercise it of course. Whereas an earn out is what it is. You can technically renegotiate it, of course, but normally it is what it is. Secondly, is what I said on timing. An earn out is more common to be one year or a couple of years, whereas our option agreements that we have with our portfolio companies or with their management teams of our portfolio companies, are longer term than that. I think those are the main reasons. We like the long-term alignment so we have actually not done a lot of earn outs, to be honest.”
(Johan Bladh, InPractice interview, 03.04.2023)

And:

“Indutrade is the earn out company but the problem with earn outs is that managers are solely focused on them instead of the longer term. We sometimes use earn outs but it always turns out more expensive than paying cash from the beginning.”
(Fredrik Karlsson, InPractice interview, 21.04.2023)

As opposed to revaluations of put/call option liabilities, revaluations of the earn-out liability flow through the income statement. From an overall economic perspective, however, this is immaterial, which is why we do not make any adjustment to EBITA. As of 31 December 2025, the earn-out liability had fallen to just SEK 3 million.

The cleanest way to think about Röko’s deal structure is therefore this: control first, ownership over time. Röko buys a majority stake, keeps the operators financially invested, and embeds a contractual route to full ownership through put/call options. Earn-outs exist, but they do not seem to define the model. The defining feature is staged ownership with management alignment – and analytically, that means Röko’s put/call liabilities should be treated as a real part of enterprise value.

5. Acquisitions: The Track Record

Röko’s compounding story is inseparable from its acquisition engine. Management is very clear that acquisitions are the primary growth lever: Röko is built to keep adding subsidiaries and let the portfolio compound over time.

This chapter takes a closer look at Röko’s acquisition history.

5.1. Acquisition History

Before discussing outcomes, it’s worth laying out the transaction list. A complete acquisition table forces clarity: how quickly did the portfolio expand, when did the group expand abroad, and how concentrated is the portfolio in any one geography?

As Röko discloses annual revenue at acquisition date in local currency, I have used the average FX rate for any given currency pair for any given year to translate it to SEK.

Let’s first look at what these businesses actually do:

• Arboritec (2019): Swedish specialist in floor-finishing products, with a focus on varnishes and related wood-floor treatment solutions. It looks like a small niche manufacturer serving professional flooring applications rather than a broad commodity market.

• Hot Screen (2019): Swedish producer of heat-transfer solutions used in textile printing. The business appears to operate in a niche of branded and functional garment decoration, likely with customer relationships built around quality and reliability.

• Addedo (2019): Swedish value-added reseller and consultant focused on consolidation, reporting, and planning software. It is essentially a niche enterprise software-services business with recurring customer relevance in finance functions.

• Synteko (2019): Add-on to Arboritec focused on floor-treatment and maintenance products. Strategically, it seems to strengthen Arboritec’s position in adjacent wood-floor finishing categories.

• Bilomsetningen i Arendal (2019): Norwegian reseller of original spare parts for automotive workshops. This looks like a distribution business serving the repair and maintenance side of the vehicle aftermarket.

• Beth’s Beauty (2019): Norwegian beauty platform combining clinics and retail, centered on skincare and related treatments. It is one of the clearer examples of Röko’s willingness to own branded, consumer-facing businesses.

• Lundberg Tech (2020): Danish manufacturer of vacuum-based waste-handling systems for industrial environments. The business appears to sell productivity-enhancing equipment into manufacturing workflows rather than consumer end-markets.

• Oppigårds Bryggeri (2020): Swedish independent craft brewery with a strong niche position in premium beer. Compared with many other Röko assets, this is a more consumer-facing branded business with product identity at its core.

• Dan-Form (2020): Danish furniture designer focused especially on chairs and related interior products. The company seems positioned around Scandinavian design and mid-market lifestyle aesthetics rather than pure low-cost volume.

• Sixty Stores (2020): UK group of e-commerce businesses focused on Home & Garden categories. It looks like a digital consumer platform built around several online retail brands rather than a single flagship concept.

• Ekstralys (2021): Norwegian e-commerce business specializing in vehicle lighting. The company appears to serve a focused enthusiast and aftermarket niche with online distribution at the center of the model.

• Renovotec (2021): UK distributor and installer of rugged IT hardware and enterprise mobility solutions. It looks like a solutions-oriented B2B business selling into logistics, warehousing, and industrial data-capture environments.

• Rocket Medical (2021): UK designer and manufacturer of single-use medical devices. This appears to be a niche healthcare products business where regulatory know-how, product reliability, and specialist relationships matter.

• Golf Experten (2021): Danish distributor and retailer of golf equipment. It is another example of Röko owning a focused consumer niche business tied to a passionate end-market with specialist purchasing behavior.

• Les Deux (2021): Danish menswear brand with a more premium, fashion-led positioning. The company stands out within the portfolio as a branded consumer asset where product identity and marketing are central.

• Wifi Gear (2021): Add-on to Renovotec that likely deepens the platform’s offering in wireless networking, connectivity, and mobility infrastructure. Strategically, it seems intended to broaden Renovotec’s technical solutions stack.

• Jade Solutions (2021): Add-on to Renovotec that strengthens the platform in enterprise software, hardware integration, and operational mobility solutions. It likely enhances Renovotec’s ability to offer broader end-to-end customer implementations.

• 4x4 (2021): UK specialist supplier of accessories for 4x4 vehicles and pickups. The business appears to serve a dedicated niche where product breadth, fit-for-purpose quality, and enthusiast demand are important.

• Smit Visual (2022): Dutch designer and manufacturer of writing boards and visual communication products. This looks like a classic niche industrial/office-products business with a tangible, functional product set and steady replacement demand.

• Brownell (2022): UK developer of humidity and moisture protection products. The business appears to operate in a narrow technical niche where performance and application-specific know-how matter more than scale alone.

• ETB Technologies (2022): UK reseller specializing in refurbished IT hardware. It seems to play in the secondary enterprise hardware market, where availability, testing, and value-for-money are key differentiators.

• Dorsey (2022): UK supplier of niche brickwork materials and related construction accessories. This looks like a specialist distribution business serving a narrow but recurring need within the building-products ecosystem.

• TECCON (2022): Norwegian developer of high-quality electrical products for professional electricians. The business appears to combine product specialization with a trade-oriented sales model, which usually supports solid niche economics.

• Silk-ka (2022): Dutch market leader in high-quality artificial flowers and plants. It is a branded decorative-products business with a differentiated premium position rather than a purely functional low-end offering.

• AJAT Group (2022): Danish designer and manufacturer of uniforms and student products. The company appears to serve specific recurring occasions and institutional customer groups with customized or semi-customized product offerings.

• Godiva (2023): UK distributor of bearings and spare parts. This looks like a classic industrial distribution business serving maintenance and replacement demand rather than highly cyclical project-based revenue.

• Snowminds (2023): Danish provider of ski instructor training programs. It is a more founder-led, experience-based consumer business and another example of Röko stretching beyond traditional mature B2B niches.

• Skywire (2023): Add-on to Renovotec in Australia, expanding the platform geographically into APAC. Strategically, it appears to extend Renovotec’s mobility and rugged IT capabilities into a new regional market.

• Siderius (2024): Dutch producer of cleaning products. The business looks like a straightforward niche manufacturer with recurring end-demand, likely benefiting from product breadth and long-standing customer relationships.

• Snowlife (2024): Add-on to Snowminds that broadens the platform’s offering in ski and snowboard instructor training. It seems designed to deepen category leadership rather than diversify into a new vertical.

• ATEMAG (2024): German developer of CNC aggregates for woodworking applications. This appears to be a highly specialized industrial components business with technical know-how and a clear niche within production machinery.

• CHP (2024): Belgian developer of lubrication systems for conveyor belts. The company looks like a small but specialized industrial supplier serving productivity and maintenance needs in automated production environments.

• Pureoptics (2024): French niche industrial business that appears to operate in a technical components category. I would keep this one slightly more general unless you want me to anchor it to the acquisition release and sharpen the wording.

• Topa Bathroom Products (2025): Dutch designer and developer of bathroom products such as faucets, mixers, and related fittings. This looks like a branded or design-led consumer-products business within the home-improvement space.

• IT OPPOLD SYSTEM International (2025): Add-on to ATEMAG that likely broadens the platform’s offering in specialized tooling or adjacent woodworking equipment. Strategically, it reads like a capability-expanding tuck-in acquisition.

• ITIB Machinery International (2025): Italian machinery company focused on equipment for manufacturing corrugated plastic pipes. This appears to be a niche capital-goods business serving a specialized industrial production process.

• Lambda (2026): Italian B2B platform acquired recently.

• NH Norsk Handel AS (Golfshopen) (2026): Norwegian golf retailer with a specialist category focus. The business fits Röko’s pattern of owning focused consumer franchises tied to enthusiast end-markets.

• Access Building Products Group (2026): UK building-products business that appears to supply a narrow set of construction-related products. It looks like another typical Röko-style niche B2B asset serving a specific function rather than a broad end-market.

5.2. Acquisition Analysis

In this chapter, we look at Röko’s acquisitions from a portfolio perspective and analyze the country split, type (platform/add-on), and segment mix (B2B/B2C).

From inception-to-date Röko has acquired 39 companies.

The following charts summarize acquisitions by country, both on a stand-alone basis and aggregated into the Nordics, Rest of Europe, and Rest of World. The pattern is clear: Röko initially bought mainly in the Nordics, but quickly shifted its center of gravity toward the rest of Europe, especially the UK and the Netherlands. We have already covered Teqnion, and the key difference is that Teqnion made its first acquisition outside Sweden only 16 years after inception. At Röko, this faster internationalization is probably due to the fact that Fredrik Karlsson and Tomas Billing had already completed acquisitions outside the Nordics long before Röko existed. Röko is therefore benefiting from the deep experience of its two lead allocators. That extends the runway and supports a higher capital deployment rate, simply because the opportunity set is much larger than if one were focused only on Sweden or the Nordics.

The next chart shows the same picture, but on a cumulative basis. In 2024 the number of subsidiaries outside of the Nordics surpassed the number of subsidiaries within the Nordics for the first time for Röko, demonstrating the early acquisition spree outside the Nordics.

Moving on to the type of acquisition, of the 39 acquisitions Röko has made, 33 were platform acquisitions and 6 were add-ons.

Of the 39 acquisitions made so far, 27 are B2B companies while 12 are B2C. So, roughly 1 in 3 acquisitons was B2C.

On a cumulative basis, the country mix is striking: in the UK, only 1 of 11 acquisitions is B2B, whereas in Denmark, 5 of 6 are B2B.

In terms of size, the following chart reveals the sweet spot of Röko. The average size comes in with revenue of only ~SEK 155 million (~$16 million) with some acquisitions smaller than SEK 100 million in annual revenue and a few ranging from SEK 250 million up to SEK 450 million.

The chart also reveals that revenue acquired during the period 2021-2022 was exceptionally strong due to a fast acquisition pace (9 and 6 acquisitions, respectively), while the companies acquired lately were a bit smaller on average and the number of acquisitions was lower as well. We’ll have a closer look at how revenue development later and what it implies for the future and why it helps to explain the weak share price development since summer 2025.

5.3. Margin Mix: Are New Deals Lifting Margins?

After reviewing the acquisition engine and the portfolio based on some statistics, it’s worth stepping back to the portfolio math. The chart shows the group EBITA margin and the estimated EBITA margin for acquisitions made during each year.

One encouraging observation about Röko’s acquisition history is that the profitability of acquired businesses has generally compared favorably with the profitability of the group as a whole. In most years, the EBITA margin of acquired companies exceeded Röko’s consolidated EBITA margin, sometimes by a wide margin. This is important because it suggests Röko has not needed to dilute quality in order to deploy capital. If anything, the recent data points for 2024 and 2025 indicate the opposite: the company appears to have added businesses with margins well above the group average, which should be supportive of mix and margin quality over time.

Across 2019–2024, Röko’s acquired businesses generated an average EBITA margin of roughly 18.5%, meaning the company did not merely meet its >10% EBITA margin core criterion, but materially exceeded it.

5.4. Deal Economics: Acquisition Multiples and the Compounding Math

Even if Röko buys the right kinds of businesses, compounding still depends on what it pays. This is where many serial acquirers fail: they overpay in good times, or they loosen discipline just to keep deal volume up.

Before we dive into acquisition multiples, it is worth clarifying what the purchase price actually represents. As we discussed already, Röko typically structures its acquisitions by taking control upfront while leaving a minority stake with the seller, usually combined with mandatory put and call options and, in some cases, Earn-Outs. As a result, the headline purchase price is often not the same as the cash Röko deploys on day one. In the table below, I therefore separate each year’s acquisition spending into its main components to distinguish between upfront cash paid at closing and the additional obligations embedded in Röko’s acquisition structure.

As a result, headline “total consideration” is often not the same as the cash Röko deploys upfront. In the table below, I therefore split each year’s M&A spending into three layers:

1. Total consideration: the full purchase price including contingent payments and estimated earn-outs

2. Cash-free purchase price: the economic purchase price adjusted for cash acquired

3. Net cash deployed: the immediate cash outflow, net of acquired cash, and after accounting for deferred/contingent mechanics and subsequent settlements

This distinction matters because it changes how you think about valuation discipline and risk. Earn-outs can make the “full” multiple look higher on paper, while the upfront cash multiple often better reflects how much Röko is actually putting at risk before performance is proven and what immediate ROIIC Röko can generate.

Goodwill often makes up roughly half of total consideration. At first glance, that can look aggressive, especially if you come from an accounting mindset where “more goodwill” equals “more room for future disappointment.” But for a serial acquirer that buys predominantly asset-light, people- and know-how-driven subsidiaries, a high goodwill share is not unusual. The reason is mostly mechanical: many of the assets that actually create value (customer relationships, assembled workforce, niche know-how, reputation, processes) either can’t be recognized as separate identifiable intangibles under IFRS, or they’re only recognized partially and involve judgment. Anything that can’t be cleanly identified ends up in goodwill by definition.

A purchase price allocation with high goodwill and fewer identifiable intangibles can, in theory, make reported profits look better. Identifiable acquisition intangibles (customer relationships, brands, technology) are typically amortized through the P&L, while goodwill is not amortized (it is tested for impairment). So if more of the price is classified as goodwill, near-term EBIT can appear higher than if more were allocated to amortizable intangibles. That accounting effect is real.

However, it’s important not to overinterpret it. First, Röko isn’t unique in this regard. Many decentralized, asset-light serial acquirers report high goodwill proportions for the same structural reasons. Second, and more importantly, the split between goodwill and amortizable intangibles has no impact on free cash flow. Amortization is a made-up non-cash expense. So the allocation changes accounting earnings, while leaving the underlying cash economics of the deal unchanged. Economically, what matters is what Röko paid (cash upfront vs earn-outs later) and how much cash the subsidiary can generate over time.

Let’s now walk through the purchase price mechanics. We’ll use 2025 as the example.

In that year, Röko reports total consideration of SEK 908 million. The acquired subsidiaries came with SEK 56 million of cash, so the cash-free purchase price is SEK 852 million.

Think of it like buying a wallet from a friend for $100, with $30 inside. You pay $100, but you immediately “get” $30 back, so you’ve effectively paid $70 for the wallet itself, cash-free. Same logic here.

From there, the key point is timing. Röko did not deploy the full economic purchase price as immediate cash. The deal structure reduces the upfront cash outflow. In 2025, Röko didn’t acquire any company with an earn-out component, but SEK 111 million (~12%) of the total consideration was not paid yet as that represents the put/call option liability.

After adjusting for those two items, the net cash effect for new acquisitions (i.e., net cash deployed for new acquisitions) was ~SEK 741 million.

Finally, Röko made cash payments related to prior years’ acquisitions (earn-out settlements and the settlement of the option liability through increasing the ownership in the subsidiaries) of SEK 52 million and SEK 153 million, respectively. Adding that brings total acquisition-related net cash paid in 2025 to SEK 946 million, consistent with the cash flow statement.

If we take net cash deployed for new acquisitions across all years shown (SEK 6,668 million) and divide it by the cash-free purchase price (SEK 9,104 million), we get an implied upfront cash share of ~73%. Put differently, roughly ~27% of the economic purchase price is not paid immediately. That lines up well with management’s repeated message that ~20–30% of consideration is typically structured as put/call option liabilities (with minor earn out components). Measured against total consideration, the implied upfront cash share is even lower: only ~66% of the headline purchase price is actually paid as cash upfront, highlighting how meaningful the majority/earn-out structure is in Röko’s M&A model and that acquired businesses come with a net cash buffer.

We now look at the acquisition multiples Röko has paid since 2019:

The chart frames Röko’s purchase prices in a much more useful way: it shows each of the three “price layers” relative to the pro forma full-year EBITA of the subsidiaries acquired in that year. That matters because Röko’s M&A model is built around (i) majority stakes and, (ii) too a lesser degree, earn-outs and (ii) conservative upfront cash deployment. Looking at just one multiple would miss the risk structure.

The three bars effectively answer three different questions: What is the “headline” valuation (total consideration)? What is the economic price net of cash acquired (cash-free)? And what multiple is Röko actually paying upfront on day one (immediate cash outflow)?

Across the period, the same pattern repeats: the immediate cash outflow multiple is consistently the lowest, often meaningfully below the cash-free multiple and far below total consideration.

You can see this most clearly in 2023, where the immediate cash multiple is very low (around ~3.7x), even though total consideration is much higher.

The chart also shows that valuation discipline isn’t perfectly constant year to year; it flexes with the quality and growth expectations in the acquired cohort. 2019 and 2022 stand out with higher total consideration multiples (around ~13x and 10x), while still keeping the immediate cash outflow materially lower (around ~10x and 6x).

The chart reveals that over time Röko managed to acquire businesses with a slightly lower multiple while, at the same time, the underlying EBITA margin of the acquired businesses tends to rise over time. In other words, Röko is paying less and buying higher quality at the same time.

On average since from 2019-2025 IPO, Röko has paid roughly:

• ~8.9x total consideration

• ~8.1x cash-free

• ~5.9x immediate cash outflow

Based on the information we’ve gathered so far, we can calculate ROIIC from acquisitions in the next step.

The chart highlights the two-layer return profile that naturally comes with Röko’s option liability deal structures.

• Entry ROIIC is based on the initial capital outflow (i.e., net cash deployed).

• Cash-free ROIIC is based on the cash-free purchase price (i.e., including estimated option liabilities and earn-outs).

Entry ROIIC is consistently higher than cash-free ROIIC. That’s exactly what you’d expect when a material part of consideration is deferred. Röko only commits part of the economic price upfront, so the return on the cash actually “at risk” at closing can look very attractive. By contrast, cash-free ROIIC uses the broader economic denominator and therefore tends to come out lower.

Over 2019–2025, average pre-tax cash-free ROIIC was ~12.4%, while average pre-tax entry ROIIC was ~16.9%. That makes sense, as Röko paid 8x EBITA on average.

By now, the machine should be clear: how Röko sources deals, how it structures them, and why the model can work. The only question left is whether the numbers are as good as the narrative. That is exactly what we will unpack in Part 3.

It will be structured in three Parts:

• Part 1 (today): From Lifco to Röko: The Blueprint Behind the Ambition

• Part 2: How the Röko Machine Works

• Part 3: The Economics of Compounding: Financials, Valuation and much more

All parts are now available in one PDF. You can download it below.

Deep Dive Röko AB

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👔 Company Name: Röko AB (“Röko”)

🔎 ISIN: SE0023950795

🔧 Business model: sector-agnostic serial acquirer

🌍 Geographic exposure: mainly Sweden, UK (sales in Europe)

📈 Stock Price: SEK 1,534

💰 Market Capitalization: SEK 22.4 billion (~$2.4 billion)

👨‍💼 Number of CEOs since foundation: 1

👨‍👩‍👦 Founder-/Owner-operator: Yes

📅 CEO tenure: Since 2019

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: N/A

🔁 Reinvestment profile: High

💸 Capital intensity: Capital-light

🏰 Moat: Seller proposition, Simplicity, experienced management team around Fredrik Karlsson

🧨 Main risks: Execution, macro pressure, key-person risk

🌳 Slow Compounding fit: Yes – high-quality serial acquirer

Business Model in a Nutshell: Röko is a Sweden-based serial acquirer that has completed 33 platform acquisitions and in a variety of industries across Europe. The Company’s ambition is to be the perpetual owner of small and medium-sized businesses. Röko’s organization has more than 100 years of combined experience working with founder- and entrepreneur-led companies in a wide range of industries and the individuals in executive management positions have worked at the Company since its first year of operation (2019).

1. Lifco: The Model Röko Builds On

Röko looks like a company that can be explained in just a few lines. It buys small and medium-sized niche businesses as a serial acquirer, lets them continue operating in a decentralized way, and tries to create value over a very long period of time. Anyone familiar with the European compounder universe knows the vocabulary: long-term ownership, strong market positions, high margins, low bureaucracy, and local accountability through decentralization.

But Röko is not just another Swedish serial acquirer. The real story begins with the fact that Fredrik Karlsson – former CEO of Lifco – founded Röko together with Tomas Billing in 2019.

Can a manager who helped build one of Europe’s most successful decentralized acquisition models replicate that success outside the original system?

For sure, Röko has its roots in Lifco. That is why it is essential to understand Lifco first if one wants to understand where Röko comes from.

That is also why this analysis does not start with Röko itself. The better starting point is the Lifco blueprint. Before turning to Röko, one first must understand how Lifco became a compounder that has outperformed Berkshire Hathaway by roughly 5x since Lifco’s 2014 IPO.

One way to appreciate just how exceptional Lifco’s model has been is to compare its EBITA growth with that of the other large Sweden-based serial acquirers. As the chart below shows, Lifco compounded EBITA at 22.5% annually from 2001 to 2025 — comfortably ahead of Addtech incl. AddLife (16.7%), Lagercrantz (13.9%), and Indutrade (13.1%). That is a remarkable spread over such a long period. In other words, Lifco was not merely one successful serial acquirer among many; it was the strongest EBITA compounder among Sweden’s “Big Four” serial acquirers.

1.1. Lifco’s History: From Turnaround Story to Compounding Machine

Lifco is now widely regarded as a textbook example of how a highly decentralized structure, a preference for small niche businesses, and an uncompromising focus on earnings can be used to reinvest capital at high rates of return over long periods. The group was not built through a single heroic turnaround, but through a disciplined operating and capital-allocation model pursued consistently over many years. That is exactly what makes Lifco such a useful blueprint. It was not a one-off special situation, but a system – and systems are easier to replicate.

Lifco’s history is closely tied to Carl Bennet. Bennet, now one of Sweden’s ten richest individuals, was born in Helsingborg in 1951, in a mid-sized city on Sweden’s southern coast.

In 1976, at the age of 26, he earned an MBA from the University of Gothenburg and took a position at Kockums and later at Electrolux. Electrolux is a global home-appliance company best known for brands such as Electrolux, AEG, and Frigidaire, with a long history of designing and manufacturing products for kitchens, laundry, and household cleaning.

In 1980, Bennet joined Electrolux in Alingsås, where he initially held management roles within the company’s manufacturing operations. He was promoted to CEO of the Alingsås subsidiary in 1982, at the age of 31, and remained in that position until 1988. During that time, he also oversaw several smaller affiliated units, further sharpening his expertise in production efficiency, operational management, and team leadership. His years at Electrolux gave him a strong grounding in industrial processes and hands-on problem-solving within a large-scale manufacturing environment.

At the time, Bennet also invested in Trelleborg, where his former boss from Electrolux, Rune Andersson, was CEO. The exit from that investment a few years later provided the seed capital with which Bennet, then 38, and Rune Andersson acquired Getinge from Electrolux in 1989 for SEK 320 million in what was effectively an employee buyout.

It was a deal that marked the beginning of a new chapter for the company. At the time, Getinge was a struggling medical equipment manufacturer, and Bennet stepped in as CEO while Andersson became chairman. Drawing on the operational experience Bennet had built at Electrolux, the new owners moved quickly to stabilize the business and restore profitability.

The turnaround was remarkably fast. Under Bennet’s leadership, Getinge focused on operational discipline, cost efficiency, and a clearer strategic positioning in medical technology, particularly in sterilization and related systems. The business returned to profitability within six months, highlighting how effective the early restructuring measures were and setting the foundation for a much broader transformation.

After the successful turnaround, Getinge was listed on the Stockholm Stock Exchange in 1993, giving the company access to capital and a wider investor base for its next phase of growth. Carl Bennet served as CEO until 1997 and then became chairman, continuing to shape the company’s development through acquisitions and expansion into adjacent healthcare niches, including patient handling and acute care.

In 1995, Getinge acquired the dental company LIC Care AB. Its roots went back much further: historically, the business had been formed in 1946 as a central purchasing entity for medical equipment and services.

By 1997, Andersson & Bennet, the partners’ joint holding company, was dissolved. Bennet subsequently renamed the company Carl Bennet AB and became its sole owner, while retaining an 18% stake in Getinge.

From 1995 to 1998, LIC Care AB operated as a division of the publicly listed Getinge Group. In 1998, following a shift in Getinge’s strategic direction, ownership of LIC Care AB was spun off to Getinge’s shareholders. In that context, the company was renamed Lifco AB.

And because Carl Bennet, through his family office Carl Bennet AB, was also a shareholder in Getinge, he thereby became a direct shareholder in Lifco AB as well.

In the midst of Lifco’s spin-off from Getinge, Carl Bennet looked for a new CEO for Lifco and found Fredrik Karlsson, who had already gained early experience in private equity and restructuring in Germany.

Karlsson, born in 1962, holds an MSc in Engineering Physics as well as an MSc in Business Administration from the Stockholm School of Economics. He worked at Boston Consulting Group in London and Germany and became CEO of Mercatura, a workwear manufacturer, in 1993 before taking over as Lifco’s CEO at the age of 36.

“Carl Bennet saw somebody who was result-focused, and that was what he wanted. I still remember how I presented my case to him: ‘I started at this German firm Mercatura, and the numbers looked like this, and when I left, they looked like this.’‍
I just showed him the financials. I believe I was the only one who showed it so clearly. And Carl is also extremely results-focused. Results are the only thing that matters. We found each other in that.“
(Fredrik Karlsson, acquirers.com interview, 07.06.2022)

Lifco’s brief period as a listed company – from the 1998 spin-off until Carl Bennet took it private again in August 2000 – had relatively little in common with the Lifco we know today. At the time, the company was much narrower and far less like what one would now call a decentralized compounder.

The next decisive turning point came in August 2000, when Carl Bennet AB took Lifco private through a public tender offer. That created the room for a fundamental repositioning away from the capital markets, one that Fredrik Karlsson would go on to execute.

Carl Bennet AB justified the take-private quite clearly by arguing that Lifco needed restructuring and could develop better outside the public markets. That decision marked the transition from an early, still somewhat undefined phase to the later strategic focus.

Already in 2001, Fredrik Karlsson sold large parts of the Health and Self-Care operations and refocused Lifco decisively on dental distribution – even though the divested business had accounted for roughly 40% of group sales at the time.

As a strong believer in decentralized corporate structures, Fredrik Karlsson managed relatively quickly to improve Lifco’s profit margins from a low single-digit level to a high single-digit level.

Around the same time, Sorb Industri met a fate similar to that of Lifco. Sorb Industri was a small industrial conglomerate: a collection of niche manufacturing and equipment businesses – including demolition robotics and sawmill equipment – that later supplied much of the industrial DNA of modern Lifco.

Trelleborg – in which Carl Bennet himself had been invested a few years earlier – floated Sorb Industri in the spring of 1999, only for Carl Bennet to take it private again shortly thereafter.

Fredrik Karlsson’s restructuring of Lifco impressed Carl Bennet enough that Fredrik Karlsson was appointed CEO of Sorb Industri in 2001 as well.

In 2006, Lifco and Sorb Industri merged. As Carl Bennet put it:

“That became the start of a successful business expansion in Lifco.”

With Lifco’s acquisition of Sorb in 2006, modern Lifco essentially came into being: a focused dental business combined with a second industrial platform already run by Karlsson became a diversified industrial group. Karlsson was therefore not only the turnaround manager of the old Lifco, but also the architect of the decentralized governance and capital-allocation model that later came to be associated with Lifco.

Sorb Industri included Brokk, a pioneer and global market leader in demolition robots. These machines are used mainly for specialized demolition work in confined and hazardous environments, for example on construction and renovation projects, but also in applications such as dismantling refractory linings in cement kilns – a highly specialized niche business with a strong market position, clear product logic, and significant operating leverage.

Brokk is Lifco’s best-known example of successful organic development: Brokk’s EBIT rose from SEK 14 million in 2000 to SEK 225 million in 2019, while the EBIT margin expanded from 10% to 40% over the same period.

When Fredrik Karlsson joined Lifco as CEO in 1998, he had limited acquisition experience. Up to that point, his main task had been restructuring and improving profitability. Although the early years were shaped by significant operational restructuring, Karlsson gradually learned to push responsibility further down into the organization – an idea he had picked up from Carl Bennet. Over time, this decentralized way of working became one of the defining pillars of Lifco’s growth and long-term success.

“From Carl, I learned the power of simplicity. I was too academic when I was young. And when you are over-educated, you are inclined to do everything yourself because you think you are that good. But he emphasised that one should not go in and interfere after you have given people responsibility.”
(Fredrik Karlsson, acquirers.com interview, 07.06.2022)

However, after the successful restructuring of the existing Dental business he was faced with another challenge: that it exhibited limited organic growth prospects and he needed to find other growth opportunities.

In 2006, he concluded that the most effective way to create shareholder value was to pursue a growth strategy built around value-accretive acquisitions. The same year Lifco and Sorb Industri merged (as described above), shaping Lifco’s structure the way we know it today.

“Growth was not considered as important when we were private. It was enough to grow a little each year with high profitability. But then I understood that I needed more growth. So we recruited a dedicated M&A professional. My role changed from being a turnaround manager in 1998 to becoming an acquirer and CEO appointer. That was important because you win the Champions League by picking the best players. Training cannot be your number one focus. And I transitioned into a role of acquiring strong firms.”
(Fredrik Karlsson, acquirers.com interview, 07.06.2022)

The same year marked the start of a new serial acquirer: Lifco embarked on its acquisition spree, adding three businesses – one in each of its three segments: Dental, Demolition & Tools, and Systems Solutions (the three segments will be explained in detail later).

By 2007, Fredrik Karlsson was already expanding the Dental and Demolition & Tools businesses in a noticeable way:

The 2007 acquisitions of Kinshofer show particularly well what Lifco was becoming under Fredrik Karlsson. Kinshofer, acquired in 2007 from a private equity owner, brought immediate industrial scale to what would become Demolition & Tools together with Sorb Industri. Founded in 1971, the company had developed into a market-leading supplier of attachments for excavators and cranes, with a reputation for technically advanced products, broad product breadth, and strong service. At the time of acquisition, Kinshofer generated around SEK 555 million in sales, making it the second biggest acquisition in terms of revenue until today.

Between 2006 and 2014, the year of Lifco’s IPO, Fredrik Karlsson built Lifco out systematically. Over that period, revenue increased from roughly SEK 2.6 billion to roughly SEK 6.8 billion, or about 13% CAGR. EBITA grew even faster, from SEK 280 million to SEK 966 million, or roughly 17% CAGR, helped by financial leverage and organic margin improvement. The EBITA margin accordingly rose from 10.7% to 12.4%. Over the same period, Lifco acquired 23 companies with combined annual sales of roughly SEK 3.6 billion.

After 14 years under Carl Bennet’s private ownership, Lifco returned to the stock market in 2014. In the secondary offering, Carl Bennet sold 49.9% of the outstanding shares and thus retained a narrow majority of 50.1% – a stake he still holds today.

On February 7, 2019, the following press release was published:

Lifco’s Board of Directors has today taken the decision to terminate Fredrik Karlsson’s position as CEO since the Board of Directors and Fredrik Karlsson have not succeeded in reaching an agreement about his future remuneration. Per Waldemarson, currently vice CEO, takes on the position as deputy CEO until further notice.

After two decades at the helm, Karlsson had become both financially secure and independent. He left behind a remarkable legacy. According to anecdotes, he had a scheduled analyst meeting that very day and, after the market punished the stock by 10%, he pulled out his phone and called his broker to buy Lifco shares because he believed what he had built was stronger than he was and would continue to thrive under new leadership.

By the time he stepped down, Fredrik Karlsson had delivered striking results. Over his full tenure beginning in 1998,

• revenue rose from roughly SEK 600 million to roughly SEK 12 billion in 2018, a CAGR of 16%,

• EBITA increased from roughly SEK 30 million to roughly SEK 2.2 billion, a CAGR of 24%,

From the IPO in 2014 until his departure,

• revenue rose from roughly SEK 6.8 billion to roughly SEK 12 billion in 2018, a CAGR of 15%,

• EBITA increased from roughly SEK 966 million to roughly SEK 2.2 billion, a CAGR of 22%,

• and the share price rose from SEK 24.6 to SEK 78, a CAGR of roughly 32%.

That growth came from both organic progress and M&A, without shareholder dilution and with only moderate leverage, which never exceeded 2.4x net debt/EBITDA.

Lifco has remained a home run under Per Waldemarson. Since Per Waldemarson took over in February 2019, Lifco has delivered an annualized return of roughly 22%, driven by around 17% annual EBITA growth, dividends, a stable share count, and a slight increase of the valuation multiple (despite a significant derating over the last 6 months). At the current stock price of around 275 SEK, Bennet’s 50.1% stake is now worth an extraordinary SEK 58 billion (about $6.2 billion).

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1.2. What Lifco Looks Like Today

Today Lifco is a diversified industrial group with a total turnover of SEK 28.2 billion ($3.0 billion), EBITA of SEK 6.7 billion ($0.7 billion) with a margin sitting at ~22%, significantly up from ~11% when Fredrik Karlsson started its buying spree in 2006. Lifco describes itself as a safe haven for small and medium-sized businesses. The business concept is to acquire and develop market-leading sustainable, niche businesses with the potential to deliver sustainable earnings growth and robust cash flows. Lifco is guided by the clear philosophy to have a long-term view on the holdings, a sharp focus on profitability and a strongly decentralized organization.

Lifco’s main objective is to ensure that its subsidiaries continuously improve earnings and deliver strong cash flow. Having one simple goal – increasing profits every year – is a legacy of Fredrik Karlsson’s time and reflects his preference for keeping things simple.

So far, it has fallen short only twice. The 2008–2009 recession, hit the more cyclical businesses within Demolition & Tools and Systems Solutions, but the steady Dental division provided an important cushion. The other one was 2013, when profits declined only marginally, partly because the group did not complete any new acquisitions that year and only one small acquisition during the prior year (with little spill-over effect into 2013).

From 2006 until today, Lifco has acquired 157 companies, of which 71 were in Systems Solutions, 62 in Dental, and 24 in Demolition & Tools.

The following slide from Lifco’s investor presentation provides a good overview of the three segments:

As mentioned above, Lifco operates in three segments: Dental, Demolition & Tools and Systems Solutions.

Dental brings together a large number of leading distributors of dental products for dentists, primarily in Europe, as well as manufacturers of dental consumables. Lifco also has companies that sell dental technology and businesses that develop and sell medical record systems. Demand for these products is relatively non-cyclical, while organic growth has historically been weak. Customers place their orders frequently and expect a high delivery and product reliability. In 2025, the Dental segment had the following sales split:

• Distribution: 54%

• Manufacturing: 25%

• Prosthetics: 16%

• Software: 5%

Demolition & Tools develops, manufactures and sells niche equipment for the infrastructure, demolition and construction industries. For instance, Brokk is the world’s leading manufacturer of demolition robots and Kinshofer with its subsidiaries is a world leader in crane and excavator attachments, while Hultdins and Indexator have strong positions in the market for forest machines. Due to the exposure to construction and given that the products tend to be very expensive and represent Capex for the customers, this segment is much more cyclical than Dental. In 2025 the sales split was as follows:

• Attachments for excavators and cranes: 59%

• Demolition machines: 24%

• Other niche machinery: 17%

Systems Solutions comprises B2B companies which are specialized in their respective niches and excel themselves for high product quality. They are often leaders in their market niches. It is split into five divisions with the following sales split:

• Transportation products: 25%

• Contract manufacturing: 23%

• Environmental technology: 23%

• Special products: 15%

• Infrastructure products: 14%

1.3. The Lifco Playbook

The playbook is a combination of principles that may look unspectacular in isolation, but become powerful in the aggregate: acquiring profitable niche businesses, owning them for the long term, avoiding integration hysteria, maintaining a strong focus on earnings, pushing accountability to the local level, and deliberately keeping central functions lean.

The strength of the model comes from the interaction of those elements. Small niche businesses are often harder to buy if the acquirer is integration-hungry, bureaucratic, or driven by short-term thinking. Long-term ownership is more attractive to founders and family businesses if operational autonomy is credibly preserved. Decentralization only works if headquarters is disciplined enough not to interfere everywhere. And high reinvestment returns can only be achieved if purchase prices, cultural fit, and margin quality all line up.

That last point in particular is often underestimated. Serial acquirers are sometimes portrayed as if they merely stack one company on top of another. That is a trivial and usually misleading description. A good model is defined by the ability to remain selective enough that each new building block does not dilute the quality of the group. Lifco did not become great because it bought indiscriminately, but because it applied a disciplined filter and maintained valuation discipline – which in turn is decisive for returns on capital.

Another key element is the definition of success. In traditional industrial companies, operating excellence is often pursued through central processes, global platforms, synergy programs, or group-wide standardization. The Lifco model instead leans more heavily on local excellence, accountability for results, and the idea that small, specialized businesses usually know better what to do in their niches than a distant headquarters does.

There is also an almost cultural minimalism to it. If serial acquirers are serious about decentralization, they need to resist the temptation to turn every newly acquired unit into a head-office project. That is easier said than done. In practice, many acquisitions fail because buyers talk about autonomy yet quickly increase reporting, processes, and personnel interventions from above. A functioning model therefore requires not only principles on paper, but people who actually live them.

For Lifco, profit is a prerequisite for long-term growth.

A profitable operation has the strength to deliver high quality products and services to its customers. It will also be a good workplace for its employees. A profitable operation can afford to invest in product development, distribution and services. Thus it can meet both customers’ and employees’ needs also longer-term.

A strong cost focus is required to stay competitive and to be profitable long-term. Lifco aims to minimize costs that are not related to manufacturing, sales or product development. Experience says that this approach both lowers costs and creates a greater employee commitment.

The cost focus is clearly aimed at headquarters. Few would have guessed that Lifco’s head office sits in an unremarkable building in the small town of Enkoping, just outside Stockholm, with not even a clearly visible company logo on it.

Lifco is a long-term owner, hence basically never sells a company. Since 2006, only 3 companies were disposed.

One of the key success factors for Lifco is the decentralized corporate governance, implemented by Fredrik Karlsson after he stepped in as CEO. All decisions are taken at local management level and Lifco does not force synergies or integration (aside from financial integration of course). Lifco strives for incremental, stable and continuous profit growth. The culture is based on simplicity, common sense and minimized bureaucracy; concepts implemented by Fredrik Karlsson.

Lifco’s culture can be boiled down to a simple idea: decentralization only works if it is paired with a relentless focus on profit and cash flow. In practice, that means putting the right managers in charge, giving them responsibility, and judging them by results. Pricing is continuously optimized, bureaucracy is kept to a minimum, and non-core functions are outsourced so subsidiaries can focus on the parts of the business that actually create value. Cash flow remains central even during growth phases, and the whole system is built around a long-term perspective, with investment directed toward activities that can support durable profit growth.

Fredrik Karlsson could have retired after leaving Lifco at the age of 57 with a fortune behind him and enjoyed life somewhere sunny. He did not. Instead, only a few months later, he founded his own acquisition vehicle, Röko AB.

2. Röko: A Refined Lifco in the Making

In 2019, Fredrik Karlsson was pushed out of his role as Lifco CEO that had paid him roughly $6 million a year. By 2025, he had already built a new multi-billion-dollar rival through acquisitions. Karlsson had spent two decades as CEO of Lifco, where he helped create enormous shareholder value by following a simple but powerful playbook: acquire small, profitable niche businesses, leave them alone operationally, hold them indefinitely. It was an aggressive but disciplined model built on sustainable growth, decentralized operations, and relentless capital allocation. After his departure, following a compensation dispute with billionaire owner Carl Bennet, Karlsson wasted no time. He teamed up with the former CEO of Nordstjernan, raised around $300 million from founders and investors within two weeks, and launched Röko. Initial shareholders were promised to IPO Röko within 10 years at the latest.

The strategy was familiar, but the ambition was just as large. Röko set out to buy small, profitable European businesses with more than 15% EBITDA margins and revenues in the €2-10 million range. Managers were given considerable freedom, but they were also expected to deliver. Cash flows from stable businesses were meant to fund further acquisitions, turning the whole structure into a compounding machine. Röko also positioned itself differently from traditional private equity. Instead of demanding a rapid profit uplift and a quick exit, it offered sellers long-term ownership, capital, independence, and no forced integration. The result was rapid progress:

• 39 acquisitions Inception-to-Date

• Scaling Röko to ~$140 million in EBITA within less than 7 years

• Reaching EBITA margins of ~18-20%, a level that Lifco never reached on a group level under Fredrik Karlsson at the helm at Lifco

• Eventually followed by the IPO in March 2025 that valued Röko at ~$3 billion

Röko’s IPO in March 2025 was a long-anticipated liquidity event for early shareholders. The shares were priced at SEK 2,048, implying an equity value of roughly SEK 30bn (~$3 billion), and the transaction was fully secondary, with Röko receiving no proceeds. Since inception, the company had raised equity from 144 shareholders (according to the 2024 annual report), and 69 existing shareholders sold shares in the offering. At the same time, co-founders Fredrik Karlsson and Tomas Billing, together with deputy CEO Johan Bladh (more about him later), retained their full stakes and accepted 1,080-day lock-ups, i.e. until March 2028.

Roughly 95% of the shares in the offering were acquired by cornerstone investors, including, among others:

• Bernt Ivarsson is the founder and owner of Profura, a privately owned Swedish investment group focused on long-term ownership across industry, development, and real estate.

• Blacksheep Master Fund is an Ireland-based investment fund managed by Blacksheep Fund Management.

• Capital Group is a privately owned global active asset manager with more than 90 years of history and over $3.2 trillion in assets under management.

• AEMG Capital Förvaltnings is a Swedish investment vehicle led by Adam Gerge.

• ANICOM is a Brussels-based holding and investment vehicle registered in Belgium as a qualified, institutional or professional investor.

• REQ is an independent, privately owned investment firm based in Oslo and Stockholm that runs long-only equity strategies focused on acquisition-driven compounders.

• Woodlock Family Capital is a U.S. private investment fund run by Christopher Mayer.

One noteworthy name among Röko’s cornerstone investors is Woodlock Family Capital, Chris Mayer’s investment firm. Mayer is also a meaningful shareholder and board member of Teqnion, which makes his involvement here particularly notable in the context of Nordic serial acquirers. After reading my Teqnion deep dive (Link), he told me he considered it the best piece he had seen on the company — a flattering comment, and one reason I think the overlap in shareholder base between these businesses is worth paying attention to.

Please feel free to check it out here:

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Back to Röko: The core investment case is straightforward: Fredrik Karlsson took the same basic playbook that had worked so well at Lifco and set out to prove that it did not depend on Lifco itself. With more than 20 years of experience as Lifco-CEO, he implemented only the best principles to design Röko in a way that is the better Lifco.

Although Röko itself has only been operating for roughly seven years now, its management team brings deep experience in operational improvement and a demonstrated ability to create shareholder value. What sets it apart is the unusual blend of seasoned operators and younger, high-performing executives. That’s a combination that few newly established compounders can match.

While Röko clearly borrows from the Lifco playbook, it does not replicate it one-to-one. The differences become most visible in Röko’s target selection and in the way it structures acquisitions.

1. While Lifco has historically focused on mature, niche-leading B2B businesses with long operating histories, Röko allocates part of its capital to more consumer-facing businesses with higher growth potential (B2C). The core model still resembles a classic decentralized compounder, but with somewhat greater openness to founder-led growth businesses and shorter track records. That already sets Röko apart from Lifco’s more conservative acquisition filter, which has traditionally favored older businesses with many years of demonstrated profitability. Röko’s portfolio includes several businesses that fit this broader mandate, including, for instance, a chain of beauty clinics and shops focused on skincare (Beth’s Beauty), a craft beer brewery (Oppigårds Bryggeri) or leading distributors of golf equipment (Golf Experten and Golfshopen). The portfolio mix suggests that Röko has been somewhat more flexible and arguably more aggressive in getting its capital deployment engine up and running during the first years after its foundation.

2. This broader acquisition remit is also reflected in Röko’s ownership model. Whereas Lifco often acquires businesses outright, Röko frequently takes majority stakes while retaining the founder and sometimes other key managers as minority shareholders in the acquired company. These non-controlling interests vary by subsidiary, but the structure is recurring: Röko secures control, while management remains financially invested in the business. In many cases, these minority stakes are paired with call and put options that give Röko the right to acquire the remaining shares and the sellers the right to exit at a later date, typically based on trailing earnings multiples.

2.1. Why Röko Exists

A few months after Fredrik Karlsson was fired in early 2019, he teamed up with Tomas Billing, then CEO of Nordstjernan, a Swedish foundation-owned investment firm. Backed by a clear vision, a strong reputation, and a deep network, the pair raised SEK 2.7 billion in just three weeks — far above their initial target of SEK 1 billion.

Fredrik Karlsson and Tomas Billing got to know one another learning Russian as military interpreters and at Stockholm School of Economics. Their first collaboration began in 2015, when they acquired Hjertmans. Hjertmans was the pre-Röko proving ground for Karlsson and Billing — a privately held marine-accessories roll up serial acquirer they owned together before launching Röko, and apparently an early test case for working together as long-term owners.

Allegedly, Tomas Billing had already approached Fredrik Karlsson in 2018 with the idea of building a business together. At the time, however, Karlsson had no intention of leaving Lifco as CEO and therefore declined. Only after his departure from Lifco in February 2019, following a compensation disagreement with major shareholder Carl Bennet, did he apparently change his mind. Röko was founded shortly thereafter.

Among the early backers was Peter Sterky, CEO of Trift Capital, who later joined Fredrik Karlsson and Tomas Billing on the board. Peter Sterky was former CFO and COO of Spotify, he brought financial credibility and capital-market experience to the venture.

In its founding year alone, Röko closed its first platform acquisition and completed a total of five platform acquisitions in Sweden and Norway, plus one add-on acquisition.

The pace continued in 2020, when Röko completed four more acquisitions, including its first deals in Denmark and the United Kingdom.

Expansion accelerated again in 2021: the company completed seven platform acquisitions and two add-on acquisitions, further strengthened its presence in Denmark and the UK, and also made its first acquisition in the Netherlands. That same year, the board was expanded with Lilian Fossum Biner and Stina Andersson.

2022 marked the transition into a new phase of maturity. Röko published its first full annual report for 2021 and began issuing regular interim reports. Operationally, the company remained aggressive, adding six further platform acquisitions. At the same time, investors unanimously approved a 40% increase in their original capital commitments to support the continuation of the acquisition strategy.

Röko remained on the offensive in 2023 as well. The company carried out a SEK 708 million capital increase, Angela Langemar Olsson joined the board following Stina Andersson’s departure, and operationally Röko added two more platform acquisitions and one add-on acquisition. This also marked the first acquisition outside Europe, namely in Australia.

In 2024, the focus shifted more toward financing. Röko refinanced itself with three banks while also completing four further platform acquisitions and one add-on acquisition, including its first acquisitions in Germany, Belgium, and France. Toward year-end, the company informed shareholders that it intended to prepare a listing of the B shares on Nasdaq Stockholm.

2025 was then the logical next step in that evolution. Röko extended its existing credit agreements with all banks, added another bank to the financing group, and formally announced its intention to list the B shares on Nasdaq Stockholm. The listing was completed in March 2025. After that came two platform acquisitions and one add-on acquisition, including the company’s first acquisition in Italy.

In 2026, Röko has completed three further platform acquisitions year-to-date.

The development shows just how systematically Röko has executed since inception: first, capital and organizational infrastructure were built in very short order; then acquisition pace was ramped up; then the capital base was broadened and financing professionalized; and finally the path to the capital markets was prepared. The timeline therefore shows not just strong growth, but also how deliberately Röko was shaped from a private acquisition vehicle into a public-market-ready platform.

In less than seven years, Fredrik Karlsson and his team have built a business generating roughly $140 million of EBITA – a level he did not reach at Lifco until 2016, or 18 years after taking over as CEO there.

The fact that he moved much faster this time is mainly due to two things:

• At Lifco, he initially had to deal with an operational turnaround and first had to make the Dental business meaningfully more profitable before he could even think about inorganic growth.

• Fredrik Karlsson also started from a completely different position this time. When he took over Lifco in 1998, he first had to restructure a much narrower company, sharpen its focus, and develop the current model in the first place. Röko, by contrast, was built from day one as a compounder: with clearly defined acquisition criteria, a broad sector-agnostic search field, substantial starting capital, established networks, and a management team that no longer needed to experiment but could build on a playbook tested over decades. Röko also did not need to clean up any legacy issues or search for its identity. It started with the culture, processes, and capital-allocation logic that Lifco itself took years to develop. That is why Röko is not merely a new acquisition vehicle, but in a way the condensed second version of a model whose first expression was Lifco.

2.2. Built to Compound

Fredrik Karlsson’s two decades at Lifco seem to have taught him one particularly important lesson: the biggest limitation in an acquisition model is often self-imposed. Lifco started out as a focused dental distribution business (when Fredrik Karlsson took over as CEO in 1998), but much of the value creation that followed did not come from staying within that narrow vertical. It came from expanding beyond it.

Between 2006 and 2025, Dental – Lifco’s historical core – grew its EBITA by a factor of 13.0x with a CAGR of 14.5% Systems Solutions, by contrast, the sector-agnostic segment, grew its profits roughly 32.9x over the same period, compounding at 20.2%.

That gap is telling. It suggests that the real power of the Lifco model was never the vertical itself, but the freedom to allocate capital wherever the combination of quality, price, and management was most attractive.

Röko is, in many ways, built around that insight. Rather than limiting itself to a single industry, it was designed from day one as a broader compounding vehicle – one able to invest across sectors, geographies, and business models, as long as the underlying economics and the people running the business are right.

Anyone who confines themselves from the outset to a narrow vertical not only shrinks the opportunity set, but sooner or later also runs the risk of having to compromise for lack of alternatives. At some point, growth becomes an end in itself, and acquisitions are made not because quality is compelling, but because the model constantly demands new deals. Röko is consciously trying to avoid that logic. The company does not want to have to buy. It wants to be able to choose.

„… it also increases the quality because you have a greater choice and are no longer forced to buy bad businesses.”
(Fredrik Karlsson, InPractice interview, 21.04.2023)

That leads to a clear strategic logic for Röko. If the best returns are generated where one does not artificially restrict oneself, then a broad mandate is not a lack of focus but an advantage. It expands the pool of potential targets, improves the negotiating position, and reduces the pressure to become active in overheated submarkets. Röko can therefore direct capital to wherever valuation, management quality, and business model are currently most compelling. That freedom is itself a competitive advantage.

Röko, by contrast, is not dependent on any single end market staying healthy. Because it can allocate capital across industries, geographies, and business models, weakness in one pocket of the economy does not automatically paralyze the whole platform. That does not eliminate cyclicality, but it does reduce the risk of being trapped inside one troubled vertical just when discipline matters most.

By looking across industries and geographies, Röko not only widens its opportunity set, but also reduces the risk of overpaying in overheated niches. A broader search field means a much larger pool of potential targets and, just as importantly, less pressure to deploy capital into mediocre businesses simply because they happen to sit inside a legacy vertical.

“If you are sector-focused and the sector is not huge, you run into problems if the sector suddenly gets popular because multiples become too high and you cannot acquire. You will be forced to buy bad companies because there are not enough good deals around.”
(Fredrik Karlsson, InPractice interview, 21.04.2023)

Röko also differs from many comparable platforms in that it invests in both B2B and selected B2C businesses. That, too, fits a model that prefers economic commonalities over sector-specific labels. The range of holdings makes this tangible: from Rocket Medical, a British manufacturer of single-use medical devices, to Ekstralys, a Nordic specialist in vehicle lighting and accessories, to Golf Experten, a leading distributor of golf equipment in Denmark, and Oppigards Bryggeri, a well-known Swedish craft brewery.

At first glance, those businesses have little in common. On a second look, Röko is searching for the same thing in all of them: robust market positions, healthy margins, good cash generation, and capable management teams.

For the model to work, however, it is not enough merely to identify good businesses. A decentralized acquirer also needs managers who can handle autonomy. Röko pushes responsibility down to the operating units, but in return it expects a clear orientation toward results. That sounds simple, but in practice it is demanding. Not every entrepreneur wants to become part of such a system, and not every company is culturally suited to a platform built around accountability, performance, and discipline. That hurdle is probably part of the protection mechanism. Röko is not just selecting companies; it is also selecting the people it wants to work with for the long term.

It also matters that sellers often remain invested and keep minority stakes, typically through put/call structures that will be discussed in more detail later. The story therefore does not end at signing. Former owners remain economically on board and continue to have a direct interest in how their business develops. That fits a model built not on rapid integration or short-term exit logic, but on continuity and long-term value creation.

“The acquisition model is based on only buying smaller family businesses that are asset-light with strong market positions, and always keeping the management as shareholders. At Lifco, we more often acquired 100%.The companies we bought in my later years at Lifco that had minorities performed very well. It has worked. And at Röko, we have chosen to focus on that model exclusively.”
(Fredrik Karlsson, acquirers.com interview, 07.06.2022)

Röko sees itself more as a capital-allocation platform with as few self-imposed limits as possible. That is exactly what makes the model so interesting. It tries to keep the search field as open as possible without compromising on quality. If Lifco showed that a broad, not overly tightly defined mandate can create enormous value, then Röko is ultimately an attempt to make that insight a founding principle from day one.

Röko is trying to build an environment in which strong companies can keep doing what made them successful in the first place. The businesses remain operationally independent, there is no heavy corporate overlay, and the center stays intentionally lean. Röko insists on financial discipline: regular reporting, and centralized control over excess liquidity, i.e. sending excess liquidity to the HQ so they can buy additional businesses.

Beyond that, the default is autonomy, not interference. This is not decentralization as ideology, but as a performance tool. Karlsson’s basic premise seems to be that great businesses are usually built by motivated founders and capable managers, not by head office playbooks. That is why sellers often keep a meaningful minority stake and why Röko works hard to preserve entrepreneurial continuity after an acquisition. Even succession is approached through that lens. If a founder wants to step back, Röko prefers to back people from within the business where possible; if not, it looks for leaders who can earn trust rather than simply import industry credentials. In that sense, Röko offers something very different from the classic private-equity model. Instead of a three-year value-extraction plan, it offers permanence, decentralization, and a long-term home for businesses that do not want to be “improved” by being standardized.

The blueprint is clear: Röko borrows heavily from Lifco, but not without its own twists. The next question is what that means in practice — how the model actually works, what kinds of businesses Röko buys, and whether the economics are as attractive as the narrative suggests. That is exactly what we will unpack in Part 2.

There is still a small chance another buyer steps in and emerges with a higher bid. On the other side, the current bid might not be successful if the minimum acceptance threshold of 80% is not reached, as the consortium is lowballing long-term investors with a shamelessly low bid.

It is a disgrace to confidence in the capital markets when an opportunistic offer that exploits short-term price weakness allows a company to be stolen from minority shareholders.

Given this situation, an 80-page report would now be overkill in parts. What remains extremely relevant, however, is the business model. It’s always fun to analyze great and extremely successful companies. It trains our sense of pattern recognition.

If you want to understand InPost, you need to understand why a dense network of parcel lockers (Automated Parcel Machines, or APMs) creates structural advantages for consumers, merchants, and InPost itself which allowed a revenue CAGR of 56% from 2017-2024 with ROIIC exceeding 50% (!) in Poland — and why that same logic can repeat outside Poland.

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1. The core product: parcel lockers vs. doorstep delivery

InPost is a European last-mile logistics company whose network is built around out-of-home (OOH) delivery, as opposed to traditional to-door delivery to the customer’s home. Parcels are delivered either to parcel lockers (APMs) or to pick-up/drop-off points (PUDOs, such as kiosks, shops, or post offices). APMs are modular locker systems placed at high-traffic locations — supermarkets, commuting routes, residential complexes — typically outdoors and available 24/7. Customers collect parcels by scanning a QR code in the InPost app ecosystem. Returns are often label-less: the customer drops the item into an assigned compartment and InPost takes it from there.

The graphic below summarizes InPost’s end-to-end parcel flow—from checkout to pickup—highlighting where the APM network sits in the value chain.

This seemingly small shift — the customers handling the last mile delivery themselves — changes the unit economics of delivery in a fundamental way. In a classic doorstep model, a driver typically delivers roughly 100 parcels per day (with only a few parcels per stop). With APM delivery, one stop at a well-utilized locker can mean unloading 50-150 parcels at once. With 7–10 APM stops per day, that can translate into up to ~1,000 parcels per driver per day. At sufficient utilization, this is where the structural cost advantage for a carrier like InPost comes from, as that cost advantage shows up as meaningfully lower shipping costs (paid by either the merchant or the end customer), which is the core reason APM delivery is so attractive.

A quick add-on: a PUDO driver can deliver ~500 parcels per day, because PUDOs don’t have the same capacity as APMs (in Poland, an APM averages up to ~145 compartments/lockers). In a PUDO model, the carrier saves on rent but pays a fee to the shop that operates the PUDO point. From the customer’s perspective, APMs tend to be more convenient than PUDOs because PUDOs have opening hours and the pick-up experience is usually less stringent and efficient than at an APM, whereas APMs are usually open 24/7 and do have a much shorter dwell time. In a PUDO, the customer might end up waiting in a queue for a few minutes and then waits again until the employee finds the package among 100 other packages. Unlike PUDOs, APMs deliver a uniform service level—so the customer experience is predictable—whereas PUDOs are only as good as the individual location. For that reason, from a customer experience and financial standpoint perspective, InPost prioritizes APM rollout much more than PUDO expansion.

You can think of the model as infrastructure. As a first mover, InPost secures the best locations for APM placement and then tries to drive high utilization across the network through service quality — which in turn benefits customers because it enables more locations. This flywheel tends to favor the first mover versus late entrants that start building an APM network years later and have to compete against an established market leader (where the best spots might be taken already by the first mover, i.e. InPost in Poland).

But it’s not a pure infrastructure play. The locker itself is just the hardware; the moat depends on service levels, reliability, customer support, seamless app UX, and—crucially—merchant acceptance. New entrants often place APMs right next to InPost lockers, yet run materially lower utilization, because customers and merchants default to the network they trust and that “just works” day in, day out.

According to the following chart, InPost is THE preferred choice in Poland.

To be competitive, a network needs sufficient density to be attractive to the entire ecosystem: customers need lockers within easy walking distance, merchants need broad population coverage, and the operator needs to run the network profitably.

That creates the classic chicken-and-egg problem. A new independent entrant needs a network to win volumes and fill its lockers — but to win volumes, it first needs a network. Ramping up can take years, costs a lot of money (capex), and comes with accumulated losses from underutilization along the way.

2. Why APMs are a “win-win-win-win”

The APM model isn’t just cheaper to operate; it’s also more attractive for multiple stakeholders at the same time. That helps explain why adoption in Poland is so high and why InPost is gaining traction quickly in other countries.

2.1 Benefits for customers

For many customers, OOH is not a second-best option; it’s the preferred one. Parcel lockers are accessible around the clock, customers don’t have to wait at home for delivery windows (sometimes for multiple parcels from multiple carriers at different times), and pick-up can be integrated into existing routines (grocery shopping, commuting, fueling up, and so on). Failed deliveries are essentially eliminated, since there’s almost always capacity in the selected locker or at a nearby location. Theft risk is lower than leaving parcels at the doorstep, and pick-up often takes only a few seconds. There is also a habit and network effect: if you use the same lockers every day and the app is already on your phone, you have little incentive to switch systems for individual parcels.

2.2 Benefits for merchants

Merchants benefit in three ways: cost, reliability, and conversion. APM delivery typically costs about 20–30% less than doorstep delivery. At the same time, indirect costs decline because there are fewer failed deliveries, fewer re-delivery attempts, less damage, and fewer customer complaints. What matters even more (and is often underestimated): in markets with high InPost penetration, offering “InPost Locker” at checkout can noticeably increase conversion — some customers simply won’t order if they don’t see their preferred delivery option (in Germany, I think twice before ordering when I see GLS is handling delivery). This makes it unattractive for merchants to switch off InPost, even if a competitor temporarily tries to gain share with aggressive pricing. If you switch off InPost, your conversion might drop significantly.

2.3 Benefits for InPost

For InPost, the lever is productivity. More parcels per driver and per stop create operating leverage on the biggest cost buckets: labor and transportation. When the network reaches scale like in Poland, it allows InPost to earn an eyewatering ~50% EBITDA margin. Compare that to the 8.4% EBITDA margin DHL generated in the German Post & Parcel segment.

APMs are also modular. If demand grows, capacity can often be added at existing sites (assuming there is physical space) without having to secure an entirely new location.

2.4 Benefits for location partners

For location partners (supermarkets, transport companies, residential complexes), there’s an additional incentive: incremental rental income and higher foot traffic. Hosting the highest-utilization locker is the most attractive — a mechanism that tends to reinforce the leading platform.

3. The economics: why the model can support unusually high margins

Last-mile logistics is usually a low-margin business. Many traditional carriers end up somewhere in the 5–15% EBITDA margin range over time, even in mature markets with high market shares. InPost is an exception in Poland. The core driver is scale: a multi-layer network of depots, hubs, IT, fleet, and people comes with high fixed costs. Whoever wins volume and density can push the marginal cost per additional parcel down dramatically.

InPost can realize that scale effect faster than doorstep networks because APM delivery massively increases drop density. As a result, InPost can offer APM delivery 20–30% cheaper than incumbents’ doorstep delivery — and still remain above-average profitable. In its Polish core market, InPost already delivers more than 750 million parcels per year (over 600 million via APMs, with the rest to-door). That equates to roughly a ~50% market share: every second parcel in Poland is delivered by InPost. This scale enables an AEBITDA margin of ~50% in Poland (pre-lease) — a level that is rare in logistics.

In Poland, the company generated roughly ~PLN 2 billion of free cash flow (after leases) in 2025 on revenue of ~PLN 7 billion, implying an FCF margin of ~29%. If InPost were to stop investing in growth capex in Poland (with growth slowing), it could likely generate ~PLN 3 billion of FCF in 2026 almost immediately.

The twist is that efficiency gains are partly reinvested into lower prices and better service, which further increases penetration and accelerates the flywheel. We know “scale economies shared” from Amazon, Costco, and others — and we know the impact it can have on customer lifetime value. InPost lowered prices in Poland from ~PLN 9.1 per parcel (2018) to ~PLN 8.2 per parcel (2022), before inflation required an adjustment.

The two charts below make InPost’s operating leverage very tangible.

Compared to doorstep delivery (2Door), APM delivery comes with a lower price per parcel, but the direct cost per parcel drops even more. That’s the key: the last mile becomes a high-density “bulk drop,” so one stop can absorb dozens (or hundreds) of parcels instead of a handful of addresses.

In 2Door, revenue per parcel is higher, but direct costs remain relatively elevated because the driver’s time and mileage scale with the number of individual drop-offs. With APMs, revenue per parcel is lower, yet direct costs per parcel are structurally lower thanks to much higher drop density (more parcels per stop, fewer stops per route, fewer failed deliveries and re-deliveries). The result is a materially higher gross margin per parcel in APMs and that margin expands as utilization rises.

4. Industry background & company history

Europe’s parcel market has been growing structurally for years, driven by e-commerce, higher delivery frequency, and a desire for faster, more reliable delivery options. At the same time, the “last mile” is the most expensive and operationally challenging part of the chain. Doorstep deliveries are labor-intensive, often fail on the first attempt, and create re-delivery costs, returns handling, and a meaningful CO2 footprint. That creates a clear economic incentive to bundle deliveries and standardize processes. This is exactly where OOH — especially APMs and PUDOs — come in: they make delivery more predictable, reduce cost per parcel, and improve the customer experience.

InPost is one of the pioneers of OOH delivery in Europe. The company built a dense parcel locker network early in Poland (first APM in 2009) and created an alternative delivery ecosystem with measurable benefits for both merchants and consumers. A key growth catalyst was tight integration with the Polish e-commerce ecosystem — especially high volumes linked to Allegro. The model worked particularly well in Poland because InPost achieved network effects early: as density increases, the system becomes more attractive for consumers (a locker closer by, higher availability), which attracts merchants and platforms; higher volumes improve utilization and lower unit costs, enabling further growth. It’s a flywheel in action.

The chart below shows the development of InPost’s OOH locations in Poland. By the end of 2025, InPost had installed 28,165 APMs (installed capacity of 6.7 million compartments, or ~143 compartments per APM on average).

This Polish success story eventually moved InPost into the next phase: international expansion. Poland provided the proof of concept and the “cash engine,” while expansion into markets like France and the UK is meant to build a second leg of growth. The starting point is similar (high doorstep delivery costs, fragmented logistics landscapes, rising e-commerce penetration), but market dynamics differ: more competition, different consumer habits, different carrier structures — and therefore a longer ramp until density and utilization eventually reach Poland-like economics.

InPost already listed on the Warsaw stock exchange in 2015 to fund an initial internationalization push. But that push was too aggressive and the balance sheet became strained (also because there was no profitable core business yet to cross-fund expansion), which led to a take-private by private equity investor Advent in 2017 with a huge discount to the IPO price. Expansion plans were cut back significantly and later relaunched in a much more focused and disciplined way. Markets are “ready” for OOH today: parcel volumes are much higher than a decade ago and consumer acceptance of OOH solutions has increased.

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5. Poland: Allegro as a growth turbo — and a stock risk

In Poland’s e-commerce ecosystem, Allegro plays a key role (think of it as “Poland’s Amazon”). After a major logistics contract in 2014, Allegro became a volume engine for InPost and the two businesses grew in tandem.

The mutual dependence is meaningful, but it has been reduced by InPost’s internationalization and a broader merchant base.

To understand the relationship, it helps to split it into two channels.

• First, Allegro’s membership program “Smart!” (similar to Amazon Prime), where Allegro pays delivery costs for qualifying orders directly to the carrier (InPost). It’s covered by a framework between Allegro and InPost. Allegro guarantees a certain parcel volume to be channeled through the InPost network, while Allegro gets cheaper prices (vs. other merchants), while the prices are adjusted every year.

• Second, “regular” Allegro orders outside Smart!, where merchants or customers pay for delivery and InPost often appears as an option at checkout — here, Allegro has less direct control over the carrier choice.

These symbiotic relationships are a double-edged sword. They can ignite a flywheel, but they also create concentration risk. That was one of the core reasons the stock struggled after the IPO. Allegro announced plans to build its own locker network, which the market interpreted as a potential attack on InPost’s moat. The result was a major de-rating — less because operations collapsed, and more because investors suddenly questioned whether the model was defensible and replicable. The stock experienced an ~80% drawdown.

From mid-2022 through the end of 2024, the share price recovered and returned to IPO levels as InPost executed fundamentally. But toward the end of 2024, the narrative turned again because Allegro began scaling its own APM network more aggressively. This pushed the stock back below €8 by the end of 2025.

Allegro doesn’t face the same chicken-and-egg problem (as for a new entrant) because it is not an independent logistics provider; it can try to steer existing volume into its own logistics. To build out a network faster, Allegro partnered with competitors of InPost (DHL, DPD and Orlen) and integrated their APMs into its platform (somewhat comparable to Amazon Delivery).

As of Q3 2025, Allegro said it had surpassed 33k “APMs” in Poland—roughly 6k of which were Allegro-owned, with the rest coming from partners—plus ~37k PUDOs. On the surface, that sounds like Allegro built, in just 2–3 years, a network that took InPost nearly two decades to assemble.

But the headline counts are misleading. The raw number of “APMs” ignores a key dimension of network capacity: how many compartments each APM actually has. Allegro doesn’t disclose compartments per locker (maybe for exactly that reason…), but a quick Google search for “DPD locker Poland” gives you plenty of examples where the APM is a small unit with fewer than ~20 compartments—versus roughly ~143 compartments per APM on average for InPost. In other words, counting “APMs” without adjusting for size can massively overstate the real, usable capacity of the network.

However, while dependency on Allegro was very high in early 2021, the relationship today looks more balanced. InPost has become so dominant in Poland that it is hard for Allegro to shift meaningful volume without hurting the checkout experience (because customers want InPost as a delivery option).

In 2020, InPost generated 28% of revenue from Allegro Smart!, plus additional volumes flowing through Allegro where end customers pay for delivery (where Allegro has less influence on the carrier choice).

InPost has reduced that dependence: Revenue generated directly through Smart! had declined to 18% by the end of 2024, and internationally InPost grew with platforms such as Vinted, which have become key customers (Vinted represented ~23% of revenue in 2024). Within Poland, Allegro’s revenue share is still ~30%, relatively stable over the years. But from a group perspective, Allegro became less meaningful.

At an investor conference that I attended in September 2025, it was said that InPost handles 60% of Allegro’s volume (with 98% next-day delivery). Conversely, Allegro accounts for only 40% of InPost’s volume at the group level. As diversification increases, negotiating power tends to shift toward InPost.

6. Poland: what risks became visible — and why the market got nervous

The Polish success story is impressive: InPost now delivers roughly half of all parcels in the country, has extremely dense APM coverage (a large share of the population lives within walking distance of a locker), and a very high share in the OOH channel. Poland is a European leader in OOH. Still, three factors weighed on the narrative in recent years.

First, the fear of significant volume losses by large customers. Allegro’s announcement that it would build its own lockers aggressively was the immediate trigger for the post-IPO sell-off. Even if such a move is operationally difficult, the mere perception of potential volume loss is enough to compress multiples.

Second, the question of whether the APM moat is replicable. In Poland, there have been multiple attempts to attack InPost. The state-controlled energy group Orlen built its own locker network and offered prices far below InPost, but according to market commentary struggled with very low utilization — a signal that price alone does not reliably move customers and merchants. Even large international players (for example from the Alibaba / AliExpress ecosystem) have dialed back ambitions and restructured projects.

Third, typical macro and market-mechanics effects. The COVID parcel boom normalized, and the IPO valuation had been expensive. In those phases, markets tend to overreact — especially when story risk (Allegro) is highly visible.

7. International expansion: rolling out the Polish playbook in Western Europe

With Poland as a cash cow, InPost has resumed expansion into Western Europe — this time more focused and disciplined than earlier, less successful attempts in the 2010s. The logic is straightforward: in markets historically dominated by doorstep delivery (the UK) or PUDOs (France), a dense and well-run APM network can drive a similar shift as in Poland. A high PUDO share already suggests that customers are willing to use OOH solutions, making APM-adoption even more likely.

Internationalization expands InPost’s total addressable market materially. Today, InPost operates (besides Poland) in

• the UK & Ireland,

• Italy,

• France,

• Spain,

• Belgium/Luxembourg,

• the Netherlands,

• Portugal.

The latter are grouped in the “Eurozone” segment, where France the core market, followed by Italy, which has been growing very rapidly from a small base. Because InPost is still in a much earlier development stage outside Poland, market shares are far lower there at roughly ~5%, which leaves substantial room for growth, as these international markets combined are 7x larger than Poland in terms of annual parcel volume.

7.1 France

The key move in France was the acquisition of Mondial Relay in 2021. At the time, Mondial Relay was heavily PUDO-based (with a meaningful C2C component driven by platforms such as Vinted) and had little proprietary APM infrastructure. Since then, InPost has invested in an APM network and in operational performance. A simple cost logic explains why that can create value: PUDOs require per-parcel compensation to the shop operator, while APM delivery requires capex and a site return but is often cheaper per parcel. Even small savings per parcel can meaningfully shift margins in a high-volume business. At the same time, InPost is trying to establish next-day delivery as a differentiator — an area that is traditionally expensive in France and requires operational investment to scale.

In the Eurozone segment, InPost has already reached 19,310 APMs. During 2025, InPost deployed 6,867 APMs across these countries. That equals ~19 APMs being installed EVERY day. This demonstrates the underlying momentum in locker adoption across Western Europe.

Early data points suggest customers adopt APMs quickly. A significant portion of Mondial Relay volumes is already being delivered via APMs, while the PUDO network remains an anchor for density. Competitors exist (for example, La Poste / DPD), but they face the same hurdles: access to great locations, utilization, service quality, and the question of whether OOH expansion cannibalizes profitable doorstep delivery.

Cannibalization is a real issue for incumbents. If you already have a high market share in 2Door delivery (for example DHL in Germany), you are forced to participate in an APM rollout when new competitors try to gain share — because you can’t afford to leave the channel to others. Incumbents have to invest heavily (high capex) without necessarily winning meaningful incremental volume.

In the Eurozone, InPost grew ~30% year over year in 9M 2025, with an AEBITDA margin of ~15%.

7.2 UK: entering through returns and C2C, then moving toward B2C

In the UK, InPost took a different route. Market entry began organically in 2017 via returns. That is smart, because the returns carrier is often chosen after the purchase and depends less on checkout integration — ideal for building brand awareness and driving network usage. In parallel, the C2C business grew (among other things driven by second-hand platforms such as Vinted). As utilization increased, unit economics improved; at times, utilization of the APM fleet even ran above 100%, which signals that demand and capacity are tightly linked in the build-out phase. In fairness, InPost also dealt with long dwell times: if customers leave parcels sitting in lockers for too long, utilization can hit 100% without the corresponding throughput behind it and that negatively affects growth and profitabtility (and hence ROIIC).

For a long time, a key bottleneck was backend logistics because partners could cap volumes. InPost initially operated only the APMs without the broader logistics infrastructure (depots, sorting hubs, couriers). This was addressed through the connection to, and later acquisition of, Menzies — a network with dense routes from the news-trade business that fits InPost’s needs surprisingly well. This gave InPost more control over capacity and service quality. The next step is B2C, which requires large-scale sorting and distribution centers — meaning capex — but that is also where the biggest value creation sits, because B2C volumes can lift utilization further.

InPost is still at a very early stage of market penetration in the UK, and it is likely that volumes will grow as APMs are installed and a larger share of the population is reached.

In 2025, InPost took another step to win volume and acquired Yodel (a 2Door carrier). This pressures margins in the short term, but comes with an instant 5% increase in market share and the possibility to scale margins through operational improvements. You can see this clearly in the chart below: starting in Q2 2025, revenue jumps while AEBITDA is burdened. The graphalso shows how quickly AEBITDA can be generated and scaled once volumes come in. In Q4 2024 (seasonally the strongest quarter due to black beek and christmas), InPost already achieved an AEBITDA margin of ~18% versus ~3% in Q4 2023.

8. Financials / Valuation

Financially, InPost is a major success: a highly profitable, mature but still growing core business in Poland, plus international expansion that currently carries lower margins but represents a much larger end-market option. Over recent years, InPost has shown exceptional growth: revenue CAGR was ~56% per year from 2017–2024, while EBITDA grew from PLN 18 million to an estimated ~PLN 4 billion in 2025 (despite temporary earnings pressure from the Yodel acquisition). Growth has been mostly organic, although the Mondial Relay acquisition (2021) was also an important driver. EBITDA margin rose from roughly ~4% to ~31%.

The Polish core business produced a pretax ROIC of >55% in 2024. I calculated that the reinvestment rate in Poland was ~66% over 2017–2024, with a ROICE of ~69% — an extremely attractive return profile explaining the significant earnings growth.

It is therefore easy to understand why InPost is trying to replicate the model in Western Europe.

Based on the closing price on Dec 31, 2025, InPost’s market cap was ~PLN 22 billion. With net debt of PLN 5 billion (Sep 30, 2025, excluding lease liabilities), enterprise value was ~PLN 27 billion. That implies an EV/EBITDA multiple of ~6x for 2026. As discussed above, Poland alone could likely generate ~PLN 3 billion of free cash flow today without additional growth capex. That would mean the stock traded at ~9x EV/FCF (Poland), or a ~11% yield — with the international business effectively free on top.

One could take this as evidence that the stock was far too cheap, given the quality of the business model, the moat, the returns on capital, the historical growth, and the remaining growth runway.

But…

9. The takeover offer

In early January 2026, initial reports about a potential takeover emerged, and the stock repriced immediately. InPost confirmed this on Jan 6, 2026, but did not disclose either the buyer or a potential price. With no anchor, the stock jumped to ~€15 and then fell back over the following days to ~€13.2.

On the same day, rumors surfaced that the PE-investor Advent was behind the offer.

In 2017, founder/CEO Rafał Brzoska entered an investor agreement with Advent International. The stated goal was to acquire 100% of the shares of Integer.pl / InPost and delist the group two years after the first IPO, stabilizing and rebuilding it outside public markets with additional equity capital; Brzoska remained a shareholder.

After the restructuring and significant operational build-out (including scaling the locker network), Advent brought InPost back to public markets during the e-commerce boom. The second IPO took place on Euronext Amsterdam on Jan 27, 2021 at an IPO price of €16 per share. Advent remained the dominant shareholder after listing (a large secondary sell-down at IPO, but still a meaningful remaining stake) and only reduced its position gradually in subsequent years. Before the IPO, Advent held ~83% while founder/CEO Brzoska held 12.2% via his holding company (A&R).

Out of ~500 million shares outstanding, 175 million were placed at IPO, most of which came from Advent (168 million).

After the IPO, Advent continued to sell down and most recently reduced its stake to ~6.5%. The largest shareholder is PPF, a Czech investment group.

Then came the big bang on Feb 9, 2026.

A consortium of FedEx, Advent, A&R, and PPF made a recommended all-cash offer of €15.60 per share, valuing InPost at roughly €7.8 billion. Formally, the offer is marketed as an “attractive premium” (including +50% to the “undisturbed” price on Jan 2, 2026). At the same time — and this is the crux of the criticism — it does not even take the stock above the IPO price from 2021: InPost listed at €16 per share, and the offer is below that.

With the deal, the power balance shifts once again — and that is what bothers many shareholders. After completion, Advent and FedEx are each expected to hold 37%, A&R (Brzoska) 16%, and PPF 10%. In other words, the founder/CEO increases his stake meaningfully without any further capital deployment (as was confirmed in the Merger Analyst Call) while minority investors are being cashed out at €15.60 (if the deal closes).

This is a raid on long-term minority shareholders, and the fact that the CEO supports it makes it feel even more one-sided. It’s pathetic that an opportunistic take-private, driven by the largest shareholders (currently ~48% combined) plus FedEx, succeed off a price that looks materially below what the business has delivered since the IPO.

InPost has executed strongly since the 2021 IPO. In 2020 (the year before listing), InPost generated PLN 984 million of EBITDA, almost entirely from Poland. The UK was negligible and dependence on Allegro was high. Today, just five years later, InPost generated an estimated ~PLN 4 billion of EBITDA in 2025. Dependence on Allegro is lower, and the TAM is 7x larger thanks to Western European expansion and after roughly ~€2.6 billion of incremental capital deployed since 2019.

After roughly ~300% EBITDA growth versus IPO, the company is supposedly worth less? That’s a complete rip-off.

And when the CEO is part of the buyer consortium and increases his stake without investing fresh capital, it doesn’t feel like a neutral process for minority shareholders — even if everything is formally within the rules.

The people with the best information and influence lock in the long-term upside; everyone else is paid out at what feels like a “joke” price. And they frame it as a “50% premium” to the pre-offer price—even though the stock had already fallen about 50% since October 2024.

The offer is recommended and supported by the Board. Closing is targeted for H2 2026 and depends, among other things, on acceptance thresholds and regulatory approvals. For shareholders, InPost is no longer primarily a fundamentals thesis; it becomes a deal decision: cash now versus the risk/optionality of a bump or a failed transaction.

Shareholders can bet on a takeover poker game and hope for a higher price. But who is realistically going to show up as a competing buyer on short notice? DHL? Amazon?

1. If you’re not invested, I would not initiate a position here: the upside to €15.60 is limited, while the downside is meaningful if the transaction fails and the stock reverts toward the pre-offer level. The only real “bull case” is betting on a higher bid, which is speculation, not compounding. Who is realistically going to show up NOW to acquire this high-quality asset as a competing buyer on short notice? DHL? Amazon? Maybe, but I doubt it.

2. If you’re already invested, it’s a tough call. You can sell now and redeploy elsewhere, which buys peace of mind and avoids having dead capital tied up for the next 6–9 months. You can hold and tender into the offer, but that likely means sitting on a largely capped outcome for months. Or you can hold out for another buyer to step in, but that’s a pure poker game—and the downside remains real if acceptance thresholds aren’t met or the deal breaks.

Personally, my path is to sell, reallocate to Teqnion, Röko, Topicus and Constellatoin Software, and keep watching the situation from the sidelines.

10. My learnings: great businesses aren’t enough — ownership can destroy everything

I take one clear lesson from this: even the best business model does not protect you if the ownership structure allows an opportunistic take-private at any time. Going forward, that means I will try to avoid private equity as a co-shareholder whenever possible. With large blockholders, I will ask more aggressively who has exit pressure, who controls the process, and who gets a seat at the table when things get serious — and who doesn’t.

It will be structured in three Parts:

• Part 1: From Compounding to Stress Test: Why the Model Cracked

• Part 2: From Repairing to Re-Accelerating: What Changed in 2025

• Part 3 (today): Show Me the Numbers: Cohorts, Margin Mix, and much more

All parts are now available in one PDF. You can download it below.

Deep Dive Teqnion AB

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The "new Teqnion": Gaining Momentum

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👔 Company Name: Teqnion AB (“Teqnion”)

🔎 ISIN: SE0012308088

🔧 Business model: niche industrial serial acquirer

🌍 Geographic exposure: Sweden, UK (sales in Europe)

📈 Stock Price: SEK 169

💰 Market Capitalization: SEK 2.9 billion (~$321 million)

👨‍💼 Number of CEOs since foundation: 2

👨‍👩‍👦 Founder-/Owner-operator: Yes

📅 CEO tenure: Since 2009

🥇 Insider ownership: 5.0% of shares

📊 10Y EPS CAGR: ~23%

🔁 Reinvestment profile: High

💸 Capital intensity: Capital-light

🏰 Moat: M&A edge due to size, type of acquisition targets and deal-making approach

🧨 Main risks: Execution, quality drift, M&A engine, key-person risk

🌳 Slow Compounding fit: Yes – high-quality serial acquirer

Business Model in a Nutshell: Teqnion is a small Swedish sector-agnostic serial acquirer that describes itself as a builder of a conglomerate of industrial companies. The company is run as a decentralized group of subsidiaries, with a strong emphasis on culture, cash generation, and M&A.

5.4. Cohort Analysis

The company-by-company view is powerful, but it doesn’t let you draw clean conclusions about the portfolio as a whole. To do that, it helps to separate cohort-driven growth from the noise of individual subsidiaries.

That’s why the next step is a cohort analysis: grouping acquisitions by year and tracking their combined revenue and earnings trajectory over time.

Since Teqnion (nor any other serial acquirer that I’m aware of) does not disclose this kind of information, I tried to reconstruct (on a best-effort basis) the revenue and earnings development at the company level and translate it into an approximate revenue and EBIT contribution to the group over time, based on cohorts. These charts should be viewed as directional, they are not 100% accurate. They capture the shape of the businesses and the trajectory of operating performance. They are not a perfect reconciliation to Teqnion’s reported IFRS numbers, but in my view they come reasonably close to what Teqnion reports at the group level.

There are three reasons why a “sum of subsidiaries” view can deviate from IFRS group results in any given year without further information:

• First, the IFRS group accounts include EBIT-impacting effects that typically don’t appear in local statutory P&Ls, most notably amortization of acquisition-related intangibles, goodwill impairments, and revaluations of earn-outs. Those items can create a persistent delta between what subsidiaries appear to earn locally and what is reflected at group level. We can mitigate this effect by looking at group EBIT excluding these three effects.

• Second, the group includes holding-company costs, eliminations, and other consolidation mechanics that don’t exist in stand-alone statements.

• Third, the UK acquisitions come with a disclosure limitation: the income statement is not available, which makes subsidiary-level reconstructions less complete from 2022/2023 onward, precisely when the UK becomes a larger and more economically meaningful share of the portfolio. As a result, charts that aggregate statutory subsidiary data become more uneven in later years, as I have to make assumptions for these companies. That’s the reason why this task will become much harder going forward, as the number of UK companies increases.

Despite these limitations, the subsidiary charts are still highly useful for two reasons. They reflect real operating trajectories, and they allow relative comparisons across subsidiaries, especially when combined with a cohort view.

We start with the revenue chart:

Teqnion’s top-line growth obviously is acquisition-driven, with clearly higher momentum after the 2018 private placement (prior to the IPO).

Revenue rises gradually through the early 2010s, then starts to inflect meaningfully around 2018. Earlier cohorts (≤2013–2017) still provide a stable foundation. Not everything they bought early on is “crap”.

The EBIT-by-cohort chart adds the more interesting layer: profitability is far more sensitive to cohort quality and macro exposure than revenue. Up to 2022, EBIT rises steadily and is supported by multiple cohorts, with the strongest positive contribution coming from the post-IPO cohorts (a very interesting point).

In 2023, and especially 2024, the cohort view makes the current “reset” visible. Some cohorts flip from contributors to detractors, pulling reconstructed EBIT down even while revenue remains high. These detractor cohorts largely overlap with the “problem cases” discussed in Chapter 5.3.1: Grimstorps, Stans & Press, Hem1, Markis City, CMW, and Kema.

In other words, the deterioration isn’t primarily a group-wide collapse. It’s the classic pattern of a decentralized portfolio: a subset of subsidiaries, often the more cyclical or margin-capped models, turns meaningfully negative, and the losses become large enough to offset the steady performers. This is exactly the environment where process maturity matters most, because HQ’s job shifts from adding new revenue to containing the negative tail: faster detection, clear action plans, and leadership changes when necessary.

It’s worth calling out the gap between stacked cohort EBIT and the red line (i.e. reported EBIT). IFRS group EBIT includes items that aren’t captured cleanly in statutory subsidiary data, and the UK P&L limitation becomes more important during 2022-2024.

In addition, Johan made a statement in his letter to shareholders in the Q3 2025 report that suggests improving quality in the younger cohorts:

“While the Reward Catering saga clearly was a mistake, we have a few companies from the 2021-2023 cohort that are currently spitting out 1/3 - 1/2 of their purchase price in free cash flow per year” (Johan Steene, CEO, 2025 Q3 report)

The key takeaway remains intact despite these imperfections: Teqnion’s growth has been built through successive acquisition cohorts, but the last two years showed that not all cohorts are equally resilient. That’s why Phase 4’s dual focus matters so much for the next compounding leg: (1) tightening the operating system and (2) raising the acquisition quality bar while keeping the process repeatable.

5.5. Margin Mix: Are New Deals Lifting Margins?

After reviewing individual subsidiaries and the cohort analysis, it’s worth stepping back to the portfolio math. The chart shows the group EBITA margin and the estimated EBITA margin for acquisitions made during each year.

A quick note on the data: unfortunately, it is only available from 2017 onward. In addition, the 2025 group EBITA margin is based on my estimate at this point, while the 2025 “acquired EBITA margin” is derived from the Q3 2025 disclosures and annualized (there were no further acquisitions after Q3, so this is a reasonable run-rate approximation).

With that caveat, the pattern is still instructive. Since 2020, Teqnion’s acquisitions have, on average, come in with materially higher EBITA margins than the group’s consolidated margin. In other words, the acquisition engine has been mix-accretive, consistently adding subsidiaries that are structurally more profitable than the legacy base.

Yet the group’s reported EBITA margin hasn’t moved sharply higher in tandem. The explanation is intuitive: the uplift from higher-margin acquisitions has been partly offset by the “struggling bucket” (Engine 3), i.e. subsidiaries where profitability deteriorated enough to drag on consolidated performance and effectively “consume” some of the margin uplift that the newer deals should have delivered.

Even if new acquisitions are meaningfully more profitable, the group margin will only move in a noticeable way if (a) those acquisitions become a large enough share of the overall earnings base and/or (b) the underperformers stop leaking profitability. Mix improvement takes time to work through the P&L.

A useful benchmark for how long margin uplift can take in a serial-acquirer model is Lagercrantz. From 2000/01 to 2009/10, Lagercrantz earned an average EBITA margin of roughly ~4%, fluctuating between 0–6%. Since then, the company has consistently acquired businesses with double-digit EBITA margins (roughly ~16.5% on average), yet the group-level improvement didn’t happen overnight. Instead, consolidated EBITA margins rose slowly but steadily over many years, ultimately reaching ~18% today.

The lesson is directly applicable to Teqnion: even when acquisitions are clearly mix-accretive, group margins typically rise only gradually as higher-margin subsidiaries become a larger share of the earnings base and as legacy underperformers stop diluting the uplift. In Lagercrantz’ case, the journey was also helped by a strategic shift toward more proprietary products (with higher margins)—a lever Teqnion is increasingly emphasizing as it raises its quality bar and moves away from structurally margin-capped business types.

To illustrate how long it can take for incremental improvements to show up in EBITA margins, let’s look at a simple hypothetical example.

Assume a company with a legacy portfolio generates $100 million of revenue and $10 million of EBITA, i.e., a 10% margin. We assume a 100% reinvestment rate of EBITA (to keep things simple) and an acquisition multiple of 5x EBITA. Further assume that all acquisitions come with an EBITA margin of 20%—twice as high as the legacy portfolio.

The calculation below shows that after seven years, revenue has doubled, EBITA has tripled, yet the margin has only increased to 15%.

The math is straightforward: within the $200 million revenue base, $100 million still comes from the legacy portfolio at a 10% margin. The other $100 million was acquired and earns a 20% margin. The weighted average is therefore 15%.

Now consider a second effect. If, for example, in year two the legacy portfolio faces temporary headwinds and its margin dips from 10% to 9%, the group margin would still be 10% in that year. At that stage, the acquired high-margin revenue is still too small a share of the overall portfolio, so even a modest headwind in the legacy portfolio can offset the incremental contribution from M&A.

This is exactly the problem Teqnion has faced in recent years and it’s the core reason why the margin uplift has not yet been able to flow through sustainably.

5.6. Deal Economics: Acquisition Multiples and the Compounding Math

Even if Teqnion buys the right kinds of businesses, compounding still depends on what it pays. This is where many serial acquirers fail: they overpay in good times, or they loosen discipline just to keep deal volume up.

Before we dive into acquisition multiples, it’s worth clarifying what the numbers actually represent. Teqnion’s deals are typically structured with a meaningful earn-out component and other deferred elements. As a result, headline “total consideration” is often not the same as the cash Teqnion deploys upfront. In the table below, I therefore split each year’s M&A spending into three layers:

1. Total consideration: the full purchase price including contingent payments and estimated earn-outs

2. Cash-free purchase price: the economic purchase price adjusted for cash acquired

3. Net cash deployed: the immediate cash outflow, net of acquired cash, and after accounting for deferred/contingent mechanics and subsequent settlements

This distinction matters because it changes how you think about valuation discipline and risk. Earn-outs can make the “full” multiple look higher on paper, while the upfront cash multiple often better reflects how much Teqnion is actually putting at risk before performance is proven and what immediate ROIIC Teqnion can generate.

Goodwill often makes up roughly two-thirds of total consideration (and sometimes more). At first glance, that can look aggressive, especially if you come from an accounting mindset where “more goodwill” equals “more room for future disappointment.” But for a serial acquirer that buys predominantly asset-light, people- and know-how-driven subsidiaries, a high goodwill share is not unusual. The reason is mostly mechanical: many of the assets that actually create value (customer relationships, assembled workforce, niche know-how, reputation, processes) either can’t be recognized as separate identifiable intangibles under IFRS, or they’re only recognized partially and involve judgment. Anything that can’t be cleanly identified ends up in goodwill by definition.

A purchase price allocation with high goodwill and fewer identifiable intangibles can, in theory, make reported profits look better. Identifiable acquisition intangibles (customer relationships, brands, technology) are typically amortized through the P&L, while goodwill is not amortized (it is tested for impairment). So if more of the price is classified as goodwill, near-term EBIT can appear higher than if more were allocated to amortizable intangibles. That accounting effect is real.

However, it’s important not to overinterpret it. First, Teqnion isn’t unique. Many decentralized, asset-light serial acquirers report high goodwill proportions for the same structural reasons. Second, and more importantly, the split between goodwill and amortizable intangibles has no impact on free cash flow. Amortization is a made-up non-cash expense. So the allocation changes accounting earnings, while leaving the underlying cash economics of the deal unchanged. Economically, what matters is what Teqnion paid (cash upfront vs earn-outs later) and how much cash the subsidiary can generate over time.

Let’s now walk through the purchase price mechanics. We’ll use 2025 as the example.

In that year, Teqnion reports total consideration of ~SEK 562 million. The acquired subsidiaries came with ~SEK 132 million of cash, so the cash-free purchase price is ~SEK 431 million.

Think of it like buying a wallet from a friend for $100, with $30 inside. You pay $100, but you immediately “get” $30 back, so you’ve effectively paid $70 for the wallet itself, cash-free. Same logic here.

From there, the key point is timing. Teqnion did not deploy the full economic purchase price as immediate cash. The deal structure reduces the upfront cash outflow. In 2025, Teqnion shows deferred payments of ~SEK 27 million (paid later) and contingent consideration of ~SEK 147 million (i.e., estimated earn-outs recognized in consideration, but not yet paid).

After adjusting for those two items, the net cash effect for new acquisitions (i.e., net cash deployed for new acquisitions) was ~SEK 257 million.

Finally, there were cash payments related to prior years’ acquisitions (earn-out settlements or deferred payments) of about ~SEK 45 million. Adding that brings total acquisition-related net cash paid in 2025 to ~SEK 302 million, consistent with the cash flow statement.

If we take net cash deployed for new acquisitions across all years shown (SEK 669.4 million) and divide it by the cash-free purchase price (SEK 1,165.7 million), we get an implied upfront cash share of ~57%. Put differently, roughly ~43% of the economic purchase price is not paid immediately. That lines up well with management’s repeated message that ~30–40% of consideration is typically structured as earn-outs (and other deferred components). Measured against total consideration, the implied upfront cash share is even lower: only ~46% of the headline purchase price is actually paid as cash upfront, highlighting how meaningful the earn-out/deferred structure is in Teqnion’s M&A model and that acquired businesses come with a net cash buffer.

We now look at the acquisition multiples Teqnion has paid since 2019 (unfortunately, no data prior to 2019 is available):

The chart frames Teqnion’s purchase prices in a much more useful way: it shows each of the three “price layers” relative to the pro forma full-year EBITA of the subsidiaries acquired in that year. That matters because Teqnion’s M&A model is built around (i) earn-outs and deferred components and (ii) conservative upfront cash deployment. Looking at just one multiple would miss the risk structure.

The three bars effectively answer three different questions: What is the “headline” valuation (total consideration)? What is the economic price net of cash acquired (cash-free)? And what multiple is Teqnion actually paying upfront before performance is proven (immediate cash outflow)?

Across the period, the same pattern repeats: the immediate cash outflow multiple is consistently the lowest, often meaningfully below the cash-free multiple and far below total consideration.

You can see this most clearly in years like 2020 and 2023, where the immediate cash multiples are very low (around ~1x and ~2.4x, respectively), even though total consideration is much higher, implying that a large share of the deal value was contingent and deferred.

The chart also shows that valuation discipline isn’t perfectly constant year to year; it flexes with the quality and growth expectations in the acquired cohort. 2019 and 2024 stand out with higher total consideration multiples (around ~12x), while still keeping the immediate cash outflow materially lower (roughly ~5–6x). They frame it as “future cash flow focused”, not “multiple focused”. In that mindset, higher quality and higher growth can justify a higher headline multiple, as long as upfront risk is controlled through deal structure.

2025 is the most interesting year in the dataset because Teqnion paid one of the lowest multiples in recent years while acquiring higher-quality subsidiaries with a better margin profile.

The estimated full-year EBITA of the nine acquisitions completed in 2025 is around SEK 100 million. For roughly SEK 102 million of EBITA, Teqnion paid a cash-free purchase price of SEK 431 million and deployed only SEK 257 million in immediate cash at closing.

• ~5.5x total consideration

• ~4.2x cash-free

• ~2.5x immediate cash outflow

On average since the 2019 IPO, Teqnion has paid roughly:

• ~6.3x total consideration

• ~5.0x cash-free

• ~2.9x immediate cash outflow

Keep in mind that the cash-free multiples (which include earn-outs) could end up being lower over the next 2–3 years actually, because earn-outs are typically only paid if profits grow. Unfortunately, Teqnion doesn’t disclose the exact profit thresholds that trigger the earn-outs.

To summarize, Teqnion’s M&A engine isn’t about always paying “low” headline multiples. It’s about controlling risk through deal structure. Even in years where total consideration multiples are higher (2019, 2022, 2024), Teqnion consistently keeps the upfront cash multiple meaningfully lower. And in 2025, the combination of higher entry profitability and an earn-out-heavy structure creates an especially attractive “cash-at-risk” valuation. That’s exactly what you want to see if Teqnion is raising the acquisition quality bar.

Based on the information we’ve gathered so far, we can calculate ROIIC from acquisitions in the next step.

The chart highlights the two-layer return profile that naturally comes with Teqnion’s earn-out-heavy deal structures.

• Entry ROIIC is based on the initial capital outflow (i.e., net cash deployed).

• Cash-free ROIIC is based on the cash-free purchase price (i.e., including estimated earn-outs).

Entry ROIIC is consistently higher than cash-free ROIIC. That’s exactly what you’d expect when a material part of consideration is deferred. Teqnion only commits part of the economic price upfront, so the return on the cash actually “at risk” at closing can look very attractive. By contrast, cash-free ROIIC uses the broader economic denominator and therefore tends to come out lower.

There’s an important nuance, though. Earn-outs are usually paid only if earnings increase over the next 2–3 years (as elaborated above). That means the cash-free purchase price denominator can include value that is only paid in a success case, while the numerator often reflects entry-year EBITA. That pairing can understate the true “fully-paid” return profile, because it matches a performance-contingent price to a static earnings base. Ideally, you would pair the fully-loaded price with the higher EBITA level that actually triggers the earn-out. As we don’t have that information, we don’t adjust for that here and use only the EBITA in the year of acquisition.

Over 2019–2025, average pre-tax cash-free ROIIC was ~20%, while average pre-tax entry ROIIC was ~35%.

6. Momentum is Back: Fixing the Portfolio, Re-accelerating the M&A Engine

What we discussed earlier about Teqnion’s process maturity gap can leave the impression that the group is struggling across most subsidiaries. That’s not the case. A more accurate interpretation is that Teqnion has a meaningful “struggling bucket” that became visible once macro conditions tightened—at a time when the operating system wasn’t mature enough to detect and address negative trends early.

That distinction matters because it reframes the current period. Teqnion’s job is to reduce the negative tail while continuing to compound through acquisitions. And for the first time since the post-IPO scaling push ran into reality, the data is beginning to suggest that this is exactly what is happening.

In this chapter, we look at a set of charts that support the view that Teqnion is regaining momentum, still largely unnoticed by the stock market. The stock still trades about ~35% below its all-time high from early 2024, while Q3 2025 EBITA increased by 63% year-over-year (and I expect Q4 2025 to increase even more than that), driven by an improving Engine 3 (the struggling bucket) and a strong Engine 1 (the M&A machine).

The following charts are meant to do two things.

• First, they show the long-term trajectory: Teqnion is a much larger business than it was pre-IPO, and growth has structurally been driven by acquisitions.

• Second, they show why 2025 looks different: the company is doing two things at once. First, tightening portfolio governance and improving underperformers, and, secondly, re-accelerating M&A at a high cadence (nine acquisitions in 2025) with a higher quality bar.

Revenue contribution. In 2020–2022, Teqnion reported exceptionally strong organic growth, driven by the post-COVID recovery and inflation (mainly price effects rather than volume). Since the second half of 2023, organic growth faded and turned slightly negative.

The spike in inorganic growth around early 2022 reflects the step-up in scale from the heavy acquisition period. The more encouraging signal is what comes after: in 2025, growth is again supported by a meaningful M&A contribution, and overall YoY growth returned to ~20%. In other words, Teqnion isn’t relying on a cyclical rebound alone. Teqnion is actively rebuilding momentum through its acquisition engine, with room for organic improvements to follow.

EBITA. EBITA trends show that Teqnion’s earnings power expanded meaningfully into 2022 and 2023, then came under pressure in 2024 as the struggling bucket weighed on performance and the M&A engine didn’t offset the organic decline. The first real momentum signal shows up in 2025. EBITA is clearly stronger than in 2024 and, just as importantly, the improvement builds throughout the year.

EBITA margin. The EBITA improvement is also showing up in margins. On a quarterly basis, Teqnion crossed the 14% EBITA margin mark for the first time. As discussed above, this reflects both an improving struggling bucket and higher-margin acquisitions.

Gross margin. What stands out and supports the “quality upgrade” thesis is the improvement in gross margin. As Teqnion acquires higher-quality companies, it’s reasonable to assume they also come with higher gross margins, which should lift the group level over time, as gross margin is a useful proxy for pricing power and business model quality.

In Teqnion’s case, the gross margin trend looks more resilient than many critics would expect given the volatility in parts of the portfolio. That’s an important signal. Q3 2025, in particular, showed a meaningfully higher gross margin versus prior quarters and the prior-year quarter. To me, this is one of the most encouraging indicators and worth tracking closely over the next few quarters.

Working capital. Working capital is where operational discipline shows up in cash terms. Working capital has increased as the group has grown. In a decentralized model, working capital discipline often comes down to systems and follow-up. If issues are spotted late, working capital tends to surprise you. If reporting is standardized and KPIs flag problems early, you can intervene sooner and prevent cash from getting trapped in receivables, inventory, or project overruns.

That’s exactly why Teqnion’s Phase 4 initiatives, i.e. monthly reporting, KPI “collector sheets,” and green-flag/red-flag escalation, matter beyond organizational neatness. They’re designed to make the portfolio cash-responsive rather than cash-reactive.

Leverage. The next chart shows how Teqnion’s leverage has evolved, depending on what you count as “net debt.”

• Interest-bearing net debt (IBND) isolates the “pure” financing position: borrowings from credit institutions minus cash.

• Financial net debt (FND) then adds the most economically relevant non-bank obligation for a serial acquirer: earn-out liabilities and deferred consideration. Conceptually, this is deferred purchase price. It’s a claim created by acquisitions, and it behaves debt-like because it represents a contractual or contingent cash outflow tied to past capital allocation.

• Financial net debt incl. leasing adds lease liabilities on top.

Starting in 2019, all three debt measures rise over time in absolute terms. That reflects a combination of (i) M&A cash deployment and (ii) a period where EBITDA didn’t keep up because the “struggling bucket” compressed earnings power from 2024 onwards. The leverage tells the same story: the balance sheet is materially more levered today than in the early post-IPO years, and the ratios worsen most when EBITDA is under pressure.

Importantly, my calculation differs from Teqnion’s reported net debt:

• Teqnion’s net debt definition includes lease liabilities, but excludes earn-out liabilities.

• My financial net debt does the opposite: it includes earn-outs (deferred consideration) but excludes leases (I prefer this, because it better reflects the economic reality of acquisition-related obligations).

Because lease liabilities are often somewhat larger than earn-out liabilities, Teqnion’s reported net debt can end up lower than my financial net debt in SEK terms, which also affects net debt / EBITDA.

In Q3 2025, my financial net debt / EBITDA (LTM) comes out at roughly 2.3x, while under Teqnion’s net debt definition the ratio is around 2.0x. No matter which definition you use, leverage has reached the highest level seen so far.

Does it worry me? Not really. It’s still within a reasonable range (below the target of 2.5x), and it’s also somewhat inflated by the recent acquisition cadence. Net debt rises immediately after acquisitions, while the leverage denominator adjusts with a lag because it’s trailing twelve months and only gradually includes the acquired earnings as they are consolidated. Mechanically, net debt / EBITDA often spikes after periods of heavy M&A and then normalizes as the acquired EBITDA rolls into the LTM base, assuming the acquisitions perform as expected and there isn’t offsetting deterioration elsewhere in the portfolio.

Capital base. The next chart tracks how Teqnion’s capital base has grown over time, shown as capital employed and invested capital. I define them as follows:

• Capital employed = non-current assets + working capital (i.e. inventories + accounts receivable – accounts payable)

• Invested capital = equity + financial net debt + lease liabilities

In addition, I show both metrics at book value (bars) and at cost (lines). The “cost” lines are higher because they add back cumulative depreciation and amortization to better reflect the total capital that has been put to work.

This is what compounding looks like: more acquisitions, more assets under the umbrella, and an expanding economic footprint. It shows that Teqnion has steadily increased its capital base over time.

But the chart also clarifies the real constraint. The real challenge is conversion quality: turning capital into earnings power consistently. When the operating system lags behind scale, invested capital can grow faster than EBITA, and returns compress. Phase 4 is essentially about reversing that: making sure the capital base Teqnion has built produces the earnings and cash flow profile a mature serial acquirer should deliver.

Capital allocation. The following capital allocation chart shows, year by year, how Teqnion uses the cash it generates and it makes the company’s priorities very explicit. Adjusted gross cash flow equals operating cash flow before changes in working capital, less IFRS 16 lease liability repayments.

The light grey bars (lease-adjusted gross cash flow) rise steadily from 2016 through 2023, reflecting the group’s scaling and stronger underlying cash generation. Against that internal cash generation, the stacked bars show how management deploys cash:

• M&A dominates by a wide margin in almost every year.

• Capex stays small and fairly stable.

That mix is exactly what you’d expect from an asset-light serial acquirer. The subsidiaries typically don’t need heavy maintenance or growth capex, so most incremental cash can be recycled into acquisitions rather than tied up in plants and equipment.

Dividends and buybacks exist, but they’re small in the context of the model. Teqnion is clearly in reinvestment mode, not harvest mode. While Teqnion’s previous payout policy allowed for a 10–40% payout ratio and paid a dividend in 2022, management later reversed course, rightly prioritizing reinvestment and balance sheet flexibility over distributions.

In the chart above, two periods stand out.

• First, the step-up in M&A spending from 2018 onward reflects the post-IPO shift into a higher-cadence regime: acquisitions become the primary growth lever.

• Second, 2025 (shown as 9M so far) shows unusually strong M&A momentum, as M&A cash outflows are very high relative to the cash flow bar. Over the next few quarters, you would expect adjusted gross cash flow to continue its upward trend as the acquired earnings roll in.

It reinforces the narrative: despite the issues that surfaced in 2024, Teqnion didn’t “freeze” the engine; it accelerated it in 2025. And as long as the company can reinvest at attractive purchase multiples that translate into high ROIIC, it makes sense to invest as much as possible.

Putting everything together, the most important conclusion is not that all issues are solved. The conclusion is that the direction of travel is now consistent across the system. Growth is again being driven by M&A, but with signals that the acquired cohort is much higher quality. Earnings power is stabilizing and improving versus 2024. Gross margin resilience supports the idea that the portfolio is gradually becoming structurally better. And while leverage has increased, the de-risking path is clear: fix the negative tail and let mix accretion work through the P&L.

For me, the investment case is therefore not just a short-term “turnaround story.” There is a credible chance that we are at the start of a new, multi-year era: Teqnion is increasingly acquiring more profitable businesses that should also deliver stronger organic performance than the legacy portfolio and it appears able to do so at valuation multiples that are at least similar to prior years. If that continues, and if the struggling bucket is steadily reduced, the most likely outcome is not a sudden margin jump, but a slow, persistent uplift in group-level margins as higher-quality cohorts accumulate and gradually dilute the weaker legacy mix over time.

Teqnion now has all the prerequisites to follow in Lagercrantz’s footsteps.

7. Management & Ownership

In a decentralized serial-acquirer model, HQ doesn’t win by micromanaging day-to-day operations at the subsidiaries. It wins by setting the tone on capital allocation, risk, and culture and by being a reliable partner when a local team needs support.

Teqnion is, at its core, a founder-led organization where the management duo has deliberately shaped the culture around discipline, simplicity, and long-term orientation.

Johan Steene (CEO) founded Teqnion together with Jonas Häggqvist, who left the company in 2009. That’s when Johan took over as CEO. As discussed in detail, Teqnion’s early years (especially the near-death experience during the 2008/09 financial crisis) appear to have hardwired his “operating temperament.”

Outside of work, Johan Steene is a serious long-distance runner, including ultramarathons.

• In 2018, he won the Big Dog’s Backyard Ultra, a “last man standing” endurance race. Runners must complete a ~6.6 km loop every hour, meaning you must keep moving quickly if you want any rest. After almost 68 hours, Johan was the last man standing, finishing 68 laps (~456.0 km).

• In 2017, he won a bronze medal at the IAU 24 Hour World Championship after completing 266.5 km in 24 hours (about 11 km/h for a full day).

Based on available statistics, he has participated in roughly 70 events over the last 15 years, running close to 14,000 km in total (you can access the data here).

These races require methodical pacing and an unusually high tolerance for discomfort. It fits well with his emphasis on discipline and long-term thinking and he comes across as a grounded, down-to-earth person.

Daniel Zhang (CXO) joined Teqnion AB in 2021. If Steene represents the cultural backbone and the organization’s “soft power,” Daniel is positioned as the deal engine and the capital-allocator. He previously served as interim CFO and has effectively become the head of M&A. Teqnion uses the CXO title because, when he joined, they didn’t yet know exactly where he would have the biggest impact. His background blends analytical training in economics with top-tier consulting experience at McKinsey & Company and Bain & Company, plus a strong personal interest in disciplined investing frameworks. That mix matters because Teqnion’s strategy only scales if the acquisition machine stays selective, repeatable, and valuation-disciplined. Since 2024, Daniel has also served as Deputy CEO.

Both Johan and Daniel are relatively young (born 1973 and 1989, respectively), which implies a long potential runway for continuity in leadership.

What should be mentioned, though, is the relatively high CFO turnover since 2020. After a long period of stability under Maria Johansson (more than a decade), Teqnion saw several shorter CFO tenures, including an interim solution where Daniel stepped in after Susanna Helgesen left the company. Johan has addressed three of the CFO changes on earnings calls, framing them as driven by specific, situation-dependent reasons rather than pointing to structural issues at Teqnion.

Importantly, continuity hasn’t been lost entirely: both Daniel and Maria remain within the organization.

Here are the reasons Johan Steene has given for Teqnion’s relatively frequent CFO changes:

• Nicklas Wigren reportedly left because family circumstances required a move to southern Sweden.

• Susanna Helgesen reportedly left to become CEO in her father’s company.

• Carina Strid reportedly didn’t fit the culture and was used to more conventional ways of working, so she decided it wasn’t for her.

  “We’ve tried a few people, and some didn’t like us. Now we have Jonathan, who has been with us for a little over a year. I hope I don’t jinx this, but it feels like he really enjoys working with us, and we enjoy working with him. He’s a big part of what we do, both in strategy and operations. So far, so good.” (Johan Steene, InPractice interview, 28.08.2025)

From the outside, it’s hard to know the full story behind each move. But regardless, the two main drivers of Teqnion’s development have clearly been Johan and Daniel.

There is also strong alignment between management, the board, and shareholders. Johan still owns ~5.0% of the shares, while Daniel holds ~0.6%. The shareholder base is highly concentrated and appears to attract long-term investors: as of 30 September 2025, the top 10 shareholders controlled ~71% of shares and votes combined. For a listed micro-cap like Teqnion, that level of concentration matters because the model requires patience. In practice, it creates an ownership structure that is more compatible with long-term compounding and with decisions that optimize for the next five years, not the next quarter.

Stravaigin AB (~17.7%) is the largest shareholder and is part of Daniel Ek’s family office (Spotify founder). In March 2025, Stravaigin bought ~11.7% from Vixar AB at ~SEK 180 per share and then increased the stake by roughly another ~6% by September 2025.

Investment AB Spiltan (~11.4%) is a well-known Swedish long-term investor. Its presence typically signals a patient, owner-minded approach, well aligned with a serial acquirer that reinvests rather than maximizing near-term payouts. Spiltan is represented on the board by Mikael Vaezi, an investment manager at Spiltan.

Vixar AB (~10.9%) is a key anchor owner, with roots going back to the post-2008 rescue phase. Per Berggren owns 50% of Vixar and previously served as Chairman for many years (he still serves as Non-Executive Board Member).

Broadcrest (~9.0%) is another meaningful holder. According to its LinkedIn description, Broadcrest focuses on high-ROIC businesses with durable competitive advantages and owner-operator management teams.

Johan Steene (~5.0%) remains a significant owner. Founder/CEO alignment.

Danske Bank Asset Management (~4.8%) is one of the larger Nordic asset managers and part of Danske Bank.

Woodlock Family Capital (~4.5%) is run by Christopher W. Mayer, author of 100 Baggers: Stocks That Return 100-to-1 and How To Find Them. He joined the board in 2024.

Erik Surén (~3.3%) is another early co-founder and one of the longest-serving board members (since 2006). Historically, his role seems less about being the public “holding-company storyteller” and more about being close to operating reality. He served as CEO of Inkom for many years, one of the early subsidiaries in the portfolio.

Mikael Rockhammar (~2.7%) is CEO of Elrond, one of Teqnion’s subsidiaries.

Ingegerd Häggqvist (~1.8%) is another early shareholder and the mother of Jonas Häggqvist.

8. Moats & Risks

Teqnion’s moat is its ability to repeatedly buy small, niche businesses, sourced through trust-based relationships and structured conservatively, while keeping subsidiary autonomy intact. The main risk is that the operating-system upgrades don’t mature fast enough, allowing the struggling bucket to keep offsetting the gains from higher-quality acquisition cohorts.

8.1. Moats: The Durable Edge

1. The “permanent home” proposition in small niches

   Teqnion doesn’t have a product moat at the holding-company level. Its edge is a transaction moat in a very specific corner of the market. Teqnion targets small, niche industrial businesses that often fly under the radar of larger strategics and are frequently too small or too “unsexy” for private equity to prioritize.

   In that sub-scale universe, the seller’s decision is often not purely price-driven. Many entrepreneurs care about who owns the company next, whether their people and culture are respected, and whether the buyer will remain stable through cycles. Teqnion’s ability to position itself as a long-term owner (buying to hold, not to fix and flip) creates a real advantage in seller selection, especially when paired with earn-outs and the promise of operational autonomy as long as performance stays “green”.

2. Relationship-building as a sourcing engine

   In micro-cap M&A, “deal flow” is often a trust game. Teqnion puts real weight on long relationships with entrepreneurs and brokers, sometimes built over many years. That changes the playing field: Teqnion doesn’t have to win “auctions” to keep buying. The UK expansion shows the mechanism. Instead of relying only on cold outreach, Teqnion has worked its way into broker networks by being easy to deal with. Fast replies, clear communication, and doing what they say they will do. Over time, that tends to improve lead quality and reduces time spent on mismatched deals.

3. Repeatable deal structure reduces downside

   Earn-outs are more than an incentive tool. Used consistently, they become a form of risk management. Teqnion’s approach is to pay a disciplined base upfront and share upside later. This structure keeps the initial cash at risk lower, reduces the chance of overpaying, and can appeal to founders who want to stay involved during the transition. If you can apply this structure repeatedly, it turns into a structural advantage: even when the headline multiple looks “high,” the upfront capital at risk can remain conservative.

4. Decentralization is a moat only if the operating system works

   The decentralized model can be a real advantage: local CEOs stay close to customers, decisions are fast, and culture is protected. But decentralization only becomes a moat when it is paired with strong governance and fast escalation. That’s the purpose of Phase 4: standardized KPIs, clearer accountability (Nordics/UK segmentation), earlier intervention, and a “trust but verify” approach. If these systems are implemented well, Teqnion can scale without losing entrepreneurial energy. It’s the balancing act that made the best Swedish compounders so successful.

5. Portfolio diversification

   A multi-subsidiary structure naturally diversifies end-markets, customers, and cycles. That doesn’t eliminate downturn risk entirely, but it can soften it. However, HQ needs to spot issues early to prevent a handful of weak subsidiaries from becoming a disproportionate drag. Teqnion’s ambition to build more “uncorrelated” risk across the portfolio is directionally right and, over time, can make the group more resilient than any single one-exposure operating company.

6. “Boring” criteria can be a moat

   Teqnion’s preference for businesses where change is slow, customer value is tangible, and cash conversion is strong sounds almost too simple. But that simplicity can be a moat in itself: it forces consistency and makes it harder to drift into fashionable themes, marginal categories, or short-lived cycles. If the upgraded acquisition filter holds (higher margins, better cash conversion, and less macro dependence) the moat becomes self-reinforcing: better cohorts generate more cash, which funds better cohorts.

   “I think it’s different kind of moat. It’s soft. It comes down to soft values, as you were talking about. I mean, we don’t have any proprietary technology or IP or some kind of super scale advantage or so. But it’s really the softer network things that makes this work.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2023 Q3)

8.2. Risks: What Could Break (or Delay) the Compounding Story

1. The biggest risk is execution: Phase 4 must become institutional, not rhetorical

   The long-term thesis depends on Teqnion actually closing the process maturity gap. If the governance upgrades remain too “people-dependent” rather than system-dependent—meaning red flags still travel too slowly, action plans aren’t enforced, and CEO changes are postponed even when needed—then the struggling bucket could linger longer than expected. In that scenario, consolidated margins may stay flat or improve slower even if new acquisitions are higher quality.

2. M&A slowdown

   Teqnion’s growth is acquisition-led. If deal flow slows (valuation inflation, fewer willing sellers, weaker broker channels, or internal bandwidth constraints), Teqnion loses both the primary driver of scale and the main mechanism for improving mix. A prolonged deal drought likely wouldn’t break the business, but it would slow the pace at which the “new era” becomes visible in consolidated results.

3. Competitive pressure and “quality drift”

   Even if Teqnion rarely competes head-to-head with large private equity, competition still shows up indirectly: more buyers raise seller expectations, and more intermediated processes can push prices up. The higher Teqnion sets its quality bar, the more it risks entering arenas where competition is stronger. The key risk is discipline drift, i.e. doing deals to maintain cadence rather than because they truly clear the hurdle. The Reward Catering episode is a reminder that a single mistake can be costly, financially and reputationally.

4. Portfolio cyclicality hasn’t disappeared overnight

   Teqnion is moving away from highly cyclical industries (housing-linked businesses and low-pricing-power contract manufacturing), but legacy exposure remains, even if it is expected to shrink over time in relative terms. If macro conditions stay weak, some subsidiaries may keep dragging results despite better new acquisitions. There’s also timing risk: the market may not reward the mix upgrade until the legacy book stops leaking.

5. Leverage risk

   Even if leverage is manageable, it amplifies execution risk. Net debt rises immediately when acquisitions close; EBITDA follows with a lag. If earnings disappoint, leverage can deteriorate quickly. That also matters for optionality: if Teqnion ever needed to raise equity under pressure, dilution could become a real cost.

6. Key-person risk

   Teqnion’s model relies on a small number of people for acquisition filtering, governance discipline, and culture. If key individuals (Johan, Daniel) leave, lose focus, or misjudge the trade-off between deal pace and absorption capacity, outcomes can change quickly. Professionalization helps, but key-person exposure remains a real risk to monitor.

7. Accounting and transparency noise (PPA, earn-outs, goodwill)

   Reported earnings can be influenced by non-cash items such as earn-out revaluations and non-recurring impairment charges. That doesn’t necessarily change economic reality, but it can distort backward-looking valuation multiples and create volatility that spooks the market. More importantly, in a stock with little to no sell-side coverage, accounting noise can lead to a wider and longer-lasting gap between fundamentals and share price than you’d like.

5. Valuation

If you look at Teqnion through a screener, you’ll probably move on. Three-year EPS growth is negative, and the stock can look like it trades at a P/E of ~44x. That looks awful.

But is it? No.

Because of the issues around Reward Catering (see Chapter 4.6), Teqnion booked a goodwill impairment in Q3 2025. That’s not what you want to see as an investor, but it meaningfully distorts reported profits and, as a result, backward-looking valuation metrics. And since there’s essentially no sell-side coverage, there are no clean “next-twelve-month” earnings estimates to anchor on.

If you add back the goodwill impairment and annualize to a run-rate, you get roughly SEK 273 million of adjusted EBT and about SEK 213 million of EAT (assuming a 22% tax rate). On that basis, the valuation looks very different: a normalized P/E of ~13.6x, and EV/EBITDA of ~9.6x.

In my view, that’s not expensive at all for a company that…

• has delivered a 26% revenue CAGR and 35% EBT CAGR for 15 years (despite not yet buying the best high quality companies),

• acquires targets at roughly ~5.0x cash-free and only ~2.9x on the immediate cash outflow multiple,

• generates high double-digit ROIIC,

• runs a reinvestment rate well above 100% (more precisely, the 2016–2025 reinvestment rate was ~200%),

• still has earnings held back by an oversized “struggling bucket,” and

• is likely to see margins trend upward over the next few years as higher-margin, mix-accretive acquisitions accumulate.

Has the market not yet fully understood what has changed beneath the surface or is it still unsure whether the improvements are sustainable? Probably a bit of both. But given that there’s essentially no analyst coverage and Teqnion is still a small-cap with a market cap of roughly ~$330 million, the simplest explanation may be that the stock is just underfollowed.

Investor attention also moves in cycles. Interest flows in and out like the tide. Until 2022/2023, Teqnion had real buzz. Within the serial-acquirer niche, people talked about it constantly. New interviews with Daniel showed up on YouTube, and write-ups popped up on Substack. Then the tide turned: fundamentals cracked, the stock followed, and attention faded. For a while now, it has felt like Teqnion barely gets mentioned.

My bet is that once Teqnion shows sustainable revenue and EPS growth again, investor interest will return and the stock price will likely reflect that shift as well.

To frame the return potential, I use a simple “three engines of TSR” model: earnings growth, valuation change, and the change in shares outstanding.

Because Teqnion does not fund acquisitions with equity, I’m not expecting meaningful dilution from rising share count. That simplifies the return framework. You can think about expected returns as being driven by two levers:

• Earnings growth, and

• Multiple change (rerating or derating).

Earnings growth is where the 3-Engines model becomes practical. Long-term, earnings growth is primarily a function of how much capital Teqnion can reinvest and how attractive the returns on that reinvestment are. Mathematically, that relationship is simple:

The following matrix visualizes exactly that. The columns show different ROIIC assumptions; the rows show different reinvestment rates. Each cell shows the implied earnings growth rate (IVCR). The red area highlights scenarios with ≤10% earnings growth.

But earnings growth alone is not the full picture. Starting from a current multiple of roughly 14x, the second matrix shows the annualized tailwind/headwind from multiple change, depending on (a) the target multiple and (b) how many years it takes for the rerating to happen. If the multiple stays flat, the multiple contribution is ~0%. If the multiple expands (or contracts), it adds (or subtracts) from annual returns.

To make this tangible, here’s one example (not a base case):

Assume the reinvestment rate normalizes to 120% (down from >200%) while Teqnion can earn 20% ROIIC. That would imply:

Earnings growth (IVCR) = 120% × 20% = 24% p.a. (before any multiple change)

Now assume the valuation gap to peers closes and the P/E moves from 14x to 35x over 10 years. That multiple expansion would add roughly ~10% p.a. as a rerating tailwind. Combined, that would imply an annual return of roughly:

~24% (earnings growth) + ~10% (multiple tailwind) ≈ ~34% p.a.

The point is not that exactly this scenario will materialize. The point is that Teqnion’s setup creates a wide range of plausible outcomes, and you can stress-test your own assumptions transparently. Some investors will anchor on conservative reinvestment and ROIIC assumptions and assume limited rerating.

I’m deliberately not selecting base scenario here. The matrices are meant to let each reader decide what they view as realistic.

In my view, the downside looks limited from a risk/reward perspective, while the upside over a multi-year cycle could be very compelling

It will be structured in three Parts:

• Part 1 (today): From Compounding to Stress Test: Why the Model Cracked

• Part 2 (today): From Repairing to Re-Accelerating: What Changed in 2025

• Part 3: Show Me the Numbers: Cohorts, Margin Mix, and much more

All parts are now available in one PDF. You can download it below.

Deep Dive Teqnion AB

6.91MB ∙ PDF file

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The "new Teqnion": Gaining Momentum

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👔 Company Name: Teqnion AB (“Teqnion”)

🔎 ISIN: SE0012308088

🔧 Business model: niche industrial serial acquirer

🌍 Geographic exposure: Sweden, UK (sales in Europe)

📈 Stock Price: SEK 169

💰 Market Capitalization: SEK 2.9 billion (~$321 million)

👨‍💼 Number of CEOs since foundation: 2

👨‍👩‍👦 Founder-/Owner-operator: Yes

📅 CEO tenure: Since 2009

🥇 Insider ownership: 5.0% of shares

📊 10Y EPS CAGR: ~23%

🔁 Reinvestment profile: High

💸 Capital intensity: Capital-light

🏰 Moat: M&A edge due to size, type of acquisition targets and deal-making approach

🧨 Main risks: Execution, quality drift, M&A engine, key-person risk

🌳 Slow Compounding fit: Yes – high-quality serial acquirer

Business Model in a Nutshell: Teqnion is a small Swedish sector-agnostic serial acquirer that describes itself as a builder of a conglomerate of industrial companies. The company is run as a decentralized group of subsidiaries, with a strong emphasis on culture, cash generation, and M&A.

3.6. Phase 4 (2025-?): Closing the Process Maturity Gap and Gaining Momentum

Phase 4 is Teqnion’s deliberate shift from a people-driven holding company to a repeatable operating system by adding the minimum set of shared processes needed to stop small problems from turning into portfolio-wide earnings drag. In other words, it’s about fixing issues that have been compounding for years and ultimately culminated in the second multi-year crisis in Teqnion’s history.

Management describes 2025 explicitly as a “new Teqnion” period: changing how subsidiaries are measured, becoming more proactive with support when trends turn, and demanding faster reversals of negative trajectories than in the past. Concretely, the group is standardizing monthly P&L and balance sheet collection, CEO reporting, and a transparent KPI “collector sheet” built around simple green-flag metrics. The aim is to spot underperformance early and address it consistently, rather than solving it only after it has already compounded into a crisis.

“This is in the process of doing a lot of changes on the organizational level and how we measure ourselves within the group. We are on the road to doing something that will be the new Teqnion.” (Johan Steene, CEO, Earnings Call 2025 Q2)

Phase 3 was when Teqnion realized that decentralization can hide problems for longer than you expect. Phase 4 is the attempt to fix what went wrong and build an operating system that makes issues visible early and forces action before they turn structural. Management’s language shifts from explaining underperformance to engineering the response: standardized reporting, faster escalation, clearer accountability, and more explicit “trust, but verify” mechanisms that anchor autonomy in leading indicators rather than gut feel.

Phase 4 is about closing the process maturity gap and upgrading the acquisition strategy. Let’s look at what they have done so far:

3.6.1. Closing the Gap: From “Soft” Decentralization to Measurable Execution

There’s no silver bullet here. It takes a set of reinforcing adjustments working together.

“The issue on my side is that I have not established a stringent system for reporting and action. It has led to a bit of individual ways of working. Now, we have pulled everything back and established a standardized approach. We follow specific KPIs, and when we notice something is going wrong, we require immediate actions.” (Johan Steene, InPractice interview, 28.08.2025)

For example, management has introduced new reporting mechanisms, including a standardized monthly data flow.

“We collect the P&L and balance sheet monthly from each subsidiary. We also have a CEO report where they input numbers, some of which may be found in the P&L. We want them to focus on these numbers as well. It’s not complex; it’s common sense. We monitor earnings, EBIT for the last month compared to the budget and last year’s month. We also track sales, order intake, backlog, gross margin, net margin, and other metrics.” (Johan Steene, InPractice interview, 28.08.2025)

The clearest example is the “collector sheet.” It’s a KPI traffic-light system that management says was implemented and rolled out broadly around mid-2025.

“What we have done for about a quarter now is implement a collector sheet that we present to everyone. We want to ensure that all KPIs have green flags.” (Johan Steene, InPractice interview, 28.08.2025)

It’s best viewed as conditional governance: subsidiaries remain autonomous when they are “green,” but HQ becomes increasingly directive once early-warning indicators turn “red.”

• green flag → freedom

• red flag → autonomy is reduced and intervention increases

“As long as you have a green flag in the sheet, you’re free to do as you like because you’re on the right track. When you have a red flag, you lose some autonomy. We’ll step in and tell you what to do. First, tell us why we’re on red and what you’ll do to get back to green. If we don’t believe you, we’ll tell you what to do. I know I’m free as long as I’m green.” (Johan Steene, InPractice interview, 28.08.2025)

The point isn’t to centralize decisions; it’s to centralize signal.

“We lacked structures to capture data effectively, which made us slow and ineffective. Over the last year, we’ve put more safety measures in place to detect issues early and implement actions quickly, not just for the future but for immediate improvement.” (Johan Steene, InPractice interview, 28.08.2025)

Read that again. It’s critical. The issue wasn’t decentralization itself. The issue was that Teqnion didn’t have a sufficiently standardized early-warning layer across 20–30+ independent units. And management is unusually self-critical about this, explicitly saying that better systems and processes likely would have allowed them to act earlier and perform better.

“There are numerous reasons we’ve underperformed for a while, and I know we could have done better earlier if we had better systems and processes in place from the start.” (Johan Steene, InPractice interview, 28.08.2025)

“I mean, decentralization still is the heart and the center of our business model. Where I think that we have not done good enough, and to be honest, far from good enough, is that decentralization works when you have individuals that are doing the right things, that have autonomy to do the right things, but it’s also people that have the capabilities and the ownership, feeling the ownership of doing the right things. If there is a person like that that is running the company in the right direction, autonomy is the right to go, and decentralization is the model.

However, when we see, and we are following this up more closely nowadays, when we see that operations are deteriorating, and we’re not talking about the financial numbers, but rather more forward-looking indicators, in those cases, we need to be quicker to identify that as number one, and secondly, to ensure that the people that are running the companies are running in the right direction. It’s really about trust, but verify. As long as the person is doing the right things, it is an autonomy. The more we feel that it’s going in the wrong direction, in the first step, they need to explain to us why it’s going in that direction that we feel is wrong. They also need to tell us the plan of righting the ship. If we believe in that, then we support that CEO fully in going in that direction, full steam ahead.

If we try that, or if we don’t feel that they are having the right plan of righting the ship, then we get to a point where we basically have to draw up the map and say, “This is now your journey going forward. Please implement.” If that is going in the right direction, then everyone is happy, and hopefully we all learn something.”

(Daniel Zhang, CXO and Co-CEO, Earnings Call 2025 Q2)

This also explains why Phase 4 inevitably creates more “friction.” If you move from broad trust and light-touch follow-up (where problems were sometimes addressed too late) to a model where underperformance triggers immediate scrutiny, the system will feel tighter. Management acknowledges this directly: there is more friction now because they are making clearer demands of the leaders who are responsible for running them well.

“There’s more friction since we have been more actively out with the subsidiaries and putting demands on the people that have given the responsibility to run them well.” (Johan Steene, CEO, Earnings Call 2025 Q2)

When performance deteriorates, subsidiary CEOs are expected to put forward a clear business plan and action plan. If they can’t, Teqnion helps build one. And if execution still doesn’t improve, management is prepared to conclude that it’s simply the wrong person in the role.

“If the subsidiary CEO is not able to produce a great action plan, then we will help them to develop one of those and then make sure that they follow them. If that’s not possible, of course, maybe that’s the wrong person for the job.” (Johan Steene, CEO, Earnings Call 2024 Q4)

“We will ask the companies for a business plan or action plan of how to make things better and see if they deliver on it, if we like the action plan. If we do not think the action plan is good, we make the action plan for the CEOs and ensure that they will run with it. If they do not, we find someone that will do it for us. It sounds harsh. I think that we’ve been a little bit too patient, to use a nice word, during 2024.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2024 Q4)

This highlights a potential downside of a soft-skill, trust-heavy leadership style, especially in a decentralized model where you assume local CEOs will do the right thing without constant oversight. It can delay tough calls.

In addition, Teqnion introduced a new governance structure in 2025 with two divisions: the Nordics and the UK Each division is led by a segment head who reports to Johan and Daniel. The goal is to strengthen accountability, improve scalability, and deepen local market insight.

In other words, Phase 4 is Teqnion formalizing what decentralization always required, but what had been enforced inconsistently: clear measurement, fast trend detection, and a repeatable escalation playbook. Management even frames it as moving away from “how we feel” and toward following metrics.

“We have metrics that we actually look at and we follow up on the metrics and not so much on how we feel.” (Johan Steene, CEO, Earnings Call 2025 Q2)

A subtle but important architectural change is that Teqnion is also tightening its follow-up culture. Management says the approach was historically too unstructured and insufficiently standardized, and it directly links the new “country manager” role to more structured, closer follow-up.

“The way we have been organized, just to be self-critical of myself, is that we haven’t followed up close enough in a structured way and maybe a little bit in a, let’s say, standardized way. That is the new role of the country managers that we will have.” (Johan Steene, CEO, Earnings Call 2025 Q2)

3.6.2. Raising the Quality Bar in M&A

The second fix is the acquisition engine itself, both what Teqnion buys and how fast it allows itself to buy.

Management’s messaging is now remarkably consistent: focus on higher-quality companies with stronger earnings and cash flow, niche offerings, real pricing power, and margins above the group average, so the group’s mix (and margin profile) improves mechanically over time.

“What we constantly try to improve even in this case is that we try to find higher quality companies, meaning that our the things that we look in a company, high earnings, high cash flow and niche products and whatever that we look at companies that are better, better in those aspects.” (Johan Steene, CEO, Earnings Call 2023 Q1)

“We are also acquiring companies with higher margin than the average margin from the group. So over time, we’re going to increase it and our goal is to constantly increase it.” (Johan Steene, CEO, Earnings Call 2024 Q2)

Management lays out fairly concrete criteria for what it wants to own: high margins, high returns on capital, resilience, strong cash conversion and ideally businesses that control more of their own destiny (own brand, own design/product) rather than being price-takers.

“We meet a lot of companies and what we’re looking for is, of course, companies that we believe is going to be relevant in the decade and more fulfilling these criteria that we mentioned already. They should be really good. They should have high margins, high return on capital and they should produce something that is more or less their own like their own brand name, their own design product or so they hold their own future in their own hands so to speak. Also, we look at the free cash flow there. We look at how good they are at actually turning their earnings into cash. And yes, so we should understand what they’re doing. We should realize that it’s a strong and resilient business model and we should believe that the people is really good at what they’re doing. And then of course there’s so many other aspects to look at, but those are a few things that we definitely look for and try to pinpoint before we proceed to try to acquire something.” (Johan Steene, CEO, Earnings Call 2024 Q3)

Management is clear about what they are avoiding going forward: turnarounds, startups, and typical contract manufacturers. They’re equally clear about the lesson learned: in some cases, they didn’t apply their own criteria strictly enough. Reward Catering is one example they cite, highlighting the importance of a long, proven operating history, since Reward was acquired only four years after it was founded.

“When it comes to the non-negotiables, I mean, the financials, historical robustness when it comes to growth, when it comes to profit margin, when it comes to return on capital, and having an organization where knowledge is spread out and importance is spread out, also when it comes to customers and suppliers, those are things that are super important for us.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2025 Q1)

“We don’t buy from anyone that has, you know, started a company three years ago, and then we buy it. We want a longer track record than that. We’ve done a mistake when it comes to that” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2025 Q3)

“When it comes to Reward Catering, we just didn’t follow our own criteria, at least in one aspect. That was to acquire companies that have a long, solid history.” (Johan Steene, CEO, Earnings Call 2025 Q3)

Phase 4 also brings in a more mature concept: absorption capacity. In other words, the bottleneck is absorption capacity, not deal flow. It’s the ability to integrate, follow up, and support new subsidiaries without breaking the core.

That’s why management says it could do more deals, but deliberately holds back. They want to ensure they have the capacity to onboard new companies properly and they want to pay the “right” price.

“We look at many, many companies and we could acquire more, but we want to be sure that we have the resources to incorporate them into the group in a good way and also that we find companies that we pay the right amount of money for.” (Johan Steene, CEO, Earnings Call 2024 Q2)

Johan and Daniel are putting in place a structure designed to reduce one of Teqnion’s earlier vulnerabilities: being pulled between operational firefighting and continuous deal sourcing.

As discussed above, both have emphasized buying higher-quality companies as a way to reset portfolio construction. They now articulate a clearer ambition to build a more robust group by acquiring businesses that are less macro-dependent and have more uncorrelated risk versus the existing portfolio, explicitly to avoid ending up in the same situation again.

“We’re looking for companies that are not as dependent on macro, and we’re looking for companies that have uncorrelated risk with the rest of the companies so that we can build a more robust group because we never want to be in this current situation again.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2024 Q4)

This is not just a “quality” shift; it’s a risk architecture shift.

In fact, the recent UK acquisitions are higher-margin businesses and less economically sensitive, improving returns on capital and reinforcing the “acquire better over time” strategy.

The early indicators are compelling. The nine companies acquired in 2025 delivered, on average, a 25% EBT margin over the first three quarters, with a range of 14–45%. Compare that with Teqnion’s historical group EBT margin of roughly ~10–11% (in good years), and the quality upgrade becomes obvious. If this high-margin cohort continues to grow as a share of the portfolio, it should mechanically lift the group’s profit margin profile over the coming years.

As you keep adding margin accretive companies to your portfolio, you’re bound to see some significant margin expansion

Quick thought experiment: Teqnion reported, that the 2025 acquisitions contributed SEK 25 million EBT in Q3 2025. Since two of the nine companies were only consolidated toward the end of the quarter, the “run-rate” EBT contribution should be higher. If we assume SEK 30 million per quarter, that implies SEK 120 million per year. For context, Teqnion’s group EBT in 2024 was SEK 119 million. Put differently: the 2025-acquired companies could be generating roughly as much EBT as the other ~30 subsidiaries combined.

A visible profitability step-up is already within reach and neither does it require heroic assumptions nor redeployment of capital during 2026. The chart below is a simple timing bridge for the 2025 acquisition cohort. Methodically, I take the average revenue of the nine acquired companies over the last three years as reported by Teqnion (as a proxy for a “normalized” revenue base) and then allocate that revenue linearly from the quarter in which each company was consolidated. I apply the same logic to earnings, using the profitability disclosed for the cohort to translate the phased revenue into an estimated quarterly profit contribution. This is not meant to be a precise forecast. It’s a directional tool to understand when the cohort should show up in the reported numbers as consolidation rolls through.

The picture is intuitive: the contribution ramps as more companies are consolidated for a full quarter. You get a partial contribution in early quarters, then a meaningful step-up once the cohort is fully in the numbers, and finally a normalization as the comparison base catches up. Importantly, when you sum the quarterly contributions, you end up with ~SEK 400 million of annualized revenue and ~SEK 120 million of annualized earnings across the quarters. In other words: even without any further capital deployment in 2026, and even if the struggling bucket doesn’t improve materially, the “math” alone suggests Teqnion should see a tangible earnings step-up as the 2025 cohort becomes fully reflected in the P&L.

The largest year-over-year step-up in EBIT should come in Q4 2025. On my estimates, 2026 EBIT could be roughly ~SEK 45 million higher than 2025 from full-year consolidation alone—and for context, full-year 2024 EBIT was SEK 148 million.

3.6.3. Incentives, Hiring, and Accountability

Phase 4 is about more than dashboards and deal criteria: it’s also about people and behavior. Management openly says it has changed the type of people it hires, putting more emphasis on a “business mindset” and a clear understanding of how to make money.

“We changed during the year when it comes to what type of people we hire. We focus much more on the business mindset of those individuals, and they should have a clear view on how to make money.” (Johan Steene, CEO, Earnings Call 2024 Q4)

That’s a cultural signal: Teqnion is trying to reduce the risk that a subsidiary drifts operationally because its CEO lacks commercial sharpness.

Even more telling are the incentive changes. Management says it has tightened incentives through a bonus structure with both upside and downside. A “negative” theoretical bonus carries forward and is netted against future positive bonuses.

“Yeah. I should maybe also add that we have changed the bonus structure a little bit in order to tighten the incentives a little bit. It is exactly as what Johan said, but there’s also a change so that if the theoretical bonus was negative, i.e., the results are lower, that’s a negative bonus that you will be carrying forward and netted against future plus bonuses. It is upside and downside. Maybe one more change that we can add for flavor is that if you get a high bonus, you will be forced to use part of that to actually buy shares on the open market that you will need to keep to create even more incentive alignment.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2024 Q4)

That’s a meaningful shift because it discourages short-term smoothing. In addition, management describes requiring that part of a high bonus is used to buy Teqnion shares in the open market and hold them. This explicitly strengthens alignment.

Put together, it forms a coherent picture. Phase 4 is Teqnion making decentralization conditional on performance and competence and embedding that logic into processes (KPI sheet, standardized reporting), people decisions (CEO replacement if plans or execution are inadequate), and incentives (downside carry plus share purchases).

3.6.4. Why this Phase Can Change the Long-term Trajectory

The simplest way to summarize Phase 4 is this: Teqnion is trying to become the kind of serial acquirer it always aimed to be; one that compounds through decentralization, but with a holding-company control layer mature enough to prevent multi-year deterioration from compounding in silence.

Management itself frames this as an organizational transformation:

“This is in the process of doing a lot of changes on the organizational level and how we measure ourselves within the group. We are on the road to doing something that will be the new Teqnion.” (Johan Steene, CEO, Earnings Call 2025 Q2)

That brings us back to the time horizon. The measures Teqnion has taken are not meant to “fix” a single quarter. They are meant to build a platform that should look meaningfully different several years from now.

4. M&A Playbook 2.0: Raising the Bar

Teqnion’s compounding story ultimately comes down to acquisition quality. The company can build a better operating system, but if new deals are low-margin, cyclical, or require constant fixing, the portfolio will never reach a “mostly fine” steady state.

The encouraging part of Teqnion’s current narrative is how explicit management is about raising the bar. They repeatedly say the number one rule is to buy high-quality companies that require very little work from the parent. They also acknowledge that earlier in Teqnion’s history, limited capital often meant that “turnaround is what you get”—a candid way of saying the group sometimes bought what it could afford, not what it would ideally have wanted.

Stripping down Teqnion to one principle: the main growth engine is acquisitions. Management is clear that this remains the key lever going forward, but it is just as clear that they won’t “do deals” simply to hit an annual quota or to meet short-term investor and analyst expectations.

“But we will never do businesses, do deals just because to get hit a certain number of deals in a certain year.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2023 Q3)

What has changed materially is the quality bar, and the infrastructure that makes the acquisition engine repeatable. In other words, Teqnion is trying to preserve what made the model work (simple rules, disciplined valuation, human trust) while upgrading what made it fragile (wide variance in portfolio quality, integration strain, and inconsistent follow-up).

4.1. The “Unchanged Core”: Buy Forever, Avoid Fads, Demand Cash

Teqnion’s long-term orientation shows up in how management talks about targets and how it structures deals. The message is simple:

Teqnion isn’t buying businesses to look good next quarter. Teqnion is buying businesses it wants to own “forever.”

“The thing is that we don’t buy things for now to perform well now. We buy things that’s going to be with us forever.” (Johan Steene, CEO, Earnings Call 2022 Q2)

“We tend to focus on industrial companies that sell something that hopefully will be needed by society in more or less with a tweak forever.” (Johan Steene, CEO, Earnings Call 2023 Q3)

“So in the early days where we bought companies where we thought that there will be very limited organic growth, getting our money back in 5 years meant more or less 5 times earnings after tax. Nowadays when we buy companies where we think that there is a higher growth potential that multiple of course it becomes higher, but we are not multiple focused. We are cash flow focused, future cash flow focused.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2023 Q1)

That mindset has a few practical consequences that have remained remarkably consistent over time:

First, Teqnion prefers businesses where demand and product relevance change slowly, and where compounding is driven by relationships, know-how, and niche application expertise.

“And we don’t try to find what’s hot at the moment or trending at this time. It’s try to find things that we believe is going to be something that’s needed in a long way in the future.” (Johan Steene, CEO, Earnings Call 2023 Q1)

“We try to find things where things change very, very slowly, where we can build the business on having great relationships” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2023 Q1)

Second, the group has long favored “light” balance sheets, i.e. businesses that don’t require heavy capex or large machine parks, and where earnings convert into cash at a high rate. That’s why valuation discussions are often anchored in a proxy for free cash flow (earnings after tax as an approximation), and why cash conversion is repeatedly emphasized as a core filter.

“So when we look at it, we try to look at companies where the profit net of tax more or less is very close to free cash flow over time.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2023 Q4)

“We tend to focus on companies that have a light balance sheet and doesn’t need to buy many machines or things inventory to function. That’s one of our criteria when we’re searching for good companies.” (Johan Steene, CEO, Earnings Call 2023 Q3)

Third, Teqnion’s valuation discipline is consistent across the cycle. Management explicitly says it didn’t “expand multiples” when interest rates were low and it isn’t “shrinking” the hurdle rate now that rates are more normal either. That matters because serial acquirers don’t just need good targets; they need price discipline that holds up across macro regimes.

Beyond the long-term mindset, Teqnion’s “unchanged core” also shows up in how it structures ownership and risk. The group has consistently preferred clean, unambiguous control. Teqnion typically acquires 100% of a target to create a clear cut. Everyone knows who is responsible for running the company going forward, while using earn-outs as a strong incentive mechanism for sellers and continued performance.

“I think for us, we’ve always acquired 100% to make a clear cut. It’s very, it’s obvious to everyone involved who is responsible for running the company going forward. We have the incentive for the sellers in earnouts that is very, very strong normally.” (Johan Steene, CEO, Earnings Call 2025 Q3)

In parallel, Teqnion has remained conservative on balance-sheet risk at the target level. It typically avoids acquiring companies with debt, reinforcing its preference for asset-light businesses where earnings translate into cash.

Finally, management consistently communicates a target of earning back its investment in roughly five years on a realistic forecast (using earnings after tax as a proxy for free cash flow), and it brings that into the conversation early to avoid wasting anyone’s time.

“We try to get our money back or our investment back in 5 years on a realistic forecast. So, we talk with the seller of the company about realistic forecast. And we when we both have agreed on that, we see that we have there is a good chance for us to get our investment back in 5 years and the seller feels that that’s fair value of their company, then we will proceed and do business together. And we have had that approach since we started in 2006 and we still have the same approach and it seems to be working.” (Johan Steene, CEO, Earnings Call 2023 Q1)

“We try to be quick since we’re strict on valuation rules. We talk to many good companies to find a few that value selling to us over others who might pay more. We lay this out quickly to save everyone’s time, as we meet with many companies annually to find the right ones.” (Johan Steene, InPractice interview, 28.08.2025)

4.2. The Early Playbook: Good Rules, Messy Targets (and why that Mattered Later)

Here’s the candid part Teqnion has increasingly been willing to say out loud: it didn’t always buy what its own rulebook would call “ideal.” In the early years, especially when capital was constrained and the organization was tiny, targets were often selected because they were available and affordable, and sometimes because they looked “cheap” on paper. In hindsight, that led to periods where Teqnion acquired businesses that didn’t fit the long-term profile: more cyclical exposure, weaker pricing power, and structurally lower margins (for example, certain contract manufacturing situations).

Practically, that means it helps explain how the acquisition engine could “work” for many years while quietly building fragility. If you buy businesses that need more fixing, the holding company’s operating system has to be stronger to prevent small problems from compounding into big ones.

4.3. What’s New in Playbook 2.0

The “2.0” shift is a bundle of upgrades all pointing in the same direction: reduce portfolio volatility, improve structural margin quality, and treat integration capacity as a real constraint.

1. Higher quality filters (margin, cash, resilience)

   Management describes a clear intention to “constantly improve” the quality of acquired companies, explicitly linking this to higher earnings power, stronger cash conversion, niche products, and better returns over time.

   You can see that evolution even in how they talk about target size and maturity. What used to qualify as “big enough” historically—only a few hundred thousand SEK of earnings—is no longer the bar. Today, they reference meaningfully higher earnings levels as the starting point for a serious evaluation.

   The companies that we’re acquiring today are, on average, much bigger compared to three years ago, and those were bigger compared to ones three years ago. (Daniel Zhang, CXO and Co-CEO, Earnings Call 2025 Q1)

2. A cleaner “business model mix”

   Teqnion increasingly frames the portfolio by “types” and is much more explicit about what it wants less of: businesses with weaker pricing power and structurally margin-compressed customer dynamics. That’s why the acquisition focus is shifting toward companies that control more of their own destiny: they own their brand, their design, and have specialized niche know-how.

3. Integration capacity discipline

   A subtle but important sign of maturity is that management repeatedly says it could do more deals, but chooses not to unless it is confident it has the resources to onboard the company properly and pay the right price. In other words, integration capacity becomes a throttle, not an afterthought.

4. Geographic expansion

   Teqnion has also started to broaden its opportunity set beyond Sweden. It’s a staged approach: learn one new territory well, build a self-sufficient local platform, and only then move to the next. The UK is the prime example of this approach, and management explicitly describes it as having a strong pipeline.

4.4. Acquisition Process: Sourcing, Valuation Conversations, and Soft Factors

Teqnion rarely competes with PE, as PE is usually not interested in small deals. Teqnion wins on trust, alignment, clarity, and speed—not the highest price. That only works if you consistently explain how you operate after the deal, and then actually live up to it.

A few elements reinforce that advantage:

• They meet many companies each year and try to be quick and transparent about valuation expectations, often after the first real meeting, so sellers don’t burn emotional energy.

  “And I think we meet a bit over 100 companies in meetings every year” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2022 Q4)

• The seller is treated as a future partner. That’s also why Teqnion is cautious about using stock as acquisition currency: if the shares are undervalued, issuing them dilutes existing owners; if they’re overvalued, it’s unfair to the seller you’re trying to turn into a long-term partner.

  “I mean for us if we would pay with stock when we think that it’s undervalued, we would never do that because we are owners of this company as well, we don’t want to give away that value. So it would make sense financially to do it when it’s overvalued. But we don’t want to do that either because the people that we pay become our partners.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2022 Q4)

• Relationship building can be genuinely long-cycle. Management explicitly references multi-year dialogues with entrepreneurs before closing. For example, Johan had been in contact with the owner of Schill Reglerteknik AB since 2015 before completing the acquisition in 2023.

• In newer markets (like the UK), Teqnion has leaned more on broker relationships after learning that cold outreach alone can be too slow. Management explicitly frames “being straightforward, responsive, and keeping promises” as a way to improve lead quality over time.

  “More and more sell-side advisors have learned that it’s actually fun to work with us, that we keep our word, etc” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2025 Q3)

  “But I think one of our competitive advantages when it comes to acquisition is our relationship building with potential sellers, with the entrepreneurs. I think they see after a while that we understand them and how tough it has been to build that company that they are trying to sell. And that is maybe soft values, but those soft values is still values. And since we tend to be very honest in what we see and what we kind of demand from them after transaction. If the people that likes what we do and likes Teqnion and want Teqnion to be a harbor for their life’s work, they sell to us and they sell to us at the price that and the valuation that we like and that we stick to.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2022 Q4)

4.5. Deal Structure: Five-year Payback and Earn-outs as Alignment (and Risk Control)

The capital allocation “math” behind the playbook is simple.

Teqnion aims to earn back its investment in roughly five years on a realistic base case (again using earnings after tax as a proxy for free cash flow). Downside is protected by keeping the upfront payment limited. Upside is then shared through earn-outs if performance improves materially over the next few years (more risk = less cash upfront and a larger earn-out component).

“On average, we pay between 60% to 70% upfront, and the rest is on earn-outs.” (Johan Steene, InPractice interview, 28.08.2025)

This also explains why Teqnion prefers sellers to stay involved for a meaningful transition period. Earn-outs aren’t just price mechanics. They’re incentive mechanics. They “incentivize the seller to stay on” and keep the business on its trajectory, with typical earn-out periods often lasting two to three years.

“We prefer to buy a company where the succession is in place or where the entrepreneur can stay on but we are also looking at companies where the owner wants to retire and then together with him or her, we make that succession happen over a 2 or 3 year period.” (Johan Steene, CEO, Earnings Call 2023 Q3)

Finally, there’s a practical, human side to succession. Many entrepreneurs sell because they want to step back. Teqnion frames the transition as a planned, multi-year process. In some cases, founders stay on as cultural ambassadors, board members, or part-time relationship holders while the next management layer is put in place.

“We usually discuss these matters thoroughly before acquiring a company, focusing on what the seller envisions for the future. Typically, when they sell the company, it’s because they want to pursue something else or reduce their involvement in running the business. In such cases, we agree to find new management within three years, hoping they enjoy working with us and choose to stay on in some capacity. They might continue for a day or two a week, or a few days a month, to maintain relationships with customers or suppliers and serve as a cultural ambassador for the company. We often invite them to join the company’s board, even if they’re not operationally involved anymore. Some individuals express a desire to continue working, which we appreciate. Although we don’t formalize this in writing, they might commit to five years before reassessing. If they decide to retire, we collaborate to find new management. However, some are ready to retire immediately upon selling, and they communicate this early on. In such cases, we ask for a certain amount of time to work together to find new management.” (Johan Steene, CEO, Earnings Call 2023 Q3)

4.6. Upgrading Diligence (Reward Catering Disaster)

One of the most valuable aspects of “Playbook 2.0” is that it’s not just about what Teqnion buys. It’s also about lowering the odds of repeating the same mistake.

Reward Catering was Teqnion’s first acquisition in Ireland, completed in September 2022. In early communications and Q&A, management described Reward as an asset-light niche player (final assembly in Ireland, with much of the work outsourced), with optionality to expand internationally, even mentioning the U.S. as a “very early days” opportunity.

At the time, Reward seemed to fit: a specialized product, strong entrepreneurial drive, and (apparently) attractive economics—exactly the kind of small business you’d want in a permanent home.

The situation later deteriorated into a seller dispute over the earn-out. In Teqnion’s own words, the disagreement “turned into a court case,” and during/after that process “a couple of other legal cases” emerged. The Irish court asked the parties to keep discussions in court and not in public, which limited what management could disclose.

By October 2025, Teqnion escalated significantly. It announced that it had decided to seek the appointment of provisional liquidators for Reward Catering. Around the same time, Teqnion recognized a goodwill impairment of SEK 73 million related to Reward, and management explicitly linked that impairment to the decision and process around pursuing liquidation.

For the Deep Dive, the key point isn’t the legal detail, it’s the process lesson Teqnion itself draws from it.

“It has been the biggest mistake that we’ve done.“ (Daniel Zhang, CXO and Co-CEO, Earnings Call 2025 Q3)

Management is direct about what they got wrong: (1) they didn’t fully follow their own criteria, especially the preference for companies with a long, solid operating history; and (2) they relied too heavily on third-party diligence reports, letting their own guard down.

The “fix” in the M&A process is described in concrete, procedural terms: running personal background checks not only on legal entities but also on the individuals involved; securing tighter and earlier control over critical systems (e.g., IT and banking access); and intervening faster when something looks off. Management also says that since then, they’ve walked away from several deals where the business itself looked fine, but personal-background signals raised concerns—an explicit cost of being stricter.

4.7. Summary: Playbook 2.0 Acquisition Criteria

The following table summarizes Teqnion’s acquisition criteria as described by management.

5. Acquisitions: The Track Record

Teqnion’s long-term compounding story is inseparable from its acquisition engine. Management is very clear that acquisitions are the primary growth lever: Teqnion is built to keep adding subsidiaries and let the portfolio compound over time.

This chapter takes a closer look at Teqnion’s acquisition history.

5.1. Acquisition History

Before discussing outcomes, it’s worth laying out the transaction list. A complete acquisition table forces clarity: how quickly did the portfolio expand, when did the group expand abroad, and how concentrated is the portfolio in any one geography?

Let’s first look at what these businesses actually do (excluding UpTech Norden AB and Electrona Sievert AB, since they were disposed of / went bankrupt).

• Industrikomponenter AB (2006): INKOM supplies electromechanical and electronic components for demanding industrial applications across the Nordics. The company acts as a specialized value-added distributor, combining strong supplier relationships with technical product expertise and reliable availability from its own warehouse.

• Storebro Energy Systems AB (2007): Storebro Energy Systems operates in sales/trading and installation of electronic products, mainly serving customers in the leisure and automotive sectors. The model is largely product-based distribution plus installation/service work depending on customer needs.

• Elrond Komponent AB (2008): Elrond provides complete solutions for a safe electrical environment in automation and installation. It is a Nordic leader in lightning protection, offering surge/lightning protection products, UPS systems, and equalization materials, supported by commissioning and service.

• Narva Scandinavia AB (2012): Narva Scandinavia sells light sources and LED lighting under its own brand (NASC), mainly to electrical wholesalers and professional customers across the Nordic region. The business is built around product availability, distribution reach, and a focused lighting portfolio.

• GB Verkstad & Industrivaror AB (2014): GB Verkstad provides industrial consumables and components with one of Northern Sweden’s broadest assortments, ranging from fasteners and hydraulics to seals, bearings, lifting products, and transmission items. Its value proposition is local presence, fast access, and customized logistics for industrial customers.

• Air Target Sweden AB (2015): Air Target develops and sells acoustic target indication systems used for military practice shooting with supersonic projectiles. It stores and presents shooting data and serves defense organizations in 30+ countries, operating as a long-lived specialist with global reach.

• K-FAB Sverige AB (2015): K-FAB supplies modern, affordable lighting for home environments and sells through retailers worldwide. It combines Scandinavian product design and branding with international sourcing capabilities (including operations in China).

• Cellab Nordia AB (2017): Cellab Nordia markets and sells laboratory instruments and consumables (pathology, histology, cytology, cell and molecular biology) and provides certified technical service. Customers are mainly clinical and research labs in Sweden, including pharma, biotech, food, and QA environments.

• Grimstorps Byggkomponenter AB (2018): Grimstorps manufactures wooden building components such as trusses and house frames and delivers complete building kits (including drawings). The model benefits from industrialized production, reliability, and repeatable B2B demand in the construction supply chain.

• Stans & Press Industriservice I Olofström AB (2018): Stans & Press is a contract manufacturer focused on high-quality sheet metal products. It operates with a modern machine park and long experience, serving both international industrial customers and smaller regional players.

• Eloflex AB (2018): Eloflex is a European leader in foldable electric wheelchairs, sold across many markets. Products are often prescribed via public healthcare systems and also distributed via partner networks, with strong positioning in the assistive technology ecosystem.

• Hem1 Sydost AB (2019): Hem1 sells architect-designed detached houses and takes responsibility for the entire construction process. With its own factory and long operating history, it functions as a turnkey homebuilder serving customers with customized “dream house” projects.

• Markis City AB (2019): Markis City refurbishes and distributes professional coolers/freezers to beverage and food industry customers, extending equipment life through service and upgrades. The model blends logistics + refurbishment + customer relationships, supported by demand from major brands and sustainability-driven replacement cycles.

• Injab Kraft Teknik AB (2020): Injab provides a full range of current and measuring transformers and deep application knowledge for installation. It also supplies relay protection (low/medium voltage) and components for grid stations and medium/high voltage use cases.

• WiMa Propulsion AB (2020): WiMa repairs and maintains gas turbine installations both in-house and in the field. The company supports customers with maintenance, rebuilds, service work, and technical analyses, positioned as a specialist service provider in a demanding niche.

• Cutting Metal Works i Valdemarsvik AB (2021): CMW is a contract manufacturer specializing in precision chip-cutting metalworking. The company is known for high quality and on-time delivery, serving demanding customers that require complex components with tight tolerances.

• Kema Storköksförsäljning AB (2021): Kema designs, manufactures, and sells stainless steel products for professional kitchens under its own brand, such as wine coolers, warming benches, and refrigerated counters. The moat is customization, reputation, and long-standing quality leadership in a demanding customer segment.

• Wallmek i Kungälv AB (2021): Wallmek designs and manufactures special tools used in vehicle repair and dismantling (cars, trucks, trailers, construction machines). Products are sold under its own brand to customers in Europe and North America, improving efficiency and ergonomics in workshops.

• UGAB AB / Innoguard AB (2021): INNOGUARD develops, manufactures, and markets laboratory and medical technology products designed to integrate into labs and healthcare environments. Products are sold under its own brand primarily to customers in Scandinavia.

• Vicky Teknik AB (2021): Vicky Teknik supplies complete equipment solutions for TMA (Truck Mounted Attenuator) protective vehicles, including its own variable LED signs and associated peripherals. It operates as a turnkey system provider with a strong position in the Nordic market.

• Teltek i Örebro AB (2022): Teltek delivers solutions for weighing, process control, and labeling in process industries. It provides tailored systems such as self-developed check scales and IT systems, and also represents equipment like X-ray machines and metal detectors.

• Belle Coachworks Holdings Limited (2022): Belle designs and manufactures enclosed vehicle transporters for needs that few others can handle, such as luxury cars, concept cars, and armored vehicles. The differentiation is premium build quality, service level, and superior finish.

• Reward Catering Limited (2022): Reward Catering designs and manufactures high-end food trucks and trailers, known for visually striking builds sold primarily to customers in the UK and Ireland, with reach into European and American markets. The model is design-led manufacturing with strong margins and execution-driven growth.

• Lundahl Transformers AB (2022): Lundahl develops and manufactures premium transformers for demanding audio applications, used across professional and high-end audio signal chains. The company also delivers custom adaptations and entirely new designs upon request, anchored in a globally respected specialist brand.

• Stanwell Group Ltd. (2023): Stanwell develops and sells dispensers, pumps, and liquid handling systems, primarily serving beverage dispense applications. Its products are widely installed across UK pubs, with customer loyalty built on reliability, consistent service, and specialist know-how.

• Schill Reglerteknik AB (2023): Schill develops advanced measuring equipment for dynamic and static alignment of weapon systems, mainly used on naval vessels (and some land platforms). The equipment enables fast and precise alignment to maximize firing accuracy.

• Surge Protection Devices Ltd. (2023): Surge Protection provides surge protection solutions across the British Isles, serving sectors such as public buildings, defense, airports, and museums. The business combines high-quality products with tailored consultation, driving long-term customer relationships.

• Nubis Solutions Ltd. (2024): Nubis designs custom enclosures used in high-intensity data center environments. Its solutions help customers improve server efficiency and lifespan while reducing energy use and carbon footprint compared with alternative setups.

• Avelair Ltd. (2024): Avelair designs and manufactures energy-efficient screw compressors and provides complete compressed-air solutions, from system design and installation to servicing and maintenance. The offering includes fixed/variable speed compressors, air treatment systems, and customized packages.

• UK Lanyard Makers Ltd. (2024): UKLM manufactures custom lanyards used in operationally critical settings such as large events, trade shows, and product launches. Customers choose the company for design quality, delivery reliability, and flexibility in execution.

• Midland Special Fasteners Ltd. (2025): Midland Special Fasteners supplies special fasteners and machined parts where unique specifications and quality cannot be compromised—serving extreme requirements ranging from supercars to aerospace and defense-related applications. It fulfills demand via in-house manufacturing and global sourcing, supported by deep industry expertise and a loyal export customer base

• Awarded 2U Ltd. (2025): Awarded 2U provides corporate customers with custom-made awards and manages the full workflow in-house, from design through production and finishing. Its success is driven by creativity, reliability, and strong customer-centric execution.

• Merridale Ltd. (2025): Merridale supplies, installs, and services commercial fueling equipment, from single pumps to fully turnkey depot systems. It also offers fuel management systems, tank gauges, and associated equipment, with thousands of installed sites generating long-term service and upgrade opportunities.

• Thermasolutions International Ltd. (2025): Thermasolutions designs and manufactures refrigeration blind systems that reduce energy usage in supermarkets and hospitality settings. It serves both UK and international customers, from small outlets to major global retailers.

• Edurus Gravstenar AB (2025): Edurus is the Swedish market leader in headstones, stone figurines, and second-name engraving, selling mainly through funeral homes (and some direct-to-consumer). It operates in a conservative, stable market where reliability, quality, and operational efficiency matter.

• MITAB i Forsbacka AB (2025): Mitab supplies cremation furnaces and associated equipment (coffin handling, ash handling, flue gas cooling, etc.) and supports customers end-to-end. From planning and manufacturing to installation and service. The company is a technical and market leader in the Nordic region.

• Norlin Polymers (UK) Ltd. (2025): Norlin compounds technical polymers tailored to each customer’s needs, primarily for medical device and pharmaceutical applications across Europe. Its products are bespoke and aligned with regulatory requirements, manufactured through a highly automated continuous heat extrusion process.

• Birkett Bogmats Ltd. (2025): Birkett Bogmats specializes in supplying hardwood timber bog mats used for ground protection and temporary access. From its UK depot it serves construction, civil engineering, plant hire, and energy projects, with a reputation built on reliability and consistent product quality.

• HT Servo Ltd. (2025): HT Servo supplies high-precision motion control components and systems, with emphasis on direct drive technology. Customers include leading UK aerospace and defense companies, relying on the firm’s technical expertise and service mindset for reliable servo solutions.

5.2. Portfolio Evolution: Geography and Age-at-acquisition

The following chart summarizes acquisitions by geographic footprint. It highlights clearly that Teqnion began its “internationalization” with acquisitions outside its home market, Sweden, in 2022. Over the last four years, Teqnion acquired 19 subsidiaries (vs. 22 from 2006–2021). Of those 19, only five were in Sweden, one in Ireland, and 13 in the UK In other words, about 74% of acquisitions over the last four years were made outside Sweden.

The next chart shows the same picture, but on a cumulative basis (also reflecting the two disposals). One point stands out. In the Q3 2024 earnings call, management said the UK and Ireland operations together accounted for roughly half of group profit in that quarter, even though about ~76% of subsidiaries were still Swedish at the time. That suggests the acquisitions abroad have, so far, been (a) larger and (b) more profitable.

The following chart shows that Teqnion typically buys mature, long-established businesses (acquisitions are sorted chronologically). The average age at acquisition is ~23 years, although there is meaningful dispersion on both ends.

Notably, the younger outliers cluster in 2022 and 2023, when Teqnion acquired several companies with shorter operating histories. Since then, the pattern shifts back toward older targets, with a clear move higher in age-at-acquisition, consistent with the tightened M&A strategy and management’s stated intent to avoid “startup-like” situations in favor of businesses with a longer, proven track record.

Overall, it supports the narrative that the quality bar has moved up and that Teqnion is increasingly buying companies with more operating history rather than relying on short-track-record exceptions (as discussed above).

5.3. Case Studies

The next question is straightforward: how do Teqnion’s acquisitions perform before and after they are acquired? In a decentralized model, the key capability isn’t “integration” in the classic corporate sense. It’s making sure each subsidiary has the right leadership, the right incentives, and the right operating discipline in order to remain autonomous while still being held accountable.

Chapter 3 might give the impression that Teqnion is struggling across most subsidiaries. That’s not the case, as the analysis below shows.

I split the case studies into two buckets. First, problem cases. Second, selected positive examples, where the goal is to show what the model looks like when it works over many years.

For the Swedish subsidiaries, the last 9–10 separate financial statements can be accessed on hitta.se for free. The UK acquisitions come with a disclosure limitation: the income statement isn’t disclosed. That’s why this chapter focuses on the Swedish businesses.

5.3.1. The Problem Cases

Problem cases matter not because any acquisition-led business avoids mistakes—none do—but because they show whether the holding company learns from them and upgrades its system. As discussed above, Teqnion’s struggling bucket simply became too large.

Housing-exposed subsidiaries (Hem1 and Grimstorp):

Management’s framing of housing is instructive. They acknowledge severe volume pressure, but also emphasize that housing has historically been a small part of group turnover. The implication is that housing can meaningfully drag results in a downturn, but it shouldn’t define Teqnion’s through-cycle earnings power.

“We’ve had some people wondering about our exposure to the construction or housing market, which, as you know, we have 2 companies, Hem1 and Grimstorp, that are exposed to that. Historically, there have been less than 10% of the turnover. And I think that Hem1 has sold close to 0 houses for the last quarter or two.” (Daniel Zhang, CXO and Co-CEO, Earnings Call 2022 Q4)

Hem1 Sydost AB and Grimstorps Byggkomponenter AB are good examples of why Teqnion has become more cautious with housing-exposed, cyclical businesses. Both companies compounded revenue and produced solid profitability for many years. Eventually the housing cycle turned and the economics broke sharply as interest rates rose.

Hem1 grew from ~SEK 41 million in revenue in 2011 to a peak of ~SEK 135 million in 2019. It then stayed around ~SEK 90–94 million in 2020–2022, before collapsing to ~SEK 33 million in 2023 and ~SEK 18 million in 2024. Over the same period, EBIT swung from healthy profits in 2016–2021 to losses in 2023–2024. It’s a classic operating leverage effect once volumes fall below the fixed-cost base.

(In the charts that follow, the light green bars represent the period before Teqnion acquired the company, while the dark green bars start in the acquisition year and reflect the period in which the business is part of the Teqnion group.)

Grimstorps shows the same pattern. Revenue climbed steadily to ~SEK 67–70 million in 2016–2018, then accelerated to ~SEK 108 million in 2022, before dropping back to ~SEK 62 million in 2023 and ~SEK 59 million in 2024. Profitability followed the cycle even more brutally, moving from high-single-digit EBIT margins in the good years to deep losses once demand weakened.

In 2025 management commented that both businesses do see a positive trend.

Contract manufacturing (Stans & Press and CMW):

Contract manufacturing often comes with limited margin upside because customers are skilled at pressing prices. But it’s not a universal rule. It depends on the industry. Just think of TSMC, the world’s largest chip contract manufacturer, with EBITDA margins of ~65%.

In Teqnion’s case, Stans & Press and Cutting Metal Works illustrate the structural challenge of many contract manufacturing businesses: you can run a highly competent operation for years, grow revenue, and still end up with fragile economics once volumes weaken because pricing power is limited and the cost base is structurally fixed.

Stans & Press Industriservice shows a long stretch of stable-to-growing revenue, but profitability is clearly cycle-sensitive. After strong years around the acquisition period, EBIT compresses quickly when demand softens, culminating in a sharp loss in 2024 despite still meaningful revenue.