SuperReturn 2023: Investing in defense & tackling the innovation gap

4 key INSIGHTS from "Investing in Defense: Tackling the Innovation Gap"
 

1. Investments in defense & KRITIS value chain on the rise: The perception of investments in defense has changed significantly, especially in Europe, and interest in public finance is on the rise. Private equity investment in the defense and KRITIS (critical infrastructure) value chain continue to thrive, with over 400 deals per year and more than €10 billion invested. This highlights the attractiveness of this investment area and the significant interest from private equity firms. Additionally, there is a noticeable shift in the public and professional perception of investments in defense in Europe: there is a growing acceptance and recognition of the importance of defense investments for national security and technological advancement.
    
2. Cyber security: Companies are actively seeking assets and companies specializing in cyber security, including software-based solutions and consulting services. The emergence of cyber security as a separate domain within the defense market has attracted significant investor interest, with the market projected to grow at a 30% compound annual growth rate (CAGR) until 2030. As companies in the market continue to grow and reach higher levels of financial performance, the increased liquidity makes cyber security an attractive sector within security to invest in.
    
3. United States influence: We look back at the early 2000s as a turning point for investment in defense in the United States, as the mergers and acquisitions (M&A) transactions in security alone outpaced the broader M&A market. Given that just last year, investment by PE firms in defense in the US eclipsed $15 billion, it’s noticeable that the US defense sector has remained robust. With the uptick in cyber security and aerospace opportunities, companies are more likely to find attractive opportunities that don’t involve the creation of instruments of war.
    
4. Market fragmentation: The current market in the cyber security sector is highly fragmented, presenting enticing opportunities for experienced private equity funds. With various segments across the value chain, including Original Equipment Manufacturers (OEMs), system integrators, and assembly manufacturers, there are ample possibilities for buy-and-build strategies to consolidate and create value in this evolving market.

Future outlook

The cybersecurity market is expected to continue its growth trajectory in the coming years, driven by market expansion and the increasing relevance of cybersecurity companies for investment. The same can be said of the uptick in defense investment, which is a profitable industry.

In conclusion, the panel provided valuable insights into the thriving private equity landscape in the defense and cybersecurity sectors. As these industries continue to evolve and expand, the opportunities for investors to capitalize on emerging trends and drive innovation remain abundant, and the outlook for the cybersecurity sector is quite promising.

The increasing relevance of cybersecurity in a digitally interconnected world, combined with the alignment of these investments with ESG considerations, further fuels investor interest. We are looking forward to more insights and predictions from upcoming panels!