Tjarda Molenaar: Investing in defence, between taboo and opportunity
Tjarda Molenaar: Investing in defence, between taboo and opportunity
This column was originally written in Dutch. This is an English translation.
By Tjarda Molenaar, Director of the Dutch Association of Participation Companies (NVP)
Since the start of the war on Europe's eastern borders, the debate on investing in defence has changed dramatically. What was once a taboo subject is now actively encouraged by the government. The creation of the NATO Innovation Fund, which deploys more than €1 billion in deep tech to address defence, security and resilience challenges, is a clear indication of this shift.
Last month, the Ministry of Defence announced a new investment fund to be set up, the SecFund ('Security Fund'). With a fund capital of EUR 100 million, this fund will provide early-stage financing to Dutch startups, scale-ups and innovative SMEs that meet defence innovation needs. During the NVP's annual seminar on 24 October 2024, Commander of the Armed Forces Onno Eichelsheim spoke about these developments and the opportunities involved.
Despite the capital set aside by the government to drive investment in defence, the response from private equity and venture capital funds remains reluctant. What is holding them back? Three main barriers pose obstacles to defence investment.
First, there is the fear of reputational damage. For years, investing in defence was surrounded by a stigma; there is a fear that this negative perception could return. Funds do not want to risk being labelled as 'war profiteers'.
Second, fund policies and the wishes of their investors play a crucial role. Often, private equity and venture capital funds have agreements with their investors that prohibit them from investing in defence-related projects. This ensures that even if a fund intends to invest in this sector, they cannot do so without before reaching new agreements with the investors in their funds.
Third, there are the limited exit opportunities. The value of an investment in a company is largely determined by the possibility of selling the share again. In a sector that is still relatively 'new' to private equity and venture capital in Europe, such as defence, it is often unclear who the potential buyers are. This lack of clarity creates considerable uncertainty for investors; without a competitive sales market, the chances of a good exit are limited. In countries such as the United States and Israel, this exit market has been in place for many decades.
Finally, investors also face increasing regulatory pressures. The complex laws and regulations surrounding defence investments make things even riskier. Think of the Security Test Investment, Mergers and Acquisitions Act (Vifo Act) but also all kinds of export restrictions. This deters many investors, as bureaucratic hurdles can land them in a legal quagmire.
Eichelsheim stressed at the seminar that these obstacles also present opportunities for investors. While the industry sees the above points as obstacles, he argued that societal perceptions around defence investment are changing. Investing in good defence and armed forces is necessary to maintain peace, especially in a world where authoritarian regimes are putting pressure on democracy. Even if Ukraine and Russia reach a peace agreement, the need for strong defence remains. Good, then, that the Netherlands will adhere to the NATO norm of 2% GDP for defence spending. This will even be laid down by law. With this, the government is creating a solid ground for long-term investments. In addition, several investors have taken steps to broaden their mandate.
In conclusion, defence is 'here to stay'. Our task now is to work together to remove the remaining barriers so that we can invest in peace and security.
This article contains a personal opinion from Tjarda Molenaar.