Defence spending in Europe has gained plenty of consideration this yr with non-public fairness companies beforehand highlighting the rising alternative to deploy capital. Whereas non-public credit score companies have been a little bit extra sceptical at first, the technique is now gaining traction.
For instance, Sienna Funding Managers introduced in September that it had raised over €270m (£234m) in commitments for a devoted technique concentrating on small- and medium-sized enterprises (SMEs) and mid-caps in a primary shut. The fund is concentrating on as much as €1bn by the top of 2026.
Philippe Roca, co-director of Sienna Hephaistos fund, mentioned that a big a part of the defence ecosystem is made up of SMEs that present components to the bigger firms and wish to extend their manufacturing capability at brief discover.
“They already elevated their debt throughout Covid,” he mentioned. “They’re now requested to extend their manufacturing capacities. So that they want additional financing following the rearming of Europe and the rise within the backlogs of navy tools producers.”
Sienna is wanting throughout Europe for alternatives, though Roca says that they’re seeing plenty of companies in France particularly.
The fund is on the point of approve its first investments within the subsequent few weeks.
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Though Roca mentioned that there are some fascinating alternatives in drone producers, he’s additionally within the provide chain of the defence trade.
Tikehau Capital’s head of personal debt Cecile Mayer-Levi, mentioned that there’s positively elevated exercise within the area pushed by non-public fairness companies.
“It was once a bit within the gray zone and it wasn’t very clear from the bylaws whether or not you can spend money on defence companies, however there have been adjustments on the regulator stage to guarantee that the bylaws of the funds and enviromental, social and governance guidelines don’t restrict funding on this space,” she defined.
Though Tikehau has been investing on this space for a while, it has not launched a devoted debt fund like Sienna. As a substitute, it has determined to maintain it as considered one of its energetic sectors from its current pool of property.
The group has beforehand lent to aerospace defence subcontractors, akin to upkeep operators and financial intelligence suppliers.
“One of many key issues of the diligence course of is knowing the government-led contracts,” Mayer-Levi mentioned.
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“They’re privately-held firms however they’re all subcontractors for governments, so you might want to perceive that in the case of working capital necessities, they typically rely on massive orders with lengthy fee timelines. They are going to have a protracted order guide that appears energetic however there are systematically some deferred orders and that’s very delicate in that setting.”
The present geopolitical turmoil has prompted many companies on this sector to ramp up their exercise. Consequently, Mayer-Levi has seen extra firms come underneath stress as a result of they didn’t have the total financing in place to extend their revenues and order books.
“It’s necessary to verify these long-term contracts are secured and never cancelled,” she added.
