Michael Sion, John Wenzel & Blaine Pellicore
Private capital is poised to play a critical role in the modernization of the US defense industry. As battlefield demands shift, the government is seeking to accelerate investment in advanced technologies and encourage disruption. Private capital will help the US close the investment gap, innovate faster, and improve the affordability of defense platforms and systems.
Venture capital and private equity firms can add value in two key areas. Disruptive start-ups need growth-oriented investments to develop new capabilities and achieve step-change improvements in cost and time to market. In particular, private capital can play a key role in reducing the cost of delivering battlefield outcomes (sometimes called “cost per effect”). More mature companies will require investment to increase manufacturing scale and production capacity, improve on-time delivery, and bring unit costs down.
Many investors have been wary of the defense sector, given its high barriers to entry, low unit volumes, high customer concentration, and atypical go-to-market costs. Defense companies also must grapple with government budget uncertainty and political shifts. These factors make self-funded corporate investment in long-term research and development more difficult. However, firms that can navigate these challenges will have the opportunity to get a stake in fast-growing companies at a critical juncture for the industry.
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