In September, in his report on European competitiveness, economist Mario Draghi criticized the European Union (EU) defense industry. The former head of the European Central Bank (ECB) and president of the Italian council points out that, from June 2022 to June 2023, 78% of EU members’ spending in the sector comes from non-European suppliers. As expected, the United States represents 63% of orders, a market share that does not seem willing to decrease.
Since January, American groups specialized in defense and security confirm his excellent health. Company acquisitions and mergers have also begun to increase again, thanks to capital flows from private investors. The most emblematic operation is the work of Arcline Investment, which paid 1.8 billion dollars (about 1.69 billion euros) to acquire the helicopter manufacturer Kaman, created in 1945. The Arcline fund even signed a new important operation in September. It offered one of its portfolio companies, Fairbanks Morse Defense, the Rolls-Royce subsidiary specializing in ship propellers.
A decade ago, only a handful of private equity firms like Arcline specialized in defense investments, including space and government services. Since 2017, the S&P Global Market Intelligence firm has identified 178 private fund managers positioned in the sector. “They are interested in long-term contracts or with clients like the Ministry of Defense that they cannot default on”explains Meghan Welch, managing director of KPMG’s corporate finance practice, specializing in mergers and acquisitions in the aerospace and defense sector.
Increase in mission outsourcing
Another factor in the sector’s attractiveness is the continued 4% growth of the US defense budget until 2028. This primarily benefits the cohort of subcontractors used by the Pentagon. The tendency to subcontract missions previously carried out by the government is only being confirmed. These contracts, which typically last three to five years, align perfectly with private equity’s five- to seven-year horizon.
The funds are also attracted by a high rate of industry consolidation. These are groups of several small and medium-sized companies that create platforms that can respond to important tenders from the US authorities. These mergers also increase the innovation capacity of companies, a determining issue for the United States that does not intend to renounce its supremacy, especially in its conflict with China.
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