Framework for Improving the Investability of EU Defense for Institutional Investors
2025/02/18
Panel #3 Financing – Munich Re:
Framework for Improving the Investability of EU Defense for Institutional Investors
Institutional investors seek stable and superior cash flows. As capital is usually bound for a long-time (10+ years), it requires careful consideration of investment risks.
However, the current investability of EU defense is low, necessitating key changes in the framework to increase attractiveness:
1. Clear political direction, unity and will: clear political agenda, goals, long-term commitments, and most importantly demand/order books by the government are needed to reduce the perceived high cyclicality (volatility) of the defense sector by asset managers
2. Increasing investment opportunities:
2.1 Expand the definition of defense to include the entire value chain beyond weapons to attract diverse private capital and investors across many asset classes and risk profiles, particularly in
- VC / PE: defense tech / AI, drones, quantum computing etc. = fit for sovereign wealth funds and insurance companies; smaller part can be invested by pension funds
- Infrastructure equity but mostly debt: e.g., communication, ports, fiber networks, data centers, production lines etc. = fit for also pension funds
- Real estate: military barracks / housing / training grounds = fit for all mentioned investors
2.2 Current hurdles/obstacles as well as known concepts that can be used as kick-starters for capital formation:
- Strengthening the VC ecosystem in the EU to scale and exit businesses; reduce government intervention when it comes to exit routes
- Encouraging role modeling and de-risking of equity investments by public institutions, such as EIB and KfW.
- Use and scaling of existing, known, and proven concepts such as PPPs (public private partnerships) on national and EU level à apply concept to other critical dual use infrastructure
3. Reducing entry barriers / restrictions: while there aren't many exclusions except EU Taxonomy on controversial weapons & Art.8 fund exclusions, investors are often unnecessarily over-excluding
- Lead a mindsets/culture change to stop investors from proactively over-excluding to increase the available investor base
- Link defense to the S of ESG - Social = Security along the EU Taxonomy would help guiding the way of investability for investors; better definition and transparency will help best if combined with grassroots role-modelling of public risk takers
- Consider lower capital charges for regulated investors (e.g., solvency II – rollout of larger application of qualifying infrastructure debt to other critical (defense) infrastructure)
Efforts along these investment principles can help increase the investability of EU defense for institutional investors, hopefully contributing to the development of a more robust and sustainable defense sector.
An integrated public and private approach is needed: without clear demand covered by public / EU / national budgets, private capital will stay hesitant to enter the sector.