Australia has a number of ASX listed defence companies and many other companies engaged in the defence sector, but none have ever been flavour of the month among certain investors.
There appears to be multiple reasons for this. Australia has never possessed the venture capital culture of the US. Compared to the US, Australia’s defence industry sector is modest. And in Australia, for most defence companies, there’s just one cautious customer.
But that appears to be changing, with the conflict in Ukraine and Australia’s more perilous strategic circumstances.
The funding of Australian defence companies is the subject of a new study by the US Studies Centre at Sydney University to be launched later this month.
Director of the centre’s economic security program and study author Hayley Channer told ADM the tide was turning, with venture capital starting to think about defence as an asset class.
“This is common in America where financing national defence is considered patriotic,” she said.
“In Australia the culture is very different. All the ESG issues in Australian mean companies really shy away from anything that has lethal potential or could be used during a conflict.”
ESG stands for environment, social and governance. That has more to do with how a company is responding to climate change in most instances.
“Companies all set their own ESG standards. There is no one size fits all and it is not regulated. A lot of the standard setting is coming out of Europe. Sometimes it is a race to the top or a race to the bottom, depending on how you see it,” Channer added.
It’s not just the prospects of an activist shareholder monstering a CEO at a bank’s annual meeting over an investment in a defence company. Private equity seeks profit and on that basis Australia’s modest defence sector isn’t that attractive.
But there are some interesting developments.
Bondi Partners, the advisory and investment firm co-founded by former federal treasurer and Ambassador to the US Joe Hockey, now includes a venture capital fund for national defence titled 1941.
“With a focus on dual-use businesses and technologies, particularly in the defense, cyber, intelligence, space and related national security industries, 1941 will help Australian and US businesses harness the world-leading expertise and resources required to grow,” the company’s website says.
US venture capital company KKR – of which Malcolm Turnbull is a partner - is investing in Australian defence. Last November KKR invested A$108 million in Advanced Navigation, an Australian defence and technology company.
“Rather than an Australian venture capital firm stepping up, an American firm is backing Australian companies with good technology,” Channer said.
Closer to home, Westpac and the government’s Export Finance Australia are set to provide startup funding specifically for Australian defence companies.
“Westpac and Export Finance Australia are hoping they can prove their financing model and other banks like Commonwealth will come on board,” she said.
“Otherwise, startups get their money in various ways. They can win contracts from defence primes and become part of their supply chain.
“Lots of Australian startups look for opportunities overseas before they will sell to Australia. There is only one customer in Australia which is Defence.”