German investors are less prepared than their Nordic counterparts to invest in a booming defence industry, as they struggle to come to terms with ESG criteria.
Investors are increasingly shifting their investment management strategies to adopt responsible investments, and follow market developments as well as relevant geopolitical events closely, Thomas Pfarrer, head of sales for institutional clients at Deka, told IPE.
Deka’s institutional clients have been implementing “holistic sustainability concepts” in recent years, taking into account investments with a long-term horizon, but the topic of “defence” is usually not included, he explained.
On 5 March, the European Commission and the High Representative presented the first-ever European Defence Industrial Strategy at EU level and proposed an ambitious set of new actions to support the competitiveness and readiness of its defence industry.
Ultimately, private sector capital must also be activated for investments in armaments, partners at PwC said in a blog post.
Institutional investors are looking for alternative and safe investment opportunities, and therefore the German government should “create more trust”, strengthening the defence industry’s contribution to security policy with a view to discussions surrounding the EU taxonomy, they added.
“We have been observing an increasing need for information on this topic among our institutional contacts for several months,” Pfarrer said.
Investors are opening up to the possibility of allocating capital to the defence industry that is profiting from the war in Ukraine and other geopolitical tensions worldwide, with Europe having to ratchet up military production as the threat from Russia is likely to last for a while longer.
But, for now, they are not considering adjusting existing sustainability concepts or investment strategies, although the interest in the defence sector is there.
“This is understandable, because institutional investors operate in their own specific environment and must take their regulatory, political, social and market-specific framework conditions into account when making relevant investment decisions. These usually involve complex and lengthy decision-making processes,” Pfarrer added.
Claus von Hermann, managing partner at private equity firm Triton, agrees that, typically, German institutional investors need time to adapt their strategic views. “Hence, we do not see a significant shift into the defence sector, yet,” he said.
However, von Hermann explained, the war in Ukraine has triggered a rethink to the general reluctance regarding defence-related investments and this reluctance is now less pronounced.
“Though a shift towards an active interest is not visible at this point in time, we expect investors to become more open to defence [investments],” he added.
In its portfolio, Triton holds RENK, a manufacturer of mission-critical propulsion technologies for military land vehicles, that recently listed on the Frankfurt Stock Exchange,. It has signed a memorandum of understanding with the Ukraine Defence Industry (UDI) and is now also part of the newly-created Ukraine Defence Industry Compact.
Asked about investment opportunities, von Hermann said the traditional defence sector is dominated by a handful of large conglomerates that will enjoy a favourable market opportunity in the coming years.
“In such an environment current owners may choose to hold onto their companies, which would mean limited opportunities to buy established companies,” he added.
The Dutch defence minister has recently locked horns with pension sector over defence investments as Dutch pension funds have not upped their investments in weapons or ammunition manufacturers over the past two years, despite demand for the products produced by these companies having surged as a result of the outbreak of the Ukraine war.
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