Defense

Why invest in Defense

• Stable cash flows: Long-term government contracts offer revenue predictability
• Economic resilience: Sector is less affected by recessions due to strategic importance
• Geopolitical rearmament: Rising tensions and defense budgets drive long-term demand and institutional focus
• Dual-use innovation: Defense R&D fuels breakthroughs in civilian sectors (e.g. AI, robotics, space)
• High barriers to entry: Regulatory and operational complexity protects market position
• Limited competition: Few active managers provide early-mover advantage
• Low consumer exposure: Minimal correlation with discretionary spending
• Institutional momentum: LP restrictions are being lifted, creating capital inflow
• Attractive risk-adjusted returns: Stable demand, low cyclicality, and limited competition support return potential relative to risk

What are the main risks of Defense

• Regulatory and political risk: Shifting policies and changing defense priorities can impact contracts and valuations
• Geopolitical uncertainty: Conflict escalation or diplomatic shifts may affect demand, access, and investor sentiment
• Concentration risk: Dependence on a limited number of government clients increases exposure to procurement cycles
• Compliance burden: Export controls and defense-specific regulations add operational and legal complexity
• Reputational and ESG risk: Defense exposure may conflict with stakeholder values, exclusion lists, or ESG frameworks
• Supply chain fragility: Cross-border restrictions and reliance on critical components may disrupt operations
• Technology disruption: Rapid innovation demands ongoing R&D investment to avoid obsolescence
• Manager scarcity: Few experienced defense-focused managers limits diversification and access
• Jurisdictional risk: Certain sub-sectors may involve exposure to politically unstable or restricted regions

What characterizes Defense?

Industry/Sector:
Aerospace & defense, cybersecurity, dual-use technologies, military logistics, intelligence tech, critical infrastructure, space-based systems, frontier defense tech.

ESG:
Traditionally excluded, but now re-evaluated. Cyber resilience, civil protection, and deterrence are increasingly seen as compatible with evolving ESG and security frameworks.

Instruments:
Private equity, venture capital, growth equity, thematic buyouts.

Target company size:
Broad range – from early-stage defense tech startups (VC) to mid-sized industrial platforms (PE).

Return profile:
High variance; VC-style upside in emerging tech, steady government contracts in traditional defense; relatively uncorrelated to broader economic cycles.

Geography:
Mainly U.S. and Europe. Increasing attention to sovereign capabilities within NATO and EU. Strong LP interest from Nordics and Central/Eastern Europe.

Question 1. How do defense investments differ from other sector-focused funds?

Behrman Capital

-            Defense investments are differentiated from other sectors for a variety of reasons, including their economic resilience / lack of correlation with the general economy, and strategic importance to national priorities that can often have bipartisan support

-            Historically, the defense sector has attracted less private equity competition compared to more traditional, economically correlated industries (e.g. consumer, technology, etc.), making it a less trafficked area for many PE firms

-            Defense sector investment requires industry-specific knowledge of trends within the industry (e.g. manned vs. autonomous, increasing electrification and power requirements, etc.), and fundamental understanding of programmatic funding support and budget priorities (sustainment vs. optempo) and lifecycles (design phase, low-rate initial production, full rate production, sunset). Having a full suite of resources to effectively navigate and evaluate these dynamics is critical for success in the sector

-            As a result, our extensive experience and proven track record in aerospace and defense give us a significant competitive advantage and differentiation in sourcing, structuring, and growing investments in the sector

-            Moreover, defense assets often benefit from long-term, government-backed demand, offering stability and visibility that can be less prevalent in other sectors

-            The complex, high-technology nature of defense projects—ranging from advanced manufacturing to cutting-edge technology—further emphasizes the importance of deep industry expertise, which we have accumulated over our 20+ year history of investing in the sector

-            This combination of sector resilience, less competitive pressure, and Behrman’s differentiated experience makes defense a highly attractive and strategically advantageous area

Question 2. What has been your experience with exit / return opportunities in the defense sector?

Behrman Capital

-            Since 2002, Behrman has completed 11 platform investments and 27 add-on acquisitions within the defense and aerospace space, which has been our highest performing sector

-            The landscape in defense is also favorable from an exit perspective, given the large number of strategic acquirers actively seeking complementary assets. This acquisition appetite from strategics and certain sponsors has yielded favorable exit opportunities in our recent experience

Question 3. Which parts of the defense ecosystem do you find most attractive today: for example, traditional manufacturing, software, dual-use tech, space, or cybersecurity?

Behrman Capital

-            We tend to focus on "embedded supply chain solutions" that possess certain business characteristics which enable sustained value and resilience

-            Within the defense and space sectors, our preferences lean towards areas with long-term tailwinds and less cyclicality, such as defense and space-focused applications, rather than more economically sensitive commercial aerospace

-            Specifically, we find the following segments particularly attractive:

o   Defense Electronics: Advanced systems with high intellectual property content

o   Advanced Materials and Composites: Innovating for lightweight, high-strength components that significantly enhance system performance and are pivotal in aerospace and defense applications

o   Designed-in Components: Custom-engineered parts that provide a strategic advantage and high barriers to entry

o   Interconnects: Critical for electronic systems across defense and space platforms, often characterized by high margins, single-source dependency, and significant intellectual property content

o   C5ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance): Enabling integrated, cyber-secure networks that are central to modern military operations

o   MRO (maintenance, repair, overhaul): provides aftermarket support for critical, high-cost of failure products and services, supporting the operational efficiency, safety and longevity of aircraft, naval vessels and ground vehicles. 

-            In these areas, we look for companies with high margins, designed / specified into customers supply chains, strong IP positions, often sole or limited sourcing relationships—creating high entry barriers and sticky customer relationships. Our preference is for businesses with recurring or platform-based revenue streams, which offer stability and growth potential over time

-            Additionally, we favor parts where the cost to produce is relatively low compared to the end-use system’s value, empowering pricing strategies that support margin expansion and growth

-            These characteristics have been evident in our recent investments such as Micross, kSARIA, The Thermal Group, and DDC