Private equity gets defensive

Despite a difficult year in the UK manufacturing industry, niche sectors like defence are actually showing resilience in the downturn. Private equity GPs, quick to capitalise on a sector that can generate strong returns, have spent the past few years buying defence portfolio companies and reaping the benefits of the Government’s need to invest in its military.

Although there are opportunities to invest in the large capital programmes for ships, planes and tanks, the smaller niche investment opportunities are said to offer significant potential in returns. Areas that are experiencing a lot of investment in the current market include soldier modernisations and protection, tracking and monitoring, cyber warfare protection and coastal border security.

Tooling up

So far mid-market firms have been very successful in buying and exiting portfolio companies. In January of this year ECI sold Racal Acoustics, a manufacturer of specialist military headsets for the defence and avionics sectors for £115m.

Keen to keep its finger in the defence pot, the firm still has an investment in Kelvin Hughes, a supplier of navigational products and services to the naval and commercial marine sectors, having backed a £52m MBO in 2007.

Ken Lindsay of ECI commented on the firm’s investment strategy. “We took an interest in Racal Acoustics because it has a few characteristics that make it very attractive to private equity. Defence companies offer high levels of revenue, and with good technology you can get attractive margins,” he said.

According to Lindsay, to be successful in investing in defence, the business you are investing in should have different drivers to the economic environment. “If you have a must-have piece of technology or you are not vulnerable to big defence programme cuts you can get something that will prove quite resilient,” he says.

Dunedin also saw the opportunities defence had to offer and provided £48m in funding to WFEL, a military tactical bridge provider. From Dunedin’s experience with WFEL, the company had received a US$500m contract from the US Government over 12-15 years and Dunedin invested mid-way through the contract. Given the initial track record of the investment, Director Dougal Bennett and his team believed that the company had a solid platform from which it could grow.

And finally Montagu is planning to exit Survitec, a marine defence and aerospace survival technology company that it backed in 2004.


There are many reasons why private equity GPs have been looking to this space but the most obvious are the wars in Afghanistan and Iraq. According to Dougal Bennett at Dunedin, defence is attractive to private equity firms because the projects that are available to invest in are long-term so there is a degree of contracted income, depending on the nature of the company.

And while the wars in Afghanistan and Iraq are certainly creating contracts for companies, it must be noted that there are pitfalls concerning jumping on the defence bandwagon when you have not invested in the area before. “Some businesses are benefiting from the wars but they will be the worst affected when the Government scales down and withdraws from both of those locations,” says ECI’s Lindsay.

Indeed, for the firms that have been active in the space for the past few years, their advice to newcomers is that nothing is as valuable as experience in this space. “Having someone in the loop will definitely be an asset. For the future I would say picking your target wisely is even more important. There is an expectation that government spending will be cut quite considerably so it will be important to pick your investment companies wisely and if you do there will still be opportunities,” he says.