CONTRIBUTORS
James Cross, CFA
Co-Head of Private Investing
Ryan Biggs, CFA
Portfolio Manager,
Co-Head, Private Investing
Richard Herbert, CFA
Head of Investor Relations
Robert Stevenson, CFA
Managing Director
Co-Head of Private Investing
Dylan Serrentino-Mullins
Research Associate
Executive summary
- Consolidation of the traditional defense industrial base over recent decades has created new challenges for the adaptability that modern warfare demands.
- Private capital by means of venture-backed technology companies has a role to play in the development of a next generation defense industrial base (DIB) that can more rapidly and flexibly respond to the increasingly complex landscape of modern conflict.
- A hybrid model of government funding and private capital is accelerating defense development; however, a key challenge is aligning fast-paced startup innovation with the government's adoption speed.
- Unlike traditional venture capital investing, where disruption is often rewarded, we believe success in defense-oriented technologies requires a deep understanding of government procurement processes and the ability to outcompete or cooperate with established defense contractors.
The US DIB—the network of companies that design, manufacture and sustain the systems underpinning deterrence and readiness—now sits at a pivotal moment with rising interest from private capital. In this paper, we examine the evolving DIB across its past, present and future, and share a framework we believe can position investors for success in this expanding yet complex landscape for private capital.
A pivotal transformation within the DIB is taking place, moving from a traditional, consolidated model to one increasingly reliant on agile private sector innovation and capital. While this shift promises to address critical security challenges with greater speed and adaptability, it also presents a complex landscape for investors. Success hinges on a nuanced understanding of the interplay between private enterprise and government needs, recognizing both the immense opportunities for growth and the persistent structural hurdles that demand strategic navigation. Ultimately, the future of defense innovation will be defined by how effectively these disparate forces can converge to deliver timely and effective solutions.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility.
An investment in private market investments is suitable only for investors who can bear the risks associated with them (such as private credit and private equity) with potential limited liquidity. Shares will not be listed on a public exchange, and no secondary market is expected to develop.
Strategies that invest in privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
Strategies that incorporate the identification of thematic investment opportunities may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. By focusing its investments in defense-related industries, the strategies carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
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There are also risks in investing. The initial potential of any asset class may not carry over to any specific company or the entire asset class chosen for investment, over any time period. Any of the stated assumptions may or may not come to fruition, and any companies referenced may or may not have future successes. Investors should be prepared for potential losses as well as the possibility of investment gains. Ideas, products, companies, themes, or entire asset classes with positive attributes are not indicative of future results. Discussions should not be regarded as any type of trading recommendation, or as a signal about any past, current or future trading activity in any fund or strategy, by Franklin Templeton and its affiliates.
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