Paris (France) (AFP) – European nations have committed themselves to huge hikes in spending on weapons, with giant defense firms reaping the early rewards. However, the signs indicate that smaller companies and investors are now beginning to mobilize.
European countries spent 343 billion euros ($403 billion) on defense last year, marking a tenth consecutive annual increase. This amount is set to rise to 381 billion euros this year, according to the European Defence Agency. In addition to this general trend, NATO members have all agreed to increase spending to reach five percent of their economic output by 2035.
Giant firms, such as France’s Dassault, Italy’s Leonardo, and Germany’s Rheinmetall, have already announced a slew of orders to meet the rising demand. With their order books filling up, ripple effects are spreading down the supply chain. Factem, which manufactures sound equipment used by jet pilots as well as gear for civilian uses, is one of roughly 4,500 small and medium-sized defense companies in France. The company, based in Bayeux in the north of the country, has 80 employees and generates 17 million euros in sales each year.
“Several years ago the defense industry wasn’t in fashion,” said chief executive Alain Dulac to AFP. “Today, banks and the financial sector are more or less willing to support us.” However, he noted that the change is gradual, and not all defense firms are benefiting yet.
Nevertheless, the movement across Europe is clear. Italian Defence Minister Guido Crosetto recently told Sole 24 Ore newspaper that raising defense spending was “a prerequisite for peace in Italy.” Meanwhile, Britain is aiming to increase its defense spending from 60.2 billion pounds ($80.5 billion) last year to 73.5 billion pounds by 2028.
Earlier this year, NATO nations pledged to gradually increase defense spending to reach five percent of gross domestic product by 2035, with 3.5 percent allocated for core defense spending and another 1.5 percent for infrastructure. If European members meet the 3.5 percent target, their defense spending could double to around 770 billion euros, according to a report by the EY-Parthenon consulting firm and DekaBank.
However, small and medium-sized companies often lack the capital to invest in the expansion of facilities and the development of new products. The head of a German firm that supplies Rheinmetall, who spoke to AFP anonymously, stated that the question of financing is essential. While growth has been strong enough that profits are likely to double this year, he expressed the desire to build another production facility. “But in Germany the banks traditionally don’t like to lend to this sector,” he said.
Instead, he has begun to explore opportunities with investment funds dedicated to the defense industry. The French public sector investment bank BpiFrance recently created a fund for individual investors aimed at raising 450 million euros. Adeline Lemaire, who leads the new fund, mentioned that she is seeing “not only a shift in public opinion” but also in the decision-making of major institutional investors in the sector. Investors are increasingly viewing “security and sovereignty as prerequisites for being able to continue thinking about healthy economic development,” she said.
Funds are emerging in other countries as well. According to Heligan Investments, a British fund that focuses on the national security and law enforcement sector, private funds invested a record $5.2 billion into the defense and security sectors last year, marking a five-fold increase over six years. French investment manager Sienna IM aims to raise one billion euros for a dedicated fund that will primarily invest in French small and medium-sized companies in the defense sector.
“Overall, some 12,000 companies work in the sector in Europe,” said Laurent Dubois, Sienna IM’s managing director for private credit. These companies will require financing to purchase new equipment for expansion and to hire and train additional staff. “It’s a real opportunity: it’s rare that we have such visibility over three, four years,” Dubois noted.
© 2024 AFP
