What follows is an attempt to organize information about venture capital & private equity in the defense industry, as well as related topics such as global defense/security/intelligence technology development & innovation.
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Article Links
Here's a growing list of articles about venture capital and private equity in the defense industry.
- "Venture Capital's Best Offense is Defence"
- Subtitle: "The military sector is seen by some in Silicon Valley as the next big opportunity following September 11."
- "A Marriage of Convenience"
- Changing technology development models in defense R&D. (Written by an investment banker).
- "Fear, Inc"
- Overly sensational but interesting Wired article.
- "Using Venture Capital to Improve Army Research and Development"
- RAND Institute Issue Paper
- "VC Plans to Invest $250M in Security"
- Press release from Arlington-based GlobeSecNine.
- "Venture Capital"
- Government direct use of VC investing.
- "Investing in homeland security technologies: a venture capital perspective"
- Defense VC as alternative investment sector.
- "Sincerest Form of Flattery"
- Self-righteous, alarmist tone nonetheless provides great info on active VC firms.
Defense VC Firms
(includes VC and Buyout)
Firms specializing in venture capital and/or private equity buyouts in the defense and security industry.
- Carlyle Group
- The big boys. Still doing traditional VC as well as mammoth buyouts (ala Qinetiq).
- Veritas Capital Management
- The 41st largest U.S. defense contractor, following its buyout (and turnaround?) of Dyncorp. Big portfolio.
- Paladin Capital Management
- Two funds. Former NSA Director Samuel Berger and no other than former CIA Director James Woolsey on their team, plus lots of other name brand government types.
- GlobeSecNine
- Arlington based emerging firm, with a strategic relationship to the Potomac Institute of Policy Studies. Brent Scowcroft leads their board of advisors.
- Arlington Capital Partners
- Mid-market buyout firm in D.C. Invested $75M in Apogen Technologies.
- Behrman Capital
- Not a pure defense portfolio at all. But they grew from $67M under management to over $1.8B in seven years. Flag waivers.
- Washington Capital Partners
- Early stage technologies related to homeland security, since 1998. Founded by retired ring knocker the Honorable Ty McCoy.
Incubators
Is this a better model?
Expect to see more projects like the "business accelerator" model at the Chesapeake Innovation Center.
At the very least, their mission statement neatly summarizes the purpose of Defense VC and the future of government R&D:
"The Chesapeake Innovation Center (CIC) focuses the power of entrepreneurship on America's most pressing security requirements."
One also has to appreciate the following comments on CIC's deal sourcing:
"We don't actually take business plans, because we don't want to read all the bullshit," says Elstner, a former hydrogeologist. "We ask very specific questions about what we want to know."
Elstner mostly wants technologies that the government is already interested in. CIC's real customers, he says, "aren't little companies. They are the agencies, the intelligence communities, the military, the prime contractors -the investors that are charged with creating full solutions to the problems associated with homeland security."
At the very least, their mission statement neatly summarizes the purpose of Defense VC and the future of government R&D:
"The Chesapeake Innovation Center (CIC) focuses the power of entrepreneurship on America's most pressing security requirements."
One also has to appreciate the following comments on CIC's deal sourcing:
"We don't actually take business plans, because we don't want to read all the bullshit," says Elstner, a former hydrogeologist. "We ask very specific questions about what we want to know."
Elstner mostly wants technologies that the government is already interested in. CIC's real customers, he says, "aren't little companies. They are the agencies, the intelligence communities, the military, the prime contractors -the investors that are charged with creating full solutions to the problems associated with homeland security."
Risk Management Consulting
Strategic partners, anyone?
I would not be surprised to find emerging risk management consulting practices like the impressive Diligence LLC partnering with a defense VC/PE firm. They already do work for the government and also run a "asset management intelligence" unit.
Other candidates could be Control Risks Group or maybe even Stratfor.
Other candidates could be Control Risks Group or maybe even Stratfor.
Government VC
The Government does VC now too ... and pretty well actually.
- In-Q-Tel
- "Investing in our Nation's Security." By far the best effort by the government to use VC. Set up for the CIA and the "intelligence community."
Great website too. Those looking for an investment strategy for their own fund could pretty much get all they need from the in-q-tel site. Very detailed investment objective and screening measures described. - Onpoint Technologies
- The Army's in-q-tel. Not surprsingly (poor Army!), this looks considerably less dynamic. Could just be the crappy website, though. OnPoint should contact their information assurance office...
Also, Onpoint is somehow related to incubator MILCOM Technologies (www.milcomtech.com). - Arch Development Partners
- This could very well be the original government VC fund. Originally set up as a partnership between the University of Chicago and the Department of Energy. Focuses on seed capital for life sciences, biotech, and communications. (Ok, so it's not really "defense" but it's an early pioneer of government backed VC).
The L-3 Way
An executive at L-3 Communications recently told me that the holding group model (my term, not his) is much better suited to developing technologies for the defense industry. L-3, he said, specializes in understanding the unique buyers and end users of their technologies (Govt Agencies and the Big 5) in order to set their acquisition strategy and to grow companies long term.
"A VC fund worried about an exit doesn't think that way."
Good point? Or could you say that about any other industry?
It's hard to say, considering the relatively scarce number of companies that have even tried to copy L-3's pure "mezzanine" strategy. I wonder how Allied Defense Group or DRS Technologies might respond to the same issue. (By the way, sweet website at DRS.)
"A VC fund worried about an exit doesn't think that way."
Good point? Or could you say that about any other industry?
It's hard to say, considering the relatively scarce number of companies that have even tried to copy L-3's pure "mezzanine" strategy. I wonder how Allied Defense Group or DRS Technologies might respond to the same issue. (By the way, sweet website at DRS.)
Network Centric Warfare
Probably the most "interesting" and commercially influential technology set being developed by the U.S. DoD. A report to Congress claims:
"Network Centric Warfare is to warfare what e-business is to business."
It involves a myriad of programs and emerging doctrines that -- basically -- relate to connecting physically dispersed forces (teams) across robust information networks. The result is smaller, more effective, agile, highly informed and situationally aware teams operating in dynamic environments. See more general info here.
The "civilian" applications are obvious. This is the kind of development activity that should be attracting young Silicon Valley tech talent that might otherwise think of the defense industry as bomb-building. DoD and the rest of the federal government absolutely cannot handle this R&D on their own.
For more detailed info, including ongoing doctrinal debate, check out the RMA Debate topic page on NCW. See the title "An Information Age Combat Model" for a more advanced overview.
"Network Centric Warfare is to warfare what e-business is to business."
It involves a myriad of programs and emerging doctrines that -- basically -- relate to connecting physically dispersed forces (teams) across robust information networks. The result is smaller, more effective, agile, highly informed and situationally aware teams operating in dynamic environments. See more general info here.
The "civilian" applications are obvious. This is the kind of development activity that should be attracting young Silicon Valley tech talent that might otherwise think of the defense industry as bomb-building. DoD and the rest of the federal government absolutely cannot handle this R&D on their own.
For more detailed info, including ongoing doctrinal debate, check out the RMA Debate topic page on NCW. See the title "An Information Age Combat Model" for a more advanced overview.
Defense Investment Banks
Who do the deals?
A short list of investment banks focused on aerospace, defense, and government sector transactions.
- Alderman & Company
- Focuses exclusively on aerospace & defense, but more on aerospace. Worked on restructuring at Pan Am and USAir, and did a series of acquisitions for a Aviation Sales Company (which went on to have some issues with the SEC).
- Aronson Capital Partners
- Specializing in mid-market M&A for the "defense and government technology services industries." Led by a couple of former Dyncorp corporate finance types.
- Philpott Ball & Werner
- They have an Aerospace & Defense practice within the firm, but it's fairly robust. Focus on controls/instrumentation systems and IT.
- Houlihan Lokey Howard & Zukin (HLHZ)
- Their Aerospace / Defense / Government Group is based in D.C., where they have 25 bankers on staff. In terms of sheer number of deals executed (2005) HLHZ is ranked #1 for deals under $750M and #2 behind Goldman for all U.S. deals.
- Cowan and Company, LLC
- Cowen's aerospace & defense group "focuses on clients in the defense electronics, defense communications, government IT services and commercial aerospace sectors." They also host an annual Global Aerospace Conference.
Admiralty Partners
Defense Finance Hybrid
A private equity firm with a lot more going on around it, including interesting traits of a hybrid M&A advisory and holding group. Use of their own capital is a unique differentiator. From their website:
"Unlike most private equity firms that raise large funds from institutional investors, Admiralty Partners invests only its own capital in the global aerospace, defense, and federal information technology industries. This significant difference means that Admiralty Partners' interests are aligned with those of management. It seeks long term capital appreciation, not the generation of transaction fees through the rapid churning of funds or the need to achieve a certain internal rate of return over a specific holding period."
Their founder, Jon Kutler, started the Quarterdeck Family of Companies back in 1992 to engage in the post cold war defense industry's "agressive mergers & acquisition environment." After selling a series of Quarterdeck mutations to i-bank Jeffries & Company, Kutler started L.A. based Admiralty Partners to concentrate entirely on investments in the defense/government sector.
"Unlike most private equity firms that raise large funds from institutional investors, Admiralty Partners invests only its own capital in the global aerospace, defense, and federal information technology industries. This significant difference means that Admiralty Partners' interests are aligned with those of management. It seeks long term capital appreciation, not the generation of transaction fees through the rapid churning of funds or the need to achieve a certain internal rate of return over a specific holding period."
Their founder, Jon Kutler, started the Quarterdeck Family of Companies back in 1992 to engage in the post cold war defense industry's "agressive mergers & acquisition environment." After selling a series of Quarterdeck mutations to i-bank Jeffries & Company, Kutler started L.A. based Admiralty Partners to concentrate entirely on investments in the defense/government sector.
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