Private investors should seek defence specialists beneath the primes

NATO allies have committed to spend 5 percent of GDP on defence every year by 2035. For private-market investors, the harder question is which companies will actually receive that money. A briefing note from UK investment firm Connection Capital, covered by Alternative Credit Investor on August 19, argues the answer sits below the prime contractors.

The firm's head of funds, Lorna Robertson, makes the case for the specialist layer: founder-led businesses, software and secure-communications companies, advanced manufacturers and dual-use technology providers that sell to both civilian and military customers. These are the businesses filling critical capability gaps, the ones positioned to turn the spending into long-term demand.

Robertson's note reads as an underwriting checklist for a sector where standard financial measures can mislead. The markers of lasting advantage, she says, are proprietary technology, specialist expertise, manufacturing capability, procurement relationships and integration into larger defence systems. A revenue concentration that appears tied to one department or prime contractor may actually be spread across programmes, platforms and end-users. And a company with strong technology in a favourable market can still fail to grow without certifications, manufacturing capacity, regulatory clarity and a clear route through procurement.

The NATO target breaks down as at least 3.5 percent of GDP for core defence and up to 1.5 percent for resilience, infrastructure, innovation and the defence industrial base. That split is the context for Connection Capital's caution that treating defence as a fashionable theme will not surface opportunities. The investors who study where the money lands, rather than the theme's popularity, are the ones positioned when the orders arrive.