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Private Equity Strategies

Inside The Portfolio: Drones

Monday, May 20, 2013

By: Bailey McCann, Private Equity Strategies

Since Private Equity Strategies launched in November of 2012, we have always tried to include at least one piece about the perception of private equity and private equity investments. Most recently, we looked at the impact of institutional divestment from funds or portfolio companies that develop a stigma, like tobacco or gun makers. This month, we look at another controversial investment €“ drones.

Unmanned aircraft that seek to track and often kill, people or groups considered to be threats to national security have been the subject of hot debate and one filibuster here in the US. Despite that, some of the world€™s largest publicly held companies, and a few private ones, are making windfall profits building these machines, to the benefit of investor portfolios, and arguably not much else. Private Equity Strategies spoke with writer, artist and futurist, James Bridle about some recent work he did on drones, and what this technology might mean for investors and society.

Recently, Bridle has created what he calls €œdrone shadows€ in public places, one in Istanbul, Turkey, another in London, England and the latest in Brighton, England for the Brighton Festival. Drawn to scale, he has rendered chalk outlines of the MQ-1 Predator Unmanned Aerial Vehicle (UAV), and the MQ-9 Reaper, both made by San Diego-based, private company, General Atomics. The models are the most popular of those in use by the US Air Force and the Royal Air Force in the UK.

reated as the Atomic division of General Dynamics Corporation in 1955, €œfor the purpose of harnessing the power of nuclear technologies for the benefit of mankind,€ and then spun out. For a few years in the 1970s-1980s it was part of Big Oil, owned by Gulf Oil, Royal Dutch Shell, and then Chevron. Eventually it was purchased by two brothers, the Blue€™s who have backgrounds in aviation. Since then, the company has been working on a variety of defense, nuclear and energy projects, testing the first Reaper drone in 1994. In the beginning, drones including those for non-military use were primarily outfitted with cameras for observation of various types. Now, while those types of drones still exist, others have been outfitted with missiles to carry out targeted, unmanned strikes.

The General Atomics drones are the most widely used drones, flying silently, and high enough not to cast a shadow. Saudi Arabia recently announced it would re-up contracts with the company; France just got approval to buy two for military operations like those in Mali, and Canada is looking at drones for its own Artic rescue missions. Israel is known to employ widespread use of drones as well but, its military has its own government-owned drone manufacturer, and a publicly traded manufacturer as well.

€œIn Gaza, which is under daily surveillance and attack by Israeli drones, the Palestinians call the aircraft €˜Zenana€™, meaning, roughly, €œbuzz€, although it€™s also a slang term for a relentlessly nagging wife,€ Bridle writes in a blog post on some of his earlier drone shadows.

Relentless is a word that seems to surround drones. For the societies under literal attack from them, those strikes come without warning. Meanwhile, in the US, civilians and law enforcement alike are embracing drones with gusto. Public polling shows support for the use of drones in national security operations. Local police forces are also buying smaller versions to patrol the streets. Private equity, and technology companies are cashing in. Last week, venture capital firm Andreesen Horowitz and Google announced their support for Airware, a drone startup that just closed a $10.7m Series A financing round. Airware provides hardware and software for drone makers.

Late last year, Arlington Capital Partners announced its successful exit from Chandler/May a drone parts maker, after a seven year run which included a strategic acquisition of another drone parts company. Arlington has institutional investors including public pensions.

On paper, drones are a regular object lesson in a high value defense play. Portfolio companies in this space are backed by blue chip names, and have contract prospects that Boeing and IBM are hungry for. But, unlike even traditional defense plays, the rules around drones aren€™t established and no one is really willing to draw a line.

€œThe drones are agglomerations of a range of technologies and investments, their development has been spurred by numerous interests at various times. Directly, the drones originate in new understandings of battlefield control that emerged from conflicts such as Palestine where traditional armies were confronted with low-tech, networked opposition; this has essentially been franchised out to Afghanistan, Iraq and elsewhere as more of the world becomes balkanized,€ Bridle tells Private Equity Strategies.

€œThe last ten years of intense conflict has produced an extraordinary bonanza for military contractors and suppliers, and such industries are of course directly complicit in the destruction wrought. It is in the nature of military conflicts that new weapons produce new wars; the CIA€™s current adventures in Pakistan, Yemen, Somalia and beyond would not be possible without the drones. But the unexamined nature of such conflicts and the weapons that facilitate and execute them is the fault of all of us, we are all complicit. We€™ve built such an aura around technology that it has become almost invisible to us, meaning it can be deployed with little political or ethical oversight. This is as true of high frequency trading as it is of the drones; what is obscured is vast inequalities in power, and unequal power relationships consistently and inevitably result in forms of violence, economic or physical.€

With high frequency trading, regulators have made mostly reactionary attempts at trying to understand and reign in this technology. Yet drones operate in a space where no one wants to limit their capabilities because of the returns both on and off the battlefield. These efforts are further supported by the private equity firms and indeed, public institutions that invest in them. The critical question is the net effect of such investments in an increasingly interconnected and interdependent world. More broadly, if the use of drones is being led by the United States and its Western allies, financial companies supporting the primacy of these economies and their governments must clearly define the rules of engagement for drones, and what it means for free societies that say they support rule of law, to engage in remote attacks without declarations of war.

€œLike the internet itself, the drones are the most expected outcome of a process by which desires are reified through technology, with explicit instructions for carrying out human demands. As a result, there is no going back. What we can do is more closely examine and better understand these technologies in order to more equally share the fruits of their agency,€ Bridle says.

*Video /Image Source: James Bridle

 
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
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