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B. G., Opalesque Geneva for New Managers:
The global military apparatus is transforming before our very eyes by using technology trends including artificial intelligence (AI), robotics, and the Internet of Things (IoT). For example, US-based start-up Hermeus is building a hypersonic jet that can travel at a speed of 3000+ miles (4828 km) per hour. Anduril, another US start-up, is developing an advanced drone system called Ghost that uses edge AI algorithms for real-time surveillance and reconnaissance. French start-up HarfangLab is deploying cyber defence solutions to protect critical infrastructure environments.
Existing defence systems need to meet the security demands of the 21st century. This creates an investment opportunity in defence and aerospace (A&D) technology. Tholus Capital, a new global thematic manager, has spotted it and is launching a fund of funds this year based on the theme of A&D technology, in the belief that this sector is ready for significant growth if it gets enough backing.
Defence budgets on the up
There is already quite a bit of money going into defence these days what with the existing geopolitical tensions - which are also highlighting the urgency for technological advancement. Global defence spending increased by 9% to a record $2.2tln during 2023, driven by heightened geopolitical tensions caused by Russia's invasion of Ukraine, according to the International Institute of Strategic Studies. This year, the US, by far the largest global military spender, allocated a record $886bn. Most of NATO's allies in Europe will spend 2%, or more, of their GDP on defence this year - compared to an average of 1.47% ten years ago.
For example, Norway's government recently proposed a record-breaking increase in capital investments for national defence that projects $60bn in spending in the next 12 years. And France is expected to reach the 2% target in 2024 with a budget of €47.2bn, which will steadily increase in the next years.
Space technology is also crucial, with the space sector projected to exceed $1tln by 2030.
Global investments in space start-ups saw a 17% rise in funding to $3bn for 103 companies in Q3-2023, according to a report by VC firm Space Capital. The increase could mean that investors are returning to start-ups that could tap government funding and develop tech crucial to space programs, said Reuters.
Tholus Capital will expand on the topic of A&D investment in the upcoming Investor Workshop webinar on May 16th (see details below).
Start-ups and private capital driving innovation
Start-ups and private capital are driving innovation in A&D, supported by initiatives like the Defense Innovation Unit (an organisation founded in 2015 to help the U.S. military make faster use of emerging commercial technologies) and the NATO Innovation Fund (a standalone €1bn venture capital fund supporting founders developing emerging and disruptive technologies).
Venture firms with deep defence industry knowledge are emerging alongside PE firms targeting middle-market A&D sectors. They are increasingly used by governments that realise that listed defence companies are no longer the primary drivers of innovation.
Forbes reported in November that VCs were discovering the new niche of defence and military tech start-ups as the increasing dependence on advanced AI systems by militaries around the world has driven a surge in demand for tech-infused military products. Private funding, as opposed to government funding, allows for quicker time to production and deployment. And VCs can help start-ups to accelerate their growth and development. Potential returns on investment in the sector are significant as governments provide substantial and steady budgets. Furthermore, the sector has low correlation to the markets.
"Governments and government agencies globally are increasingly realizing the need for private capital to fund innovation in Aerospace & Defence," Markus Bihler, co-founder of Tholus, tells Opalesque.
Source: www.startus-insights.com
A diversified portfolio
Tholus Capital's A&D portfolio, which will include venture capital (VC) and private equity (PE) funds, aims for diversified exposure to emerging A&D opportunities. PE focuses on established firms, while VC targets early-stage ventures, including first-time managers with specialized expertise. The structure is a closed-ended fund. Due to the size of the target funds, the portfolio is capacity-restrained and the total size should not exceed $200m.
Tholus has already selected 14 managers, four in PE and the rest in VC, mostly headquartered in the US.
"We have carefully selected from a global longlist of pure-play managers, including first-time funds as well as managers established 20+ years ago," Bihler says. "The majority of capital will be allocated to experienced managers with significant long-term track records."
According to the manager, the role of VC and PE in revitalizing Western defence through emerging technologies and entrepreneurial talent is critical as geopolitical tensions are escalating. In short, they are doing their bit for security.
Tholus Capital is a global thematic manager of fund of funds and OCIO (outsourced chief investment officer) incorporated in the Cayman Islands. The team was formed in March 2022 and works globally.
Next Investor Workshop Webinar
How to Access Mission Critical Investments in AI, Aerospace & Defence
In this interactive webinar, we will introduce you to some of the leading specialized investment managers in two areas of technology we believe will shape the next decades and are already of significant geopolitical importance: Aerospace & Defence and Artificial Intelligence.
Who?
• Markus Federle, founder & managing partner, Tholus Capital
• Apoorva Pandhi, managing director, Zetta Venture Partners
• Shreya Rajpal, CEO and co-founder, Guardrails AI
• Brad Harrison, managing partner of Scout Ventures
• Shaun Moore, co-founder & CEO, Tern
When: Thursday, May 16th at 11 am ET (3 pm GMT, 5 pm CEST, 6 pm Riyadh, 7 pm Dubai)
Free registration: www.opalesque.com/webinar/
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