Family offices are often secretive about their activities, but insiders say they’re growing increasingly bullish on one area of investment: defence tech. It comes as VCs are being more vocal about their activities in the space.
“We’re facing, basically, a sea change in attitudes as well as [an] openness to defence,” Nicholas Nelson, partner of UK-based defence VC MD One Ventures, which has family office LPs, tells Sifted.
Estimates put the number of family offices in Europe at more than 2,000, according to a recent Deloitte report. Nelson says he’s seeing more family offices in central eastern Europe, the UK and the US show an increasing appetite for defence and dual use (technologies that have both military and commercial applications), both investing directly into startups as well as backing VCs, though he admits his sample size is small.
Mikolaj Firlej, who has a family office called Firlej Kastory as well as a separate security- and defence-focused VC fund Expeditions, which counts family offices among its LPs, adds that he’s “certainly” seen more interest, particularly after the invasion of Ukraine.
“Particularly on the eastern flank of NATO, there are many people with a real sense of urgency who would like to contribute to the cause — so there is both this financial element and mission element combined,” he adds.
In western Europe, Nelson’s noticed a “greater willingness” to back defence among recent entrepreneurs who’ve set up family offices, compared to more traditional family offices. He says that in the process of raising MD One Ventures’s fund, one western European family office requested five meetings, but “they just kept dragging and they couldn’t quite get their heads around it”.
Firlej adds that while there is a distinction between newer family offices which may have made their millions through technology companies, versus older ones whose wealth comes from trusts or inheritances, his “experience actually doesn’t suggest that, for instance, those new technology-driven family offices are more inclined to put money in defence,” he says. “I think it’s pretty random at the moment, particularly when we take into account both the US and Europe.”
‘We prefer to stay quiet’
Even if more family offices are looking into defence, you might not hear about it: they generally tend to be hush-hush about their activities, which also explains the general lack of data on the topic. “We’re not necessarily showcasing what we do on that front, we prefer to stay quiet,” says Firlej. He says they’ve done some investments in defence and dual use, but that most of the investments from the family office side are now indirect fund investments.
He adds that, in general, family offices that are more established or sizable like to keep mum about their activities; they may have relationships with institutions which might not feel comfortable with them backing defence companies.
Still, some say family offices have more flexibility if they choose to jump on an investment: “Family offices often move much faster; this is particularly true for family offices with leaner structures and a small number of principals,” says Philipp von dem Knesebeck, general partner at Vinthera, a hybrid VC and fund of funds set up by three family officers. “Direction can change rather speedily, and right now there is a strong tailwind behind investments in defence technology.”
But the ability to get on the same page about an investment varies: While some family offices only have one decision maker, “there are also families where you have hundreds of family members and shareholders where it can be harder to align with everyone and make decisions,” says Vinthera’s managing partner, Angela De Giacomo.
What’s holding family offices back
Nelson believes that some western European family offices face an issue of comfort rather than restrictions when investing in pure defence versus dual use. He thinks that unfortunately a lot of family offices use meetings with VCs to learn more about defence but aren’t serious about writing cheques.
Though family offices don’t have to deal with a host of external LPs who can make it more difficult for VC firms to invest in defence, and often prohibit investment in weapons, they may have set up an investment thesis that “black lists” certain topics, including defence, says De Giacomo.
A lot also depends on the decision maker, Firlej adds, and whether it is a high-net-worth individual or a fund manager for the family office. “Generally, I would agree that private capital is less restricted, and therefore they can invest not just in defence or intelligence, but also in potentially lethal or kinetic applications, which obviously are becoming a hot issue now in Europe,” he says.
Investors say it’s still early days for family office (and VC) investment in defence: Outside of family offices in the UK, US and CEE, Nelson says he hasn’t necessarily seen more investors funding defence in the last year or so.
We have yet to see what the metrics of success are for defence tech companies, says Firlej, but he expects more activity in the coming years.
“We always talk about having strategic solutions, having the freedom to act, Europe as a true player alongside the US and China — for that to happen, a big catalyst for this is, yes, the big pension funds, but also these family offices,” says Nelson. “There is a remarkable gap in the market for this asset class […] but then also proving out the returns in this market for them to get interested. So it’s kind of a chicken or the egg problem.”
Read the orginal article: https://sifted.eu/articles/family-offices-investing-defence-tech/
