On Friday 12 January, representatives of the European Commission’s Directorate-General for Defence Industry and Space (DEFIS) and the European Investment Fund formalised the launch of theDefence Equity Facility, aimed at stimulating investment in defence innovation.
This €175 million initiative (€100 million from the European Defence Fund and €75 million from the European Investment Fund) will focus on technologies with dual-use potential encompassing both civil and military applications to further support EU security, in line with the objectives of InvestEU.
“This initiative will help to send a positive signal to the market and stimulate private investment in defence innovation. This is a key pillar of the European Defence Innovation Programme, which aims to strengthen Europe’s technological competitiveness and security by supporting a flourishing ecosystem of defence start-ups and SMEs”, explained European Commissioner Thierry Breton in a press release.
Over the next 4 years, the initiative will support private equity and venture capital funds with strategies covering defence-relevant technologies. “By supporting private equity and venture capital funds targeting investment in dual-use defence technologies, we aim to catalyse economic growth and foster a thriving entrepreneurial ecosystem in the security and defence sector”, said Roger Havenith, Deputy Director General of the European Investment Fund.
The initiative is expected to attract additional private investment in the funds it supports, mobilising a total of around €500 million to support European businesses.
It will be accompanied by capacity-building activities to support managers in the development and management of their funds.
SMEs have difficult access to finance
This initiative is designed to help defence companies that are finding it difficult to access finance.
In a study published on 11 January, DG DEFIS assessed the financing needs of European defence companies and the challenges they face in accessing finance. According to the study, although private investment recognises the strategic importance and growing market potential of the defence and dual-use technology sector, SMEs operating in the defence sector still face greater barriers to accessing finance than in other sectors. Around 40% of SMEs found access to finance difficult or very difficult.
For 2021-2022, two-thirds of companies have refrained from seeking equity finance and almost 50% have refrained from seeking debt finance (compared with an average of 6.6% among EU SMEs over the same period).
Investors point to a number of obstacles to financing, such as the complexity and length of procurement procedures in the defence sector limiting visibility of market potential, sector-specific regulations introducing complexities and higher costs, and foreign direct investment screening, combined with a limited market of late-stage investors in the EU, limiting exit opportunities.
Barriers to financing also stem from an overly strict and cautious interpretation of environmental, social and governance criteria, resulting in exclusionary policies on the part of banks and investment funds in the EU.
According to the study, there is an average equity financing gap of €2 billion and a debt financing gap of between €1 and €2 billion for SMEs in the defence sector.
See the study: https://aeur.eu/f/adf (Original version in French by Camille-Cerise Gessant)