The push to mobilise private capital to support Australia’s defence industry has taken a major step forward this week with the launch of Periscope Capital Partners, a new sovereign, specialised Defence and National Security Fund that will invest $1bn of Australian private capital into Defence Industry over the next decade.
With $100 million already committed, Periscope – founded by Managing Partner Mark Stevens who also leads Arican Advisory and Capital – intends to pave the way for a more ambitious Australian defence industrial strategy.
Australian defence industry has historically had difficulty accessing private capital (an issue Stevens previously discussed in ADM Podcast Episode 12) for a range of reasons, not least the financial sector’s perceived lack of understanding of defence.
“When we helped Champ acquire Marand Precision Engineering back in 2018, we realised how difficult it was for Australian defence industry companies to source capital,” Stevens explains to ADM. “That put us on a mission. We’ve been working on this in earnest for the last three years. Periscope Capital Partners is the genesis of that work.”
Stevens described Periscope as a growth fund – neither a venture capital nor a private equity fund exactly, but one that ‘combines the best elements of both’. This allows for investment from early through to late stage.
“What we’re looking for is those fantastic Australian defence industry companies that with capital – and in partnership with us – can be great for the business of capability delivery to Defence,” Stevens said.
Periscope Capital Partners is a proudly veteran-led team of defence and national security advisory and investment specialists equipped to identify and match capability to capital. According to Stevens, board level representation (called Operating Partners) would work with company management to deploy capital towards growth.
With support from Minister for Defence Industry Pat Conroy and senior leadership in the Department of Defence, Periscope Capital Partners intends to work closely with Defence’s capability development teams to understand force design and inform its investments: particularly as the release of the National Defence Strategy and Integrated Investment Program (IIP) now show the government's "difficult decision" - in the words of Defence Minister Richard Marles - to focus the 'vast bulk' of Australia's effort in the Asia-Pacific region.
The IIP also said that Defence needs to undergo "a cultural shift empowering greater initiative to achieve agreed capability outcomes with speed."
As an initial focus, Periscope will look to develop companies to support global supply chains for AUKUS Pillar One – the acquisition of nuclear-powered submarines for the RAN – which is facing well-reported challenges around the production pace of Virginia class boats in the US.
“One of the areas we’ll be looking at is finding Australian companies who – with capital – can develop to supply that program, and to the Astute submarines as well,” Stevens said. “AUKUS Pillar Two has some areas of focus for us too.”
This focus aligns with the IIP released yesterday, which specified that the second phase of US supplier qualifications for Australian companies will begin mid-year.
Early focus areas will also include ballistic protection and around a dozen other areas that the Periscope team has begun to ‘deep dive’ into, to inform early investments.
There will also be opportunities in the UK, where Periscope will launch in July.
“We certainly see the Australian companies we invest in moving into the US, but we see ourselves investing in UK companies as well – hence why the UK will be our second port of call,” Stevens said. “But any business we invest in, we’ll be looking for the angle of mobilising into the US market.”
Stevens is clear that Periscope will not be able to ‘invest in everyone’ – “we can’t be the solution for everyone” – but Arican’s experience bringing private equity into the defence sector yielded increases in defence revenue and staff numbers, including a 200 per cent increase in staff numbers at Eptec Group.
Having advised on every investment by private equity in Australia’s Defence Industry since 2018, Stevens outlined that the Periscope team are highly skilled professionals prepared to transform defence industry and provide a commercial return for investors.
“We think our involvement will result in a greater level of capability available to the ADF,” Stevens said. “We want to write checks up to $50 million and see opportunities to invest in a significant number of companies, aiming for private equity returns rather than venture capital returns.”
Companies can pitch directly to Periscope Capital Partners through their website for consideration in their first round. “We do want to engage one on one with each company we consider,” Stevens said. “Then they’ll go through a process in which we’ll look at them in detail, ask whether there’s a commercial return for investors, and ask if through our involvement that business will contribute to the ADF and its mission.”
One main challenge will be navigating ESG (environmental, social and governance) restrictions that have traditionally prevented Australian capital investments into the defence sector.
Stevens explains that whilst the $100 million already invested does not have ESG constraints, the remainder will require Periscope to bring a greater understanding of how national security sits outside ESG to investors; a cause Stevens has personally championed for some time.
“This means in 2024, our exit strategy will either be a listing or a trade sale,” Stevens said. “But in 2027 and beyond, things could look quite different as other private equity players take interest.
“That’s our ultimate goal. As a result of this initiative, can we create a new type of relationship between government, defence and the capital markets to fast-track capability outcomes for the ADF? I think we can.”
Note: More information on Periscope Capital Partners is available in Episode 67 of the ADM Podcast.