Geopolitical flames ignite a “military investment frenzy”! Carlyle is betting on military “medium power” to usher in a golden age

The Zhitong Finance App learned that the Russian-Ukrainian conflict since 2022 has continued, and that the recent intensifying geopolitical conflict in the Middle East is supplementing energy transportation safety and air defense ammunition, while advancing an urgent agenda for large-scale procurement of defense and military equipment. According to global alternative asset management giant Carlyle Group Inc. (Carlyle Group Inc.), the major investment opportunities surrounding the defense and military industry for some time to come will not only be limited to a few large military equipment contractors, but will also focus on small and medium-sized enterprises that can supplement cutting-edge battlefield technology chains and core military equipment supply capabilities in a timely and efficient manner.

Since September, the Houthis have expanded their scope of control near the Strait of Mande, and Saudi Arabia has carried out air raids on targets in Yemen; the Saudi east-west oil pipeline, which is tasked with circumventing the Strait of Hormuz, has also been attacked and stopped. The combination of restrictions on navigation in the strait and attacks on alternative land transportation facilities means that the risk of energy exports cannot be eliminated by changing transportation routes alone. According to a report by the Associated Press on September 16, citing two regional officials, Saudi Arabia sought air defense support from allies due to the tightening of interceptor ammunition stocks; the Saudi government had not responded to this at the time.

Deriving from investment logic, the demand brought about by such conflicts is not only one-time supplementary ammunition, but also continuous protection of oil and gas facilities, ports, and military bases, and industrial capacity building to support large-scale and efficient delivery of important national defense and military equipment. The European aerospace and defense military defense stock sector has far outperformed Europe's benchmark stock index, the historical long-term bull market performance of the European Stoxx 600 Index in recent years, reflecting the strength of the revaluation of this theme, but alternative investment giant Carlyle seems to be paying more attention to investment opportunities outside of large companies.

From waterway risks to military production capacity gaps, investment opportunities in defense and military industry are not limited to military supergiants

Ian Fujiyama, head of aerospace, defense and government business at Carlyle Group, said that over 30 years of excessive integration has formed a “few giants at the top, insufficient medium-sized enterprises, and many innovative companies at the bottom”; he quoted a 140% increase in the number of aerospace and defense mergers and acquisitions over the past six months and a 60% drop in average transaction size, indicating that transaction activity is taking place more on the smaller side, rather than a 140% increase in total industry transactions.

Carlyle's acquisition of military grade encryption technology company Secturion Systems and participated in the financing of Castelion, a developer of low-cost hypersonic missiles, corresponding to two types of opportunities, secure communications and large-scale manufacturing, respectively. The “medium market” here refers to the scale of enterprises and transactions, and does not mean that the company's defense and military technology is low-end; the potential value is to help companies with existing technical capabilities cross the threshold of capital, production, and customer expansion.

According to a document previously submitted to the US Congress, the $67 billion emergency funding requested by the Pentagon (the US Department of Defense) this fiscal year, including $18.2 billion to supplement America's most advanced “Patriot” missile system, the Navy's “Tomahawk” cruise missile, and the Army's high-altitude interception system called the “Saad” can be described as a confirmation sign that the global military industry is moving from “geopolitical transactions” to a “supercycle of continuous military inventory replenishment and production expansion” fueled by strong demand.

Therefore, the link with the strongest marginal benefit is undoubtedly first and foremost the anti-aircraft, accurately guided ammunition, and its upstream industrial chain, rather than simply a complete fighter. Patriot, THAAD, standard series missiles, AMRAAM, Tomahawks, anti-ship missiles, and long-range rockets all have the characteristics of high consumption, low inventory, and long replenishment cycles. Demand is transmitted along the entire missile guide, radar, solid rocket engine, propellant, combat parts, data chains, and command and control systems.

What is more worthy of in-depth dismantling than a complete bomb order is the key supporting links such as guide heads, propulsion systems, and guidance electronics, but demand transmission is not increasing in equal proportion for all components. Medium-sized professional suppliers with mature delivery records and the ability to service multiple projects may be easier to meet incremental demand than enterprises with only R&D concepts; however, investment in expanding production, cost overruns, and implementation of government funds may also temporarily prevent order growth from being converted into free cash flow.

Another main line worth tracking is the systematization requirements of battlefield technology dominated by medium-sized defense and military enterprises of “drones - anti-drones - electronic warfare - intelligence, surveillance, and reconnaissance (ISR) - military artificial intelligence,” rather than betting on a specific type of aircraft in isolation. The value of these battlefield technology depends on reliability, system compatibility, and actual deployment capabilities. Ukraine is promoting joint production of drones with the US and the EU, and its long-range drone range has exceeded 3,000 kilometers; the EU's “Readiness 2030” clearly prioritizes ammunition stocks, air defense systems, AI intelligent drone swarms, space services, and military maneuvers.

The US Army's anti-drone test previously disclosed by US military giant RTX uses a combination of KurFS radar, Coyote kinetic energy, and non-kinetic energy effectors and software upgrades, reflecting the direction of collaborative development of detection, identification, tracking, and disposal capabilities. Secturion, acquired by Carlyle, provides hardware encryption products certified by the US National Security Agency to protect sensitive data in air, sea, and ground systems. It also shows that military investment opportunities are not limited to supergiants and ammunition manufacturing.

Looking for the “middle layer” of the military sector: Carlyle is optimistic about huge investment opportunities in the medium-sized defense and military industry

Ian Fujiyama, head of aerospace, defense and government operations at Carlyle Group, said that as the US government seeks more participation from the private sector, emerging medium-sized defense and military enterprises newly entering the US defense industry have brought rich investment opportunities.

“We have experienced over 30 years of excessive integration in this field. As a result, there are only a few companies left at the top of the industry, while the middle class is hollowing out,” Fujiyama said in an interview with the media recently. “There's a very deep ecosystem of innovative small businesses.”

In May, the private equity firm launched a special fund to support and nurture smaller defense firms. In July, the company announced the acquisition of Secturion Systems, which provides military grade encryption technology. Terms of the deal were not disclosed.

In a deal announced in August, Carlyle led Castelion's $1 billion Series C round. Castelion is developing a low-cost hypersonic missile.

Fujiyama, a military investment veteran who has been following the defense industry for nearly 30 years, said that current transaction dynamics support Carlyle's next key investment direction.

“Looking at the past six months, in terms of mergers and acquisitions, the number of completed transactions in the aerospace and defense industry has increased by 140%, but the average transaction size has declined by 60%,” he said in an interview. “The market is relatively biased towards the medium or smaller side, and trading activity is very active.”

Fujiyama added that the Trump administration has shown a “reopening attitude” to public-private partnerships and access to defense technology already available in the commercial market. He said that a “new atmosphere” not seen in previous years appeared in the conversation.

The Pentagon's efforts to promote cooperation stemmed in part from the war with Iran, which consumed stocks of some critical military supplies.