“Effectively, there’s a broader set of opportunities for the largest investors, including our big pension funds,” says Shea.
Canadian Prime Minister Mark Carney intends to increase defence spending to five per cent of gross domestic product by 2035. The scale of the market and a long-term vision along with reputational risk potentially being mitigated by the feds interest could spark a new wave of investment.
Previously, defence spending typically meant manufacturing of real assets like tanks or aircrafts but now it includes technology opportunities related to cybersecurity, artificial intelligence, autonomous systems, communication and aerospace, notes Shea.
“It’s also a sector that’s well suited for long-term institutional capital. . . . These are going to be capital-intensive projects.”
A note from Dentons Canada LLP called the defence sector’s transformation a generational investment opportunity for venture capital. “The combination of substantial government commitment, dedicated investment vehicles such as the BDC Defence Platform and StrongNorth Fund and clearly articulated sovereign capability priorities creates a uniquely favourable environment for strategic capital deployment.”
In an economic paper, researchers at TD Bank Group cautioned possible capital investments will under-deliver in the economic dividends to the country, since foreign suppliers play a big role in the defence industry. The economists suggested a shift to greater Canadian workshare in maintenance and mission systems would improve the economic impact of these opportunities.
“On balance, increased Canadian military outlays will likely result in relatively smaller domestic multipliers than other government spending as industry is not set up to deliver products and some spillovers abroad,” the paper said. “So, while the focus below is on domestic spending and investments, multipliers on capital outlays can likely be discounted due to the degree of international reliance.”
Shea says the feds’ spending could also lend itself to cross-border investing programs involving multiple investors including institutions in Canada.
“Traditionally defense was a difficult sector for pension funds, . . . because either policymakers behind pension funds or investors in private equity firms often had exclusions for weapon systems and armaments. Now I think large investors are really re-examining it.
“There’s an opportunity for the Canadian federal government to be more creative and strategic [on] how they go out and seek or partner with capital providers,” he adds. “I think part of it is redefining the landscape, which is already happening and providing the longer-term commitments.”
Read: Institutional investors can help bridge Canada’s $34 billion infrastructure spending gap: report
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