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Private credit firms that could offer vital funding to Europe’s expanding defence industry are exploring whether their investors’ sustainable investment requirements can be watered down to allow them to lend.
Financing Europe’s defence sector has become a priority for governments, since President Donald Trump threatened to curtail US support for the continent.
While some smaller funds can offer financing to the industry, many funds are hamstrung by environmental, social and governance rules set by their investors that forbid lending, particularly to weapons and munitions manufacturers.
But these restrictions are increasingly being questioned by the industry and government officials for whom European rearmament has become a strategic priority.
“In France there has been a big initiative under the ministry of economy and finance to really encourage private assets and asset management companies to be much more open minded [about defence investment],” said Cécile Mayer-Lévi, head of private debt at Tikehau Capital, which manages nearly €50bn in assets and has financed a number of defence companies over the past five years.
She added that investors had been asked by French officials to “accelerate change in their documentation and the bylaws of the fund, so that defence is eligible”.
One credit fund manager said that most European collateralised-loan obligations — structured investment vehicles that are among the biggest lenders to less credit worthy companies — “cannot touch” defence companies, while even hedge funds face barriers if they have institutional investors that ban defence investments. European CLOs have about €250bn of assets under management, according to PitchBook.
“Defence, especially for Europe, is a place where we are still scratching our head,” he said about efforts to deploy funds as attitudes to the sector change.
He added that rating agencies, many of which have a sideline in providing ESG scores, are also under pressure from European governments to re-evaluate the sector to make it easier for lenders to offer financing.
Credit funds that have been able to offer financing to the industry have been rewarded with double-digit annual returns. Prague-based Czechoslovak Group (CSG), one of Europe’s largest ammunition makers, raised $775mn of bonds in November, offering buyers an interest rate of more than 11 per cent.
The bond, which partly refinanced debt after CSG’s takeover of US rival Kinetic, was sold to private credit firms, according to one person familiar with the matter.
“We’re surprised at how single minded some of our peers have been,” said a portfolio manager at a credit hedge fund that has lent money to defence companies. “There’s a lot of tick-box ESG,” they said, adding that if higher yields could be earned for reasons other than higher credit risk “then we’ll take it”.
Companies working in the defence sector that have previously borrowed from a single private credit firm are starting to approach multiple lenders as interest in backing the sector increases, according to people familiar with the matter.
These include Survitec, which provides safety equipment including for F-35 fighter pilots and previously borrowed £270mn from Ares Management in 2021. Another company approaching lenders is Mehler Systems, a manufacturer of ballistic and tactical equipment used by soldiers, which borrowed from private credit specialist Barings in 2020.
Survitec and Mehler did not respond to requests for comment. Ares and Barings declined to comment.
In January, Admiral Rob Bauer, then chair of Nato’s military committee, told the Financial Times that rating agencies, banks and pension funds were “stupid” to shun defence investments. “If you are looking at return on investment . . . there’s so much money to be spent over the next 20 years,” he said.
