The Future of Defence Spending and Investment in Australia
Australian Government spending in Defence continues to evolve in response to rising geopolitical tensions, changing warfighter environment, and economic transformation. For policymakers and businesses alike, understanding the direction of Defence spending and investment is critical. This article provides a high-level overview of key aspects shaping Defence funding, and the growing role of professional advisory services in supporting the Defence private sector to secure outcomes that are efficient, compliant, and aligned with their strategic objectives.
Key Takeaways
- Australian Defence spending is now aligned to our National Defence Strategy, with a significant emphasis on a Strategy of Denial to protect Australia, its people and national interest
- For the Strategy of Denial to be successful, Australia needs a deep and capable sovereign Defence industrial base, private and public sector investment and a more commercial Department of Defence and sophisticated Defence industry
- Driving Australia’s sovereign Defence industrial base needs to maintain alignment with the seven Sovereign Defence Industrial Priorities (SDIP)
- Private sector can use the SDIP to guide their business strategies, and investors alike should use these as strong signals about future growth opportunities
- To effectively engage through the Defence supply chain, either as a prime or subcontractor, Defence industry needs to have strong commercial sophistication to encourage Defence to take on more commercial risk to enable industry to accelerate capability development
National Defence Strategy
In 2024, the National Defence Strategy (NDS) was released to guide the future of Defence policy and planning. It was characterised through a notable shift moving from a generalist and balanced force across the domains, to a more integrated, focused force structured specifically to address the most significant and immediate strategic risks facing the region.
What Changed?
- Shift from balanced force to integrated, focused force
This shift allows the ADF to focus resources specifically on the most significant and immediate risks to Australia’s national security, as opposed to the previous strategy enabling the ADF to meet a wide range of contingencies. - Introduction of the ‘National Defence’ Concept:
By creating a broader focus across the nation for Australia’s National Defence, the NDS aimed to harness collaboration across the private and public sector with a focus on integrating economic, diplomatic, technological and societal strengths with military power for a more robust national security positioning.
- Strategy of Denial
The NDS adopted a Strategy of Denial which aims to deter adversaries by denying them the ability or confidence to project power against Australia, especially in the northern regions. The Strategy of Denial saw the seven SDIP replace the previous fourteen Sovereign Industrial Capability Priorities (SICPs) established in the 2018 Defence Industrial Capability Plan
Sovereign Defence Industrial Priorities Now Include:
- Maintenance, repair, overhaul and upgrade (MRO&U) of Australian Defence force aircraft
- Continuous naval shipbuilding and sustainment
- Sustainment and enhancement of the combined-arms land system
- Domestic manufacture of guided weapons, explosive ordnance, and munitions
- Development and integration of autonomous systems
- Integration and enhancement of battlespace awareness and management systems
- Test and evaluation, certification, and systems assurance
What This Means for Businesses and Investors
- Businesses can now have confidence to commit more funding to develop or support capabilities within the SDIP
- Similarly, investors can rely on the SDIP to inform their Defence sector mergers & acquisition (M&A) or minority investment strategies
The Role of Corporate Advisors and Commercial Consultants
Professional advisors focused on the private sector can help bridge the gap between private companies, capital and government expectations. They offer:
- Deep understanding of public sector requirements and the Defence landscape
- Broad range of experience to drive market entry in the Defence sector
- Strong corporate advisory background internationally to support businesses to grow inorganically with strong appreciation of the industry they operate within
- Understanding of the Environmental, Social and Governance (ESG) risk appetites of key investors
- Advice on regulatory, strategic, and commercial alignment to operate efficiently and effectively with Defence
- Support in preparing tenders, risk profiles, and compliance documents
Investment in the Defence Sector
Understanding where Defence spending is directed helps investors and acquirers to identify M&A or investment opportunities.
We consider the following pools of ‘investors’:
- Strategic Buyers – these are the large Australian and international prime contractors seeking to grow through acquisition.
- Private Equity – In recent years, private equity activity in the Australian Defence sector has seen a significant increase which can support exit for founder/owners.
- Venture Capital – nationally, venture capital has seen an increase in the Defence sector with many focusing on AUKUS Pillar II capabilities.
The next sections explore the factors each of these groups consider in the Defence sector.
Strategic Buyers
Strategic buyers in Australia seek to acquire companies which would support growth of their broader business. This can be achieved through acquiring new capabilities, acquiring businesses with stronger or different relationships with key Defence customers or subcontractors to drive profit margin growth.
In recent years, LightHorse Group has supported several Australian headquartered and internationally headquartered prime contractors to identify acquisition opportunities in the Defence sector. Common themes these businesses look for include:
- Alignment to SDIPs
- Relationships with different Defence customers (whether by domain or group) to identify future revenue synergies
- Businesses of scale, or several businesses of smaller scale which can be ‘rolled up’ as part of their M&A strategy
- Founders willing to continue with the business for a short period of time (up to 3 years) as part of an earn out structure to drive growth under the new ownership
Private Equity
Historically, private equity firms have been unwilling to invest in Defence in Australia due to the ESG risks (actual or perceived). However, private equity firms have undertaken more research into the sector, and as a result, more acquisitions in non-kinetic businesses has occurred. Private equity firms have shown interest in consulting, technology, AI and facilities services businesses which operate within the sector. This way, they achieve some of the upside from the tailwinds of Defence, but can still keep their ESG profile favourable for their fund investors.
Common private equity focus areas:
- Alignment to SDIP
- Strong management team who will continue to grow the business under private equity ownership before an exit in 3-5 years
- Evidence of long-term contract renewals with the Department of Defence
- Companies who are primes to Defence (as opposed to subcontractors through the supply chain)
- Stable cash flows and profitability
- Detailed revenue pipeline and growth strategy in their current subsectors of Defence, and across new domains or groups
Venture Capital
Venture capital funds showing an interest in Defence, or focusing exclusively in Defence have shown an increased interest in more innovative technologies. Importantly, venture capital funds appear to have higher ESG risk thresholds and are willing to invest in kinetic Defence technologies where it is aligned to their broader strategy.
Common venture capital focus areas
- Experienced founder with strong growth mindset and comprehensive growth strategy
- Groundbreaking or innovative technology aligned to kinetic systems such as hypersonic weapons, autonomous UAVs or USVs
- Unique competitive advantage in Australia and internationally
- High intellectual property value with export potential
- Alignment to AUKUS Pillar II focus areas to accelerate export into the USA and UK
How Advisors and Consultants Add Value
Corporate advisors add significant value to these investor groups. By having a strong understanding of most of the businesses across the market including relationships with their owners, a corporate advisor can assist these investor groups to understand businesses, develop target lists, approach with a familiar face and drive execution of deals. M&A and investment advice is not just limited to an understanding of finance, but by combining this with extensive Defence sector experience and relationships, companies can make more informed and strategic M&A and investment decisions.
Work with an Experienced Government and Defence Advisory Firm
If you operate in Defence, National Security, or Government Services sectors and are seeking insight into to enter these markets, invest, raise capital or exit or accelerate your growth organically with commercial sophistication,, reach out to LightHorse Group. With sovereign expertise, a discreet approach, and decades of combined advisory experience, our team is positioned to help you navigate Australia’s evolving Defence environment with clarity and precision.