Venture capital bets on defense sector; US pensions lag on private debt

S&P Global Market Intelligence offers our top picks of global private equity news stories and more published throughout the week.

An uptick in the value of venture capital funding rounds for the global defense sector stands out in a time of relatively quiet venture capital activity.

Private equity and venture capital firms invested $2.6 billion in defense startups between Jan. 1 and Sept. 1, surpassing the $2.2 billion invested in funding rounds for the sector during all of 2023, according to S&P Global Market Intelligence data.

The year-over-year increase contrasts with the aggregate value of overall private equity and venture capital-backed funding rounds, which are tracking for a lower annual total compared with 2023.

Russia's 2022 invasion of Ukraine continues to shape venture capital perspectives on funding defense startups, first by encouraging some investors to overcome a reluctance to fund the development of battlefield technology. Then came Ukraine's eye-opening deployment of cheap, off-the-shelf drones to counter Russian troops.

Venture capital is betting that future wars will be fought with less expensive, reusable and ultimately expendable weapon systems able to operate autonomously through advances in artificial intelligence. The big prize is upending a defense industry that for a long time has focused on large, expensive weapons that take years to develop.

Read more about the increasing value of private equity- and venture capital-backed funding rounds in the defense sector.

CHART OF THE WEEK: US pension funds miss private debt targets

⮞ A key institutional investor group is underweight in private debt, with US pension funds falling short of their median target allocation to the asset class in August, according to Market Intelligence data.

⮞ US pension funds had a median target allocation of $188 million and a median actual allocation of $112 million in August, suggesting a $76 million median net underallocation to private debt, which generally offers lower risk but less potential upside compared with private equity.

⮞ California Public Employees' Retirement System recorded the largest underallocation in August, with $14.30 billion aimed at private debt — $26.55 billion short of its target.

TOP DEALS AND FUNDRAISING

– Nebari Partners LLC agreed to sell gold mining company Centamin PLC to AngloGold Ashanti PLC in a deal valuing all of Centamin's shares at £1.9 billion.

– EQT Private Capital Asia, through its Baring Private Equity Asia Fund VIII, agreed to buy a controlling stake in healthcare outsourcing solutions provider GeBBS Healthcare Solutions Inc. from ChrysCapital LLP.

– Atomico Investment Holdings Ltd. raised $1.24 billion for its two new funds. The firm secured $754 million for the Atomico Growth VI SCSp fund, which focuses on series B to pre-IPO rounds, and $485 million for early-stage fund Atomico Venture VI SCSp.

– BEX Capital garnered $765 million at the close of its BEX Fund V SLP. The vehicle focuses on fund-of-funds secondaries.

– Sienna Private Equity pulled in €400 million for its inaugural fund. Sienna Private Equity Fund I will invest in Europe, primarily in France and Italy.

– Fika Ventures closed on $160 million for Fund IV. The vehicle seeks to lead pre-seed and seed funding rounds for business-to-business software companies.

MIDDLE-MARKET HIGHLIGHTS

– Eir Partners made a majority recapitalization of PharmaForceIQ Inc., a provider of marketing solutions for pharmaceutical brands.

– Sound Growth Partners added ATEK Access Technologies LLC, maker of automatic doors and industrial safety systems, to its portfolio.

– Audax Management Co. LLC's Audax Private Equity business acquired power generation solutions provider Total PowerGen Solutions from Trivest Partners LP.

FOCUS ON: AEROSPACE AND DEFENSE

– Autonomous vehicle systems company Robotic Research OpCo LLC, or Forterra, raised $75 million in a series B funding round led by Moore Strategic Ventures LLC, XYZ Venture Capital and Hedosophia.

– Defense technology company Darkhive Inc. secured $21 million in a series A investment round led by Ten Eleven Ventures.

– Japan-based space transportation company Innovative Space Carrier Inc. raised ¥360 million in a venture funding round, according to Market Intelligence data. Firms including Miyako Capital Co. Ltd. and SMBC Venture Capital Co. Ltd. participated in the investment.

______________________________________________

For further private equity deals, read our latest In Play report, which looks at potential private equity-backed M&A, including rumored transactions, each week.

For private credit news, see our latest private credit newsletter issued twice per month.