French defense companies are expected to seek over €5 billion in equity to support rising rearmament costs. A meeting will bring together public and private investors to discuss funding needs, particularly for small and medium enterprises (SMEs), which require between €1 and €3 billion. BPI France will establish a retail fund for public investment, and insurers are projected to contribute up to €4 billion, but challenges related to ESG criteria and reputational risks remain.
French Defense Sector Seeks Over €5 Billion in Equity
PARIS (Reuters) – French companies operating within the defense sector are projected to require more than five billion euros in additional equity in the coming years, as highlighted by Bercy and the Ministry of the Armed Forces. This funding is essential in light of the country’s increasing rearmament expenditures.
This Thursday, the Ministry of Economy, Finance and Industrial and Digital Sovereignty will convene public and private investors alongside key defense industry stakeholders to address the sector’s funding requirements and explore potential financing solutions.
Focus on Equity for Small and Medium Enterprises
The defense industrial and technological base (BITD) in France, encompassing all defense-related enterprises, particularly necessitates additional equity for small and medium enterprises (SMEs), with estimates ranging from one to three billion euros over the next five years.
A recent study conducted by the Economic Observatory of Defense (OED) and the General Directorate of the Treasury between 2016 and 2021 indicates that BITD companies exhibit a higher gross debt ratio compared to the average, which implies they have ‘sufficient access to credit.’ Consequently, the pressing need lies primarily in securing equity.
To facilitate investment opportunities for French citizens interested in BITD companies, Bercy aims to utilize existing financial instruments such as life insurance, while also developing new options through collaboration with both public and private entities. The initial idea of a new regulated savings account has been set aside.
During an interview on TF1, Eric Lombard, Minister of Economy, Finance and Industrial and Digital Sovereignty, announced the establishment of a retail fund by the Public Investment Bank. “A new fund will be created by BPI France, allowing the public to invest in the long term with minimum contributions of 500 euros, since this is aimed at business financing,” he explained, noting that the invested amounts would be locked in for a minimum of five years.
This BPI fund will amount to 450 million euros, constituting one-tenth of the overall requirement. In addition, various private firms, investment funds, and banks will also provide customized financial products for their clients.
Insurers are expected to play a pivotal role in upcoming financing initiatives. According to the France Insurers federation, the sector has already invested over 20 billion euros in defense through diverse placements.
During a session with the Finance Committee of the National Assembly, Jean-Paul Faugère, Vice-President of the Prudential Control and Resolution Authority (ACPR), estimated that direct investments from insurers in defense could reach a minimum of four billion euros, predominantly through unit-linked accounts (UC).
Ucs are investment vehicles provided by life insurers that, unlike euro-denominated funds, do not offer guarantees but allow for investments across various financial markets, including bonds, real estate, ETFs, mutual funds, and private equity.
Faugère suggested that insurers’ investments in the French industrial base could expand if financial products that unite defense industrialists are made available. “There are not many funds currently marketed to investors in the defense sector, but we can envision future offerings, both for euro funds and UCs, that would cater to savers and align with yield expectations,” he elaborated.
Moreover, private equity firms are anticipated to initiate similar efforts, as few funds have specialized knowledge or focus on the defense industry, with notable examples including Weinberg Capital and Tikehau.
However, a significant hurdle to investment in defense remains the need to address environmental, social, and governance (ESG) criteria as well as reputational risks, which will need to evolve over time.