PE firms keen to profit from defence production sector

Consider it a sunrise industry, but run up against the FDI barrier.

Though the government is hesitant to raise the 26 per cent foreign direct investment limit in defence production, it has become the new frontier for private equity (PE) players.

Reason: Scalability of the business in the next four-five years and because it is a high risk, high return game.

While Blackstone was the first and invested in MTAR, which makes critical components and products for nuclear reactors (around $65 million in 2007), several others have invested in defence ancillaries recently.

Flows from abroad are a prime funding source for PE companies. And, “there is a general interest among PE players towards defence. More PE funds are keen on investing in companies that benefit from defence services”, said Arun Natarajan, head of Chennai-based Venture Intelligence.

Recently, Sidbi Ventures invested in Trident Infosol Pvt Ltd from its growth fund. Trident Infosol provides hardware and software products & solutions and system technologies for industrial, aerospace and defence applications.

These companies do not have huge operations, given the lack of capital. Industry players say this is a sunrise industry. As these companies become older, they say the instruments manufactured by them will become more complex. “We are looking at investing in this sector. Going by the scalability of the business, the risk-return reward is huge,” said Bharat Banka, managing director and chief executive officer of Aditya Birla Private Equity.

Similarly, Reliance Technology Ventures invested $5 million in Dhama Apparels Innovations with another investor, Mumbai Angels. The company is developing jackets that increase the body temperature. These helps users adjust to various climatic conditions.

Harshal Shah, managing director and CEO of Reliance Ventures, said there was tremendous scope in defence. “It may look slightly ahead of time at this point, but as a venture capitalist, our job is to enter when the cost of entry is low and then wait for the eco system to evolve.” PE players said there was huge scope for investment in defence ancillaries such as bullet-proof jackets, ballistic helmets and assault rifles.
 

PE INVESTMENT IN DEFENCE ANCILLARIES
Company	Sector	Amount ($ mn)	Investors	Date
MTAR Technologies	Defense Tech	65	Blackstone	Nov ‘07
Delopt	IT Services (Defense)		Axis Holdings	Nov ‘08
Trident Infosol	IT Products (Defense)	3.31	SIDBI VC	Mar ‘10
Source: Venture Intelligence