CataCap, a Danish private equity firm, aims to raise a fund to back defense and aerospace companies amid growing investor interest in this area, two of the GP’s senior executives told affiliate title Private Equity International this week.
The manager is talking to potential anchor LPs with a view to investing in small- and medium-sized enterprises in those two sectors. It is targeting €500 million and hopes to hold a first close later this year, said partner Peter Ryttergaard, with goals to complete the capital raise in 2026.
The fund would be CataCap’s first defense-focused vehicle. Its three previous funds invested in Danish SMEs.
CataCap is starting out by speaking to institutions in Denmark and elsewhere in the Nordic region, said partner Lasse Lynge. “That could be pension funds, insurance companies or very large family offices.”
Although the market is seeing a shift in investor sentiment towards the defense sector, it’s still early days, Lynge said. “Some pension funds here in Denmark are quite keen to engage; others are not yet.”
CataCap sees worthwhile market opportunities and investment rationale within the sector. Europe is home to around 2,500 defense-related SMEs, which have historically found it hard to bring in equity investments and debt financing, he added.
“A lot of the European innovation in the defense sector comes from these companies,” Lynge said. “They help drive the R&D development and support some of the large-cap defense primes.”
CataCap expects to see significant future growth in European spend on defense, reflecting wider forecasts.
There is political will behind this trend: between 2021 and 2024, European Union member states’ total defense expenditure rose by more than 30 percent, reaching an estimated €326 billion last year, or about 1.9 percent of EU GDP, according to European Council data.
This is forecast to rise substantially in the coming years, after the European Commission unveiled new draft measures in March to help member states ramp up defense spending by 2030 among mounting concerns about the region’s security. These include a proposed €150 billion loan facility to support the European defense industry and a move to allow a deviation from agreed expenditure of up to 1.5 percent of GDP.
Shifting sentiment
Many private investors have historically avoided defense assets, Ryttergaard said, having put the sector on negative lists. However, that appears to be changing.
Danish pension funds that in the past would not have touched defense-related investments are now showing interest, Rune Jepsen, head of Europe private equity at Australian state fund and asset manager QIC, told PEI. “These are investors that effectively invented the concept of defense carve-outs from private equity funds.
“There is a pretty broad shift underway there. I think the main challenge that they’re running into is that it’s a difficult opportunity to access.”
CataCap has built a network of military expertise, including ex-generals and ex-admirals, across Europe to source deals and help the firm understand which businesses fall within the potential investment universe for defense, Ryttergaard said.
What’s more, Lynge and Ryttergaard themselves have deep expertise in aviation, with the latter having operational experience in the industry prior to co-founding CataCap in 2012. The firm has also identified another executive with defense sector expertise, who will join at the fund’s first close, Ryttergaard said.
CataCap has spent the last couple of years looking at the defense sector, which is closely linked to the aviation sector, he added. It has made two aviation deals and has an active pipeline of both aviation and defense deals in place.
In terms of investment size, CataCap is looking at the lower mid-market – specifically, cashflow-positive companies with EBITDA of €10 million-plus. They will typically be sub-suppliers of components or technology to large defense contractors and defense primes, which in turn would be selling to defense ministries and sovereign nations, Ryttergaard said.
CataCap wants the fund to have a well-diversified portfolio, with some eight to 12 majority-stake investments, he added.
Careful due diligence
Questions exist around value chains in the defense sector, however: namely, how does one ensure arms or components do not end up being used for the ‘wrong’ reasons?
“We obviously have to be rigorous about where weapons end up,” Ryttergaard said.
Typically, the companies that CataCap has been looking at are supplying into large original equipment manufacturers, he added. “So we will not be investing into a specific weapon system, for instance, though we could invest into something that becomes part of a weapon system later on.
“But we will only, of course, be delivering to reliable partners. The businesses [we would invest in] have a really high degree of compliance and focus on the regulatory side, and they are under heavy scrutiny and export control of their products.”
