Wars trigger $12bn venture capital rush into defence tech

In today’s newsletter:

• Wars trigger $12bn venture capital rush into defence tech

• Thoma Bravo’s record $5bn private equity loss

• ‘Hawkish shift’ in US rates upends global currency bets

Wars trigger $12bn rush into defence tech

Defence tech is booming. Encouraged by wars in Ukraine and the Gulf, venture capital funds are flooding the market, turning drones, autonomous vessels and battlefield AI into this year’s hottest bet.

According to PitchBook data provided for the FT, start-ups have raised $12.3bn so far this year. That’s nearly double the same period last year and already exceeds last year’s total of $9.95bn.

The surge comes as conflicts expose demand for next-generation weapons systems that are cheaper and faster to produce — but with some funds willing to pay increasing multiples as they bet heightened government defence spending will endure, it has also raised concerns that parts of the market are overheating, write Sylvia Pfeifer and Ivan Levingston.

“We’re seeing the most important change in the way wars are being fought arguably ever,” said Daniel Rudnicki Schlumberger, head of JPMorgan’s security and resiliency initiative for Europe, the Middle East and Asia, adding that valuations had risen steeply as investors realised “this is a sector with a long-term need.”

Shonnel Malani, managing partner at private equity group Advent International, said that while there were “very valid” concerns over some of the higher valuations, the drivers underpinning demand would remain even once today’s conflicts end.

Advent in March announced it planned to deploy up to $1bn into next-generation defence technologies.

“The underlying driver of why we need defence technologies and these defence capabilities . . . is very real. That is not a hype,” said Malani. “There is a more sophisticated set of technologies that could be used against us and we have to rise to that challenge.”

The FT in May reported that Helsing, the German drone start-up backed by Daniel Ek, was raising $1.2bn at a valuation of about $18bn. Fellow German group Stark is also in talks to raise at least €300mn, valuing the maker of “kamikaze” drones at about €2.5bn. 

“It’s a hot market . . . we are addressing what corresponds to the long-term budgets of European armies,” said Benoit Fosseprez, a general partner at investment group AVP, which recently launched a new €500mn European defence tech fund alongside VC firm Earlybird.

Thoma Bravo’s record $5bn private equity loss

Thoma Bravo has decided to dump its holding in software group Medallia and take a $5bn hit. A Blackstone-led group, which includes Apollo and KKR, will take control of Medallia and inject $150mn to help cut its debt load.

Thoma Bravo’s loss is the second largest in the private equity industry’s history, exceeded only by the collapse of Texas utility TXU, according to Daniel Rasmussen, an expert on private equity at Verdad Advisers, write Antoine Gara and Ryan McMorrow.

Medallia’s troubles had also been a concern for Blackstone, Apollo and KKR, which lent heavily to the group.

The deal comes amid mounting fears over the performance of private equity software takeovers struck in the early 2020s, when valuations were soaring during the pandemic. Firms such as Thoma, a specialist investment group focused on technology investments, ploughed hundreds of billions of dollars into software companies at valuations many investors now believe were too high and have proven hard to exit.

Private credit companies had also rushed to finance software groups backed by private equity, something that has caused deep angst among investors and helped prompt a rush of redemptions from many funds.

The rise of AI tools including Anthropic’s Claude Code has created further complications for many deals from that era because investors worry that the business models of many software groups will be upended by the technology.

Orlando Bravo, co-founder of Thoma Bravo, which manages more than $180bn in assets, has admitted publicly the firm overpaid for Medallia, which sells chatbots to automate customer service queries.

“You always learn from mistakes. It was a big mistake,” said Bravo at the Sohn Conference last month, when asked about Medallia. “That was one of our 2021 deals. We were moving really fast during that time . . . We underwrote really fast growth and in hindsight we paid too much because that growth didn’t materialise.”

Bravo has said Thoma saw better uses of its investors’ cash in making new investments rather than paying down Medallia’s debt.

Lenders believe last week’s deal will stabilise Medallia by cutting its debt load to more manageable levels and believe the software company’s business is performing adequately. Lenders have cut their valuation on their loans to about 60 cents or 70 cents on the dollar.

‘Hawkish shift’ in US rates upends global currency bets

A resurgence in the dollar has sent bets on the currencies of big emerging markets and major commodity producers into reverse, as a hawkish shift by the Federal Reserve upends what had been one of the strongest trades in FX markets this year, write Joseph Cotterill and Ian Smith.

Currencies such as the Argentine peso and Norwegian krone have been hit in recent weeks as markets have begun to price in higher US interest rates, boosting the appeal of dollar assets.

Underlining the shift, Kevin Warsh dropped the Fed’s longstanding bias towards easing rates at his first meeting as the head of the central bank last week. Traders in futures markets are now expecting a quarter-point rate rise by October.

“Expectations of a hawkish shift in US rates are reshaping currency markets,” said Rushabh Amin, a multi-asset portfolio manager at Allspring Global Investments. He added that this was undermining currencies that had offered the so-called carry of higher expected interest rates.

Brazil’s real, the Australian dollar and the South Korean won have dropped more than 2 per cent against the dollar in the past month, amid a pullback in currencies as diverse as the Malaysian ringgit and Canadian dollar. The Norwegian krone is down more than 4 per cent.

After whipsawing through the first weeks of the war, the dollar has climbed over the past month as the conflict has dragged on and inflation in the US has climbed above 4 per cent.

Falling currencies have hit appetite in particular for dollar-financed “carry trades”, where investors borrow at relatively low US funding rates to buy the assets of countries with higher yields, such as Brazil, where base interest rates are currently 14.25 per cent.

“Higher US rates and [the] stronger dollar have triggered a reversal from some popular carry trades,” said Lee Hardman, senior currency economist at MUFG.

Despite the recent sell-off, fund managers are pointing to higher foreign reserves, relative fiscal restraint and more credible monetary policy across emerging markets, since the last round of US rate increases threw many countries into crisis in 2022 and 2023.

“The long-term case for better balance sheets in emerging markets over developed markets, particularly the US, remains,” Ramjee said. “Over the long term, the central bank orthodoxy that has been instilled in many emerging markets will endure.”

Rathbones’s management was distracted by its £839mn merger with Investec Wealth in 2023 and failed to dedicate sufficient attention to implementing sweeping consumer regulations that came into force that year. When Rathbones admitted that it had to suspend some operations, its share price fell nearly 20 per cent.

AI technology groups and hyperscalers are not yet in “a bubble situation”, according to Johanna Kyrklund, chief investment officer at UK asset manager Schroders. Regardless of the hype around tech IPOs, there remains a healthy fundamental underpinning to most of the global equity market.

Saudi Arabia’s Public Investment Fund has warned that European regulations are “hurting” international investors and preventing them from ploughing more money into the region.

SpaceX was awarded the lowest possible environmental, social and governance rating by index provider MSCI ahead of the company’s record $75bn public float this month. The triple C score equates with that given to the Russian government following its 2022 invasion of Ukraine.

Investors are warning that Japan’s record stock market surge this year could be derailed by a new strain of protectionism and a feared government swipe against shareholder activists and private equity.

And finally

A century after Alexander Calder arrived in Paris, the Louis Vuitton Foundation has brought together an exhibition entitled Rêver en Equilibre, Dreaming in Balance, which spans half a century of his work. Starting from the late 1920s and the first staging of the artist’s Cirque Calder performances that captivated the Parisian avant-garde, it runs through the monumental sculptures that redefined public art in the 1960s and 1970s.

Until August 16