Leveraging private capital in defence: Lessons for Australia from the United States

Executive summary

Private capital is an increasingly salient aspect of national security around the world. In the United States, the Department of Defense has successfully engaged the capital markets to grow new defence startups and support the broader defence industrial base with financial services.

If Australia wishes to scale its domestic defence sector with private capital, it can draw on approaches that have worked well in the United States. This brief describes three types of policy mechanisms that have proven particularly important for stimulating private investment in the US defence industry: providing clear demand signalling to industry; incentivising private investment into select projects or companies with catalytic capital; and creating a healthy business environment.

Australia is already a strong destination for domestic and foreign investment. The right policy mix could increase the amount of private capital drawn into its defence sector and help grow its defence industrial base.

The role of private capital in the modern arsenal

Most highly advanced economies, including the United States and Australia, have rates of investment that are roughly 20% of national GDP.¹ By comparison, China invests over 40% of GDP every year across its economy.² Countries hoping to compete globally must find a way to counterbalance this disparity. Based on the US Department of Defense’s (DoD) experience engaging with private capital, targeted policy initiatives can turn this situation into an opportunity for Australia and the United States alike.

Both countries already possess a vibrant domestic investment sector and are unusually welcoming to foreign investment, with strong legal institutions and dynamic economies. Each is consistently ranked highly in the global “ease of doing business” index,³ a metric of how friendly an economy is to business activity.

While both countries have robust financial services industries, the United States is by far the world’s central finance hub: over 40% of the world’s public and private equity transactions occur within US jurisdiction. Roughly 38% of global venture capital investment occurs in the United States.⁴ Because the United States has such large capital markets, many US investment firms choose to specialise, resulting in an ecosystem of defence-specific financial services firms, such as defence-focused venture capital (VC) and private equity (PE) firms.

Minister for Defence Industry, the Honourable Pat Conroy MP addresses BAE Systems Australia workers and Defence representatives while attending the Hunter Class Frigate keel laying ceremony at Osborne Naval Shipyard. Source: Australian Department of Defence

According to Pitchbook, a leading market intelligence firm, global VC in defence grew to US$53.2 billion in 2025, the highest year on record.⁵ VC investments in the defence industry appear to be larger than in other industries. This may be because defence investments tend to be so-called ‘deep tech’ investments, focused on facilities, equipment and hardware. In 2026, there have already been some of the largest defence VC deals ever in the United States, including Anduril’s US$5 billion series H venture funding round, as well as other large rounds by firms like Saronic and Mach Industries. Investments like these may propel some of these firms to ‘neoprime’ status — a new generation of venture-backed defence firms producing multiple defence platforms directly for government customers.

Beyond VC, growing defence firms can draw from many sources of capital, each with different benefits. Firms can access public and private debt markets. It is also not uncommon for defence contractors to use retained earnings from their own balance sheet to stimulate growth. For example, taken together, the largest publicly traded US defence contractors invest an average of US$21 billion per year.⁶

Investors can bring specific skills into the defence industry. For example, VC investors tend to be highly focused on speed and have deep expertise in commercialisation, whereas banks prize stability and often offer a broad range of customised financial services for small businesses.

Companies choose investment partners based on their goals. If the capital markets are vibrant, with significant competition among investors, companies can afford to be selective and choose an asset class that aligns best with their objectives.

Investment priorities in Australia

Australia’s goals for defence-related private capital are a product of its strategic priorities and the structure of its defence industry. Australia’s 2026 National Defence Strategy notes that “[i]nvesting in innovation, science and technology remains fundamental to properly equipping and preparing a modern fighting force in a technology-dominated world.”⁷ Recent trends in the United States suggest that venture capital plays an important role in supporting the commercialisation of early-stage innovation and the scale-up of small businesses with proven products.

If Australian policymakers wish to see the scale-up of their own cohort of VC-backed domestic neoprimes, Australia’s venture industry will need to find a way to replicate the large investment sizes seen in the United States. Australia’s large pools of investment capital, including its superannuation funds,⁸ may help close part of the gap. But for the largest defence scale-up rounds, Australia may also need to attract trusted foreign capital,⁹ especially from the United States and other allies.

If Australian policymakers wish to see the scale-up of their own cohort of VC-backed domestic neoprimes, Australia’s venture industry will need to find a way to replicate the large investment sizes seen in the United States.

Australia’s 2026 Defence Industry Development Strategy (DIDS) highlights a number of other national security investment priorities where private capital plays an important role, such as supporting naval shipbuilding, developing autonomous systems, and growing Australia’s maintenance, repair, overhaul and upgrade (MRO&U) industry.¹⁰ These industries are extremely capital intensive,¹¹ but not all of them are well-suited for venture capital investors, who often seek rapid growth and outsized gains. Instead, other sources of capital, such as private equity and debt financing, will likely be more important in many of Australia’s strategic sectors. Since private equity and debt are much more plentiful in the capital markets, they can typically support much larger deal sizes than venture capital. These asset classes are also more conservative, favouring investments that have lower returns but are less risky. These non-VC sources of capital are a major strength of the Australian investment ecosystem, with large private equity groups having a strong track record for substantial infrastructure investments.¹²

Private capital also holds promise for supporting small and medium-sized enterprises (SMEs). In Australia, the domestic defence industry is dominated by smaller firms that, on average, have 13 employees and annual sales around A$2.2 million.¹³ For small businesses, which typically do not have large pools of savings available to fall back on during business downturns, access to core financial services such as commercial and investment banking can be crucial for survival.¹⁴ In addition, a robust private equity and mergers and acquisitions market could help some of these firms grow large enough to compete with foreign primes, or provide exit paths for founders.

Government tactics for strengthening capital markets

Each of Australia’s defence investment priorities requires a distinct policy mechanism for engaging with discrete segments of the capital markets. Governments have a wide range of tactics available to influence the direction of private investment, including both domestic capital and trusted foreign capital. In the United States, the DoD has used many of these tactics with success. The tactics can be divided into three categories, including demand signalling, catalytic capital and business environment.¹⁵

Demand signals

First, demand signalling. Investment will not take place if there is no expectation of financial returns. For defence contractors, that almost always means sales to government. The US DoD can afford to make large awards to many companies in the present, but struggles with coherently articulating future interests. US government leaders are often restrained from explaining future demand to industry by budgeting and procurement laws and regulations, and a sense of caution. Transparency, while necessary for oversight, can reveal sensitive information about national security plans, requirements and strategies to competitor nations. Further, both Congress and the DoD frequently change leadership, so most government ‘guarantees’ related to future resourcing are actually provisional.

Notwithstanding these challenges, the DoD is improving its demand signalling. For one, simply encouraging technology leaders to explain needs and constraints provides valuable information to investors and corporate leadership. Providing venues for one-on-one feedback on technologies, such as test and experimentation events or technology demonstrations, can also help companies and their investors gauge product-to-market fit. Perhaps most creatively, the US Air Force’s AFWERX technology program and the US Army’s Combat Capabilities Development Command offer non-binding memoranda of understanding (MOUs), providing a credible signal of interest, if not a guarantee that a future purchase will take place.¹⁶

The light trail of a first-person drone sweeps over the Urban Operations Training Facility before an assault by Australian Army soldiers from the 5th/7th Battalion, Royal Australian Regiment, during Exercise Predator’s Walk at Mount Bundey Training Area, Northern Territory, June 2026. Source: Australian Department of Defence

Furthermore, certain DoD programs (such as the Industrial Base Fund) are now authorised¹⁷ to offer 10-year offtake agreements. These agreements provide more reliable market signals because they can be used to legally bind the government into future purchases of a product or service. One output is a recent 10-year DoD offtake and price floor deal with MP Materials, a US-based rare-earth mining and magnet production company. While this guarantee creates risk for the US Government (e.g. surplus purchases), the concrete demand signal also enabled MP Materials to raise over US$1 billion in debt financing to expand facilities.¹⁸

Training for government personnel can help prepare them to send clearer signals to industry. It helps, for example, when acquisition personnel understand how important the ‘time value of money’ is to investors¹⁹ — moving payments nearer in time is sometimes more appreciated than increasing the financial payout. Likewise, on the industry side, education on how to interpret government budgets and other demand documentation can help them appreciate the potential value of selling to government buyers. This may be even more important for Australia, which is unfamiliar territory for some foreign firms and investors.

The Australian Government should consider strengthening the Australian Department of Defence’s ability to provide industry with offtake agreements, price floors, purchase guarantees, advance market commitments and other strong demand signals. In the United States, Congress has steadily, if cautiously, extended such authorities to the DoD.²⁰

Catalytic capital

A second set of tactics for policymakers to consider is catalytic capital, defined as the use of cash or other inducements to create incentives for investment into a particular project or company. Some of the most common forms of government catalytic capital are mechanisms like loans, loan guarantees or equity investments that are made contingent on private co-investment, sometimes at ratios that greatly multiply the impact of government dollars. In the United States, these subsidies are often offered by state and local governments, but in recent years, programs like the Small Business Administration’s Small Business Investment Capital program²¹ and DoD’s Office of Strategic Capital²² have used similar tools at the federal level.

The same ‘catalytic’ results can be achieved with equity or even a grant or contract. In that case, a request for tender can require companies to invest a pre-agreed amount of capital or to raise capital from a third-party investor (such as a VC) in order to be eligible to receive awards. The DoD’s Critical Chemicals Pilot program employed incentives like these. Companies that invested their own capital to expand domestic chemical production capacity (in at least a 1:10 government-to-private ratio) were made eligible for DoD chemical purchases as well as government support for the facility expansions. Ultimately, US$80 million in private capital flowed into this program at a government-to-private ratio of 1:25.²³

The creation of the up to A$500 million Advanced Capabilities Investment Fund represents a new opportunity for Australia to harness the power of catalytic capital.

Catalytic capital does not necessarily have to be monetary. In some circumstances, the government can provide IP rights, access to specialised research or testing facilities, engagements with operational users, expert consulting or other valuable inducements for a company to make an investment. Defence may have analogous assets that can be leveraged as catalytic capital.

The creation of the up to A$500 million Advanced Capabilities Investment Fund (ACIF) represents a new opportunity for Australia to harness the power of catalytic capital.²⁴ In the United States, such industrial policy programs have successfully triggered large private investments (such as the previously described MP Materials deal), as well as provided a perceived ‘front door’ for the investment community to engage with the DoD. Recent commentary has emphasised that the fund will require a clearly defined mission and a credible pathway connecting investment to procurement and fielded capability.²⁵ ACIF should consider targeting investments that are syndicated with trusted Australian, US and other allied investors. ACIF could include deals where public capital would catalyse private co-investment from significant firms that have not yet entered Australia. To raise awareness among allied investment communities, ACIF could publish criteria for private investors and companies it wishes to prioritise.

In practice, it is often difficult for government organisations to use these authorities effectively, with challenges ranging from misaligned incentives, lack of trained government personnel, inadequate funding, insufficient flexibility to navigate existing laws and regulations or inadequate oversight. To address these challenges, the DoD has adopted an ‘experimental’ approach, with pilot programs that can be expanded or modified as the programs mature.

Government-funded catalytic capital programs can seek returns on par with comparable private investment firms, but they are much more flexible when they are authorised to take losses.

Government-funded catalytic capital programs can seek returns on par with comparable private investment firms, but they are much more flexible when they are authorised to take losses. For example, US government credit programs can receive an appropriated ‘credit subsidy’ to compensate for situations when investments do not meet return targets.²⁶ This cushion allows the program to act as an anchor investor for private co-investors in risky, but important, deals. ACIF might benefit from a similar arrangement. This could be particularly helpful for catalysing large VC funding rounds.

Catalytic funds require talented, dedicated teams to run effectively. Since experienced investors have many options for lucrative careers, it may be necessary to provide significant flexibility in hiring to allow the government to grow these teams. The DoD has recruited experienced private investors into such programs by allowing for higher salaries than would otherwise be typical for government employees, as well as providing flexibility in terms of location: many financial analysts are allowed to work out of New York City, a financial hub, instead of Washington, DC, where such employees might otherwise relocate.²⁷

The business environment

The last set of tactics for policymakers to consider involves the overall business environment. For US and Australian defence industries alike, one of the biggest business challenges is the widespread perceptions of a slow and uncompetitive procurement system. In both countries, procurement reform initiatives are underway, holding promise to speed time to award and reduce administrative costs.²⁸

Australia should pursue this reform with alacrity. Can contracting be made more legible, especially for new entrants or foreign investors? Can the budget and acquisition decision-making process be clearer? Can the award process be made faster? These elements can determine whether a defence market attracts private capital or pushes it away.

Australian policymakers may do well to look at recent deals enacted by US companies such as ACMI Group, using private capital to finance the construction of large new defence infrastructure facilities, such as munitions production centres.²⁹ When such facilities are leasable, they have the added benefit of providing access to defence-unique capital assets for a wide range of stakeholders, such as small businesses and startups, which ordinarily are unable to finance such facilities on their own.

This model could be of particular relevance for Australia’s goals of increasing investment in capital-hungry sectors like shipbuilding and MRO&U. Moreover, the growth of leasable defence infrastructure will make it easier for allied firms and investors to enter Australia without each company having to finance facilities on its own, and take advantage of Australia’s unique geography, large land mass and extensive coastline.

One of the best ways to improve a business environment is by expanding it. With a larger market, more investment can be justified. To the extent that AUKUS Pillar II and other initiatives can expand interoperability and clarify export standards, Australia and the United States should experience greater flows of trusted capital.

Australia is already perceived as a global leader in terms of ease of doing business and friendliness to outside capital. It will be important for Australia to maintain this openness if it is to attract foreign capital to expand the Australian defence industrial base.

Conclusion

Both Australia and the United States are experimenting with new ways to engage private capital to support defence innovation and supply chain resilience. Australia has the opportunity to induce more investment by sharing stronger and clearer demand signals, leveraging tools such as offtake agreements. ACIF and other catalytic capital programs can be structured to trigger private co-investment from both domestic and trusted foreign sources, and current efforts around procurement reform can increase confidence in the business environment.

Australia’s capital markets are a source of geopolitical strength. With the right policy toolkit, private capital can play an increasingly constructive role in Australia’s national security.

Private capital cannot solve all defence industry problems — sustained defence funding will always be required. However, Australia’s capital markets are a source of geopolitical strength. With the right policy toolkit, private capital can play an increasingly constructive role in Australia’s national security.