Adopting proven US approaches could help stimulate more private investment into Australia's domestic defence sector and help grow its defence industrial base, argues a new brief from the United States Studies Centre (USSC) at the University of Sydney.

In Leveraging private capital in defence: Lessons for Australia from the United States, Emerging Technologies Institute Research Fellow Samuel Moyer examines how the Pentagon has worked with capital markets to grow defence firms and support the wider defence industrial base. This brief identifies three types of policies that have encouraged private investment in the US defence industry: clear demand signals to industry, catalytic capital and a healthy business environment.

“The United States has used targeted policy to turn its world-leading capital markets into a genuine strategic asset for defence,” said USSC Director of Foreign Policy and Defence Dr Lavina Lee. “Australia now has an opportunity to do the same and scale up its domestic defence industry.”

In the brief, Mr Moyer argues that US defence venture capital deals, such as Anduril’s US$5 billion series H venture funding round, may propel some firms to “neoprime” status: a new generation of venture-backed defence firms producing multiple defence platforms directly for government customers. For Australia to grow its own cohort, the brief finds that the country’s large pools of investment capital, including superannuation, may help close part of the gap, but the largest defence scale-up rounds may also require trusted foreign capital from the United States and other allies. Private equity and debt financing will likely be more important for capital-intensive priorities such as naval shipbuilding, autonomous systems and maintenance, repair, overhaul and upgrade (MRO&U).

The brief also points to the new Advanced Capabilities Investment Fund (ACIF) as a significant opportunity. Structured well, ACIF could act as a “front door" for domestic and allied investors and draw in private co-investment from major firms that have not yet entered the Australian market.

"With the right policy toolkit, Australia’s capital markets can become a real source of geopolitical strength,” concluded Dr Lee.

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Key recommendations for Australia

To stimulate private investment into the defence industry, the Australian Government should consider the following options:

  • Improve demand signalling to industry by increasing the use of offtake agreements, purchase guarantees and similar mechanisms.
  • Employ catalytic capital to stimulate the development of select sectors by expanding the use of loans, loan guarantees and non-monetary incentives to invest.
  • Leverage the Advanced Capabilities Investment Fund to engage new investors by publishing investment priorities and target investments.
  • Reform the procurement process by speeding up procurement and expanding access to new entrants to strengthen the business environment.