Stenbock House, 4 July 2024 – The Estonian government has authorised Minister of Economic Affairs and Information Technology Tiit Riisalo to subscribe for shares to the value of 50 million euros in a defence industry fund being established as part of SmartCap. The fund will invest both directly and via private funds in defence industry companies and those developing dual-use technologies.
According to Estonian Prime Minister Kaja Kallas, the fund represents an important step in strengthening Estonia’s security and that it will help to boost the country’s economy.
“We have a very highly developed technology sector in this country, but there is a market failure to harness its potential in order to enhance national security,” she noted. “The state can help here by providing seed money. With the support of the fund, Estonia’s defence industry companies will have the opportunity to develop and launch innovative products. In addition to bolstering our country’s security, the establishment of the fund will mean the creation of jobs that produce a lot of added value, as well as the accelerated development of our already prominent technology sector.”
Earlier in the day, Minister of Economic Affairs and Information Technology Tiit Riisalo outlined the fund’s investment strategy to the government.
“The fund will not only focus on the development of dual-use technologies, but also on the development of high-tech solutions and products with deadly force,” he explained. “That will distinguish the fund from those aimed at the defence industries in our neighbouring countries. It will invest directly in companies and market funds alike to bring new investment funds specialising in dual-use technologies to the capital market. Its initial value will be 50 million euros, which can be increased if needed.”
Minister of Defence Hanno Pevkur says his ministry has long supported the development of a high-tech defence industry that is competitive on export markets.
“It is good to see that the Estonian defence industry sector has grown so strongly in recent years,” he remarked. “There is also a great deal of interest in the development of new technologies in the defence industry among civilian companies. The strategic interest of the Ministry of Defence is to create a good environment for weapons system and ammunition developers in particular, as these companies need both financial and product development support. The Ministry of Defence can provide expertise and testing that help products mature and validate their use on the battlefield.”
The fund is primarily aimed at companies registered in Estonia (or that do significant business here) which develop and produce military or dual-use technologies that contribute to the security and defence of NATO member countries. The fund will provide both venture capital investments to finance innovative early-stage technology companies and private equity investments to finance growth-stage companies in the traditional economy, contributing to the fund’s broader goal of boosting the research capacity and international competitiveness of defence companies. The fund is open-ended, and recycled funds will be reinvested.
Minister of the Interior Lauri Läänemets says one of the fund’s key objectives is cooperation between companies and the state.
“That is why, in choosing the projects to be supported by the fund, we must take into account and actively seek opportunities to test the developed technologies or prototypes in many areas, including those in the administration of the Ministry of the Interior,” he said. “We recently devised an initiative to establish a drone wall on the eastern border of the EU which was immediately welcomed by our neighbours. To me, the defence industry fund represents an excellent opportunity for Estonian companies to use their world-class expertise to guarantee the security of the country and of all free democracies by contributing to the drone wall. This means that we have the need, we have the people to do the job and now, thanks to the fund, we have the resources to kick-start what we are planning.”
The defence industry is set apart from other branches of industry developing innovative technologies by the close security cooperation between the state and companies and the heightened requirements imposed on both, such as an atypical export regime and sales environment, the heightened risk of industrial espionage, and security requirements. The development of defence industries is also time-consuming and costly, often involving the use of research-intensive technologies and the manufacturing of physical products.
Technology is rarely ready for the market following its initial development and financing. However, the financing needed to reach the market maturity phase and paying customers and to achieve turnover may not be available on capital markets, so it is also important to offer public equity instruments to companies and thereby encourage private investors to invest in the defence industry by sharing the risk.
The government today reviewed the investment strategy and technical solution of the fund and decided to invest 50 million euros in it. SmartCap will consult market participants this autumn in order to refine the investment strategy and conditions. The establishment of the fund and the subscription of shares will thereafter be finalised with a view to opening up the fund’s financing opportunities to market participants in the defence industry by Q4 at the latest.
