Geopolitical flames ignite the "military investment frenzy"! Carlyle bets that the "mid-sized forces" in the defense industry are entering a golden age.

Title context: Geopolitical flames ignite the "military investment frenzy"! Carlyle bets that the "mid-sized forces" in the defense industry are entering a golden age. Text: The Russia-Ukraine conflict that began in 2022 is still ongoing, and the increasingly intense geopolitical conflict in the Middle East in recent days is simultaneously pushing energy transportation security and air defense ammunition replenishment onto the urgent agenda of large-scale procurement of national defense and military equipment. In the view of global alternative asset management giant Carlyle Group Inc., the major investment opportunities surrounding the national defense and military industry in the period ahead are not limited to a small number of large military equipment contractors, but also prominently include small and medium-sized enterprises that can promptly and efficiently supplement the front-line battlefield technology chain and the supply capacity for core military equipment. Since September, the Houthi armed forces have expanded their control near the Bab el-Mandeb Strait, and Saudi Arabia has carried out airstrikes on targets inside Yemen; the Saudi East-West oil pipeline, which undertakes the task of transporting oil bypassing the Strait of Hormuz, was also attacked and shut down. The combination of restricted navigation through the strait and attacks on alternative overland transportation facilities means that the risks to energy exports cannot be eliminated merely by changing transportation routes. According to a September 16 report by the Associated Press citing two regional officials, Saudi Arabia is seeking air defense support from allies because its interceptor missile stockpile is tightening; Saudi officials had not yet responded to this at the time. From the perspective of investment logic, the demand brought by this type of conflict is not just one-time ammunition replenishment, but also the continuous protection of oil and gas facilities, ports, and military bases, as well as the building of industrial capacity to support the large-scale and highly efficient delivery of important national defense and military equipment. European aerospace and defense military-sector defense stocks have far outperformed Europe's benchmark stock index in recent years - the historic long-term bull market performance of the European STOXX 600 index reflects the strength of this theme's revaluation, but alternative investment giant Carlyle seems to focus more on investment opportunities outside large companies. From shipping lane risks to military production capacity gaps, national defense and military investment opportunities are not limited to the super military giants Ian Fujiyama, head of Carlyle's aerospace, defense, and government business, said that more than 30 years of excessive consolidation has created an industry structure of "a few giants at the top, insufficient mid-sized enterprises, and many innovative companies at the bottom"; he cited a 140% increase in the number of aerospace and defense M&A transactions over the past six months and a 60% decrease in average deal size, indicating that transaction activity is increasingly occurring at the smaller end, rather than saying that total industry transaction value grew by 140%. Carlyle's acquisition of military-grade encryption technology company Secturion Systems and its participation in financing low-cost hypersonic missile developer Castelion correspond respectively to two types of opportunities: secure communications and scalable manufacturing. The "middle market" here refers to enterprise and transaction size, and does not mean that the company's national defense and military-related technologies are low-end; the potential value lies in helping companies that already have technological capabilities cross the thresholds of funding, production, and customer expansion. According to a document previously submitted to the U.S. Congress, of the $67 billion in emergency appropriations requested by the Pentagon (i.e., the U.S. Department of Defense) for this fiscal year, $18.2 billion is for replenishing the United States' most advanced "Patriot" missile system, the Navy's "Tomahawk" cruise missiles, and the Army's high-altitude interception system known as "THAAD," which can be described as a confirmation signal that the global military industry is moving from "geopolitical transactions" to a "super cycle of sustained military restocking and capacity expansion catalyzed by strong demand." Therefore, the segments with the strongest marginal benefits are undoubtedly first air defense and missile defense, precision-guided munitions, and their upstream supply chains, rather than simply complete fighter aircraft. Patriot, THAAD, the Standard series missiles, AMRAAM, Tomahawk, anti-ship missiles, and long-range rockets all have the characteristics of high consumption, low inventories, and long replenishment cycles, and demand will be transmitted along the chain from complete missiles to seekers, radar, solid rocket motors, propellants, warheads, data links, and command and control systems. More worthy of in-depth analysis than complete missile orders are key supporting segments such as seekers, propulsion systems, and guidance electronics, but demand transmission does not mean that all components grow proportionally. Mid-sized specialized suppliers with mature delivery records and the ability to serve multiple programs may find it easier to take on incremental demand than companies with only R&D concepts; however, capacity expansion investment, cost overruns, and the implementation of government funding may also prevent order growth from temporarily translating into free cash flow. Another main line worth tracking is the systematized battlefield technology demand led by mid-sized national defense and military enterprises in "drones - counter-drone - electronic warfare - intelligence, surveillance, and reconnaissance (ISR) - military artificial intelligence," rather than isolated bets on a single type of aircraft. The value of these battlefield technologies depends on reliability, system compatibility, and actual deployment capability. Ukraine is advancing joint drone production with the United States and the European Union, and its long-range drones have a range of more than 3,000 kilometers; the EU's "Readiness 2030" explicitly lists ammunition stockpiles, air defense systems, AI-enabled drone swarms, space services, and military mobility as priority directions. U.S. military giant RTX previously disclosed a U.S. Army counter-drone test that combined the KuRFS radar, Coyote kinetic and non-kinetic effectors, and software upgrades, reflecting the direction of coordinated development of detection, identification, tracking, and engagement capabilities. Secturion, acquired by Carlyle, provides hardware encryption products certified by the U.S. National Security Agency to protect sensitive data in air, sea, and ground systems, also showing that military investment opportunities are not limited to super giants and ammunition manufacturing. Finding the "middle layer" of the military sector: Carlyle is bullish on huge investment opportunities in the mid-sized national defense and military field Ian Fujiyama, head of Carlyle's aerospace, defense, and government business, said that as the U.S. government seeks greater private-sector participation, emerging mid-sized national defense and military enterprises newly entering the U.S. defense industry are bringing abundant investment opportunities. "We have experienced more than 30 years of excessive consolidation in this field, and the result is that only a few companies remain at the top of the industry, while the middle layer has been hollowed out," Fujiyama said in a recent media interview. "There is a very deep ecosystem here, bringing together innovative small companies." In May, this private equity firm launched a dedicated fund to support and cultivate smaller defense companies. In July, the company announced the acquisition of Secturion Systems, which provides military-grade encryption technology. The terms of the transaction were not disclosed. In a deal announced in August, Carlyle led Castelion's $1 billion Series C financing round. Castelion is developing a low-cost hypersonic missile. Fujiyama, a military investment veteran who has followed the defense industry for nearly 30 years, said that current deal dynamics support Carlyle's next-stage focus for investment. "Look at the past six months: from an M&A perspective, the number of completed transactions in the aerospace and defense industry rose 140%, but the average deal size fell 60%," he said in the interview. "The relatively mid-sized or smaller end of the market is very active in deal activity." Fujiyama added that the Trump administration has shown a "reopened attitude" toward public-private partnerships and toward engaging with defense technologies already available in the commercial market. He said a "new atmosphere" has appeared in conversations that was not seen in previous years. The Pentagon's efforts to promote cooperation stem in part from the war with Iran, which depleted inventories of some key military supplies.