Defence Holdings has committed £2m as a cornerstone investor in a new UK defence technology fund founded by three of the company’s own directors.
It marks a sharp change in direction after the group just recently announced its first revenue-generating contracts with the MOD.
The London-listed group said three of the four “Founding Principals” of the UK Defence Fund are its chief executive, Andrew Roughan, its finance director, Brian Stockbridge, and its chief technology officer, Andrew McCartney, with company vice-president Richard Bassett making up the fourth.
The fund’s investment adviser, First Sentinel Corporate Finance, is a firm of which Stockbridge is chief executive and a substantial shareholder.
Under the arrangement, the fund’s manager and adviser are entitled to management charges and performance fees at market-standard rates, though Defence Holdings said it would not pay any performance fees on its own participation, with charges limited to ‘reasonable and properly incurred third party costs’. This could be fees to the firm’s directors.
The £2m makes Defence Holdings the cornerstone backer of the fund, an independently managed vehicle that will take minority stakes of between £250,000 and £1m in early-stage private defence companies working in areas such as artificial intelligence, autonomous systems and cyber resilience.
Apart from a generic big-picture overview of the defence sector, today’s announcement doesn’t detail the potential upside for Defence Holdings shareholders, who will see cash siphoned off to make minority investments in early-stage companies that may not have liquidity events for years.
But the upside for the related directors is clear: they gain a cornerstone investor with minimal effort, which will help market their new fund and generate fees outside of Defence Holdings.
Shareholders have every right to ask why this structure wasn’t established within Defence Holdings to capture the benefits of any future fees from the fund.
Yet, the company’s independent directors approved the investment and concluded it was fair and reasonable for shareholders who are not related parties.
Shareholders may also be pertyrbed that the move marks a very different path for Defence Holdings, coming weeks after it secured its first revenue-generating contract in early July, a roughly £226,000, three-month engagement with the Ministry of Defence to test and deploy an integrated intelligence and decision-support platform, which marked its transition into a revenue-generating business.