Carlyle targets US defence mid-market

Carlyle is seeing growing investment opportunities among smaller US defence businesses as increased government spending and greater openness to private-sector participation drive a surge in deal activity across the sector, according to a report by Bloomberg.

Ian Fujiyama, Carlyle’s head of aerospace, defence and government, said the market was emerging from decades of consolidation that had concentrated activity among a small number of major contractors while leaving a broad group of smaller businesses operating between the largest players and niche suppliers.

The private equity firm has positioned itself to capitalise on that opportunity, launching a dedicated investment platform in May focused on backing and developing smaller defence companies.

Recent transactions illustrate the strategy. In July, Carlyle agreed to acquire Secturion Systems, a provider of military-grade encryption technology, although financial terms were not disclosed.

A month later, Carlyle led a $1bn Series C funding round for Castelion, which is developing lower-cost hypersonic missile technology. The investment marked another significant commitment by the firm to the emerging defence technology ecosystem.

Fujiyama said the shift towards smaller transactions was particularly notable in current market conditions. Aerospace and defence M&A activity has increased by 140% over the previous six months, according to figures cited by Carlyle, while average transaction size has fallen by 60%.

That divergence points to a greater concentration of dealmaking at the lower end of the market, potentially creating opportunities for private equity investors with the capital and operational resources to scale smaller businesses.

Carlyle’s investment strategy also reflects changes in the relationship between the US government and private industry. Fujiyama said the Trump administration had demonstrated greater willingness to work with private companies through public-private partnerships and to incorporate commercially developed technologies into defence programmes.

He said the resulting change in government-industry engagement was creating new opportunities for companies operating outside the traditional defence contractor base.