Sovereign wealth funds are estimated to manage close to $4 trillion of assets. European governments are increasingly concerned about such powerful investors, the bulk of which are from Asia and the Middle East, showing interest in their defense industries especially at a time when Europe must curtail its own defense investments. EU member states acknowledge that their national industrial bases are too fragmented to sustain and protect industries that manufacture sensitive technologies, explains research analyst Clara Marina O’Donnell. “If anything, some European governments actually maintain excessive controls on foreign investment, unnecessarily restricting the ability of their defense companies to access benign capital,” she explains. Liberalizing the defense and aerospace markets will streamline defense spending. As aerospace and defense industries integrate, regulations must be updated and coordinated accordingly. O’Donnell concludes that a joint EU investigative committee, rather than fragmented national reviews, would increase transparency, simplify procedures for investors and provide greater security. – YaleGlobal

Europe Frets Over Foreign Investments in Defense Industry

Air of anxiety: A sovereign investor from Abu Dhabi acquired thirty percent of Italys Piaggio Aero aircraft manufacturing company. Enlarge Image

LONDON: A small number of sovereign investors, sometimes originating from non-democratic states, are buying shares in European aerospace and defense companies. Some EU governments have responded by calling for tougher controls on foreign investment in these industries.

But there is no need for alarm. The European defense sector is sufficiently protected by the heavy and at times excessive regulations already in place. In the long term, if EU member-states integrate their defense industries further, they should coordinate their efforts to regulate foreign investments in this sector, including those by sovereign investors.

Sovereign wealth funds and state-owned enterprises, SWFs and SOEs, with ties to governments from the Gulf, the former Soviet Union and emerging Asia have become increasingly powerful global investors. SWFs alone are estimated to manage close to $4 trillion of assets globally.

Sovereign groups have focused their investments in Europe predominantly in the financial sector and remain limited players within the aerospace and defense industry. But some sovereign investors have held small stakes in the industry for years, including the Government of Singapore Investment Corporation. And more recently, the number of sovereign groups interested in European aerospace and defense companies has grown. Attracted by the prospect of solid financial returns and access to advanced technology, various SWFs and SOEs acquire small European aerospace firms, invest in some of Europes largest groups and set up a multitude of joint ventures.