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As a firm that focuses on differentiated investment opportunities, we often find ourselves deep in niche pockets of the economy that require significant market research. Most recently we’ve been exploring the defense sector.1
A cornerstone of national security and technological innovation, the defense sector in the U.S. has historically been a bipartisan priority, and is consistently backed by substantial government funding. Annual budgets recently surpassed $800 billion2. But recently re-elected President Trump has expressed interest in re-evaluating defense priorities. New dynamics may soon be introduced and the existing landscape may well evolve, presenting both challenges and opportunities for investors and contractors.
With this in mind, we felt it timely to share our perspective on why lending strategies can succeed despite the uncertainties surrounding government spending. While much of the conversation around investing in the defense industry has focused on private equity and venture capital, we believe lending can be an equally compelling strategy. (As always, please note that this discussion is not meant to constitute investment advice.)
Navigating the Defense Investment Landscape
As of September 1, $2.6 billion had been invested by private equity and venture capital firms in the defense sector, exceeding the $2.2 billion in 20233. For decades, the defense sector has attracted significant capital from private equity firms, venture capitalists, and traditional lenders focusing on large defense contractors.
Established industry leaders like Lockheed Martin, Raytheon, and Northrop Grumman have traditionally been the primary recipients of investment in the defense sector due to their scale, proven track records, and ability to secure large government contracts.
Private equity firms such as Carlyle Group, KKR, and Blackstone have targeted mid-sized contractors or manufacturers with strong ties to government contracts. Their strategies often involve streamlining operations, scaling businesses, and positioning them for long-term growth or acquisition. Meanwhile, venture capital firms like Andreessen Horowitz, Lux Capital, and DCVC focus on startups and emerging technologies in areas such as cybersecurity, artificial intelligence, and unmanned systems. These approaches typically favor companies with the potential for significant scale and founders with established track records, creating a robust ecosystem of innovation and growth.
However, traditional investment strategies often come with limitations. The complexity of federal procurement processes and perceived risks of contract cancellations can deter traditional lenders from engaging with smaller, growth-stage contractors. Despite the reliability and scale of government contracts — often structured with milestone-based payments and secure mechanisms like the System for Award Management (SAM) — many contractors face operational challenges, such as heavy capital needs to fund new projects or manage uneven earnings.
As a result, smaller and mid-sized contractors often struggle to secure traditional financing, leaving a critical gap in funding. This creates opportunities for specialized lenders who are willing to navigate the complexities of government contracts and offer tailored solutions to help contractors execute their projects and grow.
Leonid Capital Partners: A Case Study in Innovative Lending
One such company addressing this financing void is Leonid Capital Partners. Founded in 2019, Leonid provides revolving lines of credit, term loans, debt and acquisition financing to emerging government contractors and startups at every stage of growth with a focus on senior-secured loans backed by U.S. government contracts.
Here’s why Leonid stands out:
- Trusted Capital Provider Designation. Leonid is one of only two lenders designated as a Trusted Capital Provider by the Pentagon, giving it access to a proprietary marketplace for sourcing deals. This designation positions it as a key partner for contractors in the defense and space sectors.
- Innovative Loan Structures. Leonid seeks to mitigate risks through robust loan structures, including cash flow controls and direct payment mechanisms under the Assignment of Claims process. These measures aim to protect both the lender and the contractor, ensuring stability and predictability in cash flow management.
- Adapting to Emerging Priorities. With the Trump administration’s shifting priorities, Leonid’s adaptable approach positions it to support contractors in a variety of sectors. By aligning its lending strategy with government objectives, Leonid can help its borrowers scale and innovate effectively.
Why Lending Makes Sense in Defense
Lending in the defense sector offers distinct advantages that we believe make it a compelling alternative to equity investments. By providing contractors with the capital they need without diluting ownership, lending ensures that companies can maintain control over their intellectual property and operations, an essential consideration in this highly specialized industry.
Unlike private equity and venture capital, which rely on significant growth or exit events (such as acquisitions or IPOs) to generate returns, lending against government contracts potentially provides more predictable and stable outcomes. Firms like Leonid structure their returns around the terms of the loan agreements, which are backed by the reliability of government payments. This means they don't depend on the borrower achieving exponential growth or market dominance; instead, their success hinges on the contractor fulfilling the terms of their government contracts.
Final Thoughts
As new government priorities emerge, specialized lending strategies, like those employed by Leonid, address gaps left by traditional lenders and help ensure the continuity of mission-critical projects. Whatever the strategy, defense investing stands out for its unique combination of consistent demand, critical national importance, and opportunities to drive innovation and adapt to change.
[1] The information provided in this publication is for informational purposes only and should not be considered investment advice, a recommendation, or an offer to buy or sell any securities. The views expressed are those of Epic Funds and may change without notice. As of the date of this publication, Epic Funds and/or its affiliates are investors in a fund managed by Leonid Capital Management. This position may be adjusted, bought, or sold at any time without prior notice.
[2] https://usafacts.org/articles/how-much-does-the-us-spend-on-the-military/?utm_source=chatgpt.com