Andreas Urbanski led artificial-intelligence partnerships for Google Cloud and digital platforms for Airbus Defence and Space. He is the founder of deepi.ai, a defence advisory and investment firm.
Ottawa has managed to mobilize eight other allies, including defence heavyweights Ukraine and Turkey, as founding members of the Defence, Security and Resilience Bank (DSRB). Equipped with about $190-billion in capital and headquartered in Canada, the bank will use the Business Development Bank of Canada’s craft and playbook to crowd in private capital.
This coalition of the willing deserves applause. I spend my working days between defence manufacturers who need capital and institutional investors who have changed their investment mandates to fund capability building. The Prime Minister’s announcement is informed by the right vision. Yet more needs to be done to secure defence industrial supply chains, from minerals to metals to AI-powered autonomous systems.
The bank’s mission is incomplete, opening the door to a failure mode that would destroy capital. The cheap credit that the bank provides to businesses lowers the cost of capital for them. However, the investability – and hence viability – of an emerging defence manufacturer rests on overcoming challenges to scaling that are unique to the defence world.
These include nationally fragmented end markets, politically driven buying behaviours, and slow and complex procurement cycles. The failure mode is akin to Bank of Montreal providing a below-market mortgage to a borrower with uncertain ability to generate income.
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The bank should unlock private capital by underwriting risks, thoughtfully, not just by lending. Private capital will come forward under the right conditions. The DSRB needs to create those conditions by creating and underwriting a predictable framework for investors.
Any investment in a singular asset, whether a mine for defence-critical minerals or a factory, risks becoming a stranded asset if the surrounding supply chain is impaired, either because of missing pieces or sudden tariffs or changes in the permitting regime.
Canada is particularly exposed to such gaps, especially in minerals and in spite of its commodity wealth. While Canada is broadly tied with China as a miner, an overwhelming share of the refining happens in China. All of which is subject to Chinese export controls, which could choke US$6.5-trillion of downstream production outside China across automotive, defence, energy and high tech.
Therefore, the DSRB’s balance sheet should stand behind commercial structures that make projects financeable, while private investors – including the six Canadian banks already committed – provide the bulk of the debt and equity required.
Specifically, the DSRB should underwrite a floor for revenue expectations. Guaranteeing the viability of a business plan for a new mine or plant, with smart risk and reward sharing mechanisms, is crucial because the dominant Chinese suppliers can and will underprice their outputs for sufficient periods of time to drive competitors into bankruptcy. This is best achieved by aggregating the demand signals across the allies.
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The United States’ MP Materials deal, which unlocks debt underwriting for certain refining, provides a possible playbook, with minimum volume and price commitments as well as excess profit recapture formulas. If similar arrangements can be replicated across every defence-critical input, private capital will be plentiful. Canadians have seen such instruments work before, in pandemic vaccine procurement.
The DSRB should also underwrite mutual access to defence-critical outputs and guarantee allocations before a war. The International Energy Agency’s 1974 allocation formula for strategic petroleum stockpiles provides the playbook. It is the only reason governments did not simply hoard, which would have driven up prices for everyone.
Nothing comparable exists for magnets, rare earths or AI frontier models. Absent such guarantees, every country in the alliance will look out for themselves, similar to the initial COVID-19 chaos. Investment committees pass on companies that can be unravelled by “stroke-of-the-pen” risks. Canada has the credibility to backstop such arrangements, unlike its southern neighbour.
That version of the DSRB will unlock plentiful private capital, because of the magic of revenue multiples in valuing companies. The legacy defence primes – companies like Lockheed Martin or Northrop Grumman – trade at just under two times annual revenue. The high-growth software-defined newcomers, such as Anduril, are valued at about 30 times revenue.
Revenue certainty is the scarcest asset in the sector, and private capital pays multiples for it. If the same balance sheet is used to underwrite smart revenue guarantees – without becoming the customer of record – that will mobilize much larger pools of private capital.
Canada’s government has shown leadership in the space. It now needs to take the extra step of ensuring DSRB will launch with the right mandate to tackle the hardest challenges.