Germany’s nuclear waste management fund Kenfo is broadening its exposure to defence as institutional investors increasingly look to deploy capital into the sector.
Going forward, Kenfo will be able to acquire shares and bonds in companies producing conventional weapons regardless of the share of revenues derived from arms, provided they are headquartered in an EU member state, the UK, Norway or Switzerland.
Until now, companies deriving more than 5% of revenues from arms have been excluded from investment.
The revised guidelines widen the investable universe, though the resulting additional allocation amounts to less than 0.5% of Kenfo’s benchmark, the fund said in a statement to IPE.
Kenfo stressed it has “no mandate to purchase stocks and bonds” in the defence sector, adding that “there are no quantitative targets set for managers” regarding future investments in defence companies.
The fund has begun discussions with external asset managers, who will take investment decisions based on return considerations, which Kenfo said is a key long-term factor.
“Many share prices in the defence sector are already at extremely high valuation levels, so it is also a matter of smart timing [for investments] from a valuation standpoint,” Kenfo said.
The policy change reflects what Kenfo described as a new geopolitical and international security reality.
This week, Germany’s defence minister Boris Pistorius outlined a new military strategy aimed at building the strongest armed force in Europe.
“Germany is increasing its military spending, and as a German sovereign wealth fund, we cannot ignore this”
“Germany is increasing its military spending, and as a German sovereign wealth fund, we cannot ignore this,” Kenfo added in the statement.
Eligible investments will be limited to companies in the EU, UK, Norway and Switzerland, which Kenfo said meet minimum standards for export control and regulatory oversight.
The fund added: “We plan to review other regions and countries for inclusion in our investment universe in the future.”
Investor approach shifts
The shift comes as German and European institutional investors reassess defence allocations, with governments seeking greater participation from private capital alongside higher public spending.
MEAG, the asset manager of Munich Re, was an early investor in the European defence investment platform created by private equity firm Warburg Pincus.
A spokesperson said MEAG is seeing “strong interest” in defence investing, particularly from European asset owners focused on the European defence industry.
The spokesperson added that this reflects “broader public acceptance of such investments and the overall political challenge”, pointing to Kenfo’s recent decision.
MEAG is actively seeking opportunities in the sector, through funds as well as direct investments in infrastructure debt and equity, the spokesperson said.
Last year, AllianzGI and DWS updated investment guidelines to include defence companies in ESG-linked funds.
