Summary: The AUKUS partnership among Australia, the United Kingdom, and the United States aims to deepen military, industrial, and innovation integration to maintain a technical edge over competitors like China. Highlighted by a December 2023 meeting, AUKUS's success hinges on leveraging private sector capital, particularly through the AUKUS Defense Investors Network and a proposed Industry Forum. Investments, such as the $300 million in Subic Bay, showcase the private sector's role in bolstering defense capabilities. However, maximizing private capital's potential requires AUKUS governments to adapt, offering clearer pathways for investment and reducing regulatory barriers to foster innovation and collaboration within the defense sector.

AUKUS—the trilateral partnership between Australia, the United Kingdom, and the United States—is a time-pressured experiment in how far allies can deepen integration among not only their military forces but also their defense industrial bases and innovation ecosystems. The success of this experiment depends on how effectively AUKUS partners can mobilize private sector capital to ensure a collective technical advantage over strategic competitors such as China.

In December 2023, AUKUS leaders met at the Defense Innovation Unit‘s (DIU) headquarters in California to reveal progress made under Pillar 1—the submarine component, and Pillar 2—the advanced capability sharing component—of AUKUS.  The decision to present the announcement at the DIU—the U.S. body tasked with accelerating the adoption of commercial technologies for defense at speed and scale—signaled AUKUS partners‘ recognition that the private sector is integral to the partnership's success.

The private sector has never lacked interest in stepping into a role in the defense industrial base as long as it could meet its bottom line. However, a class of U.S., UK, and Australian investors today see the protection and support of national defense interests as a positive return on investment (ROI). These investors are conscious of the value of “clean capital”—void of any links to adversarial influence in their investment portfolios or governance. This means they may serve as trusted entities to fill the gaps in defense capability, infrastructure, investment, and secure critical supply chains.

Testament to this model is the establishment of the AUKUS Defense Investors Network (AUKUS DIN)—a network of more than 300 private capital investors from across the three AUKUS countries representing more than $265 billion. The 2023 December joint leaders‘ statement endorsed the DIN alongside plans to establish a standing Industry Forum with government and industry participation to help deliver advanced capabilities under AUKUS.

The private sector's appetite extends beyond investment to commercialize dual-use technologies to investment opportunities in distressed or latent strategic assets in AUKUS partner countries and across the Indo-Pacific that may support defense capabilities and force projection.

The $300 million investment by U.S. private equity firm Cerberus Capital Management in Subic Bay is a prime example of how private sector capital can advance national security as a component of ROI. Cerberus‘s financing opened the opportunity for Australian shipbuilder Austal to revive the Manila shipyard. The company leveraged out Chinese investors to ensure the former U.S. naval base is in “friendly” hands, given its strategic position as a point of access to the South China Sea.

Companies, such as DYNE Asset Management and Shield Capital, are among a range of other mission-oriented and “clean capital” conscious U.S. private sector players searching for similar opportunities to invest in technologies and assets that support national resilience and defense ecosystems in the United States, Australia, and the United Kingdom.

Unlocking private capital to help advance strategic interests, however, requires a paradigm shift from the AUKUS governments. Despite shared intent, each partner has a different level of maturity regarding collaboration with the private sector.

Australian officials, in particular, feel the urgency of this challenge, and investors look to Australia as an open market for AUKUS-related investment. Australia‘s 2023 Defense Strategic Review highlighted the need for an increased level of government flexibility and agility to spark innovation, acquire fit-for-purpose defense capabilities, and modernize risk management. For starters, investors in the United States need the Australian government to point clearly to a “front door” for private sector capital for foreign investment in Australian defense capabilities and infrastructure.

Existing programs, such as the Integrated Investments Program and the Advanced Strategic Capabilities Accelerator, may provide gateways for U.S. investors unfamiliar with the Australian market. Still, more public-private discussion and problem-solving is necessary to facilitate private sector capital funding at the scale and pace needed to further strategic needs.

A key challenge all AUKUS partners share is reconciling their own risk appetite with the private sector, particularly in emerging technology areas. While AUKUS governments want to ensure an advantage in Pillar 2 technologies such as quantum computing, private sector capital doesn‘t necessarily want to back these dual-use technologies at early-stage seed funding without clear use cases or reduced barriers to market. The flip side is that without capital, the start-ups working in these industries will struggle to scale.

In instances when commercialization is achieved, technology companies tend to avoid government contracts due to the arduous and costly acquisition timelines alongside the implications of export controls on dual-use products. The U.S. International Traffic in Arms Regulation (ITAR) export controls remain a key barrier to enabling a truly streamlined and collaborative defense relationship with industry partners. The National Defense Authorization Act (NDAA) passed in late 2023 made positive headwinds in this regard. The NDAA included an expedited processing approach for the United Kingdom and Australia, outlining an anticipatory release policy that would set up pre-approval mechanisms for foreign military and commercial sales related to AUKUS technologies.

While legislative reform is imperative, a cultural shift within AUKUS governments also needs incubating to alter risk appetites towards working with non-government entities. Opening the door for private capital requires acceptance of higher risk, but the reduced barriers will allow technology companies to “crowd in,” creating competition and driving innovation.

The Pentagon has approached these issues in part by establishing the Office of Strategic Capital (OSC), which develops and implements strategies to accelerate and scale private sector investment in critical defense technologies. For Australia, leaning on existing funding mechanisms, such as the AU$15 billion National Reconstruction Fund (NRF) to help underwrite risk in emerging critical technology areas, would be a useful start alongside revising the Australian innovation ecosystem along the DIU model in the United States. The latter has helped bridge the U.S. defense system and the American commercial technology sector.

In 2024, the AUKUS partners must focus on mobilizing capital to invest in technology and defense infrastructure to satisfy the most pressing capability gaps. Only the private sector‘s agility and innovation will enable AUKUS partners to compete against heavily subsidized Chinese competitors. Only effective public-private collaboration that taps “clean capital” will ensure that advances in emerging technologies become reality within a trusted environment and without links to malign state actors.

The industry is paying attention and remains prepared, but the AUKUS partners must match the interest and make the necessary changes to grasp the opportunities.

About the Author 

Bronte Munro is an Analyst at the Australia Strategic Policy Institute in Washington DC, covering U.S. and Australian defense industrial base policy, innovation, cyber, and technology.

Image: Shutterstock.com.