Private capital in Australian defence capability – legal considerations for a big game change

Defence Industry Minister Pat Conroy has announced the Commonwealth will explore options engaging the private investment sector to fund the development of sovereign capability. 

Together with other recent moves towards a rebalancing of how Australia funds Defence, this has  legal implications that both the Commonwealth and the investment sector will need to navigate. 

On the day of the Minister’s announcement (18 February 2026), a Request for Expression of Interest (REOI) was released on Austender, explaining that the government will consider a co-investment of A$500 million at up to 49 per cent of Commonwealth contribution into one or more funds that would ‘…finance Australian companies involved in the development of defence and dual-use advanced capabilities’. 

Recognising that expertise is best drawn from the relevant sector and that Australia is in the early stages of an alternative defence funding approach, the ATM notes a design and co-manage process, followed by a matched/co-investment model once terms have been considered and developed.

There is an increasing sentiment in Australia to engage more with private debt and equity, as well as capital (which the Commonwealth now refers to as Private Capital Partners (PCPs)) in areas that have been customarily fully funded through public expenditure. As the Defence department increases spend towards AUKUS Pillar I capability, principally sub-surface combatants, exploring alternative funding options for Pillar II capabilities or dual-use technologies is a logical evolution for Australia. 

This isn’t the first time we have seen a shift along these lines. In July 2024, referencing Item 4.4 of the 2024 Defence Industry Development Strategy (DIDS), the Commonwealth issued an EOI for a pilot fund that would facilitate private equity or convertible debt investment in ‘Sovereign Defence Industrial Priorities’. Independently and increasingly over the past three years or so, several Australian venture and debt/equity funds have announced dedicated targeting of defence and dual-use technologies. 

It is not clear whether the 2024 EOI has translated into any substantive investment. As a proportion of the total Integrated Investment Program (IIP), private investment from the Australian funds in sovereign capability has been relatively small. The trend of interest towards public/private funding of sovereign capability is clear. This is a precedent well-established in the US and one that many in both government and the investment sector in Australia are contemplating.    

Announced expenditure in the Australian Defence Budget since 2023 has been substantial, if not generational. This coincides with the 2024 Hague Summit declaration of European rearmament to 5 per cent of GDP of NATO member-states by 2035. The opportunity for private sector engagement in what has traditionally been the purview of public expenditure is clear. 

Public-private partnerships (PPPs) and private sector funding, through institutional banking or private/debt/equity/capital of government projects have well-established precedent in Australia. Issues such as on/off ramping and risk management are mature in nature. 

There are several unique legal and regulatory matters that must be considered in the case of an investment in a defence or national security business. 

Among other things, the ATM refers to 18 separate statutory, policy and international legal regimes that ‘will apply to any resulting contractual arrangement’. 

In contemplating the establishment of a fund of this nature, it should be noted that:

• At the time of publication, there is no new legislative regime or any enabling instruments, or indication the Commonwealth intends to enact new specific and associated laws. Accordingly, assessment of legal issues is premised on the application of current financial services, national security and public finance laws and policies.
• The fund will focus on AUKUS Pillar II technology streams with domestic and allied capability application and Australian-flagged fund participation, on a co-investment model with debt, equity or capital. 

In establishing the fund, the Commonwealth will need to determine both the Constitutional authority, whether it be the Defence, Trade and Commerce, or External Affairs power under section 51; and authorise the expenditure of up to A$500 million in public funds under the Appropriation (Budget) Acts. 

In addition, the government has yet to confirm whether the fund will operate through enabling legislation, as the National Reconstruction Fund and Clean Energy Finance Corporation both do, or if it will operate as a special account program under the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act). 

The PGPA Act and Rules provide the legislative framework around finance and public expenditure. Because of the nature of the fund and its intended purpose, there needs to be careful structuring of any instruments and vehicles. Some or all of the fund and any subsequent technology or capability outcomes could incorporate or be interpreted as a grant, procurement, equity allocation, or investment, each having different probity, oversight, reporting and review mechanisms.

Similarly, the present financial management legislative framework obliges a series of measures regarding the proper use of public monies, and funds have their own operating and investment criteria. 

Delegations, accountable authorities, conflict of interest management and reporting responsibilities, risk frameworks, investment mandates, and reporting KPIs, among other things, all need to be carefully considered to ensure the fund (and any investments) are sound from a regulatory perspective and palatable to investment partners. 

Private money into sovereign capability will follow the well-worn and sometimes challenging precedent of the additional requirements for companies doing business with Defence. Broadly, this captures issues around security clearances for people and accreditation for entities and facilities; system and process protections and safeguards; Defence Trade Control Act, Autonomous Sanctions Act, Customs (Prohibited Exports) Regulations, and Security of Critical Infrastructure Act obligations, and ITAR/EAR factors on US matters. 

The nature of the Pillar II technologies the fund will seek to enable further development of include AI, quantum, hypersonics/counter-hypersonics, undersea robotics, electronic warfare, and innovation/information sharing between allied partners – all inherently classified in the context of military application. The additional national security requirements will be central to any investor’s decision to engage and require significant consideration in program implementation.  

A traditionally complex - but always important - factor, structuring for vehicles will play a part in how or which ventures move from theory to practical enabling of sovereign capability. Specifically relevant will be the nexus between, and treatment of, GST between supplies and grants, and feedstock adjustments under the R&D tax incentive when there is an intersection between eligible R&D activities and Commonwealth funding. 

Cross-border taxation issues may also need to be considered, including PE risk for foreign partners, transfer pricing, withholding tax and characterisation of carried interest and returns. 

Foreign investment and ownership issues will need to be considered, as this is an Australian-based fund and participant with potential allied capability application model. Approvals for ‘notifiable national security actions’ under relevant foreign investment legislation at fund and portfolio level will need to be navigated. This is a more established regime with measures for beneficial ownership transparency, data localisation, access restrictions and conditions and governance undertakings all having precedent for implementation. 

Private investment processes raise important questions around background and foreground IP ownership, licensing and scope of application/use/territory, step-in and march-in rights, publication controls and moral rights. 

These become more involved and acute in the context of sovereign capability, which the Commonwealth would ordinarily seek to reserve primacy over. The current presumption of exploitation priority may deter private investors whose primary interest is commercial, not a capability outcome. Early alignment in thinking between the commercial imperative and existing Defence procurement pathways will be critical in finding a deal space and negating down-the-track renegotiations.  

Similarly, government business under existing rules generally obliges adherence on at least some level with Privacy and FoI Act mandates. Segregation of data, confidentiality regimes, and classified content and information barriers can offset obstacles to private investment, but will require careful or case-by-case development.