The new security landscape: Investing in defense tech, energy & resilience

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This session is close to the press. Welcome to the J.P. Morgan webcast. This is intended for informational purposes only. Opinions expressed herein are those of the speakers and may differ from those of other J.P. Morgan employees and affiliates. Historical information and outlooks are not guarantees of future results. Any views and strategies described may not be appropriate for all participants and should not be intended as personal, investment, financial, or other advice. As a reminder, investment products are not FDIC insured, do not have bank guarantee, and they may lose value. The webcast may now begin.

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Golden ink swoops across a black background, forming letters in cursive.

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Text: J.P. Morgan. There is a long swoop from the N in Morgan.

Sitara Sundar, Head of Alternative Investment Strategy and Market Intelligence, J.P. Morgan Bank. Sitara sits in a room at a table, a slatted acoustic wall behind her on which is text: J.P. Morgan. Josh Wolfe sits next to her at the table.

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Hello, my name is Sitara and I lead the investment strategy and research efforts for our alternative business at J.P. Morgan Private Bank. Now, the focus of the webcast today, and thank you all so much for joining, is on a handful of different things. But before we even get there, there is one thing that I like to do to level set the conversation. We're in a period of time right now when you think about the economic and macro environment that seems lined with uncertainty. And during these periods of time, we'd like to level set on what it is that we know.

And what we, as we outlined in our midyear outlook that just got released, promise and pressure, is that there are three secular forces that are dictating markets right now. Artificial intelligence, and what the next phase of that is going to mean. Fragmentation, geopolitical fragmentation and a shift from globalization to deglobalization. And then ultimately what those two forces mean for inflation.

Today, we're going to be focused specifically on fragmentation. And a key theme that you'll be hearing throughout this entire conversation is simple. The idea of what national security means has fundamentally shifted, something that started a multiple years ago, probably three or four years ago. But the idea that national security is just focused on traditional defense systems has changed. Now that very definition has broadened to things like defense tech, cybersecurity, energy security, and supply chain resilience.

So the best way we thought to dive into many of the subthemes within that overarching landscape is to talk to a key investor within this space. Because as we, and what we probably well, is that there's a lot of innovation that's happening within public markets, but there's equally the same amount of innovation that's happening within private markets.

So I am joined by Josh Wolfe. And you're going to forgive me because I'm going to read because there's a lot of accolades here that I want to make sure I have-- who is the co-founder and managing partner of Lux Capital, $7 billion venture firm. And, as I recently learned, fellow Star Wars enthusiasts--

Love Star Wars.

--and--

Love sci-fi.

--which we'll talk about sci-fi turning into reality today, but just a couple of things for folks to know as to why we brought Josh into the conversation to break down many of these macro themes that we're seeing today. Josh has spent two decades backing breakthrough technologies, most people initially dismissed as impossible, so think robotics and AI, space, autonomy, biotech, and defense systems.

The second, and one of my favorite things in terms of what makes, I think, unique is that you don't just study technological change in the first order effect, you think through the second and third order effect and study history and what the lessons we can learn from history dictate to what that means for the future today. There are so many more things that I can read, but I do think that we should get into the meat of the conversation.

So the very first question that I have is a lot of what I just mentioned, shifting ideas of what the definition of security means-- one of the biggest questions that we generally get from clients within this space is what has structurally shifted over the past five years, 10 years that has made the innovation that we're starting to see within the defense tech area proliferate. And then, two, it seems like private markets are playing a bigger role now than they have historically, so how do you think about that change?

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Josh Wolfe, Partner and Founder, Lux Capital.

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Well, you have a backdrop globally that is well-- or increasingly well-understood, which is going from a relatively unipolar world for roughly a generation to a bipolar, now multipolar world where the allies of various countries, geopolitical regions are reshaping. You had a Cold War era where it was primarily US versus Russia and Russian proxies and a fight between freedom and capitalism and communism and socialism.

And now it's a different set of threat vectors. You have the rise of religious, violent extremists. You have the rise of what some would call CRINK-- of China, Russia, Iran, North Korea-- as allies against US hegemony and influence in certain regions. You have the rise of the African continent, particularly in the Sahel and Maghreb, which are increasingly a risk vector that may be projected into Europe and sow chaos.

And, of course, we are in the past three years that shocked many people in sovereign wars where we thought, maybe you have small skirmishes, maybe you have insurgent conflicts, that's most of what we fought in the US, particularly in the Middle East, in Afghanistan, in what people would call coin of counterinsurgency. But with Russia's invasion of Ukraine, and the war in Gaza, and now with the Iran war and the closing of the Strait of Hormuz, the implications affect everybody.

And you mentioned a few things earlier, which was AI, that touches everything from software, command and control, autonomous systems-- air, land, sea-- that are next generation technologies in many ways taken from the commercial sector now applied to the defense. So that's one realm defense tech itself, which used to be companies that were primarily dual use. Companies would come and they would pitch and say, well, we'll sell to the government and we also have a contract with the intelligence community and with the CIA, through their venture arm, stood up maybe 20 years ago, called in-q-tel.

But it was really rare for companies to say we are exclusively going to be a venture-backed company only focused on defense. And, by the way, we might be focused on offense, that we might actually make weapon systems. That was really anathema to the idea of engineers in Silicon Valley.

People forgot that the roots of Silicon Valley were not Hewlett Packard making a calculator so that we could calculate the future, like TI, Texas Instruments-- TI-82 in your calculus class. They were there to help with the missile trajectory calculations. Lockheed Martin, which had no presence in Sunnyvale, California, created a secret city under burlap canvases so that Soviet satellites wouldn't be able to track and understand that there was these situations there, building planes and missiles and defense systems.

But the roots of Silicon Valley were not orchards, and garages, and catch and burn fire-- catch and halt fire startups. It really was defense tech. And, in many ways, we've gone back to those roots.

Something happened around 2015 or so, when our program in the Pentagon called Project Maven. And Project Maven was intended to take aerial imagery that was increasingly being collected by drones, large-scale drones like predators or reapers, and aerial footage from aircraft, and collect it all and look at patterns of life and be able to identify bad guys and bad places that might be meeting with other bad guys and be able to send that back to the combatant commanders, the people that were running the region, so that they could basically make decisions about collect Intel, try to kidnap or capture somebody, or maybe kill somebody.

Google was involved in that program. And the employees of Google around that time protested. And they said, we don't want anything to do with this. We think it's morally wrong. And it created a real fissure because you had Silicon Valley, with its roots in defense tech, that had forgotten those roots, protesting and saying, we don't want to support the American government or the Department of Defense to do something that we think is morally wrong. That's an important protest, an important argument to have.

Microsoft took the other side and said, we're an American company. We get to do what we do because of the brave women and men on the front lines. We're going to continue to do this. The result of that protest from Project Maven was one of our companies that ended up capturing that contract because they said, yes, we want to support this, we want to do that.

And it created this big firestorm debate. Are these programs that we should be working on? And if we're not working on them, what does it mean for our adversaries who are going to be working on them?

And around that time had a guy, Palmer Luckey. And Palmer spoken at J.P. Morgan conference and he's a founder of Oculus, which sold to Facebook. He became a young billionaire. He got fired in part because of some of his political views. And he looked around and said, is there a real life Stark Industries, just like we see in the movies, going to sci-fi, out of Iron Man? Does this exist. Are there these secret rooms inside of DARPA and the Pentagon that are developing the cutting edge technology we see in movies. And his conclusion was, no, these don't exist, but they need to. And he decided, I'm going to create that.

And he started a company called Anduril, and we became founding investors in that company. And it started off very small and it's gotten very big and very successful. But it changed the tone and tenor and said, we are exclusively going to work on defense technologies. You have to be comfortable in the idea that a technology that you might be used by a combatant commander to decide that they're going to end a bad guy's life.

And I actually came around, because this was a very heavily debated thing inside of our own partnership, and said, if you have greater technological precision to be able to identify a truly bad person or to limit collateral damage, which is something that in war is a terrible thing, then you have greater moral precision.

What does that mean?

Collateral damage? If you talk to one of our--

Moral position.

A moral precision means you're not killing innocent people, you're able to have a very targeted-- and that's what you start to see with drones instead of dropping a large 2,000-ton-- 2,000-pound bomb on a building and indiscriminately you have a specific target, and there's 20 other people that might be killed in that-- you're able, as you see in video footage now, because it's wild that it's always aired on Twitter, of a drone capturing one bad guy or two bad guys that are in a car on a highway with precision and you see the video footage of another car next to them that's completely unscathed. So better technological precision leads to better moral precision because you're not killing innocent lives. So that's one trend that started to happen all around that time, about 10 years ago.

Against this backdrop of increasing global insecurity, as you've noted, and rising bad actors that sought to sow dissent, create chaos, make land acquisitions in the case of Ukraine, and the kinds of technologies that these actors were using, increasingly were leveraging the very trend that we saw across almost every technological sphere, which was more and more democratization. That's something that used to be expensive and monopoly and only used by the government or by a large incumbent, suddenly the average person could have, like a small drone.

And if you talk to commanders in Iraq or Afghanistan, they would say we had air superiority. We had fighter jets and F-18S and F-35 joint strike fighters and-- but yet there was like the day of the drones when all of these insurgents would launch hundreds of drones and we had no ability to deal with them because they were weaponized or they had a bomb on them. And so then-- the scary and unfortunate, but also promising thing about being an investor in defense tech-- it is a never-ending arms race, quite literally. Every time that somebody comes up with an offensive capability, somebody counters with a defensive capability.

When Iran or Hezbollah or Hamas are launching rockets at Israel, Israel figured out, how do we have interceptors with radar in the form of David's Arrow or Sling or Iron Dome, which the rest of the world now covets. The US has the Golden Dome, of course, more substantial than Iron Dome. There's probably an earring joke that you can come up with that.

And then they say, well, it's too expensive right now to be able to do that. And this is one of the other big trends in defense right now and probably one that will last for a generation, the economic asymmetry.

When Iran attacked Israel, it was roughly $100 million initially of missiles that US and allies with Israel and Gulf countries spent about $3 billion to counter that. Iran wants to do that all day long. How do you send a $20,000 Shahed drone, which is their cheap version of a drone, that requires a $4 or $5 million interceptor to hit that. And so there's going to be this constant innovation of people saying, how do we do that more cheaply?

Well, Israel says, let's come up with laser systems. We can shoot them out for $5 with laser, but that will create a counter effect when somebody that's launching that missile says, why don't we just put a shiny surface on it so the laser gets reflected back or put a cavitated surface to prevent the laser from working? And so it's a never-ending arms race of a capability, a counter-capability, a new invention.

You go back to our submarines in the United States-- the submarines themselves are super quiet and they're quiet, in part, because they have nuclear reactors in them. We've got 104 nuclear reactors and 104 subs around the world. Why? Because you're able to avoid sonar detection from the sound that a normal engine would make because they're dead silent. And so all of these things happen just in this constant flywheel of innovation.

And so you have a bit of global chaos. You have the rise of entrepreneurs that want to work on these problems. You have new inventions and new needs for counter-inventions. And then you have another big phenomenon, which is looking at the defense industry and the ability to provide for national security a generation ago or two generations ago and today.

If you look at the Cold War-- the navy we had in the Cold War was roughly 600 ships, 600,000 sailors. We have about half that today. We have less than 300 ships and less than 300,000 navy.

And during the war on terror, most of the navy was deployed-- more of the navy was deployed in the desert than they were in submarines. Our defense budget went from 6.5% down to 2%. Most other countries around the world, which you see with Trump and others saber-rattling, saying you have to spend more, are below 1.5% and increasing-- Germany in particular now Japan of all groups. So you have rising defense budgets to meet the need to say we are ill-equipped for this.

If you look at most of the major military vessels an F-18, an attack helicopter, an Apache, or an Age 60, a Virginia class sub, a Nimitz, a Arleigh Burke destroyer, they all have one thing in common, which is the number 8. They were all made in the '80s. So we have 50 years roughly-- 45 years-- of platforms that have not really been updated. You have--

Then where do you-- not to cut you off--

Yeah, no, please.

--because this has been great-- so where do you feel-- so I'm hearing innovation is coming because we haven't invested also in our fleet globally for a long time. There is a need for capital, it seems like. There's a need from a rearmament perspective. There's a need from a resilience perspective in the globe. Where is it-- I mean, we talked about defense tech quite a bit and autonomous systems and the need to create those at scale and to create them cheaply, just given what warfare looks like right now. If I can flip to a different side of the conversation, which is what I alluded to in the beginning, given what the changes that we've seen over the past decade, where do you think-- when you think about defense spending increasing, where is that opportunity going to go? Is it going to be resilience and rearmament or is it going to be something related to-- because as part of NATO spending guidelines, infrastructure is also within there as well. So where do you feel like that opportunity set is outside of just the defense tech area?

If you take that concentric circles of opportunities within defense, it is every domain-- air, land, sea, space, subsea. We have autonomous submarines. Subterranean, which is crazy, because we are now invested in a company that-- Palmer, from Anduril, is also an investor in-- that is doing subterranean warfare. And when I first heard it, I'm like, that's crazy. Underground? Who cares? But the ability to navigate underground, the ability to hit things underground, the ability to send troops underground quietly, these are new capabilities that I never would have imagined.

And then space, which truly, going back to Star Wars, is a contested frontier. There's limited international rules about this. You had an International Space Station with lots of international collaboration that is literally broken apart now. So the ISS is being decommissioned. It was an opportunity for the US and Russia, in particular, to be allies. Russia has basically said we're teaming with China. China has gone to the dark side of the moon. We're going back to the moon. We just did the Artemis II that went around it but didn't quite land on it. We have satellites that are being launched into space, which, today, provide us with SiriusXM, and TV, and images of the Earth, and internet, and Starlink.

When China showed a few years ago that they could deorbit or decommission one of the satellites, they blew up a weather satellite. That was not intended to show that they could blow up a weather satellite that was intended to show we can take any of your space assets and destroy them. So, of course, that begets the need for in-space maneuvering and the ability to shift something into a different orbit. So every domain within defense tech is going to see more and more demand. And the demand is going to be not only for existing, rebuild, the arsenal of democracy, although that will happen too-- and you are seeing companies like Hadrian, where they're saying we need to rebuild the factories that-- we lost this capability.

We used to have over 80 shipyards. We have less than four now in the US. China has over 200. China can make 450 aircraft every year. We can make less than 100. And so whether or not we ever end up in a kinetic race with China, there is a very similar Cold War ethos build up because any gap in capability presents a vulnerability where China might say, OK, we're going to do something kinetic in Taiwan because they don't have adequate abilities to protect.

So every domain-- air, land, sea, space and cyber-- is ripe for investing. Within that, there's all kinds of themes and trends. Autonomy is one. Having lots of distributed systems that are low cost per kilogram, that are expendable. And the future, sadly, of all warfare, are what we were describing just before about rockets and interceptors, attritable systems. Attritable is a nice way of saying it's going one way, it's not coming back, and it's meant to bombard the enemy's defenses, lots of inexpensive projectiles.

The history of mankind was you and I, as cavemen, fighting with each other. We threw punches. Then we got some distance, we threw rocks, we threw spears. We invented guns, we shot bullets, we shot projectiles, and it just keeps getting bigger and bigger. Now they're hypersonic, and they're going into space, and they're dropping at Mach 10.

And the warfighter is constantly thinking, in this poetic way, if you let me nerd out here for a second, between entropy and reducing entropy. Reducing entropy is what every engineer does. They try to create the most beautiful systems, the most well-architected watch, the perfect semiconductor and GPU that operates the gaming system and the cutting edge AI stack. But they're also trying to use those things to develop the most lethal weapon systems on world that can destroy a commander or a city into pure rubble, which is pure entropy.

So there's this weird balance in these two competing parabolas, one that takes us to Artemis and the moon and human progress and one that basically takes those rockets and missiles down and is massively destructive. Both require huge amounts of capital, huge amounts of human ingenuity. And this ever-- never-ending game of strategy. So that's within the defense concentric circle.

If you look at the Strait today, everybody's worried about oil. And oil is an important input into many, many things. But the next thing, and I know Michael Cembalest has talked about this and I believe you have-- fertilizer. The implication if you have a shortage of bread that leads to bread lines, that leads to bread riots, that leads to migration and political turmoil, those are very hard to predict.

You can argue that the Arab Spring was a direct result of the 2010 wheat crisis of Russia. And so the world is, even though it is increasingly decoupling or globalizing, still interconnected in ways that a domino or a butterfly flapping its wings here has a really complex, chaotic effect that is very hard to predict. How do you deal with that? You need resiliency. You need redundancy. You need allies that can help you in these kinds of situations, which is what we're seeing in various parts of the world.

Are you seeing-- I mean, to that point, one of the biggest things within this broader theme is this idea, or people thinking that folks are going to try to reshore, whether it's manufacturing or trying to find fertilizer like the goods themselves, closer to the point of sale or the point of production. Are you seeing that? Do you believe that?

For sure, the attempts will be there. I think in some cases, attempts to reshore are futile. It would be amazing to rebuild our ship industry here. It's more likely that we're going to be partnering with South Korea and Japan and some of the Baltic states as friends, and it's going to be more about comparative advantage. What can we trade for you, and vice versa.

So the supply chains will shift in some way. There will still be some shift in terms of flow of goods.

In fact, you see that now out of necessity. So in this current situation, I would argue Saudi has probably been one of the bigger winners. The East-West pipeline cannot contain nearly as much capacity, but oil is up 80%. But they're sort of marginal net winners in this as the Strait is complicated. And by the way, the asymmetry of the Strait, you're not talking about, you have a Naval force that's been destroyed and Air Force that's been destroyed, a military that's been destroyed. All you need is one fast-attack boat and a torpedo or a missile, and you can threaten very large ships, which is what's happening.

And so the ability to counter those and have redundancy and say, OK, we don't need the Strait, we can go with these East-West pipelines. There is a geopolitical layer that I'm very bullish on, personally. And it's early and it's speculative, but it's important both for the US as a counter to the China Belt and Road Initiative and what you would consider those countries, as I mentioned before, of China, Russia, Iran, North Korea. And that's another acronym, which is not CRINK but IMEC, India, Mideast, Europe, Corridor, Economic Corridor.

The idea here is India to UAE and Saudi, Israel and Jordan into the Mediterranean, which itself has abundant natural gas and energy-- another topic-- into Europe and back. And I believe that the flow of capital, human capital, talent, technology, weapon systems, and defense systems, trade is going to be enormous. And that will be a generational thing where you will see allies with shared interests against violent extremists, religious extremists, particularly the Gulf states, where you're seeing this bifurcation become a little bit more stark, and new allies forming. And I think that there's going to be a lot of money to be made for investors and companies in that latitude.

When you mentioned energy, and we talked about oil a little bit, unpack that a bit. When you're thinking about energy security or energy independence, whether it's US or Europe or other areas, what do you feel like is the next opportunity? Is it LNG? Is it us rebuilding within the United States, our Grid Infrastructure and transmission lines, or anything along those lines? How are you seeing that opportunity set?

If I was a world energy czar for the day, I would say the answer is here, it is nuclear fission. We have 104 domestic reactors that now maybe it's down to 98. We have 440 globally. They cost about a gigawatt-- $1 billion, it produces a gigawatt of power, and it's reliable. There's no intermittency. The fuel, as a percentage of the total cost of nuclear, is really insubstantial. Doesn't matter if uranium spikes ends up 30. It's inconsequential. Whereas nat gas and oil, the marginal cost of that commodity defines the marginal cost of the electricity in the production.

You have also today a dynamic that was unanticipated, including by the political class, which was let's build lots of AI data centers. And the demand there has been enormous. And you are now seeing a political backlash as municipality after municipality, partially politically-motivated, partially because it's a real problem, are saying we want a moratorium on these data centers.

Why is it politically popular? Because particularly a Democratic view is affordability is a winning campaign slogan. People don't want rising prices. Inflation is going to be in many different forms, but they're saying, shut these things down and they're able to point out a villain. And that villain might be an Anthropic or an OpenAI or a Microsoft or Google or whoever of the day they can point to and say, here's a big company making a lot of money. You're just a citizen, a taxpayer. And a ratepayer, and your bills are going up, and that's not fair. So let's cut this down.

I do think, by way, some of those companies are actually relieved. They've made so many very large CapEx commitments that they're like, oh, it's a shame we're not able to build right now, if it weren't for these pesky politicians. But I think that they're happy to take a breath in the ever-expanding CapEx race to build and build and build. But that's another issue.

So nuclear fission, to me, which is about 20% of our total electricity production in the United States, 60%, 70%, 80% in France. Germany had it, but I think fell victim, and I don't want to sound like a conspiracy theorist, but the rise of the Green Party, which I think was fomented in part by Russia and Putin through information operations, was a brilliant tactical chess move. Because they shut down nuclear and they delivered the entirety of the country to dependency upon Russian natural gas.

So that should tell every country you need to have your own sovereign source of energy. We talked about for, 10 years, I remember, from 2003 to 2013 or thereabouts, about needing to get off Middle East oil, and we wanted to do that in part because of post 9/11 and concerns. And nobody was really thinking about fracking. And this was a technological breakthrough that changed the game for domestic sovereignty of our energy production.

We do not depend on the Strait of Hormuz. We depend on it in a tertiary and secondary effect of the rest of the world economy. But we're relatively energy-independent now. It's amazing.

We're an energy exporter now versus an energy importer.

Which is incredible. Truly, 20 years ago, if you would have said that that was likely, people would have thought you were crazy. And people thought the guy that came up with the fracking technology was crazy. So there are now efforts underway for people to do more speculative forms, modular nuclear reactors. Fusion, there's at least six different companies that are trying to do fusion.

I always joke that we have a working fusion reactor. It's called the sun. It's been around for billions of years. It may be around for another 10 or 100 million years. Maybe something happens. And we can collect it reasonably efficiently with ever cheaper solar panels from a long pantheon of failed solar companies that have enabled that.

Well, on the solar point, Orbital Data Centers, and I have a couple other questions, just keeping an eye on time. But Orbital Data Centers, there's been a lot of conversation about the innovation related to that, and perhaps being the best way to solve some of the power demand, supply-demand imbalances that we expect to see, given the rise of needs from artificial intelligence, electrification, and the like, on being a direct source of solar power.

I'll give you my hot take on this. Usually when I fund a company, I get one of two answers and both are validating. That's all I've ever wanted to do my entire life, and I'm in. Or, that's the stupidest idea I've ever heard. My first reaction when I heard this, particularly from Elon, who I think is always trying to figure out how do I grow the TAM, how do I grow the market size, and tell the bigger narrative, was very skeptical. I have heard the technical case to say, look, it's very cold in space, so you've got a cooling issue.

You've got the sun on one side, cooling on the other, you've got the dissipation of heat, and it would make sense. I still believe that if you want to do large scale power for data centers, you build it in the Permian where we have abundant natural gas here in the US. You build it in the Mid East, around Saudi and UAE and Bahrain and elsewhere, where they can do the same. And you probably want to build it underground, because one of the problems that we have relating to security, as we've seen, is somebody can throw a bomb or a rocket or a missile at it and destroy your data center.

So I would rather see that done. There are people that are thinking about doing it now at sea or under sea, because you also have a cooling thing. But I'm a little bit skeptical about the space thing, but somebody's going to try it and somebody's going to make it work, and you're going to beam down data and all of us will eat our words.

OK, two final questions. First one, we've talked a lot about the opportunities in the space and the evolution that we've seen. What are the risks that you think that you're seeing in the space? I think one that is brought up is valuations, at least in some of the later stage players. And how do you feel about that? Or if there's anything else that you are keeping your eye on.

And then two, there's a lot of complexity in this space. So when you're underwriting companies, what are you looking for to prove a durable moat or durable earnings growth. Because the other question that we end up getting, and I myself frankly have, is with the speed of technological innovation and the creation-destruction cycle, feeling like it's the fastest it's ever been. Even if the speed to a certain revenue threshold is high, how do you ensure that it's durable?

It's a great question.

First, valuations or any risk that you're seeing. And the second, how do you underwrite to a durable moat?

So I always think about value creation for companies as risk reductions. And I'm always telling my team, failure comes from a failure to imagine failure. So if you can think about what can go wrong, you can throw time or money or talent at those things and try to kill them. So I look at every kind of risk. Financing risk, can they raise money or are they raising it too high a price as we as an investor, price is what you pay, value is what you get. If you pay too high of a price, your expected return is going to be low.

So financing risk, technology risk, is it going to work? Product risk, will people buy it? People risk, do have the right people? Are they good leaders? Is there going to be a coup? And people are going to say, she or he goes or I go and they form and fracture. And many companies have these Shakespearean timeless dramas in them.

It was actually our Treasury Secretary Scott Bessent, he's a friend of mine. And when he was still at Rockefeller, he made a comment. He said, Josh, we're early to defense investing. And I think that there may be a tailwind in a bubble that benefits you. And I said, what do you mean? He said, well, there are certain institutions like ours maybe that wouldn't feel comfortable investing in a company like Anduril or Saildrone or Hadrian or these defense companies, but they would feel comfortable investing in a generalist manager, maybe not a specialist defense manager, but they would definitely feel comfortable investing in a fund of funds that invests in both. Because they are willing to pay two layers of fees to be two layers removed morally from, what we talked about earlier, a kill chain, that they would feel comfortable.

So what that led me to believe is that you will have an abundance of capital that forms in vehicles that will get into some of the best companies, but there will be a long tail of other people that are less discriminating, that will form capital, and you will end up with a bubble in the space. So the key is, the biggest risk you can do, is not the error of omission, of missing it out, but the error of commission, of investing in a really crappy company or a company that is too highly priced and those kinds of things.

So that gets to your second question, what are the factors that we're looking to in discriminating? The number one thing is the team. Great people can attract great people, and you build a culture of people that like, trust, admire each other, want to be there, aren't there because they just want to collect a check or they want to vest stock after three years, they're really mission-driven. And more so than any tech sector that we've seen in 20-something years of investing, the people that want to work on national security, whether they are US companies or are Israeli companies or our UK companies or Bulgarian company or Japanese, they all care deeply about the sovereignty and security of their nation. So it really is a mission-driven thing.

Usually, I squirm when somebody says, I just want to change the world or they give some, I'm too cynical to believe that. But when they say, I mean, when you talk to somebody out of Israel, you talk to somebody here that's served, they really deeply care about the country and the future of security, and they see the threats. So people is, number one. The ability for people to execute on multiple programs so that they have a portfolio of systems, not one that they're dependent on, allows them over time to raise their equity capital, raise cash, and end up doing tuck-in acquisitions.

And so one of the greatest defense companies that people can study was Teledyne back in the day. Henry Singleton was one of the greatest capital allocators. There's a book called Distant Force. I think it's like $1,200, if you can find it on eBay, but I've given copies to a lot of our defense tech founders because I think it's a really smart way, how do you take these cutting edge technologies in these complex environments and use a rational capital allocation model of when you buy stock, when you sell stock, when you do acquisitions, when you divest of something. And that should be a timeless thing, like rational capital allocation against this set of cutting edge and risky technologies and a chaotic world, I think, is the way to go.

Got it. OK, I wish that we could talk forever, but we have to end it there. I think for everyone who dialed in today, there's a couple of key takeaways, I guess, I would take home with you as you're thinking about what this means for your portfolios and what this means for society. We maybe leave for a different conversation.

On the portfolio front, one of the things that has rung true in this conversation is, one, there is likely going to be a massive amount of capital that's going to be feeding into this space. What that means is that there's likely going to be a lot of innovation that will follow within that, but probably there's going to be an equal amount of folks who are able to use that capital to create a durable moat and create a step function level higher from an earnings growth perspective. And those that maybe won't be able to do the same thing.

So that creation-destruction cycle, the amount of innovation that we're seeing and the amount of capital that we'll probably see get injected into this space, whether it's defense tech, whether it's cyber, whether it's energy independence, whether it's supply chain resilience, that entire gamut, there's going to be winners and there's going to be laggards within that space. So that need for active management at the company selection level, both across public and private markets, is critical.

Two, zooming out holistically. When we set out to think about how we advise clients on investing within their portfolios, the same way that the world is trying to think about how to think about shoring up resilience from a defense perspective, from a deterrence perspective, from a security perspective. And the same way we think about how to build durable portfolios that can last and withstand market cycles. And the biggest question that I would encourage investors to think about today is in this what feels like a new era and a new regime, is your portfolio built to withstand a regime change for what we expect to see tomorrow? And at the confluence of artificial intelligence, geopolitical fragmentation, and inflation are the tools that you're using within your toolkit going to build that durable portfolio?

The simple takeaway for us when we're having conversations with clients is as follows, which is a simple truth that traditional stocks and bonds and that confluence of that 60/40 portfolio worked over the past 10 to 15 years in a lower rate environment, lower inflation environment, higher above trend growth environment, we're likely going to be in a different environment moving forward as these three secular forces converge. So thinking about other parts of your toolkit, diversified private market allocations, including venture capital and growth to lean into those next stage of winners, hedge funds, and the less correlated hedge funds, when you think about relative value and macro, and even other diversifiers within the commodity landscape, like gold.

So we're here to help you think through how to build and navigate portfolios for this different stage in the cycle. Thank you so much for your time. Thank you, Josh, for joining us today.

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