Co-founder and partner Marko Maschek explains how Marondo Capital aims to exploit the potential of Germany’s ‘Mittelstand’ for dual-use defense and critical infrastructure applications.
With investment into Europe’s defense sector on the rise, DACH specialist Marondo Capital sees German SMEs as key suppliers of components for defense and related applications, and is raising capital to invest in such companies.
The Munich-based GP is targeting €250 million for its second fund, partner and co-founder Marko Maschek told affiliate title Private Equity International. Marondo II will continue its predecessor’s strategy of investing in small and mid-sized tech enterprises across the DACH region of Germany, Austria and Switzerland, but this time with a focus on dual-use defense and critical infrastructure, he said.
Dual-use refers to businesses providing products or services with both civilian and military applications.
The fund has a Europe-wide mandate but is largely targeting majority and substantial-lead minority stakes in DACH companies. It is looking for small-cap growth firms with around €5 million-€25 million in annual sales and aims to deploy ticket sizes of €5 million-€15 million.
Marondo is talking to business owners directly, without involving investment banks, Maschek said. “So far nothing is intermediated.”
Targeting tech SMEs
Marondo sees at least 8,000 addressable investment targets in Germany alone, Maschek said, and views dual-use and critical infrastructure SMEs as moderately priced but venture-backed businesses and primes in relevant areas as overvalued.
The Mittelstand is becoming more fertile hunting ground in general, with these traditionally family-owned firms increasingly open to overtures from financial investors, Holger Rossbach, partner at Hamburg-based investment firm Vorsprung Partners, told PE Hub in a recent interview.
The Mittelstand has “no single, clear-cut definition” according to The Bundesverband der Deutschen Industrie, or Federation of German Industries. It loosely refers to SMEs, which the German government defines as enterprises with up to 500 employees and an annual turnover of up to €50 million.
In Germany, the SME sector recently represented a total addressable market of €10 billion for dual-use applications and €20 billion for critical infrastructure, Maschek said, citing research undertaken last year.
“I guess it’s a multiple of that now,” he added, given that German leader Friedrich Merz in March unveiled a €1 trillion fiscal plan to rebuild the country’s infrastructure and loosen budget rules around defense spending.
Maschek cited as an example a company that makes night-vision goggles previously bought largely by civil customers like hunters and fire brigades. The war in Ukraine triggered exponential growth in military demand for the equipment, he said, with the firm recording 50 percent annual revenue growth since 2022.
Critical infrastructure assets might include cyber tech, space tech or biotech. Maschek said Marondo II could invest in producers of satellite components or a maker of mobile bio and chemical labs that can assess, for instance, whether local water is drinkable or detect diseases. These labs would have been sold via NGOs to developing countries, but now the federal army in Germany and public agencies are interested, he added.
“Except for pure-play military products – such as WMD [weapons of mass destruction], mines and munitions – we can invest in almost anything,” he said.
Necessary expertise
However, due diligence is crucial – and challenging – around defense-related investment, said Maschek, and necessitates a network.
For one thing, there are a lot of regulations and restrictions governing investment into dual-use defense and critical infrastructure, he explained. “We partner with law firms that have specialists on these regulations, and national regulations trump European or global regulations on investing in defense.”
It’s not just about whether one is able to acquire an asset, but whether it can be sold to an entity elsewhere, Maschek noted. “When you have a company in Bavaria [a region in southern Germany] and you want to sell that to an acquirer in the UK, what sort of approvals do you need and from which government agency?”
Specialist military expertise is also key, so Marondo has brought in various advisers, said Maschek. They include Ben Hodges, the former commander of the US army in Europe, and joining soon will be another retired four-star general, who was also a chief transformation officer at NATO.
Marondo has also joined BDSV, the association for the German security and defense industry, he added.
Opening up
Launched in the first quarter, Marondo II is targeting a first close on around €100 million later this year or early next, and a final close in mid- or late 2026, he added.
The new fund has already received commitments from both new LPs and existing investors from Marondo I. The European Investment Fund, for instance, has made a 60 percent larger commitment to the second fund than to its predecessor, said Maschek, declining to reveal the precise figure.
Fund I, which collected around €100 million at final close in January 2020, was largely raised via family offices and public-sector institutions – split roughly 50:50 – and it was likely to be a similar story for the new strategy, Maschek said.
Public institutions such as EIF, German regional banks and development financial institution KfW Capital now have a political mandate to support dual-use defense and critical infrastructure, Maschek added.
Marondo is also speaking to pension schemes. A growing number of LPs are easing restrictions they had imposed on defense-related investment, including Danish retirement funds AkademikerPension, PenSam and PFA; The State Pension Fund of Finland; and Finnish pension insurance firm Varma.
