As governments on both sides of the Atlantic ramp up spending on defense, the technologies they are turning to are providing fertile ground for investors specializing in the space.

Novacap is eyeing increased opportunities to invest in defense tech with its seventh technologies fund, which closed on nearly USD 3.8bn last month. The Montreal-based firm is looking to capitalize on what it sees as secular trends shaping the current geopolitical environment.

“Massive budgets are being allocated to [defense tech],” David Lewin, a lead senior partner for Novacap’s technologies strategy told Mergermarket. “It’s a priority for many countries, including Canada, which was very vocal and deliberate about it.”

Through its government technology team, Novacap has tracked the defense tech segment and has evaluated many deals, but it has not transacted recently, Lewin said.

More broadly, Novacap’s focus for investments broadly will remain on technology companies in highly regulated and data‑rich sectors.

Lewin cited industrial tech as “another very, very strong powerhouse and overweight sector” in the next few years, while also pointing to continued investment in healthcare IT companies. Novacap is positioning itself to take advantage of lower valuations in software, finding strong candidates for healthcare SaaS assets.

Novacap’s technologies strategy also invests in enterprise and vertical software, payments, and adtech. In payments and transaction‑based services, the firm sees potential for margin expansion through artificial intelligence‑driven process improvements in areas such as underwriting, risk evaluation, and routing optimization.

Novacap’s technologies strategy wrapped up deployment of Fund VI in December with the USD 1.9bn take-private of Integral Ad Science (IAS), a global digital ad verification and measurement platform, and is now investing Fund VII.

The firm is engaged in conversations with 30-60 companies at any point in time and expects to execute its first acquisition from the fund within the first half of the year, said Gordon Hargraves, senior managing director of investor relations and strategy.

Novacap raised Fund VII in less than a year, exceeding the vehicle’s USD 2.75bn target. It held a first close around Liberation Day in April last year before finishing the fundraise in December and announcing a final close last month.

Hargraves attributed the pace to a diversified global LP base, strong support from existing investors, and a track record of distributions. In February, the firm sold Eddyfi Technologies to strategic acquiror ESAB Corporation for USD 1.45bn. Novacap teamed up with La Caisse – then known as CDPQ – in 2020, investing USD 163m in Eddyfi, with that investment used to acquire Germany-headquartered peer NDT Global, as previously reported.

The majority of Fund VI LPs committed to Technology Fund VII with a significant increase in average commitment amount.

The firm also expanded commitments from investors in Asia, the Middle East, and Latin America during the raise, Hargraves said. Geographically, roughly 20% of commitments came from Canada, 30% from the US, 30% from Europe, and 20% from the rest of the world, including Asia, the Middle East, and Latin America.

LPs include public pensions, private pensions, sovereign wealth, insurance companies, family offices, and fund of funds, Hargraves added.

UBS acted as placement agent.

Novacap will target a portfolio of 12 companies, Hargraves said. With Fund VI, typical equity checks were around USD 300m, with the same size expected for Fund VII. The firm’s sweet spot in target size is companies with USD 25m to USD 50m in EBITDA.

Hargraves described the firm’s approach as “boring technology buyouts” that emphasize valuation discipline and avoid revenue‑multiple‑driven models. Much of the firm’s pipeline comprises companies where founders remain involved, often in sub‑scale or fragmented markets that lend themselves to consolidation, he said.

As with previous funds, Novacap expects to make its first investment in a USD 10m EBITDA company that it sees an opportunity to scale, according to Hargraves. Senior professionals build relationships with management teams, often over years, before transacting, Hargraves said. It favors being top of mind when a company is ready to take on an investor, he said, noting it typically does not participate in broad processes.

Founded in 1981, Novacap is one of Canada’s largest private equity firms, with about USD 12bn in assets under management. It focuses investments on lower mid-market and mid-market companies across four sectors: technology, digital infrastructure, industries, and financial services.

Novacap’s technology strategy has made 29 platform investments, more than 95 add-ons, 16 full realizations, and two partial exits. It has completed more than 20 deals outside of North America.