Snow-covered and pristine, Helsinki, Finland is a mere bus ride away from St. Petersburg, Russia, once a common weekend trip for many Finns before the war with Ukraine. Now, the neighboring country feels like another world.
Known for its historic aversion to global conflict, Finland became an active participant in the alliance countering Russia’s aggression when it joined NATO in April 2023 in response to Russia’s full-scale invasion of Ukraine the previous February.
Finland’s institutional investor base isn’t as quick to abandon the longstanding neutrality, but they’re warming up to the idea.
“Defense investing is very taboo in Finland,” said Patrik Louko, chief investment officer of the €170 million ($177 million) endowment at the University of Jyväskylä in Central Finland. “If you go back three years and you were a VC and you told your LP that you were investing in defense tech, they would have killed you.”
In 2021, aerospace and defense startups across Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden raised a cumulative $41.1 million—about 0.3% of all VC dollars in the region that year. That compares to the $1.1 billion raised by companies in the sector across Europe that year, according to PitchBook data.
While defense technology investments have taken the US and Western European markets by storm, the Nordic region has taken a slower approach in line with a cultural distaste for profit through wartime materials.
But over the past few years, Russia’s aggression has softened some Nordic investors’ approaches to the defense economy.
Hedging against Russia
Louko, who has been at the helm of the University of Jyväskylä’s fund for a year, plans to build out the portfolio to emulate the structure of US-based mega-endowments, like Yale University, with high allocations to private equity and venture capital. Over the course of the next year, the fund will deploy $70 million in commitments across the asset classes, looking largely for diversification outside of its concentration in Finnish VC managers.
A major part of his allocation strategy over the next year includes protecting the university’s portfolio from the impacts of conflict with Russia. One way the fund plans to do that is through allocations to dual-use technology funds, which invest in products that can be used for civil and defense purposes, like drones and satellite technology.
Louko also plans to load up the endowment with investments in absolute return funds and private debt funds that will protect against downside risk.
“It’s not highly probable but it’s probable we’ll have a conflict. The first ballistic missile that comes into Finland kills our stock market and real estate market for years,” he said.
Other investors are taking a similar approach. So far this year, VC investment in Nordic aerospace and defense companies is at $94 million, a 71.1% increase from 2023’s total, according to PitchBook data.
The conflict has already cast a shadow over the burgeoning startup and venture capital scene in the Nordic countries. In 2024, Helsinki fell from the list of top 15 cities in Europe by private market deal value (a spot it gained after reaching a record €1.6 billion in 2022) largely due to its position as the barrier between Russia and the other Nordic nations, according to PitchBook’s 2024 Nordic Private Capital Breakdown.
Jari Mieskonen, a managing partner at Finland-based Conor Venture Partners, which invests in early-stage companies in the Nordic and Baltic countries, has worked in the Finnish VC world since his first job at Sitra, an investment fund backed by the Bank of Finland, in 1994.
Over the course of his career, he has witnessed limited partners move from explicitly banning funds from investing in defense companies in their limited partnership agreements to a loosening of the definition of defense.
“All of my venture life, there were three no-goes: adult entertainment, gambling and arms,” Mieskonen said. “Now it has been a big turn in the last six to eight months, thanks to the Russian aggressor in Ukraine. The war is on everybody’s minds and quite close to us physically.”
Beyond Helsinki’s proximity to St. Petersburg, Finland shares a meandering border with Russia that is 830 miles long.
Tensions heightened this week, when Russian President Vladimir Putin formally lowered the threshold for the country’s use of its nuclear weapons. In response, Sweden, Finland, Denmark and Norway warned citizens to prepare for the possibility of an attack. The Finnish government produced a new website outlining how citizens can be prepared for crises, like military conflict.
At an industry event on the same day, Mieskonen, who also works for an accelerator co-funded by the European Union, said that some of Finland’s largest asset owners, including Keva, its largest pension provider, deemed defense investing permissible.
“They openly said that it’s totally okay to invest in defense but it’s not okay to invest in killing weapons, so of course there will be a lot of gray areas,” Mieskonen said.
Finnish LPs are likely following the lead of Europe’s largest allocator into the private markets: the European Investment Bank, which in June 2023, in response to the shifting geopolitical conditions, expanded its budget for financing the security and defense industry to €8 billion, up from €6 billion, until 2027. The initiative prioritizes investments in military mobility, space, green security and critical infrastructure.
Earlier this year, the European Investment Fund, the bank’s asset manager, put to work €175 million in equity to venture capital and private equity funds investing in European companies developing dual-use technologies.
Featured image by Westend61/Getty
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