The Evolving Role of Pension Funds as LPs in Defense Venture Capital
The landscape of defense and dual-use venture capital is undergoing a profound transformation as institutional investors, particularly pension funds, reassess their asset allocations and risk tolerance in an era of heightened geopolitical competition. A recent discussion between Jo Taylor, CEO of the Ontario Teachers’ Pension Plan (OTPP), and C.S. Venkatakrishnan, Group Chief Executive Officer of Barclays, highlights the critical role of equity culture and risk appetite among institutional limited partners (LPs) (Ontario Teachers’ Pension Plan, 2026). While defense technology startups attracted record funding in 2025, the ability of these companies to scale depends heavily on the willingness of massive institutional pools of capital to participate as LPs in defense-focused venture funds.
Record Funding and the “Valley of Death”
In 2025, venture capital investment in defense technology reached an unprecedented $49.1 billion, nearly doubling the $27.2 billion recorded in 2024 (Plaster, 2026). Equity funding alone climbed to $17.9 billion, significantly outpacing the broader global equity funding growth of 47% (Plaster, 2026). This surge is driven by rising global defense budgets, the real-world validation of autonomous and AI-enabled systems in conflicts such as the war in Ukraine, and a shift in the ethical debate surrounding dual-use technologies (Plaster, 2026).
However, the influx of early-stage capital has created a new challenge: the commercialization gap, often referred to as the “valley of death.” Startups frequently struggle to transition from research and development to scaled production due to lengthy defense procurement cycles that can extend five to eight years (Dentons, 2026). Bridging this gap requires patient, growth-stage equity capital—a role traditionally filled by large institutional LPs such as pension funds. As noted by industry practitioners, there is a structural disconnect between venture capital valuations based on total addressable market and the bottom-up revenue metrics required by private equity and public markets, meaning that until that gap narrows, some of the most flexible capital available will remain on the sidelines (Business Executives for National Security, n.d.).
The Institutional LP Landscape: Canada vs. the UK
The willingness of pension funds to allocate capital to high-growth, high-risk sectors like defense technology varies significantly by region. During the OTPP podcast, Venkatakrishnan observed a stark contrast between the equity cultures of Canada and the United Kingdom. He noted that the culture of equity risk-taking in the UK has declined over the past 30 to 40 years, with typical UK pension plans allocating approximately 40% to equities—and the aggregate figure across all UK pension fund types sitting at around 30% (Wright & Thornhill, 2024). In contrast, large Canadian pension funds like OTPP maintain a much higher exposure to risk assets, functioning effectively as a 70–75% equity portfolio when factoring in private markets and commodities (Ontario Teachers’ Pension Plan, 2026).
This structural advantage allows Canadian funds to be more aggressive in venture growth. OTPP’s Teachers’ Venture Growth (TVG) arm focuses on late-stage venture and growth equity investments, with initial direct investments ranging from $50 million to $250 million (Top1000Funds, n.d.). In 2025, OTPP’s venture growth portfolio surged by 30%, driven largely by investments in frontier technology companies including SpaceX, contrasting sharply with the plan’s 5.3% loss in traditional private equity and its overall 6.7% net return against an 11.7% benchmark (Kolivakis, 2026).
| Metric | OTPP (Canada) | Typical UK Pension Fund |
|---|---|---|
| Effective equity exposure | ~70–75% | ~30–40% |
| Venture growth return (2025) | +30% | N/A |
| Net assets (2025) | CA$279.4 billion | Varies |
| Private equity + infrastructure allocation | ~34% | ~6% |
ESG Constraints and Policy Shifts
Historically, many institutional LPs have been hesitant to invest in defense venture funds due to strict Environmental, Social, and Governance (ESG) policies. However, the geopolitical realities of recent years have prompted a reevaluation of these constraints. As global stability is increasingly threatened, LPs are finding paths to investment with fewer ESG barriers, recognizing that defense technologies play a crucial role in supporting democratic values and national resilience (Johnson, 2026). Defense investment is transitioning from a taboo edge case to a core strategic consideration for many institutional allocators (Balentic, n.d.).
Furthermore, governments are actively creating mechanisms to de-risk defense investments for private capital. In Canada, the Business Development Bank of Canada (BDC) launched a CA$6 billion defense platform, including the CA$300 million StrongNorth Fund, a dedicated venture capital vehicle for dual-use deep technologies expected to back 30 to 40 startups over four years (Dentons, 2026). Similarly, the NATO Innovation Fund, backed by 24 allied nations with a €1 billion mandate, has become a catalytic anchor for European defense startups, with European defense and security startup funding growing to a record €8 billion in 2025 (Dentons, 2026). These government-backed initiatives serve as critical demand signals, encouraging private LPs to deploy capital alongside sovereign vehicles.
Conclusion
The mobilization of pension fund capital is essential for the sustained growth of the defense industrial base. While venture capitalists have proven adept at funding early-stage innovation, scaling these technologies to meet the demands of modern conflict requires the deep pockets and patient horizons of institutional LPs. As ESG frameworks evolve and government co-investment vehicles proliferate, pension funds with robust equity cultures—such as those in Canada—are uniquely positioned to capitalize on the defense technology boom while supporting broader national security objectives. The structural divergence between UK and Canadian pension equity culture, as highlighted by Venkatakrishnan, is not merely an academic observation; it has direct implications for which LP bases defense venture fund managers can realistically target.
References
Business Executives for National Security. (n.d.). Equity capital for the defense industrial base: Why private investors can’t underwrite what they can’t see. Equity Capital for the Defense Industrial Base: Why Private Investors Can’t Underwrite What They Can’t See | Business Executives for National Security
Balentic. (n.d.). Target locked: The rising case for defense in private markets – Part 3. Target Locked: The Rising Case for Defense in Private Markets – Part 3 - Balentic
Dentons. (2026, May 5). Venture capital opportunities in Canada’s defence sector. Dentons - Venture capital opportunities in Canada's defence sector
Johnson, B. (2026, March 11). LPs are mostly clear of ESG restrictions on defence tech: Nexus panel. New Private Markets. LPs are mostly clear of ESG restrictions on defence tech: Nexus panel
Kolivakis, L. (2026, March 10). A discussion with OTPP’s CEO and CIOs on their 2025 results. Pension Pulse. A Discussion With OTPP's CEO and CIOs on Their 2025 Results
Ontario Teachers’ Pension Plan. (2026, June). Thoughts from C.S. Venkatakrishnan, Group Chief Executive Officer, Barclays [Audio podcast transcript]. Thoughts from C.S. Venkatakrishnan, Group Chief Executive Officer, Barclays
Plaster, G. (2026, January 27). 2025 was a breakout year for defense tech startups—and the rules are changing. Silicon Nation. 2025 Was a Breakout Year for Defense Tech Startups—and the Rules Are Changing
Top1000Funds. (n.d.). In muted IPO market, OTPP’s venture growth team talks exit alternatives. In muted IPO market, OTPP's venture growth team talks exit alternatives - Top1000funds.com
Wright, W., & Thornhill, J. (2024, September). Comparing the asset allocation of global pension systems. New Financial. https://www.newfinancial.org/reports/comparing-the-asset-allocation-of-global-pension-systems
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