Albion River's Darren Farber on owning the 'meat and potatoes of warfare' through defense private equity

Speaker 1: You've heard him on Best Like the Best and now he's here with us on TBPN. What's going on? How are you doing, Darren? Hi, guys. Hi. Thank you so much for taking the time to join us. I would... I... Let's kick it off with a little bit of an introduction on yourself just get everyone familiar. And then I wanna talk about about China and everything that's going on there and how The US is engaging. But let's start with a little bit on your background.

Speaker 9: Sure. So, you know, simply my background is I'm an engineer by trade and spent the better part of a decade inside the Department of Defense as a weapons buyer, for lack of a better term, and spent three years in Iraq and two in Afghanistan doing that. And left in 2011 to work for a large family office in Chicago to build the defense business, which we ultimately sold, and then formed a private equity vehicle in 2013 to buy and improve defense businesses, primarily defense weapon system businesses. Yeah. And that's what we do today. And the the logo I have behind me is a is a new defense platform business that we have Uh-huh. Called Ignium, which is an amalgamation of about 11 brands or now 12 brands of of kind of critical componentry inside of weapon systems. So think fuses and these kinds of things.

Speaker 1: Got it. Yeah. What's the deal size? What what's the sweet spot? Are you looking for... It it doesn't sound like you're trying to be like the bending spoons of defense tech going after venture funded companies that were maybe funded just a couple years ago. It's more...

Speaker 2: Maybe in a year or

Speaker 1: so. Maybe in a year. But what what has been the strategy? What type of companies do you love to partner with most?

Speaker 9: We like to say they're... We like to own the meat and potatoes of warfare. Yep. So think... If you if you think of our portfolio, we're talking about power management for weapon systems, fuses for weapon systems, relays, targeting, kind of the building blocks that any... That would exist in any weapon system that are extensible across every weapon system. And so our view is we wanna be a kind of this permissive supplier to everyone's system at the end of the day Yeah. Because the pace of change and innovation is so great, you know, we don't know which system will ultimately be the program of record. And so our view is we should supply everyone, and we should make the pieces that need kind of large industrial Yeah. Capability, and we can drive the price lower. And so those are the businesses we wanna own. And, you know, to your to your point on deal size, you know, I have three kids. There isn't... Like, none of them are the same. Is no one deal that's the same. There's no one size that's ever the same at the end of the day. We recently bought a business for 300,000,000. We bought a business, you know, prior to that for 60,000,000.

Speaker 1: Yeah.

Speaker 9: We're in the throes of trying to buy something for 1,500,000,000 right now. So it just depends on the the underlying quality of the asset.

Speaker 1: So one thesis that we've heard from a number of newer startup founders is that that fuse business that you mentioned or that business that's doing componentry that goes all over, it's so critical to the defense industrial base. But the person that owns that business, they're getting older. The person who's on the manufacturing line, they're getting older and there's no plan for succession and that will create a crisis that's coming and we're going to lose this valuable skill in America of how to make a particular part. How real is that? How have you confronted that? How when you buy this business you have to think I assume decades in the future of how this business will continue to run and flourish. What has your strategy been for hiring and succession planning at these businesses?

Speaker 9: Sure. So I would say it's very mayoral. It depends on the nature of the business and exactly what it's manufacturing at the end of the day. I think one of the things is automation has taken a lot of, let's say, work instructions out of the process where people used to do it. Now we can, you know, bring material automation in order to the process at the end of the day. But, look, trade schools are very important. Mhmm. Spending the calories to have a a kind of a a mentor protege program

Speaker 2: Mhmm.

Speaker 9: Within these businesses are also extremely important at the end of the day. And, you know, automation can't come too soon. I'm... We know I'll be a prolific buyer of the Tesla robot for our factories at the end of the day. And look, we own bomb factories. We own a very large factory in Germany and also one in The United Kingdom that make, you know, ordinance and, you know, smoke and illumination. These are these are very dangerous factories and products at the end of the day. And so the more you can add add automation, actually, you're far better off. And so our goal is a combination of leveraging the future through automation and then making sure, like, the internals of the company have very strong mentor protege programs to bring in young people from technical and trade schools, but that's not enough. We don't have enough feedstock through that, and so it's really taking someone that maybe didn't have a hard technical skill and showing them through, you know, functionally a mentor protege program how to how to do the particular activities that we feel are are are in short supply.

Speaker 2: Yeah. So you you talked about being in procurement, but being actually deployed on on for that effort in Iraq and Afghanistan. How much time do you spend today actually, like, you spend time obsessing over battlefield footage in these in these sort of active conflict zones? Like trying to get an understanding of like what kind of componentry is gonna be more in demand in the future? Or is that... Or or can you sort of get to those conclusions in a different way?

Speaker 9: No. It's it's a very good question. Look, battlefields are the laboratories of the defense industry, and so we learn so much by these active contingencies. You know, an old battle buddy of mine who I now get the privilege of working with, is a retired two star says, plans rarely survive first contact. And I love that kind of old army saying because it's it's quite true. And so there's so much to learn in the act of contingency in the Ukrainian theater, but also there's this risk of over imputing what's happening there to say that it will happen everywhere else.

Speaker 2: Yeah.

Speaker 9: And so, you know, war is primarily a combination of old and new. It's never all old and it's never all new. And what you see in the Ukrainian contingency is, you know, a real combination of elements from World War two, like trench warfare, 155 millimeter shells, these articles, howitzers, these things that you would be familiar with in a documentary almost of of a previous generation. And the battle lines, for example, are getting resupplied through a 100% autonomous systems. So there are autonomous sleds that are delivering kinetic material to the front lines and these guys are in trenches. Right? The trenches are are... Look a little different. They're they're almost spiral and they have a deck where they sleep inside of them, but it's all dug out of dirt. And they have small caliber weapons and, you know, they may have a drone or two. But functionally, it looks like World War two in those trenches. So it's this it's this ingenious combination of old and new. And so in the new, what we look for are the extensible pieces almost of the old that will continue. So for example, we make one of the world's leading pyrotechnic cards that goes in many different types of drones. And so if an adversary were to capture your drone, they would interrogate it for signals intelligence to see what they could learn about what you're doing, pack into your network, and so you want to melt and fragment the board. And because that is a small incendiary device and needs to be made at a very specific factory, that's the kind of thing I want to make. And an incendiary device and that technology and that manufacturing process and delivering a kinetic effect, we fundamentally feel won't change over a much longer cycle. For example, fuses need to be in either autonomous systems or a drone, or they need to be in a conventional system. And so these are the businesses we like where the map of the future won't largely change even if the end using program may change kind of very quickly. We want... We wanna be in all of it. Mhmm. We wanna drive volume and scale and then drive down cost to the customer while maintaining margin. You know, an example of this is I'm still the chairman of Magpul, which is the world's largest manufacturer of firearm accessories. And so we make a 100,000 magazines a day at our factory in Cheyenne, Wyoming. So this is the Western world's largest magazine plant. We haven't raised the price of a magazine in a decade, and so we drive so much volume into that business. We've we've completely vertically integrated the business. We consume the most nylon, a particular type of nylon for that business that I can maintain margin but radically expand the TAM. And so that magazine, the generation three PMAG is used literally all over the world by every allied military, and that's our goal. We wanna make the pieces that fit into everyone's system and have enormous scale in them. We have 12,000,000 square feet of manufacturing capacity for, you know, in our in our new platform, in this platform called Dignium. That is more manufacturing square footage than any new business that's been formed for the purposes of defense in in in the last, seven to ten years. Maybe maybe there's only... Angela is the other one. Yeah. So you need lots of space. You need lots of industrial scale. But if you have lots of distribution and lots of extensibility into many platforms. Right? We make one fuse, goes into many things. Super important. We can deliver enormous value to the taxpayer and have enormous industrial capability that the country needs.

Speaker 2: Fascinating. Why why do soldiers on modern battlefields seemingly take videos of the active conflict zones and post them on social media? I would think with even sort of the obliterated models of today you could aggregate a lot of that content and use it to create like, you know, basically your enemy is... If you're the Russians it seems like your enemy... Both sides I think are doing this, but but you're effectively like delivering intelligence to your enemy which feels shortsighted, but is it, you know, people just want to... Everyone just wants to share their life online? What do you think is like happening?

Speaker 1: Yeah.

Speaker 9: No. It's a great question. I think... Look, there's there's this broader concept of information security in a networked world. Right? And how how closed off do you make people and how open do you make people. And clearly through data fusion, if there's enough videos of peep... Of, you know, soldiers on the battlefield taking videos, people could triangulate information for the purposes of targeting at the end of the day. There's also a valuable component, the the counter narrative to to at least a part of that would be the psyop, right Mhmm. Of of concerning your enemy about your capability at the end of the day. And look. The Russian signals intelligence that's been exfiltrated suggests that they are extremely concerned about the sophistication of the Ukrainian weapons, at least on FPV drones, and the American... The quality of American gear that that we've been giving them.

Speaker 1: Yeah.

Speaker 9: You know, one of the translated blocks of signals intelligence I was listening to that got declassified recently was they were so concerned about... They kept on talking about, be careful. They have American stuff down there. And so, you know, the psyop of being able to share some of this in social media. Right? The Ukrainians, for example, were doing facial recognition technology on Russian soldiers

Speaker 1: I remember.

Speaker 9: And letting their families know that they were dying on the battlefield. The Ukrainians were doing this

Speaker 1: Yeah.

Speaker 9: To to create disharmony in the environment. So there could be an element... There could be a SIOP element of it. Sure. If I was the command... If I was the CG, if I was the commanding general in the battlefield, you you know, and American military doctrine would suggest you probably don't want to give any information whatsoever.

Speaker 2: Yeah. Let me just... What role is open source AI playing on modern battlefields? I'm thinking, you know, Iran, Ukraine, etcetera.

Speaker 9: So, you know, the targeting... Many of the targeting systems, you know, have a corpus of data, and this can add to the data, but there's so much cleansing that needs to happen. I don't I don't think you... We've seen yet kind of a true integration into many aspects of warfare. I will tell you the resupply lines, in particular, that are happening in Ukraine are using... The autonomous ones are using a form of artificial intelligence to navigate the battlefield and resupply the lines. And so it's a very kind of closed and narrow mission set at the end of the day where, you know, the... You know, a a subset of AI is working very... In a very particular way, in a tasked way. But really, in in population control and the sigh up of how you engender support, right, all military action has a political motive and a political will. And so how you build that and how you engender support is actually kind of directly tied to how you farm social media, how you farm your population. There there's a lot of ways to get signals intelligence off of people's phones, for example, at the end of the day, and AI's working on that pretty aggressively. So it's it's a weird new, you know, modern trade space. And I think, you know, the participation of civilians in the activity and what they are feeding into the battle space unwittingly is kind of... Is is this is this new fulcrum of war that clearly AI is having a part. Right?

Speaker 1: Mhmm.

Speaker 9: Like, meaning, you know, forget like the Jensen Huang honeypot, which is kind of like the oldest form of of clandestine activity. Yeah. This is like, can you inadvertently get citizens to give you information on a power plant, the position of soldiers, where they're traveling on a highway for logistics and supply lines. Right? There's an interface between civilian population and military population.

Speaker 1: Yeah. We've heard about this with Tesla, the self driving and the cameras stop working when you're in China and you're near the Forbidden City or near any important military infrastructure. It just sort of goes dark and you have to drive the car yourself. And so, yeah. What what... We've seen some work on DJI drones where, okay, there's a... You know, you can't fly them in, you know, national parks but you also probably can't fly them next to...

Speaker 2: Have you seen a softening in venture investment in defense over the last call it six months?

Speaker 9: I haven't... So I'm not a venture investor.

Speaker 2: No. Know. Know. I know. But I imagine you like... Or or it's quite interesting to you watching a bunch of relatively novice defense, know, investors enter a category in which they are far from experts in, and you happen to be an expert. And so I imagine when you see a $100,000,000 go into a company, you you have pretty strong opinions on it regardless of kind of what exactly it's doing.

Speaker 9: Sure. So look, I'm not going to take the full bait there,

Speaker 1: but at the end of

Speaker 9: the day, because I think it's a... I've been in this industry for pretty much my entire career. Right? I'm I'm 49. I started in my twenties. And I remember defense conferences were like a bad piece of meat and a baked potato when everyone looked a 100 years old. And today, it's, you know, it's a it's a lot of young and dynamic people. And I always ask myself, why is the provenance of new technology almost exclusively to the young? It's the same reason we put 18 year olds on the frontline infantry. They are unafraid. And so we need these young people in the system. Right? If you think about, you know, prior to the Berlin Wall coming down, two thirds of the world's scientists worked in defense. And kind of immediately after that, when we no longer had a pacing threat, these scientists went into every other field. And I don't think it's a coincidence that we had a a revolution in compute technology and biotech. You know, all these new things started to flourish. We got an Internet revolution. We got all these great things. And so I like seeing the activity and the young people come back in and venture makes that possible. It it it becomes a sufficient carrot for folks to come back in. As to whether or not the investments will be meritorious, you know, it remains to be seen. There are some valuations that are, you know, kind of spectacular and and, you know, to your point, I I I probably don't understand them necessarily at the end of the day, but it's drawing in a whole caliber of people that we desperately need instead of working on the next app or going to Wall Street. We need these technical abilities to come into the industry. And so my hope is that the reversion to the mean here isn't too much of a whipsaw, and we get a few high quality companies that can... That come out of this, that can that can act as a training ground for the next great set of technical leaders that are interested in defending the nation.

Speaker 1: Yeah.

Speaker 9: But, you know, there has been a decoupling between let's say...

Speaker 1: Some of the relations, yeah.

Speaker 9: Yes. You know, the the...

Speaker 1: Ben Thompson...

Speaker 2: Yeah. Overall I ask I ask because I think, you know, venture capitalists do incredible things. I think it will be an enormous net positive that there was billions and billions of dollars pushed into these categories even at prices that are disconnected from valuations you would typically see for these kind of businesses. So I think it's an enormous net positive. I also think like VCs can be fair weather sort of friends where like I would expect there to be a pretty significant pullback at at some point. So I was just wondering if you were if you were seeing that. But but that all makes sense.

Speaker 9: It hasn't happened yet. Right? And, you know, if, you know, if and when it does happen at the end of the day, my hope is is that the carnage isn't so material that we we permanently flush out all this talent that we need to stay in the system. Right? That we desperately need to stay in the system. So I'm hopeful. And look, if you can... You know, I I think of the SpaceX IPO as papering over a lot of portfolios. Mhmm. And the success of that, I actually believe will kind of, you know, put this into extra innings if you will. Yeah. Because it seems like, you know, that piece of equity was nearly in everyone's portfolio.

Speaker 1: Yeah.

Speaker 9: And so, you know, maybe that will keep the system going for longer at the end of the day. But there needs to be exit and return here, and that will that will keep the wheels in motion. And if there isn't, it will stall out ultimately.

Speaker 1: Yeah. Yeah. I've always thought that even if there's there's like there's knock on benefits of bubbles. I mean, even in the dot com bubble, we got dark fiber. If we build a lot of energy infrastructure or we have hard tech companies that are buying CNC machines, training people, whether the equity value accrues in one portfolio or another, you're still actually re industrializing. You're putting machines on the ground in buildings, training people to use them and that's valuable to The US economy.

Speaker 2: Last question, I know we're way over, so apologies, but where, like, I imagine you see opportunities that a venture backed company might pursue that could be well suited to an existing portfolio company of yours because maybe we're not looking at for some of these categories maybe we're not looking at like five to six years of really hardcore R and D and it's much more of a hey there's a fifty to a hundred million dollar annual revenue you know product here but we can just use an existing company. Like I imagine like if Magpul is as an example I know that's not I know I know it's a board position for you but if they can make a 100,000 magazines a day, I would be pretty optimistic that they can make a $100,000 of like some drone componentry which feels like that we capability that we want as a nation. Mhmm.

Speaker 9: Right. Yeah. So you... Yeah. Magpul makes like a 100,000 units a day. Yeah. That's a lot. So it's it's a it's a lot of units. But look, We are capable of so much as a country. Right? If you think about what we did in the a bomb project, it was it was like 200 basis points to 300 basis points of GDP Yeah. That one project. And so if the country decides that this is important Yeah. You know, hang on because, you know, we'll take a whole part of the Nevada Desert or something, and we will build a multi million square foot factory to pump it out. There is... One of the challenges in drones is it is a dual use technology

Speaker 1: Mhmm.

Speaker 9: With low cost providers in the system at the end of the day. Yep. And so I always say in a dual use technology, you better ensure that you're the commercial leader

Speaker 1: Yep.

Speaker 9: Right, outside of the department. Because ultimately, one day, it will come to eat your bacon if you're only focused on the Department of Defense. And so that's why the products that we buy are exclusively defense products.

Speaker 1: Mhmm.

Speaker 9: Right? Unless I have a clear path to be the commercial world leader.

Speaker 1: Yeah.

Speaker 9: Right? There aren't specialty products in the department for things like databases. Amazon runs a huge part of CIA today. Yeah. So it's like, it's not that, you know, we're not making special custom products as much anymore for the department for for anything dual use, quite frankly. We wanna use commercial off the shelf. And so in the drone... In the fulcrum of drones, like, guys, we've had drones since the Vietnam War, but what made them popular and permissive in this theater of war is they are cheap and they are... Are commercially available. That was the changing architecture of war. And so if we need a blue supply chain, then we have to have a view on how that blue supply chain becomes also a commercial world leader in order to withstand the invariable shrinking of a defense budget and choose your number of years.

Speaker 2: Yeah. That makes sense. Makes total sense. Well, this was great. Maybe... I wish we had more time.

Speaker 1: Maybe zipline. Zipline's pretty dominant in commercial drones. They're getting there. I I I feel like if if we need the technology is emerging. It's not just...

Speaker 2: And thank you for your service.

Speaker 1: Yeah. Thank you for your service and Happy Veterans

Speaker 7: Day.

Speaker 9: Thanks, guys. Happy Veterans Day. Thanks to all the veterans and

Speaker 2: Yes.

Speaker 9: You know, to double back on your previous guest. Third Option Foundation is a dedicated foundation to the paramilitary activity at CIA, does wonderful work. Then also Objective Zero, which works to prevent veteran suicide, both wonderful charities. Both that I'm proud to support. Happy Veterans Day to everyone.

Speaker 2: Thank you, Darren....

Speaker 1: Coming on. Have a great day.

Speaker 2: See you again soon.

Speaker 1: Guys. Talk to you soon. Cheers. Goodbye. Let me tell you about Shopify. Shopify grows with e commerce. It's the commerce platform that grows with your business. It lets you sell in seconds online, in store, on mobile, on social, on marketplaces and now with AI agents. And we have our last guest of the show, Walter Goodwin, the founder and CEO of Fractile, bringing him in to the TBPN. For keeping you waiting, There he is.