Technology investors can profit from the new Cold War

Israeli security agency Mossad recently confirmed it had completed the first investments from its new technical innovation fund. The clandestine state agency plans to help start-ups which have the potential to help its covert operations and keep the state of Israel safe. However, the Israeli officials have decided to keep the beneficiary companies and the amount invested in each a secret. After all, keeping mum is likely to be one of the first lessons learnt at Spy School. But there are other ways to discover what type of technologies are of interest to the world of espionage.

Financial analysis is a core skill required by an investor, but the ability to identify long-term trends is also a vital part of a shareholders tool kit. The recent poisoning of Sergei Skripal, a Russian former military intelligence officer who acted as a double agent for the UK, highlighted that international espionage did not die with the Cold War. In fact, developments in technology since the collapse of the Berlin Wall and the break-up of the former Soviet Union means espionage globally is in something of a renaissance – and this will almost certainly provides opportunities for investors if they position themselves correctly.

Mossads fund – called Libertad, the Spanish word for freedom – was first announced in the middle of last year. It plans to invest in five new projects annually, with each individual investment averaging around 2 million shekels (£417,000). Libertad is targeting Israeli-based companies in various fields, including robotics, miniaturisation and encryption. It also seeks new electronic methods of extracting information from documents and innovative technology that could boost secrecy and stealth. Interestingly, the investment will not come with any onerous strings for the investee companies, with Mossad being clear that is not buying exclusive use of any technologies developed. But this is as about much as we know. One way for investors to get a handle on emerging investment areas is to look at what the well informed are doing and “follow the money”. However, in this case it is impossible because of the cloak of secrecy. But its equivalent fund in the US is an entirely different beast.

US is clearer

The Central Intelligence Agency (CIA) established In-Q-Tel (IQT), a non-profit investment fund aimed at accelerating the delivery of new technologies for government agencies, in 1999. The “Q” in its name is supposedly a nod to “Q” the quartermaster in the James Bond franchise. Helpfully, the fund lists all of the businesses its supports on its website. It is an interesting range of companies that are developing exciting technologies. However, most of them are relatively early stage and not in public markets. Venture capitalists are able to invest alongside the IQT fund but, disappointingly, private investors are unable to invest alongside the professionals. However, looking at the type of technologies the CIA has put its cash behind is informative for the general investor looking for a trend. Especially since the fund targets technologies that are expected to be delivered within a three-year period.

The companies in IQTs portfolio are involved in many industries, but a lot of them involve data – both its protection and analysis. Amongst the 2017 investee companies listed on its website is Cylance, which has developed an anti-malware product that uses artificial intelligence and machine learning to assess whether an email attachment or software download is a risk. Most other virus-protection products have to consult a centralised list of problem software. Then theres Echodyne, which is developing a new radar-based sensor technology for drones and driverless vehicles, which are used for targeting terrorist bases and other military targets. Theres also SnapDNA, which is developing a handheld device that can confirm a persons identity within five minutes. There are many situations when this could be useful, for example when US Navy SEALs killed Osama bin Laden at his compound in Pakistan in 2011 they needed to bring back DNA samples for labs to prove that they had hit the right target. This kit would have meant the SEALs could have confirmed they had hit their market almost immediately – and continue with the mission if they had been wrong.

Watch the front line of investment

The IQT website is very useful to “follow the money” and see where investments are being made, but it is almost impossible to invest in these individual companies. However, there are collective investments that target sectors that appear to be of great interest to the CIA and other intelligence players. These include ETF Securities Cyber Security exchange-traded fund (ISPY) which gives exposure to companies engaged primarily in online safety. Its top holdings are companies which many may not have heard of, including Rapid7, Ahnlab, Qualys, Proofpoint and CyberArc. However, this fund has proved extremely popular in the last few weeks and the London-listed fund has seen its share price jump.

Although identifying and investing in these types of businesses can provide a substantial opportunity to profit, there are also risks. The sensitive nature of the technology produced can mean governments may step in to limit their distribution, truncating the profit opportunity. Indeed, in November last year, members of the European parliaments trade committee voted almost unanimously to update export controls on devices that can be used to intercept mobile phone calls, hack computers or circumvent passwords. However, recent events show that the world of international espionage remains a key feature of many countries foreign policy – and technology is going to become increasingly vital to their operations.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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