Long Before Rheinmetall’s Surge, This Investor Saw the Potential

(Bloomberg) — As Russian tanks started rolling into Ukraine in late February 2022, Michael Herzog, then a top trader at Davidson Kempner Capital Management, realized that Europe faced a moment of reckoning: War had returned to the continent, and the US defense umbrella offered little shelter.

Herzog began scouting where to place his bet on this historical shift, or Zeitenwende, and he quickly zeroed in on German defense company Rheinmetall AG, where Chief Executive Officer Armin Papperger had begun aggressively expanding factories even before orders started rolling in.

Herzog says he was convinced Germany would drive a wave of European spending, reversing a decades-long anti-military stance shaped by the scars of its Nazi past.

“Europe needs to wake up; they have a gun to their heads,” said Herzog, an avid reader of historical war documents, diaries and novels. “It’s a rude awakening, but not a bad thing if we can take advantage of it.”

Throughout 2022, the Davidson Kempner team began snapping up Rheinmetall shares. That year alone, the stock more than doubled in value, logging one of its best annual performances since 1996, when Rheinmetall became a founding member of the MDAX midcap index in Germany.

Even as others viewed the shares as overpriced, the New York-based hedge fund kept building out its stake to almost $300 million over the next two years, making it the “largest contributor to overall performance” in a key portfolio in certain time periods, according to people familiar with the matter and investor letters seen by Bloomberg. Herzog declined to comment on specific investment amounts.

In the last four years, Rheinmetall has become Europe’s most valuable and fastest-growing defense company, surging from only €4 billion ($4.7 billion) in market value in 2022 to €84 billion today. The stock has gained 1,729% since Feb. 24, 2022 — the day Russia’s full-scale invasion of Ukraine began.

Such an unlikely performance for a company that long only garnered lukewarm investor interest and at one point even considered outright abandoning its defense operations and going private has paid off massively for Davidson Kempner.

Herzog’s conviction about this pivotal moment for Europe is also influenced by the fact that his Jewish father and family fled to the UK from Austria in the late 1930s to avoid Nazi persecution. US President Donald Trump’s push to gain control of Greenland has further strengthened his view about Europe’s need to rearm.

“This is about Europe regaining agency and a seat at the table, otherwise it’ll be kicked around by Washington, Moscow and Beijing,” said Herzog, a dual British-Austrian citizen. “These big conflicts, these eruptions, are reshaping politics, economics and security.”

Dusseldorf-based Rheinmetall has become an emblem of Germany’s reassessment of its military doctrine, which for decades relied largely on US protection and the belief that the end of the Cold War had washed away any threat of a large-scale conflict.

Russia’s aggression in Ukraine, and Trump’s thinly veiled threats that Europe is essentially on its own, have changed that view, and led people like Papperger to take the unapologetic stance that the region must take rearmament into its own hands.

Under pressure from Russian President Vladimir Putin in the east and Trump to the west, Europe could spend as much as €14 trillion on defense and related infrastructure over the next decade, according to estimates from buyout firm Carlyle Group Inc.

The European Union also rolled out a massive €150 billion defense fund — known as Security Action for Europe, or SAFE — that allows EU members to borrow to invest in defense equipment made mostly within the EU or Ukraine.

“When I started thinking about where the European spend was going to be, I realized Germany was going to be the focus and it had the right company and right CEO,” said Herzog, the global co-head of merger arbitrage and global head of long/short equity at Davidson Kempner until he left in January 2025. “Rheinmetall was obviously in the right place, front and center.”

As part of their research, Davidson Kempner’s portfolio managers in mid-2024 made the pilgrimage — like many investors thereafter — to the company’s key site in Unterlüss and spent extensive time with CEO Papperger. In this rural backwater in northern Germany, the maker of ammunition and land defense vehicles owns a sprawling 50-square-kilometer (19-square-mile) private weapons testing site, the largest in Europe, alongside its huge factories producing ammunition and military vehicles.

Their visit included an overnight stay at the sprawling Waldfrieden guest house, a test drive of a Leopard tank and a taste of the company’s infamous in-house schnapps Ratzeputz, according to people familiar with the matter. It was also around then when an alleged Russian assassination plot against the CEO came to light.

Herzog and his team’s enthusiasm for the company wasn’t always infectious: In November 2024, he presented his Rheinmetall thesis to about 40 people at Goldman Sachs Group Inc.’s annual conference for chief investment officers in London, the people said. When the moderator asked attendees to raise their hands if they held Rheinmetall shares, only about five did so; then trading between $468 and $622 a share, some saw the stock as overpriced and had either taken their profits or held back. The shares have since more than tripled to about €1,800.

A representative for Davidson Kempner declined to comment, as did Goldman Sachs. A representative for Rheinmetall said the company was “continuously engaging with a large group of institutional investors from all over the world.”

To be sure, Davidson Kempner isn’t the only investor to bet on European defense and profit from geopolitical shifts. Asfandyar Nadeem, a former money manager at Brevan Howard Asset Management, has profited from Deem Global’s macro hedge fund bets on European defense stocks as well as a basket of wagers on the rebuilding of Ukraine.

Herzog remained a believer in Rheinmetall even after leaving Davidson Kempner and relocating to Switzerland. Because of temporary restrictions often in place after departures in the hedge-fund industry, he now runs a fund with his own money, keeping his bets on defense stocks and assets like gold, copper and rare earths. Davidson Kempner has retained a significant investment in the German defense giant, even after it “trimmed the fund’s position on strength,” according to an investor letter after his exit.

The hedge fund’s portfolio managers continued to oversee the investment in 2025, which benefited from the best annual performance of Rheinmetall shares that year.

Europe will end up spending roughly the same as the US on defense annually, or close to $1 trillion, according to Herzog, citing NATO spending targets.

“People still think Europe won’t spend the money, they think it is a ruse,” Herzog said. “But events will force Europe to do this.”

–With assistance from Nishant Kumar.

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