M&A in Ukraine’s defence sector: battlefield innovation meets investment reality

In the crucible of war, Ukraine’s defence sector has become a laboratory of rapid innovation, producing battlefield-tested technologies that have global implications. While the country is fighting for its survival, a new ecosystem of startups, engineers, and defence entrepreneurs has emerged, offering highly specialised capabilities in areas such as unmanned systems, electronic warfare, and military-grade software. Notably, Ukrainian defence tech firms are virtually the only companies in the world capable of developing and refining their products under real combat conditions of such complexity and scale. Their innovations, however, come with a complex investment landscape—one that presents both emerging risks and potentially outsized rewards in a world where the question of European and global security is more urgent than at any time since the collapse of the USSR.

Foreign investors and strategic acquirers are increasingly eyeing Ukraine—not only out of geopolitical solidarity but also due to the sector’s dual-use potential and proven performance in a real combat environment. While total private investment in Ukrainian defence technology companies in 2023–2024 remained modest, broadly estimated at under $50 million, the sector is expected to see significant growth by late 2025 and beyond. In this period, key investors—mainly specialised venture capital funds—provided critical early-stage funding to companies in this emerging sector.

As the industry continues to evolve dynamically, there is a growing need for growth-stage capital, likely to come from international strategic investors and private equity funds. At least several large M&A deals are currently underway, expected to close by late 2025 or early 2026, signalling the entry of major international strategic investors and marking a new milestone in the sector’s global development and partnerships.

The heightened interest may be additionally reinforced by:

• Ongoing discussions between Ukraine and the United States around U.S. investment in Kyiv’s domestic drone production
• The EU’s announcement on 9 May 2025 of a €1 billion allocation—to be drawn from excess profits on frozen Russian assets—to bolster Ukraine’s defence industry
• The approval in late May 2025 by EU defence ministers of a colossal €150 billion arms fund under the Security Action for Europe (SAFE) programme, including joint borrowing to fund defence projects—among them those involving Ukraine—with a preference for EU member states and Ukraine

Navigating Ukraine’s defence M&A landscape offers great promise but also demands a nuanced grasp of its legal, regulatory, financial, and operational complexities, as well as the many other challenges facing investors venturing into this fast-growing yet immature sector—often without the comfort of well-developed structural and legal frameworks typical of more established industries.

Opportunities within the Ukrainian defence ecosystem

Ukrainian innovations, battle-tested and powered by technologies proven in active combat, offer genuine strategic value. Smaller firms are particularly well positioned, benefiting both from lean, agile development cycles tailored to the realities of modern warfare and from manufacturing teams’ exceptionally high motivation to innovate, learn, and improve.

Valuations remain attractive. Capital constraints, coupled with the ongoing risk of physical damage to or even destruction of production facilities, have suppressed prices, thereby creating rare entry points for investors willing to operate in a high-risk environment. At the same time, robust domestic demand and international support programmes, including the Danish model and the SAFE initiative, help sustain companies’ fundamentals, preventing valuations from falling further.

Emerging capabilities are another major draw. Ukrainian firms are pioneering field-tested solutions in UAVs, electronic warfare, cybersecurity, and battlefield communications—areas of rapidly increasing global interest.

The market is further supported by strong domestic demand. Today, defence spending accounts for nearly 62% of Ukraine’s state budget and over 26.3% of its GDP—the world’s highest share of GDP allocated to defence and security—ensuring a steady pipeline of contracts for capable suppliers. Moreover, the Ukrainian defence sector is already being integrated into the European Union’s broader defence agenda.

Crucially, many Ukrainian defence products have dual-use potential. Technologies developed for the battlefield are already finding their way into logistics, agriculture, border control, and cybersecurity. This versatility, coupled with high scalability, opens opportunities for monetisation beyond defence, broadening the appeal to long-term investors.

Major challenges for investors seeking to acquire a defence company or startup in Ukraine

Many defence sector firms—particularly startups and SMEs—lack adequate accounting practices and reliable financial information. Their financial records often fall short of established standards, including IFRS, and budgets or financial forecasts may be missing or poorly developed. These gaps complicate investors’ ability to assess profitability, verify the reliability of historical data, and project future performance.

Yet another issue is intellectual property. Only a few firms have properly registered or transferable IP rights, which creates significant legal uncertainty for acquirers and reduces the long-term value and defensibility of technology-driven acquisitions. The matters are made worse by the lack of robust IP protection laws and practices in Ukraine.

Corporate structures are often unclear, and opaque—in many cases—ownership and legal frameworks increase compliance and legal risks that may surface during due diligence.

Similarly, governance also remains underdeveloped. Many firms lack formalised decision-making processes, internal controls, or functional corporate boards, which further undermines investor confidence. Quite frequently, they even have no legal standing and operate as groups of private entrepreneurs working together on joint projects under gentlemen’s agreements rather than as legal entities.

Additionally, non-transparent business practices in which the economic substance differs from the legal form are relatively common. These include reliance on individual entrepreneurs to generate off-balance-sheet cash flows or conducting transactions that may be difficult to substantiate in statutory accounts—leaving room for both price manipulation and financial misstatement.

On 21 August 2025, recognising these challenges, the Verkhovna Rada passed a law introducing a special legal framework—Defence City—to support defence manufacturers, aiming to reduce regulatory and tax burdens and eliminate non-transparent business practices in the sector.

Importantly, one of the most significant barriers is the current ban on arms exports from Ukraine, which severely limits the scalability of production and the international revenue potential for companies operating solely within Ukraine. Without a clear scaling model, investor interest declines, affecting deal flow and valuations. Consequently, many Ukrainian defence manufacturers seek to establish foreign branches and production facilities, viewing security as a major concern of growing importance.

Finally, investors should factor in Ukraine’s capital control regulations, which continue to evolve. That said, a gradual trend toward liberalisation has been observed in recent years. Payments for goods and services have been permitted, though dividend repatriation and loan repayments remain restricted. The National Bank of Ukraine has announced a phased plan to ease these limits. At the same time, Ukrainian companies face restrictions on foreign direct investments. Given ongoing volatility in Ukraine, there remains a high likelihood of tightening capital controls and applying new restrictive measures, particularly if the country’s foreign currency reserves decline. Nonetheless, recent developments suggest a continued trajectory toward liberalisation.

Market dynamics: a hybrid ecosystem shaped by war

Ukraine’s defence M&A landscape is evolving at remarkable speed, shaped by battlefield-driven innovation, decentralised demand, and increasing foreign interest. Traditional procurement models no longer suffice—flexibility and local insight are now critical to navigating this war-forged ecosystem.

Among key trends, the attentive observer can note the following.

• Foreign investors, particularly from the EU, show a strong preference for joint ventures and minority stakes over full acquisitions. These lower-risk structures offer access to combat-proven technologies while easing an investment journey in Ukraine’s complex and highly regulated environment.
• Larger international players increasingly enter the market through partnerships with Ukrainian state-owned enterprises and ministries. These public-sector alliances—being low-risk entry points—help build credibility with investors, giving them a better understanding of local bureaucratic hurdles and enabling them to align with national priorities before pursuing private-sector deals. The year 2025 witnessed several partnerships and contractual collaborations between international players and Ukrainian private manufacturers.
• The domestic ecosystem is bifurcated: new startups (post-2022) focus on modular, flexible frontline solutions, while more mature firms (often founded after 2015) operate international subsidiaries and offshore facilities, making them more accessible and structurally investable.
• Unlike most defence markets, Ukraine’s procurement system is decentralised. Local governments, individual military units, and volunteer funds frequently procure equipment independently, often with support from crowdfunding and charitable initiatives. This creates a unique bottom-up validation model: products proving their worth in the field gain traction organically and attract institutional buyers.