Perspective

11 Nov 2025

10 minute read

Private capital in European defence: from peripheral sector to strategic imperative

Authors:

Fraser Clark

Ieva Miyares

Long viewed as peripheral to private capital, the European defence sector is now becoming a compelling area for Private Equity (PE) investment. This significant shift is supported by a substantial increase in government defence spending and a fundamental re-evaluation of investor perception, particularly concerning the sector's strategic importance and evolving Environmental, Social and Governance (ESG) considerations. This article looks at the dynamics of private capital investment in defence. It explores how PE can deploy diverse investment strategies -from strategic partnering and supply chain financing solutions to private credit – as well as how to capitalise on this transformative period.

Key Points

Europe’s defence sector is undergoing a structural transformation, shifting from a consolidated, policy-sensitive domain to a viable investment frontier as governments boost spending and investor perceptions evolve.
Private equity and private credit are becoming key enablers, deploying capital through strategic partnerships, supply chain consolidation, venture debt, and structured credit instruments tailored to firms’ maturity and risk profiles.
This influx of private capital is more than financial – it underpins Europe’s strategic autonomy by funding innovation, strengthening industrial capacity, and aligning market incentives with long-term security objectives.

Europe’s changing defence landscape

Driven by the conflict in Ukraine and growing need for all nations to significantly increase their readiness, the current geopolitical climate has compelled allied European governments to substantially increase their defence investments. This shift has also led financial institutions to re-evaluate and expand their engagement with the sector. Quantitatively, defence expenditure by EU Member States’ climbed to €343 billion in 2024, representing a 19 per cent real term increase from 2023,¹ and further reflected in European defence stocks repeatedly hitting record highs throughout 2025.

Historically, PE investors were hesitant to invest into the defence sector. This reluctance stemmed from complex regulatory requirements, lack of specific demand signals, the sector’s perceived sensitivity and significant ESG concerns. Further deterring investment was the industry’s consolidated market structure, dominated by a few large 'prime' suppliers which created near insurmountable barriers for new entrants. Recognising these challenges, governments are now actively introducing various incentives, such as reforming procurement processes, reducing bureaucracy, shortening decision timelines and actively engaging innovative Small and Medium-sized Enterprises (SMEs) and mid-market participants.

This evolving landscape is making the sector increasingly attractive to institutional investors. Notably, BNP Paribas provided €12 billion in financing to defence companies in 2024, primarily focusing on NATO countries². Away from traditional banking, private sector has also been active, launching dedicated funds to capitalise on the sector's growth. For instance, Tikehau Capital is currently raising an ambitious €800 million aerospace and defence fund, notably backed by leading industrial players such as Airbus, Safran, and Thales, signalling strong industry confidence³. Similarly, Weinberg Capital Partners successfully closed its Eiréné fund at €215 million, exceeding its original target, with a clear focus on defence investments⁴. These examples underscore a broader trend of private capital actively seeking opportunities within the European defence market, moving beyond historical hesitations to embrace the sector's strategic importance and growth potential.

Nevertheless, while the opportunity is significant, the intrinsic nature of the sector – including its regulatory landscape and long development cycles – alongside current elevated valuations, indicates that traditional majority direct equity investment will continue to present challenges for PE firms. This necessitates the exploration of other investment routes to unlock value in the sector.

Private equity investment routes in European defence

Strategic partnerships and joint ventures

Recognising the substantial capital outlay often required for majority equity investments in the defence sector, PE firms are increasingly exploring strategic partnerships or Joint Ventures (JVs) with defence companies. This approach enables PEs to leverage their expertise in improving operational efficiency and accelerating growth with the knowledge and expertise of other partners in the sector.

One advantage of this approach is that it can help with overcoming reputational barriers in the sector. Partnering with an established defence player can help PE firms and their portfolio companies mitigate some of the historical reputational concerns noted in the sector and help manage the important relationships that exist with governments and other stakeholders.

It should be noted that defence JVs are already highly prevalent between industrial players – often between two large defence contractors, or a prime contractor and a specialist technology firm – to pool technical expertise, share risk, and access specific markets. These JVs are often capital-intensive, have long gestation periods, and require significant ongoing investment. This is where PE can step in as a financial anchor or facilitator.

Beyond direct operational involvement, PE firms can also serve as crucial financial partners within the defence sector's often complex joint venture landscape. Given the prevalence of JVs between industrial players – formed to share technical expertise, access new markets, or pool resources for large-scale projects – PE can act as a 'silent' capital provider. This role is particularly valuable for funding the substantial capital requirements and long development cycles inherent in defence projects, allowing industrial partners to focus on their core technical and operational competencies while benefiting from PE's financial backing and structuring expertise. By providing much-needed patient capital, PE can enable the formation and sustained growth of these strategic alliances, effectively de-risking ventures for industrial participants and accelerating critical capability development.

For example, the asset management firm Apollo Global Management and the engineering and infrastructure company CIMIC Group formed a 50-50 investment partnership in 2015 and founded Ventia, an infrastructure service provider covering social and defence infrastructure.⁵ CIMIC Group provided its industry expertise by merging three of its core service divisions to Ventia whilst Apollo Global Management provided capital investment and management expertise. Both Apollo Global Management and CIMIC Group realised their investment through Ventia’s IPO in 2021 and have reduced their shareholdings thereafter.⁶

However, even strategic partnerships and JVs remain subject to the defence sector’s complex legal and regulatory landscape. Navigating issues such as antitrust and competition law, foreign investment regulations and sector-specific compliance makes these avenues far from straightforward for private capital.

Strengthening Europe’s defence supply chain

At the heart of Europe’s strategic autonomy is a robust and independent defence supply chain, heavily reliant on SMEs. This strategic imperative is reinforced by the European Commission's mandate for member states to procure a minimum of 50 per cent of their defence equipment from within the EU by 2030, escalating to 60 per cent by 2035⁷. Meeting these targets will demand significant private investment to modernise and scale production capacity, a critical need that became unequivocally clear through the disruptions of the COVID-19 pandemic and the conflict in Ukraine.

The challenge is that the sector remains highly fragmented and undercapitalised. The European Commission’s 2024 Communication on the European Defence Industrial Strategy (EDIS) noted that EU countries collectively operate around six times more major weapons systems than the US, which undermines interoperability and economies of scale. Many key suppliers are small, family-run firms with limited capacity to invest in technology, digitalisation, or international expansion. This presents a natural opportunity for PE to contribute capital, strategic guidance, and consolidation expertise. The following sets out some potential approaches to this.

1. Direct investment in defence SMEs

Investing directly in lower-tier suppliers - those producing components, sub-systems, or dual-use technologies – offers a comparatively less complex entry point for PE. These firms are often removed from the highly sensitive, strategic sovereign programmes directly managed by prime contractors and therefore face less scrutiny from national security and foreign investment regulators, who tend to focus more intensely on ownership changes in companies directly involved in critical defence platforms or classified programmes. This principle would appear to be acknowledged by the European Investment Fund (EIF) and European Commission as both noted their intention to support venture and private equity funds investing in such dual-use technologies.^8,9

2. Consolidating fragmented sub-sectors

Beyond merely providing capital, a key aspect of this support lies in consolidating fragmented sub-sectors. Many critical segments of the defence supply chain are characterised by numerous smaller, often family-owned businesses, which, while highly specialised, may lack the scale, capital, or management expertise to invest in modernisation, achieve economies of scale, or navigate complex international markets. Through strategic consolidation, PEs can integrate operations, professionalise management, and justify investment in advanced manufacturing technologies like automation or new materials. This strengthens not only individual suppliers but also the broader European defence industrial base by ensuring resilience, competitiveness, and technological advancement.

3. Providing supply chain financing solutions

Beyond equity investment, PE can address the sector’s liquidity challenges by engaging in Supply Chain Finance (SCF). Defence suppliers often face long payment cycles and high working-capital needs. PE can alleviate these pressures through:

Capital for early payment programmes. Acting as financiers for large primes, PE firms can fund accelerated payment schemes that allow suppliers to receive cash sooner, improving liquidity. In this model, PE could either directly fund large defence primes to offer accelerated payment options to their extensive network of suppliers or invest in specialised SCF platforms that facilitate such arrangements. Instead of enduring lengthy payment terms, often stretching 60, 90, or even 120 days, suppliers can receive payment much sooner, typically within days, in exchange for a small discount.
Investing in SCF platforms. These platforms are the backbone of efficient supply chain finance, automating processes, managing transactions, and providing transparency across complex supplier networks. By scaling these technology providers, PE firms enable the more widespread and efficient adoption of SCF solutions across various industries, including defence. PE-backed platforms such as C2FO (supported by SoftBank Vision Fund and Temasek) and PrimeRevenue (backed by Battery Ventures) demonstrate how private capital can enhance supply chain resilience through technology.
Structured finance solutions. PE firms can design bespoke financing instruments – from hybrid debt to project-specific loans — to ensure critical suppliers have the liquidity to invest, scale, and innovate. In the defence supply chain, this capability allows them to design customised financing arrangements for particular tiers of suppliers, especially those involved in critical components or technologies.

Building on the concept of structured finance solutions, it becomes clear that PE’s role extends beyond traditional equity investment into the realm of private credit provision. The defence sector, with its unique risk profile, long project cycles, and often bespoke financing needs, frequently finds traditional bank lending constrained. This creates a significant opportunity for PE firms to step in as direct lenders, offering flexible and tailored debt solutions that banks may be unwilling or unable to provide.

Private credit: A quicker alternative to address the funding gap

While all financial transactions in the defence sector attract scrutiny, pure debt financing – which does not grant ownership or control – generally faces less intense national security and foreign investment screening than equity stakes. Under Foreign Direct Investment (FDI) regimes such as the EU FDI Screening Regulation and national laws like the UK’s National Security and Investment Act, regulators mainly focus on acquisitions that confer control, voting rights, or significant influence.

Matching PC instruments to firm maturity

The type of private credit instrument employed often reflects the maturity and business model of the borrower. Early-stage defence innovators developing dual-use technologies – in fields such as AI, cybersecurity, drones, and advanced materials – tend to seek venture debt or hybrid credit instruments that bridge the gap between equity rounds or government grants. For example, In-Q-Tel and MD One Ventures have provided convertible debt to frontier-technology firms building AI-based defence and intelligence applications, securing upside exposure through warrants. These loans are typically unsecured or backed by intellectual property and structured around expected future contracts or grant payments.

In contrast, growth-stage and established defence manufacturers require more structured credit facilities to finance production ramp-ups, supply-chain investment, or factory modernisation. These are usually senior secured or unitranche facilities collateralised by machinery, inventory, or contract receivables. For instance, Apollo Global Management, through its credit platform, has structured project finance facilities for defence and aerospace infrastructure, while Carlyle Credit Opportunities Fund has extended unitranche loans to industrial technology suppliers supporting NATO-aligned defence programmes.

Advantages for investors

By offering non-controlling debt, PE firms acting as private credit providers are less exposed to many of the more time-consuming and stringent approval processes. This gives an opportunity to a faster, more predictable route to inject capital into the defence sector where deal timelines and compliance costs often deter equity investors.

This model offers three main advantages. From an investment perspective, private credit extended to SMEs in the defence supply chain can command higher, lender-favourable interest rates reflecting the elevated mid-market credit risk. Yet, many of these risks are moderated by the fact that defence contracts are typically government-backed, significantly reducing actual default risk probabilities. Second, private lenders retain flexibility to structure strong covenants and collateral packages and ensure robust risk mitigation.

Another benefit lies in the discreet nature of private credit deals. Unlike equity transactions, debt financing is often bilateral and less public, which suits defence companies seeking capital without the spotlight of ownership changes or public filings. For investors, this translates into a combination of high and stable returns, diversification potential, and lower exposure to the operational and regulatory complexities inherent in direct ownership.

Substantial market demand for financing

The market need for such financing is considerable. Fragmentation of the European defence market, coupled with long procurement cycles, has created a persistent funding gap for small and mid-sized suppliers. A significant challenge for securing credit is that many of these companies struggle to demonstrate a clear customer and associated funding. Consequently, when assessing the debt risk profile, there is often a challenge around how to prove the debt will be paid back. This has been a significant challenge in the relationship between traditional banking provision and the defence sector, leading to a paucity of financing available. According to a European Commission study (January 2024), defence SMEs face a financing shortfall of €1–2 billion in debt and €1–3 billion in equity¹⁰. For PE firms, this represents a significant and largely untapped opportunity.

Illustrating this trend, the Defence Equity Facility (DEF), funded by the European Defence Fund (EDF) and European Investment Fund (EIF), recently committed €30 million to Sienna Hephaistos Private Investments¹¹. This marks the first European private credit fund exclusively dedicated to SMEs and mid-cap companies within the defence industry. This investment highlights DEF's broader strategy of not only backing venture capital and private equity funds but also supporting debt financing vehicles.

Conclusion

The European defence sector is undergoing a profound transformation, moving from a peripheral domain for private capital to a strategically vital investment frontier. Driven by geopolitical imperatives and increased governmental spending, this shift has been further enabled by a re-evaluation of investor perception and a growing recognition of defence as a critical component of national and regional security. As this article demonstrates, PE firms are positioned to engage with this evolving landscape, deploying diverse strategies which will allow PEs to not only inject much-needed capital but also to leverage operational expertise, drive consolidation, and enhance the resilience of Europe's defence industrial base.

While challenges persist, PE's adaptable investment models offer pathways to navigate these hurdles. By focusing on non-controlling stakes, providing patient capital, and supporting critical supply chain segments, PEs can mitigate some of the complexities associated with traditional direct equity investments. Ultimately, the active engagement of private capital is not merely a commercial opportunity but a strategic imperative for Europe. It is essential for fostering innovation, strengthening industrial capacity, and ensuring the long-term strategic autonomy and security of the continent.

References

1. Defence Data 2024-2025, European Defence Agency, published on 1 September 2025.

2. BNP Paribas reaffirms its long-standing commitment to the defence sector and its corporate clients - BNP Paribas

3. Tikehau co-founder: Our plan is to match the scale of large US alts players

4. Private Equity Firms Target Defense Assets Once Seen as Toxic - Articles - Advisor Perspectives

5. New name for new services business, Ventia website, published 20 September 2015 Link

6. Ventia IPO: Morningstar gives the ASX's newest member the thumbs up, Morning Star website, published 19 November 2021. Link

7. European defence industrial strategy

8. Defence Equity Facility

9. EU launches €175M equity fund to prime private investment in defence R&D | Science|Business

10. Study results: Access to equity financing for European defence SMEs, European Commission website, published 11 January 2024. Link

11. EIF commits EUR 30 million to Sienna Hephaistos Private Investments, the first European private credit fund dedicated to the defence industry, under the InvestEU Defence Equity Facility, European Investment Fund website, published 17 September 2025. Link

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