Private equity and venture capital are pouring into defence and security ventures
Private equity deals targeting European defence firms have surged – nearly $0.8 billion in the first few months of 2025 alone. These include not just established suppliers but also mid-sized tech companies that serve defence. Meanwhile, defence tech startups are drawing record venture funding, often with encouragement from governments. The NATO Innovation Fund’s activity is one example, but there are also new dedicated VC funds (some backed by defence primes) cropping up. For instance, in February the NATO fund invested in a UK-based microelectronics startup and a European quantum encryption firm – precisely the deep-tech that traditional VCs used to avoid due to ties with defence. Additionally, several nations (France, UK, Netherlands) have launched defence innovation challenges that come with venture-style funding for startups to develop prototypes for the military. The British VC meeting in April led by Minister John Healey aimed to unlock venture funding by highlighting that “there is no more important investment than in European security”. As a result, funds that once might have shied away from dual-use tech are now actively scouting for startups in cybersecurity, surveillance drones, space launch, and AI that can win defence contracts. From a market sentiment perspective, this is a 180-degree turn – defence is now seen as a growth frontier for private capital, not a backwater. Big private equity firms are even carving out dedicated teams to look at aerospace & defence assets coming up for sale (in part because many conglomerates are streamlining, e.g., Airbus might sell some defence electronics units, etc.). We also see more consortium bids mixing private equity and strategic investors for defence deals, signaling that large capital pools are prepared to collaborate on acquiring big targets. There remain constraints: highly sensitive companies (nuclear submarine builders, for example) will still face government vetoes if foreign or purely financial buyers try to take over. Therefore, some private capital is focusing on less sensitive but crucial niches – like components, software, maintenance services – which are more freely tradable. The market sentiment among private financiers is that defence is a “safe bet” with guaranteed demand (given government backing) and room for operational improvement. Many European defence firms were run conservatively when budgets were tight; PE investors see chances to streamline operations and improve margins as spending grows. However, these investors also generally plan exits in 5–7 years – likely via IPOs or sales once the companies have grown. This aligns with the bullish view that the current defence upcycle will last through the decade, giving time to realize returns. In summary, private equity and VC entry is both a result of shifting sentiment (defence seen as profitable and acceptable) and a driver of future growth (their investments will help new defence tech and efficiency improvements). It’s a self-reinforcing dynamic that brings more dynamism to Europe’s defence sector, long dominated by state actors.
Sources
UK government courts venture capital to boost defence industry
Inside NATO Innovation Fund: progress to date and a look ahead
Private equity firms target defense assets once seen as toxic