Private investors are setting themselves up to play an important role in re-arming Europe by providing much needed capital to help the defense industry expand and enhance the industrial resilience of the region.
More than three years after Russia’s full-scale invasion of Ukraine, the European capital has pledged billions of euros to invest in national defense and new technology, but private equity and venture capital executives believe there is a gap in the funds they can meet.
The government “cannot be 100% successful in rebuilding its defensive capabilities,” Thomas Friedberger, deputy chief executive at Tikehau Capital, added that the private sector is needed to drive investments in “defense, resilience and sovereignty.”
The Private Equity Group, which has just raised nearly 450 million euros to funds investing in companies focused on technology used in both civil and military applications, is one of dozens of companies chasing sector opportunities.
Investments in European startups jumped to $5.2 billion last year as investors’ desires for companies like Software AI Group Helsing and drone maker Tekever ignored the wider economic recession in European VC funding.
Private capital investments in the aerospace and defense industries date back decades, but have long been dominated by large acquisition funds that can navigate operations in highly regulated sectors.
However, investors’ profits from VC funds have skyrocketed as the government tried to strengthen its defense industrial bases after Russia’s invasion of Ukraine. Donald Trump’s cold shoulder to NATO is only turbocharged such efforts that Europe wants to spend more on its own security.
Many VCs, especially in Europe, have been wary of supporting arms manufacturers in the past, due to the risk of fouling environmental, social and governance rules.
Executives believe they can play a role by investing in Capital Hungry startups.
“We are pleased to announce that we are committed to providing support for our clients, Campbell Lutyens, as well as our partners, said Ali Floyd, co-head of European private equity funding.
The government added, “We are reluctant to spend far more taxpayer money to fund defence investments, and there are only so many Rheinmetall and BAE systems that the public market can fuel.”
The European funding gap is “growing due to current issues regarding America’s commitment to NATO, as well as the European desire to fund much of Ukraine’s defense,” said Michael Sion, a partner at consultant Bain & Co and author of a recent report showing the value of venture capital transactions in the defense sector, which has increased by 18 times in past forecasts.
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Wars in Ukraine highlight the increasing role defense technology plays on the battlefield, from drones and other autonomous systems to robotics and artificial intelligence. Executives said private equity and venture capital funds can help drive innovation by investing in early stage technology.
“To set up companies and take risks, we need to innovate and invest in research and development prior to production,” said Sten Tamkivi, one of the co-founders of multiple technology funds, one of the early supporters of Helsing, which is under management, which is one of the early supporters of approximately 800 million euros.
Also, many investors are looking for transactions that can help restructure or use companies that have a wide portfolio.
Recent data from Pitchbook showed that global aerospace and defense sector transactions increased last year, with 274 transactions rising. The total amount of transactions in the sector in 2024 was $36.8 billion, an increase of $10 billion or 37% from 2023.
“Historically more PE companies are interested in defense,” said James Dawson, partner at Boutique Investment Bank Gleacher Shacklock.
Dawson points out that US acquisition group Advent International has been successful in purchasing UK Cobham and Ultra Electronics. Ultra manufactures submarine hunting equipment and control systems for the Fleet of Trident submarines carrying British nuclear deterrent forces.
The UK government intervened to ensure binding commitments from Advent in relation to both acquisitions, but the deal was given Go-Amead. “Everyone has seen Advent’s success, they have seen it succeed with the government,” Dawson said.
It is unclear whether the sector will see more famous M&As. British-listed explosives maker Chemring received a £1.1 billion approach from US-based Bain Capital earlier this year. Chemistry had not commented at the time.
High ratings are a barrier to M&A defense, according to Dawson, but there is much debate about cooperation on more joint ventures.
Despite the influx of money into the sector, the challenges remain if Europe wants to build a defence technology sector that leverages funds from private investors. Several Tamkivi said the government needs to revise the infamous bureaucratic procurement method of prioritizing larger contractors.
“If new technology companies are born in Europe and are funded by private capital (that is), we need to make sure they have access to the procurement flows.”
Europe needs the right mechanisms to deal with small businesses, he added. “How do you create a large business of the future from a small business? It’s a venture capital game.”
However, even if there is a ceasefire between Ukraine and Russia, executives said attitudes towards defence investment would change dramatically, and it is unlikely that interest in the sector would decline if it was not easing.
“The mood is changing, perhaps, and perhaps even regulators,” Tikehau’s Friedberger added, adding that “there is no sustainable economic development without defense.”
