Written By Andrew Bozzato and Oscar Crawford-Ritchie

With NATO members recently agreeing to increase defence spending to levels unseen since the Second World War, this is a timely opportunity to take a closer look at a theme we have been hearing a lot about lately – the growing role of private equity and venture capital investment in the defence industry.

As we mentioned in our recent blog post, PE Opportunities and Trade in the Spotlight at CVCA Invest Canada, the growing need for defence spending is creating new opportunities for private equity (PE) in Western countries and Canada is no exception.

A few reasons for this include:

1. Recent geopolitical events are prompting Western countries to refocus attention on rapidly rebuilding domestic defence manufacturing and procurement capabilities.
2. What constitutes a defence industry investment now extends well beyond traditional heavy manufacturing to include companies operating in AI, space, communications, infrastructure, dual-use technology, software, cyber security and other areas that have not historically been viewed by investors through a defence lens.
3. As the role of Environmental, Social and Governance (ESG) policies and investment screening evolves, there are increased opportunities to reconsider the investment fundamentals of an industry that may previously have been automatically excluded from consideration.

Increased Focus on Defence

Private equity and venture capital investment in the defence industry continues to grow as the world grapples with increasing and constantly evolving geopolitical tensions, gaps between defence needs and capabilities, and limited national defence budgets. Bain & Company and the Financial Times have both recently reported that the value of venture capital deals in the defence industry has grown eighteenfold over the past 10 years, with notable acceleration since 2019. According to S&P Global Market Intelligence, the announced value of PE- and venture capital (VC)-backed investments in aerospace and defence between January 1 and March 16 totalled US$4.27 billion globally—nearly matching the US$4.31 billion invested in such deals over the entirety of 2024.

PE/VC-backed Investments in Aerospace and Defence, 2022-2025

  

S&P Global Market Intelligence. Q1 2025 to date through March 16, 2025.

Carlyle Group, in its recent report The New Martial Plan, observes that increased defence spending is creating a major opportunity for private capital. It goes on to conclude that PE firms are well positioned to play a leading role in assisting governments as they build out a new defence industry.

We expect VC investment in this area to continue increasing, while PE interest is poised to accelerate as governments around the world seek collaborations with private sector partners to significantly and swiftly bolster their defence procurement and production capabilities over the next decade.

Increased Prominence of DefTech

An important driver of the surge in private capital investment in this area is due to changes in what is perceived as being a "defence" investment – a category that now includes such areas as software, cybersecurity, and dual use technologies, as well as space, communications, AI, autonomous technologies and machine learning – all broadly referred to in this blog as defence technology (DefTech). Private capital investors are actively seeking new investments in all of these areas as well as working to raise funds and assemble teams specialized in defence industry investment. The Financial Times reported recently (citing Pitchbook data) that the number of VC investments in DefTech has significantly accelerated over the past few years, with 2025 VC transactions already on track to outpace the number from 2024.

Many private equity investors have historically not had the luxury of enough time to make meaningful investments due to the extensive lead time involved with procurement to manufacturing of traditional defence equipment. But this is changing. The shorter timeframes now being realized in both government procurement and many areas of modern defence manufacturing are making investments more attractive for private capital. Private capital investors of all types are increasing their focus on this sector as the prominence of DefTech increases and as it becomes clearer that there is significant growth expected in numerous areas of this industry.

New Opportunities for Private Capital Investors

VC and PE investors are well positioned to play an important role in the growth of this key sector, which is poised for significant expansion. We expect governments around the world to continue enacting policies that encourage private equity and venture capital investment through initiatives aimed at fostering private sector partnerships in the defence industry. Additional catalysts include recent major investments in defence research and development, such as the €1 billion NATO Innovation Fund—a venture capital fund dedicated to financing deep tech founders in NATO countries addressing challenges in areas as broad as AI, energy, autonomy, quantum technology, communications and space.

We anticipate the need for private equity and venture capital investments to increase significantly over the next several years as demand for defence assets grows, with notably less focus on traditional heavy manufacturing and a much greater emphasis on emerging technologies, including AI, DefTech and software components of the defence industry.

To discuss recent developments and emerging opportunities in the defence industry, please contact one of the authors.