Europe Rearms: Private Markets Want Piece of the Action
Defense spending across Europe is rising at its fastest pace in 30 years, pulling private markets into a sector many once avoided.
1. Why the sector is back in focus
Defence was avoided by many UK and European LPs for years due to ESG-based exclusion policies and tight regulatory scrutiny. The war in Ukraine, a less predictable global security environment, and pressure on Europe to strengthen its own capabilities have changed that. Public budgets are driving the shift: global military spending reached about 2.7 trillion dollars in 2024, the steepest annual rise since the Cold War, with Europe increasing the fastest. NATO members have also agreed to move towards 5 percent of GDP on defence and wider security spending by 2035.
These long-term commitments have pushed investors to reassess the sector, with public markets leading the way, as shown below:
*Figures as of 28 November 2025
With listed valuations rising rapidly, private markets are considering where they can participate in a way that fits ESG requirements and regulatory expectations.
2. How private equity is approaching the sector
Private equity has adjusted faster than private credit, mainly in adjacent parts of the defence ecosystem.
Evolving ESG interpretations
Several LPs, (e.g. Nordic pension funds and insurers), have refined their exclusion lists. Rather than treating all defence-related activity the same, they now distinguish between weapons (still widely excluded) and areas such as dual-use technology, cyber security, testing facilities and communications. This gives GPs more deal-making flexibility.
Thematic strategies
Industry reporting suggests that as many as 200 European teams are evaluating defence-linked strategies. Most focus on businesses that benefit from higher defence budgets but still have civilian customers, with examples including surveillance technology, specialist manufacturing, aerospace components, logistics and software used by governments and corporates. This ranges from major players (e.g. Tikehau raising a new defence-focused fund in June 2025), to mid-market specialists such as Marondo Capital and BOKA Capital.
Institutional capital arriving gradually
Family offices were first movers, and now larger institutions are beginning to invest selectively in defence and security funds, often with strict export-control and human-rights requirements. However, deal activity is still limited. Government approval processes can be slow, and many managers lack a long track record in the sector.
3. Private credit’s slower shift
Private credit, however, has been slower to adapt. European private credit is now a c. £380-400 billion market, yet direct defence exposure remains rare. According to 9fin data, only five out of nearly 2,000 deals that priced over the previous three years were in the wider aerospace and defence sector.
Key constraints include:
Lenders are often wary of businesses with large fixed-cost bases or long lead times
Existing ESG commitments
Revenue concentration risk, since many defence companies rely heavily on one programme or ministry
Bank financing facilities or fund structures that include sector restrictions
As with private equity, interested lenders will likely focus on defence-adjacent sectors where businesses benefit from increased government spending without sitting directly in weapons production.
Governments have indicated that they want more private capital involved in defence-related infrastructure and R&D. As LP mandates evolve, private credit could play a larger role in the latest vintages, but the adjustment will likely be gradual.
4. Conclusions
Appetite for defence exposure is rising amongst both GPs and LPs, but current ESG policies and mandate wording still determine whether a defence deal can proceed.
The universe of investable assets is still narrow, and competition is increasing for the most attractive companies.
Updated ESG frameworks in newer fund vintages are likely to allow selective exposure to the sector, focusing on non-weapons companies.
PE funds have pivoted faster than private credit into this space, but credit funds will seek to close this gap going forward, starting with defence-adjacent sectors.
Sources: Private Equity International (Oct 2025; Nov 2025), Private Debt International (Oct 2025) SIPRI Military Expenditure Database (2024), NATO Hague Summit Commitments (2025), S&P Capital IQ data, Deloitte - Private capital in European defence: from peripheral sector to strategic imperative, 9fin - Private credit and European defence — Calm before the storm?
