Europe’s rearmament is creating one of the continent’s largest industrial opportunities in decades. However for private equity firms, bigger budgets do not automatically create better assets.

EU Member States spent EUR 418 billion on defence in 2025, including EUR 134 billion of defence investment. European defence-industry turnover rose 13.8 percent to EUR 183.4 billion in 2024. Yet national procurement remains dominant and supplier concentration is high. In selected European markets, the ten largest contractors receive more than 70 percent of procurement order volume. For mid-sized suppliers operating largely through national supply chains, this heightens exposure to individual primes, programmes and countries. 

The central investment question is therefore not who benefits from higher spending, but who can convert it into diversified, defensible cash flow.

PE-backed companies should avoid replacing dependence on one ministry with dependence on one prime. The strongest businesses sell modular sensors, electronic-warfare components, secure communications, software and maintenance across several platforms and borders. Aftermarket upgrades, spares and training add recurring revenue long after the procurement ceremony and commemorative photographs are over.

Bolt-on acquisitions can add capabilities, security clearances and approved-supplier relationships. Dual-use products and multinational programmes can widen the customer base. No single cancellation should turn an investment committee memo into an emergency discussion with lenders.

As one industry expert explained, “The major European defence primes will continue to dominate the sector,” both directly and through their influence over procurement and supply chains. “New entrants will struggle to compete unless governments create dedicated mechanisms to support them,” including private-equity partnerships and targeted innovation programmes.

“THE MAJOR EUROPEAN DEFENCE PRIMES WILL CONTINUE TO DOMINATE THE SECTOR … NEW ENTRANTS WILL STRUGGLE TO COMPETE UNLESS GOVERNMENTS CREATE DEDICATED MECHANISMS TO SUPPORT THEM.”

Industry expert, Europe

Due diligence must look beyond ministerial announcements. A speech, however confidently delivered, is not a purchase order.

Commercial diligence should distinguish funded backlog from political ambition and test exposure to customer, programme and country concentration, termination rights, milestone payments, working-capital demands and intellectual-property ownership. 

Operational and regulatory reviews should then test surge capacity, alternative suppliers, security clearances, specialist talent, export controls, sanctions, foreign-investment screening, end-user restrictions and third-country technology dependencies.

Investors must also underwrite ESG exclusions, lender appetite, entry valuation and the narrow pool of credible exit buyers. The risk is not just missing the defence cycle, but overpaying for exposure that proves too concentrated, too political or too difficult to sell.

Returns vary sharply by subsector. The defence expert noted, “Munitions provide relatively predictable returns but limited upside” because revenues remain tied to production volumes and pricing. Demand is visible, but capital expenditure, working capital and explosives compliance are substantial.

“I would rank cyber as the most attractive investment area, followed by drones and autonomous systems,” stated the industry professional. Cyber underpins many other defence capabilities, while military-drone technologies can have civilian applications. “The same core technologies can support both defence and commercial use cases,” creating additional upside, although fast technology cycles and export controls increase execution risk.

“I WOULD RANK CYBER AS THE MOST ATTRACTIVE INVESTMENT AREA, FOLLOWED BY DRONES AND AUTONOMOUS SYSTEMS.” 

Industry expert, Europe

Sensors, electronic warfare, counter-drone systems and secure communications offer attractive cross-platform exposure. In land systems, vehicle electronics, active protection and sustainment are more investable than complete vehicles. In naval, sonar, underwater autonomy, power electronics and maintenance offer cleaner entry points than whole platforms, which remain long-cycle, political and capital-intensive.

Without alternative routes to testing and procurement, start-ups may still “have little choice but to align themselves with larger incumbents,” remarked a defence expert. For PEs, that distinction matters: procurement access will determine whether smaller defence-technology companies can scale independently, become attractive bolt-ons or remain trapped as fragile suppliers to a small number of primes. Ukraine has shown how a parallel, battlefield-led innovation ecosystem can accelerate development by connecting developers directly with military users, investors and buyers.

The industry expert advocates an “offset” model requiring primes to invest in smaller innovators, potentially through a pan-European defence fund. “An equity-based approach would likely be more attractive as it would be treated as an investment rather than a direct expense.” The expert continued, “Creating such a fund should be a priority.”

Consolidation will favour businesses with several customers, several programmes, exportable technologies, recurring revenue and resilient supply chains. Europe may be rearming at speed, but procurement has not become next-day delivery. The businesses best placed to benefit will be those built to withstand both battlefield urgency and peacetime politics.