(Bloomberg) -- Private equity firms are scouring for investment opportunities in European defense, chasing the once shunned sector in an effort to benefit from a historic switch to military expansion in the region.
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Firms including Tikehau Capital and CVC Capital Partners have either been raising funds or putting together teams dedicated to investing in companies that help underpin national security. Others, Advent for instance, are preparing to shop defense assets to take advantage of the rising buyer demand.
The moves reflect what leading defense executives call a paradigm shift as Europe earmarks hundreds of billions of euros to rearm itself and reduce a dependence on the US. They also mark a change in attitude toward a sector that’s been unpopular with investors, owing to its capital-intensive and cyclical nature and the ethical risks associated with the business of war.
Private equity spending on defense has reached $1 billion in only five of the last 20 years, data compiled by Bloomberg show. In 2025, private investors have already forked out about $790 million in the industry, the data show, with the potential for big transactions to come. Bain Capital and KPS Capital are interested in Iveco Group NV’s defense unit, which could fetch as much as €1.5 billion ($1.7 billion), Bloomberg News reported last week.
“The defense sector looks like it will prove to be an exception to the broader downturn we are experiencing in dealmaking,” said Frank Bretag, head of industrials advisory at UniCredit SpA. “They are reliant on European government spending, which is only likely to tick upwards.”
Among those looking for deals is Paris-based Tikehau, which is raising an €800 million aerospace and defense fund and has already collected more than half the target amount. Backers include the firm itself, as well as French aerospace giants Airbus SE, Safran SA and Thales SA.
“There’s a lot of investor demand for defense and aerospace exposure right now, given the massive industry backlog both in commercial aviation and defense industries,” Roberto Quagliuolo, Tikehau’s deputy head of private equity, said in an interview.
Tikehau isn’t alone. Weinberg Capital Partners, the French buyout firm with investors including BNP Paribas SA and Crédit Agricole SA, recently raised €215 million for its Eiréné fund dedicated to strategic security and defense. The company was founded by Serge Weinberg, the one-time chairman of French drugmaker Sanofi and hotel chain Accor SA.
“We think the barriers to investing in defense will progressively disappear,” said Lionel Mestre, a partner at Weinberg Capital. The fund closed above its target, Mestre said, adding that it had previously been harder to raise money for a sector that wasn’t considered compatible with environmental, social and governance policies.
Veritas Capital, which counts aerospace and defense and national security as one of its focus areas, is seeking to raise $13 billion for its latest flagship fund, according to data compiled by Bloomberg. KKR & Co., which has made European defense electronics and space acquisitions in recent years, is scouting for more opportunities.
Elsewhere, Klaus Hommels, the founder of European venture capital firm Lakestar, is chairing a €1 billion NATO Innovation Fund to invest in early-stage startups working on dual-use technologies like artificial intelligence, quantum computing and propulsion. Like Mestre at Weinberg Capital, Hommels said European investors had been wary of defense assets before the geopolitical shift changed things.
“The perception of defense investments has shifted massively,” Hommels said. “High-net-worth individuals and the billionaires crowd in Europe are telling me it’s not just about returns, it’s for patriotic reasons too.”
Bigger Budgets
Europe relies heavily on the US for capabilities that are core to its security, including missile defense, precision-guided munitions and surveillance systems. Leaders in the region are now being forced to increase military budgets in response to US President Donald Trump, who has made it clear that Europe needs to do more to protect itself from threats such as those emanating from the ongoing war in Ukraine.
Spending pledges from the likes of UK Prime Minister Keir Starmer and Friedrich Merz, Germany’s chancellor-in-waiting, have sent the valuations of European defense stocks soaring — and investors still want more.
Attracting private capital will be key to helping finance Europe’s defense readiness. Last month, the European Commission published a White Paper on an €800 billion “ReArm Europe” plan that included suggestions for mobilizing private money.
“There is only so much that governments can do alone to procure and develop defense products,” said Ian Fujiyama, head of aerospace, defense and government at Carlyle Group Inc. “Private equity can provide the capital and expertise needed from the outset.”
Buyout firms have been refocusing on the space in ways other than just raising money. CVC last year established an aviation, defense and space team led by James Mahoney, who previously worked on deals for the firm including its investment in aerospace product supplier Ontic.
Meanwhile, several top law firms and banks have assembled internal defense working groups to benefit from the potential uptick in activity. One long-time banker covering the industry, who recalls being told for years to stop wasting his time on military-related transactions, said his phone has been ringing non-stop with calls from private equity firms since Europe’s pivot.
Removing Roadblocks
One of the main hurdles to private equity acquisitions of defense assets in the past has been restrictions faced by firms’ limited partners — whether self-imposed or connected to European Union rules on ESG investing. But amid the war on Europe’s eastern flank, and the change in tone from the White House, fund bosses have been redefining their mandates to make room for potentially lucrative defense bets.
“One challenge was always that investors in European private equity firms had different levels of comfort on defense, but that’s changing,” said David Black, partner at Renaissance Strategic Advisors. “We are now seeing efforts by several buyout firms to identify targets, small and mid-sized companies, to build a bigger defense group.”
Officials in Europe are looking to do what they can to remove regulatory roadblocks around ESG that make it harder for investors to support the sector.
European Commission President Ursula von der Leyen has signaled the bloc will do everything it can to free up capital, saying last month that, with the region’s values, freedoms and laws under threat, “nothing is off the table.” In the UK, watchdogs have made clear that existing sustainable investment rules don’t prohibit fund exposures to defense.
“ReArm Europe puts capital formation at the very center,” said Jason Thomas, head of global research and investment strategy at Carlyle. “The 180 degree turn by European governments has been something quite incredible.”
Heightened demand for assets in the sector is also leading private equity firms that already own defense companies to explore selling them in an otherwise challenging market for exiting investments.
Advent has just sold Cobham Satcom, a provider of tracking antenna systems for ships and soldiers, after trying to do so for some time, and is also considering a divestment of Ultra Precision Control Systems, which makes products including ejection systems that help with launching missiles. And Searchlight Capital Partners is weighing a sale of Survitec’s aerospace and defense business, which provides safety gear for F-35 fighter pilots.
Other businesses that could be shopped include private-equity backed ScioTeq, a maker of visualization products for air traffic control, avionics and defense markets. Wescom, a British maker of pyrotechnics and detection systems for the defense industry, may also attract interest, according to people familiar with the matter. Representatives for ScioTeq, its owner OpenGate Capital, as well as Wescom declined to comment.
Some notable deals have already been struck this year. In January, AE Industrial Partners agreed to sell Edge Autonomy, which makes autonomous combat systems sold to the US Defense Department. The following month, Greenbriar Equity Group reached a deal to offload Arotech Corp., a US provider of simulation systems, power gear and electronics manufacturing to global defense companies.
To be sure, such assets have become increasingly sensitive to European governments, which could make it more difficult for private equity firms to do business. After news leaked in February that Bain Capital had made a preliminary approach for UK defense equipment maker Chemring Group Plc, Prime Minister Starmer was quoted as saying it was important to keep companies in the sector British.
Investments in the sector could also be impacted by any changes in approach to global security coming from Washington.
“The main risk involves a potential shift in US foreign policy in the medium-term — in three to four years’ time — which could render these investments less profitable and somewhat redundant,” said Valeriya Vitkova, a senior lecturer in corporate finance at the Bayes Business School at City St George’s, University of London.
--With assistance from Eleanor Duncan and Laura Noonan.
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