The Changing Face of Defence - Why Private Equity is Embracing Military Investments
Dear Readers,
For years, investments in the military and defence sector carried a stigma in many private equity circles. While undeniably profitable, concerns over social and ethical implications often kept many funds on the sidelines. Today, that narrative is changing—and rapidly so.
Driven by geopolitical shifts, technological modernisation, and a renewed focus on national security and resilience, defence-related investments are not only delivering strong financial returns but are also being reassessed through a more nuanced, socially responsible lens.
1. The New Geopolitical Reality
Ongoing global tensions—from the war in Ukraine to instability in the Indo-Pacific—have forced governments to rethink defense budgets and increase spending on both conventional and next-generation capabilities. NATO member states are moving toward the 5% GDP defence spending target, with countries like the Netherlands, Germany, and Sweden launching multi-billion-euro investment programs. This upswing has created a strong tailwind for defence contractors, infrastructure providers, and cybersecurity firms, many of which are now attractive acquisition targets for private equity.
2. Defense Tech: A High-Growth Subsector
The modernisation of the military is no longer just about hardware. Private equity is increasingly focused on defence tech, where software-driven innovation is transforming intelligence, surveillance, communications, and threat detection. AI-powered platforms, autonomous systems, space surveillance, and quantum-resistant encryption are just a few areas drawing investor attention.
These technologies often have dual-use potential—applicable in both military and civilian contexts, which enhances the commercial upside and softens the social resistance historically associated with the sector.
3. Shift in ESG Thinking
Until recently, defence was considered a red flag in ESG-aligned portfolios. That, too, is evolving. A growing consensus recognises that defence plays a legitimate role in safeguarding democratic institutions, humanitarian operations, and civil infrastructure. As one NATO official recently put it: “Without security, there can be no sustainability.”
As a result, more ESG frameworks now include “security and resilience” as a pillar—opening the door for defence-related investments that align with broader ethical considerations. Funds are increasingly distinguishing between offensive weaponry and systems designed to protect civilians, enhance intelligence, or defend against cyberattacks.
4. Government Partnerships and De-risked Revenue
Unlike many industries, defence often benefits from long-term government contracts, offering predictable, recession-resistant revenue streams. This dynamic is highly attractive to private equity, particularly as global interest rates and inflation challenge other sectors.
Governments are also increasingly co-investing or offering incentives for innovation, particularly in areas such as green propulsion systems, space technologies, and cybersecurity. These partnerships help de-risk investments and accelerate go-to-market timelines.
5. Growing Institutional Interest
Institutional investors—once hesitant—are showing renewed interest. Sovereign wealth funds, pension funds, and insurance groups are allocating capital to defence-focused funds or acquiring stakes in specialised firms. The rationale? Strong returns, geopolitical relevance, and alignment with national interests.
Defence is no longer a sector whispered about in closed-door conversations. It is becoming a strategic and socially validated investment space, where innovation, security, and sustainability intersect. For private equity, this represents a rare opportunity: to deliver value while contributing to a safer, more stable world.
At PhoenixRevoco, we continue to track these developments closely and engage with investors and founders navigating this evolving landscape.
Until next time,
The PhoenixRevoco Team
phoenixrevoco.com
