As defense spending rises and geopolitical tensions intensify, private equity firms are investing billions of dollars into defense technology, fueling a surge in investment across the sector.
According to PitchBook data, traditional M&A investors are increasingly backing younger, faster-growing companies in this sector. Private equity growth investments in the defense sector reached $4 billion in the first nine months of 2026, up from $500 million in 2024.
Analysts say that as defense technology companies mature, private equity, debt, and other forms of financing are expected to become increasingly important in bridging the gap between innovation and industrial-scale production, as venture capital alone may not be sufficient to fund corporate expansion.
This trend emerges as geopolitical tensions, wars, and nations' efforts to strengthen their military capabilities are creating opportunities for companies developing products ranging from autonomous drones to missile defense systems and satellite technology.
A survey by the UK law firm White & Case of 250 senior decision-makers at defense companies found that 97% expect their companies to seek large-scale external financing within the next 12 months.
Daniel Turgel, partner at White & Case, told CNBC: “Private capital is now playing a critical role in financing defense technology companies.”
Turgel said that private equity and venture capital firms, sovereign wealth funds, and family offices are all seeking to invest more capital into the industry, marking a significant shift compared to just a few years ago, when many investors were cautious or restricted from entering the space.
A new class of investors
The increased allocation of private equity to defense technology is accompanied by a surge in venture capital investment in the same sector. According to a report released in October by Dealroom and Resilience Media, startups in NATO and its allied countries have raised $27.1 billion as of September, nearly double the total amount raised for the entire year of 2025.
Venture capital traditionally supports young, high-growth startups, while private equity focuses more on more mature companies; however, this distinction is becoming increasingly blurred as some private equity funds shift toward growth-stage investments.
PitchBook’s Chief Analyst for the Industrial Sector, Jim Corridore, told CNBC: “Private equity firms are investing more capital into the defense sector, and they are changing their investment approach.”
According to PitchBook data, the number of defense private equity growth transactions increased from 15 in 2024 to 31 in 2025, reaching 48 in the first nine months of 2026.
These investments accounted for 41% of defense PE transaction value in 2026, compared to just 3% in 2024.
Corridore said, "In my view, PE is entering the territory once dominated by VC."
In March, private equity firm Advent International announced a commitment of up to $1 billion toward next-generation defense technologies, including investments in autonomous systems developers Shield AI and Saronic.
Shonnel Malani, Managing Partner at Advent and Global Head of Aerospace & Defense, told CNBC that the company has deployed about three-quarters of the committed funds.
Malani said that Advent's expansion into younger defense technology companies is a natural extension of its existing investments in established defense businesses.
He said that Advent supports companies it is familiar with and prioritizes mature technologies that have been validated by customers and can meet specific military requirements, rather than focusing primarily on financial metrics.
Bubble concerns
Although the influx of private capital is accelerating defense technology innovation, it has also raised concerns about overvaluation and speculative investments.
Malani said that the valuation of defense technology companies is increasingly based on their technological prospects rather than revenue, profits, or order books, creating significant room for interpretation of their true value.
He added that if some companies fail to translate their technological prospects into commercial success, a market correction may be inevitable.
When asked if an investment bubble could occur, he said, "I believe there is a very high risk."
Malani said there are “a lot of bubbles” in the system and added that Advent has walked away from several potential investments because valuations became “absurd.”
PitchBook’s Corridore countered the notion that the industry is overheated, but he expects investment interest to continue growing.
He said, "Budgets are increasing, the military has consumed large quantities of ammunition, and new drone and counter-drone technologies are emerging. All of this provides investors with the stable revenue needed for long-term PE investments."
Other private equity investors are closer to traditional merger and acquisition strategies.
Lionel Mestre, a partner at French private equity firm Weinberg Capital Partners, told CNBC that the company remains focused on defense companies that are profitable, have mature products, customers, and positive cash flow, rather than early-stage startups.
He said that the valuations of smaller but more established defense suppliers that Weinberg focuses on have not risen significantly despite increased investor interest.
Mestre believes that the funding opportunity lies in helping to expand manufacturing capacity and consolidate Europe’s fragmented defense supply chain, while the rapidly evolving drone market remains too early for Weinberg’s traditional M&A strategy.
Weinberg’s targeted smaller defense companies need to invest in capacity, employees, working capital, and business operations to meet growing demand.
“This industry must consolidate one way or another,” said Mestre, noting that smaller suppliers need to grow larger and more competitive.
He also noted that European institutional investors' attitude toward defense has changed significantly, especially following Donald Trump's return to the White House and renewed pressure on European nations to increase defense spending.
Will this wave of enthusiasm generate returns?
Malani and Mestre both believe that PE firms have an opportunity to help defense companies scale production by providing not only capital but also industry connections and access to government customers.
Malani said that some startups are rushing to proceed with initial public offerings before they have sufficient operational maturity to become sustainable public companies.
Even with increased investment activity, exits can still be challenging.
According to PitchBook data, since 2021, there have been 504 private equity transactions in the defense sector, but only 101 exits; however, this comparison includes follow-on acquisitions, so it does not directly measure the proportion of investments awaiting exit.
As of September 2026, IPOs accounted for 70% of defense private equity exit values, exposing investors to fluctuating stock market conditions.