How Is Private Equity Shaping Investment and Exit Trends in Defence Tech?

Global defence spending reached US$2.44 trillion in 2023, representing the largest year-on-year real-terms increase in recent decades, according to SIPRI, an Independent global defence research institute. Over the same period, private capital commitments into defence and government-focused technology reached multi-year highs. PitchBook data shows sustained growth in sponsor-backed deals across autonomy, cyber defence, secure communications, space systems, and electronic warfare software. 

This convergence of sovereign urgency and financial capital has structurally reshaped defence technology investing. Defence tech is no longer peripheral to private equity portfolios. It has become a strategic allocation where exit certainty, regulatory exposure, and geopolitical alignment directly influence valuation and fund-level outcomes. 

Capital Shifts to Capability Depth

 

The defining investment shift in defence technology is the reallocation of capital away from monolithic platforms toward narrowly defined, mission-critical capabilities. Private equity sponsors are prioritising assets embedded deep within defence value chains, including sensing, data fusion, secure networking, and software-defined command systems. These assets benefit from repeat procurement, faster upgrade cycles, and integration across multiple platforms. 

US-based Anduril Industries exemplifies this shift. Focused on autonomous surveillance towers, counter-drone systems, and AI-enabled command software, Anduril scaled from early-stage contracts to multi-billion-dollar valuation territory by aligning tightly with US Department of Defence priorities while maintaining commercial manufacturing agility. Similarly, Germany-headquartered Helsing has secured long-term European defence contracts for AI-enabled battlefield software, demonstrating how capability-focused models can scale across allied procurement frameworks without reliance on legacy primes. 

Strategic Exits Dominate

 

While capital inflows remain strong, exit pathways in defence tech have narrowed. Public listings remain rare due to exposure to classified revenue, customer concentration risk, and export control complexity. Instead, exits are increasingly dominated by strategic acquisitions, particularly by incumbent primes seeking accelerated access to next-generation capabilities. 

Lockheed Martin’s US$4.7 billion acquisition of Aerojet Rocketdyne in 2023 highlighted this dynamic. Despite extensive regulatory scrutiny, propulsion and missile systems were deemed strategically indispensable, underscoring that assets aligned with core defence priorities continue to command premium outcomes. In the UK, Advent International’s sale of Ultra Electronics to Cobham reinforced the view that electronic warfare and secure communications platforms remain highly attractive to strategic buyers when regulatory risk is proactively managed. 

For sponsors, this has reinforced the importance of exit readiness well before formal processes begin. Portfolio companies are increasingly structured around exposure to allied governments, multi-year backlog visibility, and compliance maturity to preserve strategic optionality. 

Regulation Extends Holding Periods

 

Heightened foreign investment controls are now a structural feature of defence tech investing. Mechanisms such as CFIUS in the United States and the EU FDI Screening Regulation have materially altered deal timelines and buyer universes, particularly for cross-border exits. As a result, average holding periods for defence-related assets have lengthened relative to traditional industrial or software investments. 

This has forced private equity firms to recalibrate underwriting assumptions. Value creation plans increasingly emphasise operational resilience, domestic supply chain security, and revenue diversification across NATO-aligned customers. Mid-scale defence technology operators that demonstrate sovereign trust, such as Saab-linked electronics suppliers in Scandinavia or secure avionics firms embedded in US and Australian programmes, are consistently outperforming peers on exit valuation despite longer hold durations. 

Secondaries Reopen Liquidity

 

As strategic exits face regulatory friction, secondary transactions are reasserting themselves as a viable liquidity pathway. Large-cap sponsors with extended fund lives and defence-specialist operating teams are acquiring assets from earlier-stage funds, particularly in aerospace subsystems, secure electronics manufacturing, and mission-critical services. 

US-listed Parsons Corporation illustrates this evolving ownership dynamic. Operating across defence engineering, cyber intelligence, and space systems, Parsons has seen both sponsor ownership and public market participation, enabling staged liquidity while maintaining strategic continuity. These secondary pathways are not merely financial stopgaps; they reflect a market where asset maturity and regulatory clearance matter more than speed to exit. 

Dual-Use Drives Valuations  

The most substantial valuation premiums in defence tech continue to accrue to companies with credible dual-use positioning. Assets that serve both military and commercial markets benefit from diversified revenue, broader buyer pools, and reduced dependence on annual defence budgets. 

Space systems provide the clearest example. SpaceX remains privately held, but its Starshield programme for US defence customers leverages the commercial scale of Starlink infrastructure, fundamentally altering how defence communications assets are valued. In cybersecurity, Israeli firms with roots in military intelligence units but substantial enterprise customer bases consistently achieve higher multiples due to their commercial scalability alongside defence credibility. 

Private equity sponsors are increasingly structuring investments to preserve and expand this dual-use optionality, recognising its impact on both downside protection and exit flexibility. 

Europe Advances, Capital Lags  

European defence technology has accelerated since 2022, supported by rearmament programmes and increased NATO coordination. Companies such as Thales and Saab have intensified acquisition activity in cyber, sensors, and digital command systems, often targeting sponsor-backed suppliers to close capability gaps. 

However, private equity capital deployment in Europe remains fragmented and smaller in scale compared to the United States. This limits the speed at which European defence tech companies can scale independently, creating opportunities for transatlantic sponsor platforms but also increasing execution risk. Funds that underestimate the political and regulatory heterogeneity of European defence markets continue to face delayed exits and valuation compression. 

Patience Becomes a Return Driver  

Private equity investment in defence technology has entered a structurally different phase. Capital is abundant, but exits are selective. Regulatory scrutiny is persistent, but strategic relevance is rewarded. The funds that outperform will be those that integrate geopolitical analysis into core investment decision-making rather than treating it as a risk overlay. 

Over the next cycle, defence tech will remain one of the few sectors where demand visibility is anchored in national priority rather than consumer sentiment or macro cycles. For boards and investment committees, the implication is clear. Defence technology is no longer about tactical exposure. It is about long-term positioning in an asset class where strategic patience, policy fluency, and operational depth will determine competitive advantage and capital outcomes.