Europe’s defense industry is entering a decade of rising investment and robust M&A as the continent commits to greater self-sufficiency. Defense spending is up sharply across the continent, fueled by growing geopolitical threats, multinational initiatives such as ReArm Europe, and a 5%-of-GDP pledge at the Hague Summit. Also, European public sentiment toward defense spending, which has historically lagged the US, is now equally supportive (see Figure 1).

Figure 1

Despite Europe’s renewed commitment, achieving its ambitious goals will require major increases in industrial investment, scale, and productivity. Companies and private investors will have a major hand in shaping the continent’s defense future—along with a new generation of industry leaders. The billions of euros they invest over the coming decade could produce the “Airbus of land systems” or the “MBDA of intelligence surveillance and reconnaissance.”

No question, European vows to raise defense spending over the past 30 years have routinely fallen short. Few countries met NATO’s initial target of 2% of GDP following the Cold War. On average, EU nations spent only two-thirds of that target between 2010 and 2020. Strained budgets, mixed public sentiment on defense spending, and reliance on the US and NATO security guarantees deterred governments from spending more.

What’s changed? Security threats are more urgent, most notably the war in Ukraine, which has exposed gaps in European industrial capacity and capability. There are also increasing concerns about the strength of international alliances and reliance on non-European equipment. European nations want greater control over their supply chains and defense platforms, especially in areas such as electronics, intelligence, and software. Finally, the accelerating pace of technological disruption has made innovation and capacity growth even more urgent.

Investments are no longer about patchwork procurement; they are about shaping the future industrial architecture of European defense. One example is the “drone wall” coalition of six eastern and northern European states developing a joint unmanned defense capability. Another is Project Bromo, a joint venture uniting Airbus, Thales, and Leonardo to create a European champion in the growing space sector. Europe is embarking on a once-in-a-generation military recapitalization, and companies that sit on the sidelines are likely to see their competitiveness erode.

Private equity is surging

After a decade of limited activity, private equity (PE) is investing more heavily in defense. Deal activity in Europe is up significantly, with many general partners (GPs) and limited partners (LPs) now considering defense as an attractive and viable investment compared with other industrial segments. PE deal activity in European defense over the past five years has increased nearly 100% on average when compared with the prior five years.

Several structural shifts are galvanizing renewed interest. The European Investment Bank, for example, has tripled its loan guarantee program. And the EU’s SAFE defense fund is offering long-term, low-cost financing. Governments are increasing their investments in core defense, targeting 3.5% of GDP, and supporting critical infrastructure, targeting an additional 1.5% of GDP. In this environment, LPs have shifted their views on defense investing. What was once a segment to be avoided is now becoming a financial and social imperative.

That shifting investment landscape plays to private equity’s strengths—increasing scale, improving productivity, and unlocking capacity. Promising areas for investment include carve-outs of noncore or orphaned defense businesses that require increased focus; midcap companies that need to scale; and infrastructure investments, including within the supply chain.

Europe’s Anduril moment?

In the US, venture-backed start-ups such as Anduril are beginning to disrupt the defense industry. Europe may be next.

In many ways, Europe has an even greater need for defense tech disruption than the US, which already has experienced a sharp rise in investments. Budget constraints across the continent and multiple border threats create an urgent demand for cheaper, better, faster military equipment. Europe’s defense needs skew more toward shorter-range and land-based systems. At the same time, most of Europe’s prime defense contractors are subscale, which creates an even bigger opportunity for low-cost, disruptive solutions. The war in Ukraine has provided a window into what some of these next-generation technologies will be.

Although US venture capital funding in defense outstrips Europe’s by nearly six to one, investment across the EU is growing fast, and average deal volume has nearly quadrupled over the past five years when compared with the prior five years (see Figure 2).

A new cohort of well-capitalized start-ups includes Helsing in AI and autonomous hardware, Satlantis in space-based imaging and analytics, and Quantum Systems in drone-based aerial intelligence. As in the US, these companies face many challenges on the path to high-rate production and scale. The most successful will engage in partnerships with commercial companies, software providers, and, in some cases, traditional prime contractors that can better commercialize new technologies.

Corporate deals and partnerships

Corporate M&A is playing a central role in reshaping Europe’s defense landscape—one that remains highly fragmented across borders, domains, and technologies. Europe’s major primes are on the move. Companies such as Hensoldt, Rheinmetall, and Leonardo are using rising stock valuations to acquire capabilities and extend their reach. The STOXX European aerospace and defense index rose 74% in 2025, creating equity that could be used to fuel future deals.

Europe has several paths to building its defense capabilities: national champions; intra-European mergers and joint ventures such as KNDS, Iveco, Eutelsat, and Project Bromo; and transatlantic or transpacific purchasing and partnerships involving non-European primes. The path is likely to differ across market segments. Defense segments with limited existing infrastructure, high capital intensity, gaps in intellectual property, and a need for interoperability will likely require non-European partnerships. Other segments will be addressed by national or pan-European companies (see Figure 3).

Strategic playbooks

Platform consolidation, joint ventures, and foreign alliances will be key to strengthening Europe’s defense industrial base. M&A in defense electronics, naval systems, and missile propulsion will bring scale and improved profitability to these highly fragmented sectors. Joint ventures are likely to mature into deeper integrations or full mergers. Today’s pan-European consortia will evolve into full corporate combinations. And partnerships with US and Asian primes that build a strong presence will enhance European access to emerging technologies and systems.

These powerful vectors for change—bold disrupters, sovereign capital, and scaled incumbents—will redefine the European defense landscape. Firms that compete effectively will follow key guidelines for success.

Private equity investors: Winning firms will invest in achieving scale, improving productivity, expanding capacity, and improving underperforming businesses. High-potential areas for investment include:

• Tier 2 and Tier 3 suppliers with underutilized capacity;
• infrastructure, including transportation, energy, defense installations, and cybersecurity;
• sustainment assets, including distribution and maintenance repair and overhaul; and
• defense electronics and space, especially sensors, radio frequency technology, and radar.

Venture capital firms and disrupters: Successful investors and start-ups will place bets in areas in which primes lack risk appetite or sufficient speed. They will be apt at identifying dual-use opportunities from off-the-shelf capabilities. High-potential areas for investment include:

• autonomous drone fleets and counter-drone systems;
• integrated air and missile defense;
• cyber capabilities across battlefield and infrastructure layers; and
• space capabilities (launch, Earth observation analytics, in-orbit services)—also mission software for intelligence, surveillance, and reconnaissance as well as autonomy.

Defense incumbents: Leaders will use disciplined M&A to build scale and volume, especially across borders. Strategic imperatives include:

• expanding systems integration capabilities to meet multidomain program requirements; and
• creating segment leaders that offer the best technologies at the lowest price, especially in land systems, air defense, and space.

As today’s investments forge tomorrow’s leaders, the strategic reshaping of the European security industry will favor the bold.