Key Takeaways
- • Private equity deal value in aerospace and defense reached a record USD 55.6 billion in 2025, with PE and VC-backed investments hitting USD 17.7 billion by mid-October 2025, signaling sustained momentum in the sector.
- • U.S. defense budget increased 7% to USD 962 billion for 2026, with proposals to raise spending to USD 1.5 trillion by 2027; NATO members have committed to allocating 5% of GDP to defense, underpinning structural demand.
- • European defense expansion is driving a structural shift in private capital allocation, with EU order backlogs at major defense contractors rising approximately 15%, creating capacity constraints that private investors are positioned to address.
- • Private capital is mobilizing to close investment gaps in defense technology, dual-use assets, and production capacity expansion across both U.S. and European markets, supported by public funding mechanisms such as the EU's Security Action for Europe (SAFE) program.
- • The Stoxx Europe Aerospace and Defense index has more than tripled since 2022, reflecting sustained institutional investor confidence and valuation expansion in the sector alongside record PE activity.
Summary
Private equity investment in defense and aerospace has entered a new structural cycle, driven by geopolitical volatility and heightened government commitment to defense spending and industrial resilience. In 2025, PE deal value in the sector reached USD 55.6 billion, a record level that reflects a fundamental shift in investor appetite for defense assets once considered constrained by regulatory and political barriers. By mid-October 2025, PE and VC dealmaking had already accumulated USD 17.7 billion, indicating sustained momentum heading into 2026.
Government spending patterns are providing the foundational support for this investment wave. The U.S. defense budget rose 7% to USD 962 billion for 2026, with policy proposals suggesting increases to USD 1.5 trillion by 2027. More significantly, NATO members have pledged to allocate 5% of their GDP to defense spending—a historic commitment that extends visibility for defense contractors and suppliers. European governments, motivated by strategic autonomy concerns, are driving particularly aggressive spending expansion, with research from Carlyle indicating that European defense and infrastructure spending could reach EUR 14 trillion over the next decade.
The European market is experiencing acute supply-side constraints that create commercial opportunities for private capital. Order backlogs at Europe's largest defense companies have risen approximately 15%, creating immediate pressure to expand production capacity. This supply gap is being addressed through coordinated public-private mechanisms, including the EU's Security Action for Europe (SAFE) funding program, which explicitly uses public capital to mobilize private investment as a core strategy for scaling industrial output. This represents a deliberate policy shift toward leveraging private sector efficiency and capital to meet government procurement timelines.
The public market has validated the underlying opportunity set. The Stoxx Europe Aerospace and Defense index has more than tripled since 2022, demonstrating sustained institutional confidence in sector valuations and earnings visibility. Private capital providers are responding by loosening historic constraints on defense investing, recognizing that the current cycle is driven by structural geopolitical realignment rather than temporary cyclical demand. The combination of record government budgets, production capacity gaps, policy support mechanisms, and multi-year order visibility has created a rare alignment of favorable conditions for defense and aerospace private equity deployment.
Government spending patterns are providing the foundational support for this investment wave. The U.S. defense budget rose 7% to USD 962 billion for 2026, with policy proposals suggesting increases to USD 1.5 trillion by 2027. More significantly, NATO members have pledged to allocate 5% of their GDP to defense spending—a historic commitment that extends visibility for defense contractors and suppliers. European governments, motivated by strategic autonomy concerns, are driving particularly aggressive spending expansion, with research from Carlyle indicating that European defense and infrastructure spending could reach EUR 14 trillion over the next decade.
The European market is experiencing acute supply-side constraints that create commercial opportunities for private capital. Order backlogs at Europe's largest defense companies have risen approximately 15%, creating immediate pressure to expand production capacity. This supply gap is being addressed through coordinated public-private mechanisms, including the EU's Security Action for Europe (SAFE) funding program, which explicitly uses public capital to mobilize private investment as a core strategy for scaling industrial output. This represents a deliberate policy shift toward leveraging private sector efficiency and capital to meet government procurement timelines.
The public market has validated the underlying opportunity set. The Stoxx Europe Aerospace and Defense index has more than tripled since 2022, demonstrating sustained institutional confidence in sector valuations and earnings visibility. Private capital providers are responding by loosening historic constraints on defense investing, recognizing that the current cycle is driven by structural geopolitical realignment rather than temporary cyclical demand. The combination of record government budgets, production capacity gaps, policy support mechanisms, and multi-year order visibility has created a rare alignment of favorable conditions for defense and aerospace private equity deployment.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.