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With war back on the European continent, raising Europe’s defense effort to a level comparable to that of the United States (around 3.5% of GDP) has become a strategic emergency. NATO now has a very concrete objective. In the words of the Declaration of its June 2025 summit in The Hague:
“Allies agree that this 5% commitment will comprise two essential categories of defence investment. Allies will allocate at least 3.5% of GDP annually based on the agreed definition of NATO defence expenditure by 2035 to resource core defence… And Allies will account for up to 1.5% of GDP annually to inter alia protect our critical infrastructure, defend our networks, ensure our civil preparedness and resilience, unleash innovation, and strengthen our defence industrial base.”
Such a level implies a paradigm shift for public finances, but also for capital markets. Private Equity, as a long-term transformation industry, can and should play a key role in this ramp-up.
1. Reconciling ESG and defense: a strategic imperative
The main obstacle to equity investment in the defense sector today is the way it is perceived from an ESG standpoint, particularly among large institutional investors. Many mandates explicitly prohibit any investment in companies that produce military equipment or are linked to security.
Yet this dogmatic reading is now outdated. Defense, in the broad sense, is a precondition for all ESG objectives:
- without security, there is no sustainable development;
- without societal resilience, there is no social justice and no viable climate transition;
- without cybersecurity, there is no protection of personal data and no digital sovereignty.
A new approach is therefore urgently needed:
- Revise the EU green taxonomy to introduce a specific “responsible defense” category.
- Draw a clear distinction between spending on national security, cybersecurity and dual-use technologies, and purely offensive industries.
- Allow sustainability-labeled funds to invest in defense companies that meet criteria of ethical oversight, compliance with international humanitarian law and transparency.
Several countries are already pushing for this change in Brussels. In Germany, the BDI (the federation of German industry) argues for broader compatibility between ESG and the defense industry. In France, France Invest (the French Private Equity association) and AFEP (the association of large French companies) have put forward similar proposals.
2. Accelerating dual-use innovation and consolidating Europe’s defense industry
Private Equity is an ideal vehicle for financing the growth of dual-use (civil and military) technologies: deeptech, cybersecurity, artificial intelligence, drones, space. It steps in at the growth stages, when capital is scarce and risk is high.
The other challenge is the extreme fragmentation of Europe’s defense industry: more than 2,500 small and medium-sized companies, often isolated, vulnerable and undercapitalized.
Private Equity can build industrial platforms through buy-and-build, professionalize governance and help European champions emerge — companies able to bid for major contracts and compete with the American or Israeli giants. It can become the operational arm of the European defense technological and industrial base (EDTIB).
3. Creating specialized defense funds
Europe has managed to create dedicated vehicles for the energy transition and for infrastructure. Why not for defense?
Funds backed by the European Investment Bank, by national investment programs or by the European Defence Fund could emerge. One can imagine channeling private savings on a large scale, for example with a state guarantee, or with debt guaranteed by Bpifrance (the French public investment bank) to enhance returns. Bpifrance has decided to launch a “Bpifrance Défense” fund with a fundraising target of €450 million.
4. Reindustrializing through “patriotic” LBOs
Private Equity has long been a driver of reindustrialization. In defense, its role could be decisive in strengthening critical supply chains, by taking over strategic small and medium-sized companies that are fragile or undercapitalized.
Industrial LBOs bring capital, improve governance, modernize production facilities, structure growth through acquisitions (buy-and-build) and optimize industrial flows. This is particularly relevant in niche segments — high-precision machining, sensors, optronic components, pyrotechnics — where industrial know-how is strong but the financial structure is weak.
In some cases, the arrival of a Private Equity fund can save a key subcontractor from bankruptcy or from a takeover by a buyer from outside the EU, while preparing it to scale up. This requires patient, sector-focused funds with in-depth knowledge of industrial ecosystems, and access to a capable management team.
5. Taking the long view
The defense cycle does not match the classic five-year horizon of funds (in French). Designing, prototyping, certifying, producing and then maintaining a military system often takes 10 to 15 years. That long horizon fits poorly with the quick-return logic that still prevails in many traditional funds.
Yet Private Equity has begun to change: evergreen funds, long-dated vehicles (10 years or more) and continuation funds make it possible to align holding periods with industrial reality.
This type of vehicle could be designed specifically for defense, in coordination with national objectives, with an extended investment horizon and a clear regulatory framework for the alignment of interests.
The key: break with the dogma of the “quick exit” and embrace a stewardship approach to technological sovereignty.
