Expert Spotlight: Defense Tech’s New Industrial Logic

Europe may be producing more defense innovation than at any point in a generation. Whether it can produce enough of it remains an open question.

The war in Ukraine has accelerated investment in autonomous systems, software, sensors, cyber capabilities, and other technologies reshaping modern warfare. Capital has followed. Venture funding has surged, institutional investors have entered the sector, and defense technology has become one of Europe's fastest-growing investment themes.

Yet the industry's next challenge is increasingly industrial rather than technological.

During Defense Tech Debrief: Growth Capital and M&A, a webinar presented in partnership with Winston Taylor, Paul Thorpe led a discussion with Eva Davis, Hugh Liddell and Andre Turville on the forces reshaping investment and dealmaking across the sector

Their discussion suggested that the most compelling opportunities may not lie in identifying the next defense technology champion. Rather, they may lie in the businesses that can manufacture, maintain, scale, and supply those technologies at speed.

For investors and acquirers, the question is no longer simply which technologies matter. It is whether the industrial base required to support them can keep pace.

An industrial cycle, not a passing trade

Investors appear increasingly convinced that European rearmament represents a multi-year industrial cycle rather than a temporary response to war.

The reasons are familiar. Defense budgets are growing, the security environment remains unsettled, and institutional investors are becoming more comfortable with a sector they once regarded as ethically or commercially difficult. Investors are increasingly underwriting defense businesses as industrial and technology assets, placing greater emphasis on scale, production capacity, and supply-chain resilience.

This is a more exacting test than demonstrating promising technology.

Defense procurement remains slow, even as the technologies being procured advance quickly. A successful trial or initial contract may establish relevance, but it does not necessarily prove that a company can secure repeat orders, manufacture reliably, or earn sustainable returns.

The gap between technological promise and industrial execution is therefore becoming central to valuations.

The opportunity below the platform

Much of the capital entering the sector has concentrated on a relatively small number of conspicuous companies. That has helped create scarcity premiums, but it may also have obscured the opportunity further down the supply chain.

Defense programs depend on specialist motors, control systems, electronics, radar, communications equipment, and other components that rarely receive the same attention as the platforms into which they are fitted. Yet these businesses can occupy more defensible positions.

A supplier that meets exacting production standards, serves several programs, and can expand capacity offers something more durable than exposure to a single platform.

This is particularly relevant in Europe, where specialist engineering expertise remains dispersed among smaller companies, including family-owned businesses approaching succession. Fragmentation creates opportunities for private equity and strategic buyers to build larger suppliers through consolidation and operational improvement.

The proposition is less glamorous than identifying the next “neo-prime”. But it may be more investable.

Sovereignty becomes a financial consideration

The importance of sovereign capability adds another complication. Capital may travel internationally, but trust, procurement, and permission to operate remain substantially local. The ownership and domicile of a defense business can determine which programs it may serve and which technologies it may access or export.

And ownership and domicile can influence market access, future buyer pools, and valuation. For Europe, the issue is not simply whether to accept American capital. The continent continues to face a shortage of scale-up funding, making overseas investment important. Strategic autonomy instead concerns Europe’s ability to produce, maintain and replenish critical capabilities, regardless of where the original capital came from.

Dealmakers must therefore consider whether a proposed change of ownership could impair the commercial position that made the target valuable. An acquisition may trigger national security scrutiny, restrict access to certain customers, or complicate the control of sensitive intellectual property.

These questions cannot sensibly be left until exit. They belong in the original investment case.

Regulation moves from obstacle to asset

The same is true of regulatory preparedness. A defense technology business entering the US faces a dense framework governing foreign ownership, national security, and exports. The UK may provide American investors with a relatively familiar first step into Europe, but it offers no automatic access to the continent’s other markets. Each jurisdiction brings its own procurement rules, security requirements, and expectations around localization.

Poor preparation can delay a deal, reduce competitive tension, or prevent a transaction from closing. Conversely, companies able to map their critical technologies, demonstrate effective controls, and separate sensitive operations can offer buyers greater certainty.

In defense M&A, it can preserve market access and widen the range of credible acquirers. Regulatory readiness is increasingly becoming part of the asset itself.

Dual-use claims face a higher bar

The attraction of dual-use technology is easy to understand. Commercial customers can provide revenue while a business waits for government procurement decisions, reducing its dependence on public budgets.

But investors are becoming less willing to accept dual-use potential at face value. A technology tested in a demanding national security environment may have considerable civilian value, particularly in cyber security, communications, autonomy, and sensing. Investors increasingly want evidence of commercial traction rather than theoretical applications.

Execution also matters. Defense and civilian customers buy differently, and attempting to pursue several markets at once can stretch an early-stage company. The more credible strategy is often sequential: use demanding customers to validate and refine the product, then move selectively into adjacent markets.

So, dual-use works best when it is a commercial record, not a presentation slide.

Valuations meet procurement reality

None of this has prevented valuations from rising sharply. Scarcity helps explain why. Few companies combine differentiated technology, funded demand, qualified manufacturing capacity, and access to strategically important programs. Those that do can attract intense competition.

But scarcity is not the same as scalability. Some valuations assume that emerging businesses will become major platform providers, despite the long path from technical validation to repeat orders and reliable production. That path may require several more funding rounds, leaving companies exposed if capital becomes more selective.

Defense remains subject to the same investment disciplines as any other sector. Procurement risk, customer concentration, and working-capital demands remain stubbornly conventional.

The next defense M&A thesis

The next phase of defense M&A may be less about backing the most visible technologies and more about building the industrial foundations that allow them to scale.

Private equity is likely to play a growing role through supplier consolidation, capacity expansion, and cross-border roll-ups. Some established primes will acquire new capabilities. New strategic suppliers, and perhaps even new primes, may emerge.

For dealmakers, the most attractive assets may not be those attracting the highest valuations today. They may be the businesses that sit deep within the supply chain, navigate complex regulatory environments, and can reliably turn strategic urgency into industrial output when demand arrives.

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