PE defense investment surges in early 2025 as geopolitics drives change

Private equity investment in defense swelled in early 2025, even as the investment landscape is quickly shifting in both the US and Europe.

The announced value of private equity- and venture capital-backed investments in aerospace and defense between Jan. 1 and March 16 totaled $4.27 billion globally, nearly equaling the $4.31 billion invested in such deals in all of 2024, according to S&P Global Market Intelligence data.

Recent policy decisions are changing the field of play for private equity defense investors. Under President Donald Trump, the US is refocusing its defense priorities, while European countries are getting serious about boosting military budgets, said Erik Tonsfeldt, a senior manager in the private equity practice at consultancy West Monroe.

"European defense investment, that's probably going to be the next arena," Tonsfeldt said.

Investments target North America

For now, private equity defense investments are heavily weighted toward North America.

The US and Canada have absorbed 83% of all private equity- and venture capital-backed investment in aerospace and defense since 2020, including all the deals announced or completed in 2025 through March 16, according to Market Intelligence data. Europe's share of global private investment in the sector over that same period was just 12%.

The 10 largest private equity- or venture capital-backed investments in aerospace and defense since Jan. 1, 2024, all targeted North American businesses, including the largest deal of that period: Berkshire Partners LLC and Warburg Pincus LLC's $2.9 billion bid to privatize aircraft systems and components business Triumph Group Inc., announced in February.

Change in Europe

Private equity may soon see more opportunities to invest as Europe increases defense spending against the background of the Russia-Ukraine war and the US pullback as the primary provider of European defense, Tonsfeldt said.

Earlier this month, the European Commission proposed a $158 billion fund to boost defense spending. In Germany, lawmakers on March 18 approved a €500 billion infrastructure and defense spending package backed by Friedrich Merz, who is set to serve as the country's next chancellor.

Expectations of higher military spending by European governments have already bolstered the performance of European defense stocks.

The Russia-Ukraine war has highlighted the battlefield potential of cheap, off-the-shelf military technology and fueled the rise of new, defense-focused technology companies — like autonomous weapons maker Anduril Industries Inc. — which are challenging the dominance of the US military's traditional prime contractors.

"Europe is going to have to do something similar," Tonsfeldt said.

US adjusts priorities

Change is also coming to the US. The Department of Defense aims to shorten a lengthy procurement process for new defense tech that can be so difficult for new suppliers to navigate and has been dubbed the "valley of death," according to the first National Defense Industrial Strategy, released in January 2024.

"Shrinking that procurement cycle will help a lot more businesses come into market," said Edward Crawford, co-founder and co-CEO of Coltala Holdings LLC. The private equity firm made its first aerospace and defense investment in February, acquiring aircraft maintenance, repair and overhaul business Aeroparts Group LLC, now known as Coltala Aeroparts LLC.

"There are a lot of smaller businesses that either run out of money or they get a contract that they can't deliver because it takes too much time, there's too much red tape," Crawford said.

More change arrived in February, when Defense Secretary Pete Hegseth ordered the department to plan on trimming costs while reorienting spending to Trump priorities, including an Israel-style "Golden Dome" missile-defense shield. The pivot was "huge" for defense investors, Tonsfeldt said.

"Prior to this time period, we saw a lot of transactions supporting programs that private equity firms thought had a lot of stickiness and staying power, with large program offices at the defense department. What they got this last month was strategic redirection," he said.

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That redirection highlights a challenge for private equity defense investors.

Consulting firm Bain & Co. noted in a December 2024 brief that "there are relatively few examples of scale private equity investments that primarily serve defense markets," adding that the largest deals tend to target businesses with strong commercial or civilian customer bases.

Crawford said overlapping exposure to military and commercial markets was important for private equity investors because it makes defense industry portfolio companies more resilient in the face of demand cycles driven by government contracts.

"If you're entirely defense, you're going to have to ride through some cycles, and that can be difficult for you," Crawford said.