Private Equity in Defense Technology—Changing the Face of National Security

Global geopolitical instability—from conflicts in Eastern Europe to the Middle East—is accelerating investment in defense technology. Once the exclusive domain of federal governments and select contractors, the future of defense is now being shaped by a growing wave of private equity and commercial innovation.

A country’s commitment to defense technology plays a critical role in advancing national security and maintaining military superiority. By investing in cutting-edge innovations such as AI, robotics, drone systems, cybersecurity, and hypersonic missiles, nations can strengthen their defense capabilities, deter potential adversaries, and adapt to rapidly evolving threats like cyber warfare and autonomous weapons.

Amid growing geopolitical instability, nations are prioritizing national security like never before. Defense spending has increased every year in the past decade, totaling $2.7 trillion in 2024. In fact, the 9.4% gain in 2024 marked the largest advance since 1988.1

World Military Expenditure By Region, 1988-2024

Source: SIPRI

Spending amounts going forward look to eclipse earlier budgets. President Donald J. Trump’s proposed 2026 budget requests over $1 trillion for the defense department, the largest military budget in history.2 That, combined with a commitment by NATO members to increase their defense spending to a targeted 5% of GDP by 2035, is expected to fuel significant investment in next-generation technologies—creating both opportunities and challenges for defense contractors and private investors alike.

The Department of Defense's (DOD) push for greater private sector involvement signals a strategic shift toward commercial innovation by inviting private equity in defense technology. The DoD aims to accelerate the development and deployment of advanced capabilities—such as AI-driven systems, cybersecurity solutions, and autonomous platforms—ensuring the U.S. stays ahead of emerging threats and technological rivals.

This collaboration—Small Business Investment Company Critical Technologies Initiative (SBICCT)—bridges the gap between traditional defense contractors and tech innovators, fostering a more agile and future-ready defense ecosystem—while creating direct channels for private equity and venture capital to fund emerging defense technologies.

By enabling institutional capital to flow into early-stage and growth-stage companies developing critical defense capabilities, the initiative strengthens the innovation pipeline and ensures that national security priorities align with private market incentives.

NATO’s €1 billion Innovation Fund—the first multinational VC initiative focused on defense tech—made its initial deep-tech investments in June 2024. Meanwhile, the U.S. allocated over $150 billion to R&D and testing in FY2024, a 55% increase over five years, supporting agencies like the Defense Innovation Unit and Office of Strategic Capital. Globally, countries are building new institutional frameworks to boost defense innovation, including Japan’s Defense Innovation Technology Institute and the UK’s Defense Innovation Initiative, tied to plans for increased defense spending.3

For decades, the defense sector was dominated by a handful of large, established contractors with long procurement cycles and deep ties to government agencies. Innovation was often slow-moving and centralized, limiting opportunities for smaller, more agile players. Today, that landscape is shifting as governments increasingly turn to startups and private capital to drive faster, more cost-effective solutions, opening the door for venture-backed firms to play a meaningful role in national security.

As defense priorities evolve, new opportunities for private equity in defense technology are emerging. Private equity and venture capital firms can drive impact in two critical areas of the defense sector.

• Early-stage innovators can accelerate innovation, reduce time to market, and unlock transformative advances in capability and efficiency—particularly in lowering the "cost per effect" of battlefield outcomes.
• More established companies can boost production capacity, improve delivery timelines, and reduce unit costs, enabling them to meet growing defense demands more effectively.

Source: Pitchbook, indexed to 2014 levels

These private equity and venture capital firms are driving a broad modernization of defense technology by investing across key areas such as AI and data infrastructure, with startups improving access to emerging technology and advanced cybersecurity solutions.

One example is Anduril Industries, a specialist in AI-enabled systems, including autonomous weapon systems. Anduril was the largest PE/VC defense investment in 2024, with a raise of $1.5 billion.4 The firm is already the recipient of military contracts in both the US and the UK.

The war in Ukraine demonstrates how rapidly deployed, tech-enabled solutions can reshape modern warfare. Ukraine’s reliance on commercially developed technologies—such as drones, satellite communications, cybersecurity tools, and AI-powered surveillance—has demonstrated the strategic value of agile, private-sector innovation in real-time conflict. These technologies, many backed by private equity and venture capital, have not only enhanced Ukraine’s battlefield capabilities but also underscored the limitations of traditional defense procurement cycles.

The odds against Ukraine have resulted in a growing trend of defense tech startups across the country, and led to a surge in production of surveillance and attack drones.5 Unmanned aerial vehicles (UAVs) have been a cornerstone of Ukraine's defense, used extensively for reconnaissance, targeting, and attack missions. Given Ukraine’s superiority in drone technology, U.S. startups are pairing with Ukrainian drone makers, providing an opportunity for venture capital and private equity in defense technology.6

The trend of private equity in defense technology has continued in 2025, reaching $4.27 billion between January 1 and March 16. This rapid acceleration underscores growing institutional appetite, with Q1 2025 already approaching full-year 2024 totals—a sign of sustained momentum in the sector.7

PE/VC-Backed Investments in Aerospace and Defense 2022-2025

Source: S&P Global Market Intelligence

Increased defense technology is spreading across the globe. 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.

As international conflicts escalate, governments are rewriting their military budgets. The U.S. Department of Defense has requested billions in funding for FY2025, Germany has pledged €100 billion to overhaul its military, and Japan is doubling its defense spending.

But this wave of modernization isn’t possible without commercial technologies or the capital to scale them. AI-enabled platforms, dual-use space systems, autonomous vehicles, quantum sensing are the focus of urgent procurement efforts, startup acceleration programs, and a growing appetite from institutional investors.

Sources:

1. Unprecedented rise in global military expenditure as European and Middle East spending surges | SIPRI
2. President Trump’s FY2026 defense budget: continuing priorities, new missions.
3. Creating a modernized defense technology frontier | McKinsey
4. PE defense investment surges in early 2025 as geopolitics drives change | S&P Global
5. Ukraine’s innovative defense tech sector is the country’s trump card - Atlantic Council
6. America Turns to Ukraine to Build Better Drones - WSJ
7. PE defense investment surges in early 2025 as geopolitics drives change | S&P Global