Navigating Europe’s defense investment landscape: Key takeaways

Europe’s defense sector is undergoing a profound transformation driven by heightened geopolitical tensions, evolving security requirements, and unprecedented public investment commitments. The commitment by European nations to increase defense-related spending to 5% of GDP is creating one of the largest industrial investment opportunities in recent decades, extending beyond military equipment into critical infrastructure, manufacturing capacity, logistics, and technology development.

In our latest webinar, we took a look at the developments and trends driving progress and innovation in the sector, with a particular eye to what is most note-worthy and interesting for investors.

Read on for our key takeaways:

Defense investment is accelerating

European governments are making unprecedented long-term commitments to defense and security spending, creating opportunities across manufacturing, critical infrastructure and advanced technologies. Initiatives such as the ReArm Europe Plan are designed to strengthen Europe’s defense industrial base and strategic resilience, while recent conflicts have reinforced the importance of resilient supply chains and scalable production.

Key growth areas include:

• Artificial intelligence and autonomous systems.
• Advanced manufacturing, software and space technologies.
• Critical infrastructure and supply chain resilience.

Innovation is reshaping the market

Rapid technological advancement is attracting significant venture capital and private equity investment, particularly in AI, autonomous systems and software-enabled capabilities. Established defense contractors are increasingly partnering with emerging technology companies through joint ventures, strategic partnerships and acquisitions to combine innovation with industrial scale. As discussed during the webinar, consolidation is expected to accelerate as companies seek to strengthen capabilities and respond to evolving procurement requirements.

Regulation is evolving alongside investment

Europe is adapting its regulatory framework to strengthen strategic autonomy and defense readiness. Recent initiatives, including the Defence Readiness Omnibus package and Defence Readiness Roadmap 2030, demonstrate a broader shift towards supporting industrial resilience and European defense capabilities. Competition policy is also evolving, with the European Commission’s draft revised EU Merger Guidelines recognising that scale-enhancing transactions may contribute to defense readiness and security of supply. As a result, consolidation is becoming an increasingly important feature of the sector.

National security is becoming central to transactions

Foreign investment screening is playing an increasingly significant role in cross-border transactions involving defense, dual-use technologies and critical infrastructure. Proposed reforms to the EU Foreign Direct Investment Screening Regulation would expand mandatory screening across strategic sectors, increase scrutiny of indirect ownership structures and strengthen cooperation between Member States. Regulatory approvals are therefore becoming an increasingly important consideration for transaction timing and execution.

Export controls are now a strategic investment issue

Export controls and sanctions have evolved beyond traditional compliance obligations and increasingly influence valuation, transaction timelines, supply chain decisions and exit opportunities. Investors should assess export controls alongside foreign investment screening and competition issues from the outset, particularly where businesses develop or use strategic technologies. Regulators are also placing greater emphasis on software, technical know-how and technology transfers, rather than physical exports alone.

Successful due diligence should consider:

• The technologies and products subject to export controls, including dual-use items.
• The interaction between EU, UK and US regulatory regimes.
• Licensing requirements that could affect future operations or exit options.

Early planning creates value

Competition law, foreign investment screening, export controls and sanctions increasingly operate together around the same strategic technologies. Businesses with robust governance, licensing strategies and compliance frameworks are better positioned to manage regulatory scrutiny, reduce execution risk and maximise long-term value. An integrated approach to regulatory due diligence can improve deal certainty and help avoid costly delays later in the transaction process.

Conclusion

As Europe continues to strengthen its defense capabilities, investors will need to balance significant commercial opportunities with an increasingly complex regulatory environment. Those that incorporate regulatory considerations into investment planning from the outset will be best placed to execute successful transactions and create long-term value.