Private capital is reshaping the global defence technology landscape, with venture capital and private markets driving innovation in drones, AI-enabled systems, cybersecurity, and dual-use applications. The United States remains the epicentre of this transformation, but Europe is rapidly catching up, buoyed by NATO-backed policies, rising defence budgets, and EU incentives like the Critical Raw Materials Act.
According to Morningstar’s analysis of PitchBook data, startups specialising in AI-driven unmanned systems, cyber resilience, and modular solutions—such as Helsing, Anduril, and AeroVironment—are gaining significant traction. These companies are not only challenging traditional defence primes in niche markets but are also benefiting from strategic acquisitions by larger contractors eager to integrate cutting-edge innovations.
The Ukraine-Russia war has accelerated this trend, with a surge in “bolt-on” acquisitions since 2022. Big defence firms are increasingly acquiring tech startups to secure access to advanced technologies, while startups gain credibility and long-term contracts through these partnerships. NATO and EU policies are further fuelling this growth by encouraging venture-backed firms to develop dual-use technologies that can transition seamlessly into civilian markets.
While the US market is relatively consolidated, Europe’s defence sector remains fragmented, dominated by smaller, national-level primes. Morningstar suggests that greater consolidation could streamline procurement and attract more venture capital. However, regional imbalances persist, with the majority of private defence capital concentrated in the US, while emerging markets receive a smaller share.
“There are stark regional imbalances, with the majority of private defence capital concentrated in the US, while only a small proportion is directed towards emerging markets,” said Loredana Muharremi, equity analyst at Morningstar. “Europe, while growing steadily, requires structural support to bridge the gap in public and private defence investment. Early-stage leaders hold a competitive advantage in nascent markets, such as seabed defence and drones.”
The defence technology sector is also seeing a slow but steady rise in initial public offerings (IPOs). Muharremi believes this momentum is just beginning. “IPOs are on the rise, albeit at a slow pace. And we believe momentum is just getting started. The IPO market is positioned for an increase in activity volume over the upcoming years, supported by structural spending increases and a healthy private pipeline building through increased venture capital and private equity investments. The activity increase is expected to accelerate in the coming years, and this is certainly a space to keep a close eye on.”
As defence budgets expand and geopolitical tensions persist, the role of private capital in driving innovation will only grow. The sector is poised for significant transformation, with startups and established primes collaborating to shape the future of military technology.
