A New Era for Defence Investment
The defence sector is undergoing a profound transformation, driven by a surge in private investment and strategic policy shifts. As highlighted in our recent analysis, Private Equity and Venture Capital Investors Showing Renewed Interest in the Defence Industry, the momentum has only intensified throughout 2025. Investors are increasingly viewing defence technology (DefTech) as a credible and scalable asset class with significant growth potential.
Governments are also recognising the critical role of defence investment in bolstering economic resilience, societal stability, and national security. This realignment of public sector priorities is reshaping private capital markets, driving a reallocation of resources towards defence and dual-use technologies.
Policy Momentum, 2025 Budget and Fostering Development of Dual-Use Technology
Government actions are amplifying private capital interest and momentum in the defence sector. The Canadian government’s recently announced two-stage plan commits to spending at least 2% of GDP on defence this fiscal year, meeting NATO’s target five years earlier than previously planned. By 2035, Canada aims to raise defence spending to 5% of GDP, including 1.5% for broader security investments such as critical infrastructure and dual-use technologies. This commitment totals over C$1.2 trillion over the next decade.
The 2025 Federal Budget formalised this commitment with an C$80 billion investment in defence and security over the next five years—the largest in decades. The funding will be allocated to recruitment and retention, infrastructure and equipment (including digital and cyber infrastructure), industrial support focused on modernising fleets, expanding Arctic and maritime surveillance, and strengthening cyber and space capabilities.
The Budget also confirmed the creation of the Defence Investment Agency (DIA), which will streamline Canadian defence procurement with a focus on procuring Canadian technology and equipment. Additionally, a Defence Industrial Strategy will fund and catalyse research and innovation in areas such as quantum computing, aerospace, shipbuilding, and advanced manufacturing.
The Canadian government’s policy priorities extend beyond traditional military platforms, recognising the need for investment in capabilities such as AI, cyber, space, logistics, and semiconductors. The Budget includes C$180 million to establish sovereign space launch capability, C$450 million to support the development of innovative critical minerals processing technologies, C$335 million for quantum computing technologies, and C$650 million to develop and commercialise dual-use technologies in various sectors.
One of the most significant budget announcements is the C$1 billion allocated to the Business Development Bank of Canada to provide loans, venture capital, and advisory services to help small- and medium-sized businesses contribute to Canada’s defence and security capabilities.
Beyond Canada, NATO’s €1 billion Innovation Fund, backed by 24 member nations, continues to direct investment into deep-tech and defence startups. Additionally, the creation of a new international defence-specific lender, the Defence, Security and Resilience Bank (DSRB), backed by NATO members and other allied nations, is expected to support the deployment of capital by private lenders, including Royal Bank of Canada, JPMorgan Chase & Co., ING Group NV, Commerzbank AG, and Landesbank Baden-Württemberg.
Private Capital Allocation Continues to Accelerate
Recent government initiatives are accelerating market trends in the global defence and DefTech sector, transforming it from a fragmented and niche investment category into a rapidly growing mainstream asset class. According to PitchBook data, global VC defence tech deal value is likely to reach US$10 billion by year-end, having hit US$7.7 billion already—more than double the amount raised in 2024. In Europe alone, defence tech startups raised US$4.2 billion in the first nine months of this year, almost reaching 2024’s total.
Private-sector momentum is also being driven by initiatives such as JPMorgan Chase’s US$1.5 trillion Security and Resiliency Initiative, launched in October 2025. The initiative allocates up to US$10 billion for direct equity and venture investments in critical sectors including defence and aerospace. This record fundraising reflects the intersection of geopolitical urgency and scalable technological advancement.
Investors are increasingly targeting dual-use technologies, which have both civilian and military applications, as a way to balance ESG mandates with exposure to defence-aligned growth.
Is the Optimism Justified?
Despite clear policy backing and strong capital inflows into defence and dual-use technology, the sector faces skepticism about execution risk and the pace at which this capital can be deployed and successfully exited. These concerns feed a persistent “hype narrative” suggesting that valuations may be outpacing operational progress.
A major friction point in the defence sector is the clash between traditional financial timelines and the slow, complex mechanisms of government acquisition. Governments remain the