War in Europe and rising geopolitical tensions are driving investment in European defence firms. Despite the urgent need to strengthen its military industry, financing remains pocket-change when a big fat wallet is needed.
Europe’s defence sector lags that of the United States, unsurprisingly. Only 19 European companies appear among the global top 100 defence firms compared to 48 in the US, which benefit from a robust private funding ecosystem and specialised defence funds.
While Europe counts 2500 small and medium-sized enterprises (SMEs) specialising in niche military technologies, their growth is hindered by limited access to private funding. Yet SMEs are considered the backbone of defence supply chains.
Limited funding access
A study conducted by the European Commission showed that between 2021 and 2022, approximately 40 per cent of SMEs faced difficulties accessing finance. Many avoided equity financing, and nearly half refrained from seeking loans.
Factors such as lengthy procurement processes, complex regulations, and a lack of specialised funds exacerbate these challenges, leading to estimated equity and debt financing gaps of up to €4 billion.
While countries like France, Germany, and Spain show some activity in venture capital and private equity for defence, the EU lacks the comprehensive financial ecosystems of the US and UK, where extensive public programmes support innovative defence companies.
Helping SMEs thrive
Public sector involvement is crucial to bridging this gap. Initiatives such as the Defence Equity Facility aim to stimulate private investment by creating a dedicated ecosystem for defence finance, enabling SMEs to scale, innovate, and enhance the EU’s defence resilience.
An analysis by the Centre for European Policy Analysis (CEPA) comes to the same conclusion. While it cites concerns over the fragmented nature of Europe’s defence markets, it calls for improving access to private financing as a critical step in revitalising Europe’s defence sector.
The European Defence Industrial Strategy (EDIS), introduced in 2024, aims to address shortcomings by focusing on demand aggregation, industrial transformation, and private investment.
Key proposals include implementing the European Defence Investment Programme (EDIP), reducing administrative burdens to foster economies of scale, and mobilising private capital through changes in European Investment Bank lending policies.
Impact of private equity
The 2023 “Investing in Europe: Private Equity Activity” report by Invest Europe highlighted the resilience and ongoing appeal of the European private equity and venture capital sectors.
In 2023, private equity funds raised €133 billion, with €37 billion invested in SMEs (representing 85 per cent of all private equity portfolio companies), supporting over 20.000 companies and nearly one million jobs.
Although investments stood at €40 billion in the first half of 2024 due to market challenges, venture capital grew by 26 per cent year-on-year, driven by investments in artificial intelligence (AI) and tech-focused start-ups.
Notably, private equity is starting to shift its stance towards defence. More investors are backing defence-related ventures, reflecting evolving attitudes towards environmental, social, and governance (ESG) standards.
Increased defence expenditure
This shift aligns with increasing defence expenditure across Europe. From the record €279 billion in 2023, the figure is projected to rise to €326 billion in 2024, according to the latest report of the European Defence Agency (EDA).
EDA Chief Jiří Šedivý emphasised the importance of boosting European defence autonomy by reducing reliance on off-the-shelf equipment from outside the EU and increasing collaboration within the European Defence Technological and Industrial Base.
Although 20 Member States exceeded the investment benchmark of 20 per cent of total defence expenditure, innovation in defence research and technology remains a critical area for improvement to match global competitors like the US and China.
Private equity, combined with public initiatives like EDIS, holds the potential to transform Europe’s fragmented defence market by mobilising resources, driving innovation, and improving competitiveness, ultimately strengthening the EU’s military capabilities and strategic autonomy.
[Edited By Brian Maguire | Euractiv’s Advocacy Lab ]
