Private equity pours billions into defense tech as investors debate a bubble

Private equity firms are pouring billions into defense technology as rising military spending and geopolitical tensions fuel an investment boom.

Traditional buyout investors are increasingly backing younger, high-growth firms in the sector, according to PitchBook data, with private equity growth investments in defense reaching $4 billion in the first nine months of 2026, up from $500 million in 2024.

As defense tech companies mature, analysts say private equity, debt and other forms of financing are expected to become more important in bridging the gap between innovation and industrial-scale production, as venture capital alone may not be enough to finance companies' expansion.

It comes as geopolitical tensions, wars, and countries' efforts to strengthen military capabilities are creating opportunities for companies developing everything from autonomous drones to missile defense systems and satellite technology.

A survey of 250 senior decision-makers at U.K. defense companies by law firm White & Case found that 97% expected their businesses to seek significant external funding over the next 12 months.

"Private capital is now playing a critical role in the financing of defence technology companies," Daniel Turgel, a partner at White & Case, told CNBC.

Private equity and venture capital firms, sovereign wealth funds and family offices were all looking to invest more in the sector, marking a significant change from just a few years ago, Turgel said, adding that many investors were previously reluctant or restricted from doing so.

A new class of investors

The growth of private equity allocations to defense technology also comes amid a surge in venture capital investment in defense technology. Startups across NATO and allied countries raised $27.1 billion through September, nearly double the total for all of 2025, according to an October report from Dealroom and Resilience Media.

While venture capital traditionally backs young, high-growth startups, and private equity focuses on more established businesses, the distinction is increasingly blurring as some PE firms move into growth investments.

"Private equity firms are putting more money into defense, and they are changing how they do it," Jim Corridore, lead industrials analyst at PitchBook, told CNBC.

The number of defense PE growth deals increased from 15 in 2024 to 31 in 2025 and 48 through September 2026, according to PitchBook.

Those investments accounted for 41% of defense PE deal value in 2026, up from just 3% in 2024.

"It is clear to me that PE is moving into territory VC used to own," Corridore said.

Private equity firm Advent International announced a commitment of up to $1 billion to next-generation defense technology in March, including investments in autonomous systems developers Shield AI and Saronic.

Shonnel Malani, Advent's managing partner and global head of aerospace and defense, told CNBC the firm has already deployed roughly three-quarters of that commitment.

Malani said Advent's expansion into younger defense technology companies was a natural evolution of its existing investments in more mature defense businesses.

Advent is backing businesses it knows well and prioritizing proven technologies that address specific military needs and have been validated by customers, rather than focusing primarily on financial metrics, Malani said.  

Bubble concerns

While the influx of private capital is helping accelerate innovation in defense technology, it is also fueling concerns about inflated valuations and speculative investments.

Malani said defense technology companies are increasingly valued on their technological promise rather than revenue, profit, or order books, leaving considerable room for interpretation over what they are worth.

He added that a correction may be inevitable as some companies struggle to turn technological promise into commercial success.

"I think there is a very big risk of that," he added when asked whether an investment bubble could emerge.

There is "a lot of froth in the system," Malani said, adding that Advent had walked away from several potential investments because valuations had become "silly."

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PitchBook's Corridore pushed back against the notion that the sector is overheated, but he expects investment interest to keep growing. 

"Budgets are growing, the military has used up a lot of ammunition, and new drone and counter-drone technology is arriving," he said. "All of that gives investors the steady revenue PE needs to make long-term bets."

Other private equity investors are sticking more closely to traditional buyout strategies.

Lionel Mestre, partner at French private equity firm Weinberg Capital Partners, told CNBC his firm still focuses on profitable defense businesses with established products, customers and positive cash flow, rather than early-stage startups.

He said valuations for the smaller, established defense suppliers Weinberg targets had not increased significantly, despite growing investor interest in the sector.

Mestre sees opportunities to finance manufacturing expansion and consolidate Europe's fragmented defense supply chain, and considers the rapidly evolving drone market too immature for Weinberg's traditional buyout strategy.

The smaller defense businesses Weinberg is targeting need investment in production capacity, employees, working capital and commercial operations to meet rising demand.

"This sector will have to consolidate anyway," Mestre said, arguing that smaller suppliers need to become larger and more competitive.

He also said European institutional investors' attitudes toward defense had shifted significantly, particularly since President Donald Trump's return to the White House and renewed pressure on European countries to increase military spending.

Can the boom deliver returns?

Malani and Mestre both see opportunities for PE firms to help defense companies scale production, providing not only capital but also industry connections and access to government customers.

Malani said some startups were rushing toward initial public offerings before developing the operational maturity needed to become sustainable public companies.

And, despite the increase in investment activity, exits remain a potential challenge.

According to PitchBook, there have been 504 defense PE deals but just 101 exits since 2021, although the comparison includes add-on acquisitions and therefore does not directly measure the proportion of investments awaiting an exit.

IPOs accounted for 70% of defense PE exit value through September 2026, leaving investors exposed to changing stock market conditions.