The funds industry could play a vital role in Europe’s challenge to increase defence spending amid an increasingly volatile geopolitical landscape. However, there will have to be changes to a fragmented supply chain, a lifting of various investment restrictions and a restructuring of the funds’ distribution process.
These were the main points to arise from a panel debate on the financing of the European defence sector at the European Investor Summit, held by Societe Generale Securities Services in Paris this month.
The defence industry has changed significantly since the fall of the Berlin Wall signalled the end of the Cold War, explained the panel’s moderator – Stéphane Audrand, international risk consultant with business consulting company Sylmaris.
From 1990 onwards, defence spending dwindled to less than 2% of GDPO while the public opposition to the Gulf War and other conflicts meant that countries could walk away from the defence market on ethical grounds.
The financial crisis was the final nail in the coffin, said Audrand. Defence budgets across Europe were dismantled, falling to less than 1.5% of GDP and below 1% in some instances.
In 2014, Russia invaded the Crimean Peninsula and despite the outcry in parts of Europe, Russia still felt able to invade Ukraine in 2022. At the same time, allies in the EU admitted to significant gaps in defence capability.
So how does Europe go about financing a rejuvenated defence sector? The funds industry has a role to play but there are numerous challenges involved.
“The defence industry is not like other industries investors look at,” said Martijn Rozemuller, CEO, Europe at ETF and fund manager VanEck. “It has been a sensitive topic for investors because of ESG concerns but it does need long-term investment. So how do we do that?”
In March 2023, Van Eck launched the Van Eck Defense UCITS ETF which has grown from $1.6 billion in January 2025 to more than $7 billion as of October.
“As an ETF issuer, we try to develop products for a mainstream market, they have to be palatable for a broad range of clients, but because of the ESG restrictions there were no defence ETFs,” said Rozemuller.
“It was hard to get a defence-related investment fund onboarded with banks and brokers five years ago. But the Ukraine war changed that, it made people realise we need a well-funded defence industry.”
The problem though is the distribution process, which in Europe is controlled by the banks, a larger number of which would until recently not allow the marketing of funds invested in arms.
“By adding a thorough screening on controversial weapons, our Defense ETF became more acceptable for most banks and brokers, which is shown by the fact that today it is our most popular ETF.
There’s a big benefit for the included defence companies as well, because being included in an index helps with visibility, funding and changing public opinion.”
However, this financing avenue only exists for listed companies. And, as Rozemuller said, there are many unlisted companies in Europe that need funding in the form of equity.
The way the defence industry is structured also has to be considered, said Pascal Bouchiat, senior executive vice-president and chief financial officer with France-based aerospace and defence corporation Thales. “It is fragmented, especially in the supply chain, which is populated by a large number of small and medium enterprises.”
These companies need equity more than ever, said Bouchiat. “We have been progressively fixing the ability for banks to able to finance these companies. The direction of travel has changed in the last two years.”
Despite the fragmentation of the supply chain, it remains a very profitable business, said Fabien Roualdes, co-head of aerospace & defence, private equity at alternative asset manager Tikehau Capital.
“It provides 15-20% growth every year but it is a hardcore manufacturing business,” said Roualdes. “It takes work and expertise to exit these assets and you need a fluid market where it is possible to buy and sell assets.
“In the EU, the good news is that we have the solution in our hands. The large pension funds are re-considering investment restrictions to invest in defence and it is providing the fluidity and liquidity that was needed,” said Roualdes.
According to Bouchiat, it is a question of unleashing this power. “The US has done this pretty well. Europe has to do it now.”
