Private markets and venture capital are transforming global defence technology, with investment increasing in drones, AI-enabled systems, cybersecurity and other dual-use applications, according to Morningstar.
The US remains the dominant hub for integrating private capital into defence innovation, while Europe is catching up, spurred by Nato-backed policies, rising defence budgets, and EU incentives such as the Critical Raw Materials Act, according to Morningstar analysis of PitchBook data.
Startups specialising in AI-enabled unmanned systems, cyber resilience, and modular solutions, such as Helsing, Anduril and AeroVironment are gaining traction. According to the analysts, they are displacing traditional primes in niche areas and benefiting from acquisitions by larger defence contractors seeking innovative solutions.
Since the start of the Ukraine–Russia war in 2022, there’s been a sharp rise in strategic “bolt-on” acquisitions. Big defence companies are snapping up tech startups to get their hands on cutting-edge innovations. For the startups, it’s a win too, as the backing of a major defence player instantly boosts their credibility and opens the door to long-term contracts in the sector.
Nato and EU policies are also encouraging venture-backed firms to focus on dual-use technologies that can cross over into civilian markets.
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While the US market is relatively consolidated, Europe’s remains fragmented. According to Morningstar, these are dominated by numerous smaller, national-level primes and “greater consolidation could streamline procurement and boost VC interest”.
“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. 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”, Loredana Muharremi, equity analyst at Morningstar, said.
“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”, Muharremi added.
