M&A Updates

More private capital is seeking access to the aerospace and defence sector, and that cash could be increasingly heading towards UK opportunities.

There’s an undeniable shift in the private equity world towards investment in the aerospace and defence sector, and British businesses are seeing a significant boost.

In the past, large parts of the private equity (PE) world have distanced themselves from defence for various reasons, mostly because their fund rules prevented them from investing in the sector.

But rising geopolitical instability and committed increases in defence spending across the UK and other non-US NATO allies mean that a clear opportunity is emerging for private investors – and many are looking to take full advantage.

What’s emerging is a move by PE houses to raise new capital from their investors for funds that can invest in the aerospace and defence sector. The potential returns are on the rise. And there are plenty of British targets for that money, meaning UK firms are likely to be in the PE crosshairs.

Spending Hike

Europe is seeing a modal shift in its defence spending approach in response to pressure from President Trump’s economic demands. The continental members of the NATO alliance agreed in June to increase their defence spending to 5 per cent of GDP by 2035. This will be a significant leap for many, especially the likes of Spain and Italy, which currently spend around 1-2 per cent of GDP on defence.

In the UK, which had already pledged to increase its defence spending to 2.5 per cent of economic output, that will translate to a doubling of its current spending in the next decade.

With S&P data¹ showing that global investment into defence by private equity hit $4.27 billion in the first three months of the year – almost equal to the $4.31 billion allocated in the whole of 2024 – it’s guaranteed that venture capital will be seeking more opportunities in the sector.

Deal Boost

The pace of mergers and acquisition (M&A) activity in the UK has already accelerated, with Kroll alone overseeing several deals in the mid-market in recent months. And while significant portions of that capital have come from overseas – such as the recent purchase by Dallas-based Trive Capital of a Sheffield, UK firm supplying critical Defence products to the UK and other allies– domestic sponsors are waking up to the opportunity as well.

That factor could help activate a crucial shift in the UK defence industry. Notably, the trend for UK firms developing new defence and dual use technology, which is then commercialized in the U.S. before being sold back to UK and European primes, could become less commonplace.

Instead, UK-based capital will be seeking out clear opportunities on their doorstep, with a host of British firms creating integral components and systems for the armed forces. Many British defence firms are embedded in the supply chain for major primes, such as Babcock and BAE Systems, and UK investors will likely be on the lookout for potential investment opportunities.

Military Readiness Shift

One of the key catalysts for the shift is the UK’s Strategic Defence Review, published in June 2025 – a vital factor behind the likely expansion of Britain’s military complex. The country is moving to warfighting readiness, fully equipped with a new hybrid navy, including dreadnought and SSN-AUKUS submarines, cutting-edge warships and support ships, transformed aircraft carriers, and new autonomous vessels.

Furthermore, the army’s armored capability will be enhanced, with AI, long-range weapons and land drone swarms coming to the fore. Significant spending will come from the £15 billion pledged this Parliament for a sovereign warhead program. Over £1 billion will be funneled into a homeland air and missile defence system. Lessons are being learned from Ukraine’s invasion by Russia, and the UK is actively upgrading its military capabilities.

Assessing Opportunities

This stance will mean that private equity investors will be competing to identify the best names in the industry, with a close eye on the potential returns. Since the start of the Russia-Ukraine conflict in February 2022, European defence stocks have tripled, rapidly outpacing the wider market.

This meteoric outperformance could continue if some analysts are to be believed. Morningstar is upping its fair value estimates of major European defence companies, such as Germany’s Rheinmetall AG and BAE Systems². And some experts suggest that even if there were ceasefires in some of the world’s existing conflicts, it would still present a raft of opportunities for enterprising defence firms.

Any pause in military action would allow defence firms to engage in repair work on various items, providing a service-based revenue stream. Either way, it will be vital for investors to discern the more appropriate and geographically advantageous opportunities, especially as competition heats up.

Interestingly, aerospace names are trading nearer their 10-year average valuation (using enterprise value/forward 12 months EBITDA), while defence companies have experienced a significant surge to push the metric well above the 10-year average.

Private equity investors should monitor where the UK’s funding for defence innovation ends up. It could spark inspiration for future investment ideas, because the government cash could be directed towards the most cutting-edge technologies, which is exactly where investors should be, too.

Ultimately, amid the excitement, investors should take care not to rush ahead. In a dynamic and evolving global marketplace, where defence spending is ramping up by the day, the most successful investors will select target acquisitions and make decisive moves without skipping their due diligence.

 

Sources
¹ https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/3/pe-defense-investment-surges-in-early-2025-as-geopolitics-drives-change-88086420
² https://global.morningstar.com/en-gb/stocks/whats-next-european-defense-stock-rally