Defense technology investment boom triggers bubble warnings; Private equity funds flood in in large numbers
CNBC
1h ago
Ai Focus
With rising military spending and intensifying geopolitical tensions, private equity is investing billions of dollars in the field of defense technology. PitchBook data shows that private equity growth investments in defense technology reached $4 billion in the first nine months of 2026, a significant increase from $500 million in 2024. However, some investors are also warning of overheated valuations and speculative risks.
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With rising military spending and intensifying geopolitical tensions, private equity firms are investing billions of dollars in the defense technology sector, fueling a boom in investment in this industry.

According to the data from PitchBook, traditional mergers and acquisitions investors are increasingly supporting younger and faster-growing companies in this field. In the first nine months of 2026, private equity growth investments in the defense sector reached $4 billion, up from $500 million in 2024.

Analysts say that as defense technology companies mature, private equity, debt, and other forms of financing are expected to become more important in bridging the gap between innovation and industrialized production, as venture capital alone may not be sufficient to fund corporate expansion.

As this trend emerges, geopolitical tensions, wars, and the efforts of various countries to strengthen their military capabilities are creating opportunities for companies that develop products ranging from autonomous drones to missile defense systems and satellite technology.

A survey conducted by British law firms White and Case among 250 senior decision-makers from defense companies found that 97% of them expect their companies to seek large-scale external financing within the next 12 months.

White & Case Partner Daniel Turgel said to CNBC: "Private capital now plays a key role in the financing of defense technology companies."

Turgel says that private equity and venture capital firms, sovereign wealth funds, as well as family offices, are all seeking to invest more capital in this industry, which marks a significant change compared to a few years ago; previously, many investors were cautious about this field or were restricted from entering it.

A new category of investors

The increase in private equity investment in defense technology is also accompanied by a surge in venture capital in this field. According to a report released in October by Dealroom and Resilience Media, startups from NATO and its allies had raised $27.1 billion as of September, which is nearly twice the total for the entire year of 2025.

Venture capital has traditionally supported young, high-growth startups, while private equity has focused more on more mature enterprises. However, as some PE funds have shifted towards growth-oriented investments, this distinction is becoming increasingly blurred.

PitchBook, the chief analyst of the industrial sector, said to CNBC: "Private equity firms are investing more capital in the defense sector, and they have also changed their approach to investment."

PitchBook data shows that the number of growth-oriented transactions in national defense PE increased from 15 in 2024 to 31 in 2025, and reached 48 in the first nine months of 2026.

These investments accounted for 41% of the defense PE transaction value in 2026, whereas in 2024 it was only 3%.

Corridore said, "In my opinion, PE is entering a field that was previously dominated by VC."

Private equity firm Advent International announced in March that it is committed to investing up to $1 billion in next-generation defense technology, including investments in autonomous system developers Shield AI and Saronic.

Advent, the managing partner and global head of Aerospace and Defense, stated to CNBC that the company has already allocated approximately three-quarters of this committed funds.

Malani indicates that Advent's expansion into younger defense technology companies is a natural extension of its existing investments in mature defense businesses.

He said that Advent supports companies that he is familiar with, and gives priority to mature technologies that have been verified by customers and can meet specific military requirements, rather than focusing mainly on financial indicators.

Bubble Worries

Although the influx of private capital is accelerating innovation in national defense technology, it has also raised concerns about overvalued assets and speculative investments.

Malani indicates that the valuation of defense technology companies is increasingly dependent on their technological prospects, rather than revenue, profits, or order books, which leaves a lot of room for interpretation regarding their true value.

He added that if some companies are unable to transform their technological prospects into commercial success, a market correction may be inevitable.

When asked whether there might be an investment bubble, he said, "I think there is a very high risk of that."

Malani indicates that there are 'many bubbles' in the system, and it is also mentioned that Advent has abandoned several potential investments because the valuations have become 'absurd'.

Corridore of PitchBook refuted the claim that the industry is overheated, but he expects investment interest to continue to grow.

He said, "The budget is increasing, the military has already consumed a large amount of ammunition, and new drone and anti-drone technologies are emerging. All of this provides investors with the stable income needed to make long-term bets on PE."

Other private equity investors are closer to traditional mergers and acquisitions strategies.

Weinberg Capital Partners, a French private equity firm, partner Lionel Mestre, stated to CNBC that the firm continues to focus on defense companies that are profitable, have mature products and customers, and generate positive cash flows, rather than early-stage startups.

He said that the valuation of smaller but more established defense suppliers, which Weinberg focuses on, has not increased significantly despite the rising interest from investors.

Mestre believes that financing opportunities lie in helping to expand manufacturing capacity and integrate the fragmented defense supply chains across Europe, while the rapidly changing drone market is still too early for Weinberg's traditional mergers and acquisitions strategies.

The smaller defense companies targeted by Weinberg need to invest in production capacity, employees, working capital, and business operations to meet the growing demands.

"This industry must be integrated anyway," said Mestre, and believes that smaller suppliers need to become larger and more competitive.

He also stated that there has been a significant change in the attitude of European institutional investors towards defense, especially after Donald Trump returned to the White House and European countries once again faced pressure to increase military spending.

Can this wave of enthusiasm bring returns?

Both Malani and Mestre believe that PE company has the opportunity to help defense enterprises expand production, not only by providing capital but also by offering industry connections and channels to access government customers.

Malani indicates that some startups are eager to proceed with their initial public offerings (IPOs) before they have achieved sufficient operational maturity to become sustainable listed companies.

Despite the increase in investment activities, exiting may still be a challenge.

PitchBook data shows that since 2021, there have been a total of 504 transactions in national defense PE, but only 101 exits; however, this comparison includes additional acquisitions, so it cannot directly measure the proportion of investments waiting to be exited.

As of September 2026, IPO accounts for 70% of the exit value of national defense PE, which exposes investors to a constantly changing stock market environment.

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