Defense tech investment boom heats up, private equity giant warns 'a lot of bubble' is emerging.

Note that private equity firms are pouring capital into defense tech, with rising military spending and geopolitical tensions fueling an investment boom. PitchBook data shows traditional buyout investors are increasingly betting on younger, high-growth companies in the sector. In the first nine months of 2026, PE growth investments in defense reached $4 billion, compared with just $500 million for all of 2024. Analysts note that as defense tech companies mature, private equity, debt and other forms of financing are expected to play an increasingly important role in bridging the gap between innovation and industrialized mass production, as venture capital alone may no longer be sufficient to support companies' expansion. The backdrop to this boom: geopolitical tensions, wars and efforts by countries to strengthen military capabilities are creating opportunities for companies across areas from autonomous drones to missile defense systems and satellite technology. A survey of 250 senior decision-makers at UK defense companies by law firm White & Case found that 97% of respondents expect their companies to seek substantial external financing in the next 12 months. Daniel Turgel, a partner at White & Case, said: "Private capital is now playing a key role in the financing of defense tech companies." Turgel said private equity and venture capital firms, sovereign wealth funds and family offices all want to increase investment in the sector, a marked change from a few years ago. Previously, he added, many investors were either unwilling or restricted from entering the sector. A new cohort of investors The growth in private equity allocations to defense tech also comes as venture capital investment in the sector surges. According to an October report by Dealroom and Resilience Media, as of September, startups across NATO and allied countries had raised $27.1 billion, nearly double the total for all of 2025. Traditionally, venture capital backs young, high-growth startups while private equity focuses on more mature businesses. But as some PE firms shift toward growth investing, the line between the two is increasingly blurring. Jim Corridore, chief industrials analyst at PitchBook, said: "PE firms are putting more money into defense, and they're changing the way they invest." According to PitchBook data, the number of PE growth deals in defense rose from 15 in 2024 to 31 in 2025, and had reached 48 by September 2026. In 2026, these investments accounted for 41% of the value of defense PE deals, compared with just 3% in 2024. "It's clear to me that private equity is moving into territory previously occupied by venture capital," Corridore said. PE firm Advent International announced in March that it would invest up to $1 billion in next-generation defense tech, including investments in autonomous systems developers Shield AI and Saronic. Shonnel Malani, managing partner and global head of aerospace and defense at Advent, said the firm has deployed about three-quarters of its committed capital. Malani said Advent's expansion into younger defense tech companies is a natural extension of its existing investments in mature defense businesses. Malani said Advent backs companies it understands deeply and prioritizes proven technologies that address specific military needs and have been validated by customers, rather than focusing primarily on financial metrics. Bubble concerns While the influx of private capital helps accelerate defense tech innovation, it has also heightened concerns about inflated valuations and speculative investing. Malani said valuations of defense tech companies are increasingly based on their technological prospects rather than revenue, profit or order volume, leaving considerable room for interpretation about what these companies are actually worth. He added that as some companies struggle to translate technological promise into commercial success, a correction may be inevitable. Asked whether an investment bubble may be forming, he added: "I think there's a very big risk." Malani said there is "a lot of bubble" in the market, and said Advent has walked away from several potential investments because valuations had become "absurd." PitchBook's Corridore pushed back on the idea that the sector is overheating, but he expects investment interest to keep growing. "Budgets are growing, militaries are consuming large amounts of munitions, new drone and counter-drone technologies are emerging," he said. "All of this gives investors the stable revenue they need for private equity to make long-term bets." Other PE investors are sticking more closely to traditional buyout strategies. Lionel Mestre, a partner at French PE firm Weinberg Capital Partners, noted that his firm remains focused on profitable defense businesses with mature products, customers and positive cash flow, rather than early-stage startups. He said that despite growing investor interest in the sector, valuations of the small, mature defense suppliers Weinberg targets have not risen significantly. Mestre sees opportunities to finance capacity expansion and consolidate Europe's fragmented defense supply chain, while viewing the fast-evolving drone market as still too immature for Weinberg's traditional buyout strategy. The small defense businesses Weinberg targets need to invest in capacity, staff, working capital and commercial operations to meet growing demand. "This industry will need consolidation eventually," Mestre said, adding that small suppliers need to scale up and become more competitive. He also said European institutional investors' attitude toward defense has shifted significantly, especially after Trump's return to the White House and as European countries face pressure to increase military spending. Can this boom deliver returns? Both Malani and Mestre 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 are rushing toward initial public offerings (IPOs) before they have the operational maturity needed to be sustainable public companies. Moreover, despite increased investment activity, exits remain a potential challenge. According to PitchBook data, there have been 504 PE deals in defense since 2021, but only 101 exits, though this comparison includes add-on acquisitions and therefore is not a direct measure of the proportion of investments awaiting exit. As of September 2026, IPOs accounted for 70% of the value of defense PE exits, leaving investors exposed to shifting market conditions.