The European defense tech ecosystem as a new asset class for private equity

Deca­des of under­in­vest­ment, the prio­ri­tiza­tion of effi­ci­ency over capa­city and a focus on a few, highly complex weapon systems (in some cases for dedi­ca­ted foreign deploy­ment scena­rios) had led to an indus­trial land­scape that had neither the neces­sary produc­tion volume nor the requi­red speed for an adequate response. This wake-up call trig­ge­red a defense policy and fede­ral budget response that became commonly known in Germany as the “Zeiten­wende”, a term that aptly descri­bes Euro­pe’s profound stra­te­gic realignment. The realiza­tion that peace and stabi­lity, as the ulti­mate foun­da­tion of our free, demo­cra­tic and social market economy, can no longer be taken for gran­ted has led to a para­digm shift in defence budgets and indus­trial policy across the continent. 

Global mili­tary spen­ding reached a new record of USD 2,718 billion in 2024, with Europe being the main driver of this increase. The conti­nen­t’s mili­tary spen­ding rose by 17% to 693 billion US dollars. Indi­vi­dual count­ries recor­ded even more drama­tic increa­ses: Germany reached 88.5 billion US dollars (77.6 billion euros) in mili­tary spen­ding, moving up from seventh to fourth place in the global ranking of mili­tary spen­ding. This deve­lo­p­ment is reflec­ted throug­hout the NATO alliance. 

For private equity inves­tors, whose invest­ment models and struc­tures are gene­rally desi­gned for an invest­ment hori­zon of five to ten years, this predic­ta­bi­lity of govern­ment spen­ding in the defense sector crea­tes an excep­tio­nally stable invest­ment environment.

The defense tech sector in Europe has evol­ved from a niche charac­te­ri­zed by ethi­cal concerns, regu­la­tory hurd­les and low capi­tal flows to a core stra­te­gic asset class for private equity. The conver­gence of secure long-term govern­ment spen­ding, a funda­men­tal para­digm shift in mili­tary doctrine and deter­rence, and a chan­ging ESG narra­tive is crea­ting a once-in-a-gene­ra­tion invest­ment window. 

For inves­tors who are prepared to master the comple­xity of the sector, there are excep­tio­nal oppor­tu­ni­ties to parti­ci­pate in the tech­no­lo­gi­cal moder­niza­tion of Euro­pean secu­rity and defence and to gene­rate signi­fi­cant added value.

Networks and stra­te­gic posi­tio­ning play a decisive role.

Success in the defense sector is less a ques­tion of capi­tal alone and more a ques­tion of “smart capi­tal”. PE funds looking to invest in defense tech need to actively build and main­tain stra­te­gic networks with govern­ments, mili­ta­ries, defense contrac­tors and tech­no­logy clus­ters. Hiring former high-ranking mili­tary offi­cers, procu­re­ment offi­ci­als or defense company mana­gers as advi­sors, venture part­ners or board members for port­fo­lio compa­nies can create a decisive compe­ti­tive advantage. 

Quirin Herz is a renow­ned inves­tor with a focus on the defense and deep tech sectors. He successfully estab­lished the corpo­rate venture capi­tal program at HENSOLDT AG with the aim of syste­ma­ti­cally tapping into exter­nal inno­va­tions through targe­ted invest­ments in start-ups and initia­ting stra­te­gic part­ner­ships for the Group. 

He began his profes­sio­nal career in invest­ment banking at Deut­sche Bank and Merrill Lynch in New York. After comple­ting his Master’s degree at ESB Busi­ness School, he was invol­ved in the stra­te­gic realignment and opera­tio­nal value crea­tion of three port­fo­lio compa­nies of the renow­ned Euro­pean invest­ment company Equis­tone Part­ners Europe. Today, he combi­nes his exten­sive exper­tise in finance, stra­tegy and tech­no­logy in the defense indus­try. He was reco­gni­zed by the maga­zine “Grün­der­szene” as one of the ten most influ­en­tial minds in the German defence tech start-up scene.