Defense Industrial Consolidation and Private Equity Returns: Strategic Positioning in Europe’s Geopolitical Renaissance

The European defense sector is undergoing a seismic shift, driven by geopolitical volatility, regulatory reforms, and a strategic pivot toward technological self-reliance. From 2023 to 2025, defense M&A in Europe surged by 35% year-on-year, with transactions reaching $2.3 billion in the first half of 2025 alone [1]. This acceleration is not merely a response to the war in Ukraine but a calculated alignment with long-term geopolitical imperatives, such as reducing reliance on non-European suppliers and accelerating innovation in AI, drones, and space technologies [1]. For private equity (PE) investors, this environment presents a unique confluence of risk and reward, as historically underperforming European defense deals now show signs of outpacing their North American counterparts.

Geopolitical Tailwinds and Structural Reforms

The war in Ukraine has acted as a catalyst for European defense spending, with 2024 budgets reaching $693 billion—a 17% increase from 2023 [2]. Governments are now prioritizing sovereign capabilities, exemplified by the €800 billion ReArm Europe Plan and the European Defence Industrial Strategy (EDIS), which aim to streamline joint procurement and foster intra-EU collaboration [1]. These initiatives have created a fertile ground for consolidation, as seen in the strategic acquisitions of SMEs and tech startups by industry giants. For instance, Rheinmetall’s $950 million purchase of Loc Performance Products and its partnership with U.S. firm Anduril to develop drone systems underscore the sector’s shift toward agile, technology-driven solutions [2].

Regulatory frameworks, while complex, are also shaping the landscape. The UK’s National Security and Investment Act 2021 and Germany’s stringent FDI screening rules emphasize the strategic importance of defense assets, requiring PE firms to navigate rigorous pre- and post-transaction scrutiny [4]. However, these hurdles are not deterrents but rather signals of the sector’s elevated status. As one source notes, “The regulatory environment reflects a broader recognition that defense is no longer a purely public-sector domain—it is a battleground for economic and technological leadership” [4].

Private Equity’s Strategic Reentry

Historically, European defense PE deals have lagged behind North American ones, with a median MOIC of 1.8x since 2010 compared to 2.6x in the U.S. [5]. But the current macroeconomic and geopolitical climate is reversing this trend. Global PE investment in aerospace and defense exceeded $13.8 billion in 2024, with European activity rising by 30% year-on-year [1]. Firms like Tikehau Capital and CVC Capital Partners are now raising dedicated funds to target advanced manufacturing, AI developers, and drone technology firms [5].

The focus on SMEs is particularly noteworthy. European governments are increasingly sourcing technology from smaller firms rather than relying on traditional primes, creating a “middle-market sweet spot” for PE. For example, Safran’s $243 million acquisition of Preligens, a French AI developer, highlights the sector’s pivot toward dual-use technologies [2]. This trend is supported by the European Commission’s Defence Readiness Omnibus package, which clarifies ESG guidelines and streamlines processes to attract private capital [1].

Valuation Dynamics and Exit Opportunities

Valuation multiples in European defense M&A have expanded significantly, with EV/EBITDA ratios reaching 20.7x in H1 2025 [5]. This reflects strong investor confidence, driven by the sector’s resilience amid broader economic uncertainties. Exit activity has also remained robust, with trade sales and secondary buyouts dominating strategies. Middle-market deals, in particular, have outperformed larger transactions, delivering an average IRR of 16.9% and a TVPI of 1.8x [5].

However, challenges persist. Regulatory complexity and geopolitical unpredictability—such as U.S. policy shifts under President Trump—introduce risks that require careful structuring [3]. Yet, these risks are increasingly seen as manageable, given the sector’s alignment with national security priorities. As one analyst observes, “The defense sector is no longer a ‘safe haven’ but a ‘strategic imperative’—and investors are recalibrating accordingly” [4].

Conclusion: A New Era of Strategic Positioning

The European defense sector is at an inflection point, where geopolitical necessity, technological innovation, and regulatory clarity are converging to create a high-returns environment for PE. While historical underperformance lingers, the current trajectory suggests that European defense deals could soon rival their North American peers. For investors, the key lies in strategic positioning: targeting SMEs with cutting-edge capabilities, navigating regulatory frameworks proactively, and aligning with government-led initiatives like ReArm Europe. In this new era, defense is not just about security—it’s about capitalizing on a redefined industrial landscape.

**Source:[1] Rising geopolitical tensions ignite European defense M&A [https://www.aoshearman.com/en/insights/global-ma-insights/rising-geopolitical-tensions-ignite-european-defense-ma][2] Europe's Sharpened Focus on Defense Creates M&A and Investment Opportunities [https://www.skadden.com/insights/publications/2025/06/insights-june-2025/europes-sharpened-focus][3] PE defense investment surges in early 2025 as geopolitics drives change [https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/3/pe-defense-investment-surges-in-early-2025-as-geopolitics-drives-change-88086420][4] M&A in the defence and aerospace sector: regulatory challenges and success factors [https://www.taylorwessing.com/en/insights-and-events/insights/2025/07/ma-in-the-defence-and-aerospace-sector][5] Monthly Sector Signal: Europe's Defense Sector [https://www.dealedge.com/insights/monthly-sector-signal-eu-defense/]