Private Equity's Bold Gamble: Turning Defense Assets from "Toxic" to Treasure

The defense sector, once considered a risky and cyclical backwater for investors, has become the latest frontier for private equity (PE) firms. In early 2025, PE-backed investments in aerospace and defense reached $4.27 billion globally—nearly matching the entire $4.31 billion total for all of 2024. This surge reflects a strategic pivot toward industries seen as vital to national security and geopolitical stability. But what’s driving this shift, and is it sustainable?

The Rise of Defense as a "Safe" Bet

For years, defense assets were viewed as "toxic" due to their reliance on government contracts, lengthy procurement cycles, and exposure to geopolitical instability. Yet today, PE firms like Berkshire Partners and Warburg Pincus are betting big on the sector. Their $2.9 billion bid to acquire Triumph Group Inc., a manufacturer of aircraft systems, epitomizes the new confidence. The key drivers?

1. Geopolitical Tailwinds
The U.S. Department of Defense (DoD) is overhauling its procurement process to shorten the "valley of death"—a bureaucratic bottleneck that stifled innovation. The January 2024 National Defense Industrial Strategy aims to fast-track contracts for smaller suppliers, creating opportunities for agile firms. Meanwhile, President Trump’s focus on "Golden Dome" missile-defense systems has redirected funding toward high-priority programs, attracting investors aligned with policy shifts.

In Europe, the Russia-Ukraine war has spurred a €158 billion EU defense fund and Germany’s €500 billion infrastructure-defense package, signaling long-term growth. Analyst Erik Tonsfeldt of West Monroe calls Europe the "next arena" for PE investments, as governments prioritize localized military tech.

The Tech Edge: Dual-Use and AI

PE firms aren’t just chasing policy tailwinds—they’re targeting companies at the intersection of defense and commercial markets. Over 70% of deals now involve firms with dual revenue streams, such as Coltala Aeroparts LLC (a former aircraft maintenance provider acquired for its ability to serve both military and commercial clients).

Autonomous systems maker Anduril Industries, a venture capital darling, exemplifies the "dual-use" trend. Its AI-powered border security tools and battlefield drones are equally valuable to militaries and private logistics firms.

The Risks: Valuations and Volatility

The sector isn’t without pitfalls. PE firms face 11.9x EBITDA multiples in North America—a 20% jump since 2020—and geopolitical risks like tariffs or defense budget cuts.

Edward Crawford of Coltala Holdings warns that companies relying solely on defense contracts face "difficult cycles." Investors must prioritize firms with resilient dual markets or risk exposure to government spending lulls.

Conclusion: A Strategic Shift with Staying Power

The defense sector’s transformation is undeniable. With $4.27 billion in PE investments in just 12 weeks and Europe’s €158 billion defense fund on the horizon, this isn’t a fleeting trend. The key to success lies in backing firms that straddle military and commercial markets—like Triumph Group (aircraft systems) or Anduril (AI-driven tech)—while avoiding overvalued pure-play defense companies.

The numbers tell the story:
- North America’s 83% share of global defense PE deals since 2020 underscores its dominance.
- $28 billion in DoD tech contracts (2018–2022) highlight AI’s growing role.
- Germany’s €500 billion package signals Europe’s commitment to self-reliance.

For PE firms, the gamble isn’t reckless—it’s a calculated bet on a sector where geopolitics and technology are merging to create enduring value. The question now isn’t whether to invest, but how to navigate the risks without getting caught in the "valley of death."