Europe’s defense landscape has undergone a profound transformation over the past five years. Geopolitical tensions, evolving security threats, and a fundamental shift in transatlantic relations have spurred governments to dramatically increase defense spending. At the same time, private investment—long constrained by ESG concerns—is beginning to flow into the sector. For investors, this convergence represents both opportunity and complexity.
On 24 September 2025, K2 Integrity hosted a webinar discussing investments in the European defense sector with Jason Wright, senior managing director in the Investigations and Disputes practice at K2 Integrity, and two eminent guests: Air Chief Marshal Sir Mike Wigston, KCB, CBE, former head of the Royal Air Force; and Sir Mark Lyall Grant, GCMG, former National Security Adviser to the British government. Click here to view the recording.
Geopolitical Drivers of Defense Spending
Understanding the forces behind Europe’s defense-spending surge is essential to evaluating its investment potential. Geopolitical and security dynamics are reshaping priorities and budgets across NATO and the European Union.
Renewed Security Imperatives. European defense budgets, once in long-term decline, are now surging. All 32 NATO members are meeting the 2% of GDP target for defense spending in 2025, up from only three countries in 2010. Commitments made at the 2025 NATO Summit include increasing spending to 5% of GDP by 2035—an unprecedented expansion totaling more than $4 trillion.
This spending surge reflects:
- Russian aggression and expanded hybrid tactics across Europe.
- Perceived unpredictability of U.S. security guarantees.
- A more fragmented and multipolar international order, elevating regional self-reliance in defense capabilities.
Evolution of Threats. While conventional platforms—ships, aircraft, and armored vehicles—remain vital, governments are prioritizing new domains:
- Drones and autonomous systems (air, ground, and maritime).
- Counter-drone and missile defense technologies.
- Cybersecurity, secure communications, and space-based systems.
- Artificial intelligence and robotics.
ESG and the Shifting Investment Climate
Historically, ESG frameworks excluded defense investments. Russia’s invasion of Ukraine reframed the sector as essential to protecting democratic freedoms and global stability. This has caused European institutional investors and private equity firms that once avoided defense to reconsider their positions. As a result, new opportunities include:
- Mid-market supply chain: Investors are increasingly targeting tier-two and tier-three suppliers—components, materials, and enabling technologies—where growth is robust but reputational risk is lower.
- Early-stage innovation: Start-ups in dual-use or defense tech (AI, robotics, space, cybersecurity) are attracting record levels of venture funding.
- Recapitalization and stockpiles: The urgent need to replenish ammunition, spare parts, and critical materials creates predictable demand cycles.
Procurement and Cross-Border Considerations
Defense ministries across Europe recognize that traditional procurement processes are too slow for today’s innovation cycles. Efforts are underway to:
- Expand rapid acquisition pathways first piloted for Ukraine-related needs.
- Increase transparency and provide more forward visibility into contract pipelines.
- Engage small and mid-sized enterprises alongside established prime contractors.
While cultural and bureaucratic inertia remain, the direction of travel is toward greater agility, especially for technologies deemed critical to national security.
In navigating cross-border deals, defense investors must also manage a patchwork of national security and investment-screening regulations:
- Preference for allied supply chains over suppliers from perceived adversaries.
- Increasing emphasis on component traceability and sovereign manufacturing capabilities.
- NATO’s €1 billion Innovation Fund and new EU programs aimed at facilitating cross-border collaboration and reducing compliance friction.
Market Segments with Growth Potential
Europe’s defense transformation is not limited to headline programs. Beneath the surface, specific market niches are emerging as attractive plays for investors seeking long-term growth and diversification. Some examples include:
- Stockpile replenishment: Ammunition, spare parts, and consumables depleted by the Ukraine war represent near-term, high-volume opportunities.
- Next-generation platforms and upgrades: Submarines, ships, fighter aircraft, armored vehicles, and associated systems are entering major recapitalization phases.
- Autonomous and counter-autonomous systems: Drones, counter-drone technologies, and affordable mass production solutions.
- Information and communication networks: Secure, resilient, and high-speed systems to integrate sensors, weapons, and decision-making at scale.
- Space and satellite infrastructure: A fast-growing dual-use domain critical for surveillance, communications, and navigation.
Investors should balance enthusiasm for high-profile segments (e.g., drones) with attention to underinvested niches such as countermeasures, logistics, and maintenance infrastructure.
Risks and Considerations for Investors
The sector’s growth potential is significant, but so are its risks. Political shifts, regulatory hurdles, and technological volatility all require careful navigation. Some considerations include:
- Political and fiscal pressures: Populist movements and constrained public finances could slow defense budget growth.
- Dependence on key suppliers: Increasing reliance on tech firms, some still founder-led, introduces governance and continuity risks.
- Procurement variability: Despite reforms, contracting cycles remain complex, requiring patient capital and deep government-relations expertise.
- Technology obsolescence: Rapid innovation means systems can become outdated within months, demanding agile manufacturing and flexible contracting models.
Outlook
The European defense sector is entering a period of structural growth unmatched since the Cold War. With governments committing to sustained spending increases and the private sector overcoming historical constraints, opportunities are opening up across the value chain.
Investors who understand procurement dynamics, align with national security priorities, and identify under-served market segments are well-positioned to benefit from this transformation. The key will be combining capital with expertise—developing the partnerships, compliance strategies, and operational agility to navigate an environment defined by both opportunity and uncertainty.
Conclusion
The European defense sector has shifted from a niche market to a strategic investment frontier. Defense spending commitments through 2035, combined with evolving security threats, have created a durable pipeline of demand. At the same time, ESG norms, procurement processes, and cross-border regulations are recalibrating to enable greater private-sector participation.
For investors, the challenge is to move quickly but judiciously—identifying the right balance of traditional defense platforms, enabling technologies, and consumables; weighing risks across jurisdictions; and building the relationships needed to succeed in a market where government remains the ultimate customer.