Investing in the EU defence sector

The European Union is rearming. Russia’s invasion of Ukraine and broader geopolitical tensions have pushed Europe to reverse decades of underinvestment in defence. Military budgets have grown sharply. By 2030 the EU aims to be “defence ready”, meaning prepared for and able to respond to any defence-related crisis, including high-intensity warfare.

Building the industrial base and infrastructure to meet these ambitions requires significant public spending and creates opportunities for private investors. At the same time, the sector is heavily regulated, with governments acting not only as regulators but also as primary customers. The following provides key considerations for non-EU investors.

A supportive EU policy framework

The EU has adopted a strategic, long term policy to strengthen its defence sector. The European Commission’s White Paper on the Future of European Defence (March 2025) sets out overall policy goals and the Defence Readiness Roadmap 2030 (October 2025) defines specific actions for the coming years.

These goals are supported by a growing suite of legal, political and financial instruments:

• EDIS (European Defence Industrial Strategy), which sets out specific plans for the European defence industry
• EDIP (European Defence Investment Programme), which is forthcoming and will implement EDIS
• SAFE – a EUR 150 billion loan instrument that is already boosting defence spending by individual Member States
• EUDIS, EDIPRA, ASAP and the Defence Equity Facility are each targeted initiatives to address capability gaps, procurement shortcomings and funding needs

Finally, a proposed Defence Readiness Omnibus bill sets out ways to speed up permitting, relax government procurement requirements, commits to apply state aid and merger control rules in a measured way and overall wants to cut regulatory tape in the defence sector. 

There is a common theme: The EU is serious about boosting defence by mobilizing private capital, facilitating investments and broadening access to third-party financing.

One EU policy, 27 national systems

Despite an increasingly integrated defence policy, the EU remains a union of 27 Member States, each with its own laws, political priorities and defence demands. Many Member States are now allocating record levels of GDP to defence, in line with NATO commitments. This creates sizeable opportunities across the entire value chain — but also regulatory complexity. A successful investments requires understanding national rules as well as the overall EU framework.

Availability of financing

Historically, European banks and institutional investors in the EU were hesitant to finance or invest in defence-related activities due to ethical considerations and the EU’s demanding ESG framework. Defence was often grouped with other “restricted sectors” such as tobacco, coal or gambling.

This has shifted substantially. Most major banks have updated their policies to permit financing of defence activities, typically prohibiting only involvement in internationally banned controversial weapons (e.g., anti personnel mines, cluster munitions, biological or chemical weapons). And the European Banking Federation also recently confirmed that EU financial regulations do not pose specific barriers to lending in the defence sector.

Publicly-backed financial institutions, notably the European Investment Bank (EIB) and national development banks have also expanded their mandates to include security and defence. Activities eligible for support are defence-related infrastructure, equipment, dual-use technology, and companies in the respective supply chain. EIB has also improved access to intermediated lending (i.e. via national private/commercial banks) to channel funds to smaller companies in the sector. 

ESG considerations

The rise in defence investments and large amounts of funds earmarked for sustainable investments raises questions about compatibility with the EU's stringent ESG framework. Major EU regulations such as the Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation do not exclude the defence sector from its scope, but they impose compliance requirements. In a nutshell, they require that an investment does not do significant harm to other social or environmental objectives or complies with certain minimum safeguards, including the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Becoming comfortable that a defence investment meets these requirements can be challenging, both in terms of the subject matter but also regarding possible enforcement risks by regulators and NGOs. 

However, the European Commission recently clarified in the context of its Defence Readiness Omnibus (see above) that investments in the defence sector are compatible with the EU's sustainable finance framework, provided proper risk mitigation measures are undertaken and assessments are done on a case-by-case basis.

Industrial players, start-ups, suppliers

The European defence sector is diversified. There are the large established primes, often national champions, some of which are also publicly traded. They profit directly from increased military budgets, are well established and typically have access to a full range of financing options. Significant investments, if at all, are only possible on a large scale.

By contrast, many tier 1 and tier 2 suppliers in the defence supply chain are, however, often small or medium-sized entities, in many cases family-owned. Some are highly specialized are highly specialized defence contractors. Others are pivoting from supplying the civilian sector to producing defence or dual use products. This is particularly noteworthy among automotive suppliers, where many are diversifying their product and customer base. These companies often require external financing to expand production capacities and scale up quickly given recent surges in order volumes.

In recent years, more innovative start-ups with concepts for artificial intelligence, cyber solutions, and drones have emerged. These range from large international companies with valuations in the double-digit billions to early-stage micro-enterprises. Strategists are also expanding their product portfolios and R&D capacities by acquiring or cooperating with start-ups and venture capital investors are increasingly active in the sector as well.

Foreign Investment Control

The European Union is open to foreign investments, but 24 out of the 27 EU Member States operate FDI screening regimes. Non-EU/EFTA-investors are subject to FDI control, which may result in a refusal of their (direct or indirect via a fund) investment in a European company active in certain sectors. Investments touching defence or other critical technologies continue to attract particular attention. The European Commission's fifth annual report (published in October 2025 for 2024) on FDI screenings across the EU notes, for example, that of all in-depth Phase 2 assessments conducted in 2024, 37% concerned defence-related activities, up from 26% in 2023.

The EU currently operates only a framework regime for FDI screening under the FDI Screening Regulation, with substantive review powers remaining at national level. A political agreement has recently been reached on a revision of the FDI Screening Regulation aimed at further harmonising FDI screening across the EU, with entry into force currently expected in Q2 2026, subject to formal adoption by the European Parliament and the Council.

While the final text has not yet been published, the agreed reform is expected to require all Member States to operate a national FDI screening mechanism, based on a common minimum scope covering, inter alia, dual-use and military items, AI, quantum technologies, semiconductors, critical raw materials, key infrastructure, electoral systems and certain financial entities. The revised framework is also expected to introduce minimum procedural harmonisation, establish an EU-level screening database, and extend screening to investments channelled through EU-based subsidiaries (Greenfield investments), supported by further Commission guidance to promote consistent application. However, until a revised FDI Screening Regulation is formally adopted and implemented, investors must continue to navigate diverging national FDI regimes. Even under a more harmonised EU framework, material differences between Member States will remain. And if the target is active across several jurisdictions, more than one FDI filing may become necessary, with a positive outcome typically also being a CP to completion of the investment. National screening mechanisms vary considerably—by notification thresholds, by how broadly the “defence sector” is defined, and by the intensity of review. In practice, direct or controlling investments in weapons manufacturers or tier-one OEMs face the highest scrutiny, while minority or upstream investments in companies further along the defence supply chain typically encounter a lower, but still non-negligible, level of review. It should be noted that transactions involving defence-related technologies and software are also falling within the scope of many FDI regimes. 

In this evolving landscape, being able to effectively navigate all applicable FDI regimes across the EU will be key for a successful investment.

National security obligations on ownership and governance

Even if foreign investment clearance is obtained, additional national security constraints may apply. These can include nationality or residency requirements for directors and senior managers, mandatory personal and facility security clearances, location and site controls for sensitive operations, and state special rights (including golden shares) over strategic decisions. Investors may also be required to implement ring‑fencing arrangements, information segregation, local incorporation of certain functions, and data localization measures.

Government contracts: Opportunities and barriers

EU defence markets are procurement driven and Member States and their national armed forces are the largest customers. A defence company' s success depends on its ability to win tenders. EU procurement law is harmonized across the EU but tenders are still mostly conducted by national authorities to meet national demand. Joint tenders of two or more Member States to combine purchasing power and order at scale remain the exception. Though, the EU's policy instruments include measures to incentivize joint procurement. 

EU procurement law does not impose a formal "Buy European" rule and non-EU bidders are usually eligible unless specific security concerns apply. However, the EU's recent policy instruments indicate a trend towards favouring EU-based bidders, putting stronger emphasize on European sovereignty. For example, SAFE, the EUR 150 billion loan program for defence procurement, requires bidders to be based in and managed from the EU/EEA or Ukraine. Bidders may also not be subject to control by a third-country entity and must use infrastructure, facilities, assets and resources located here. The EU's Defence Readiness Omnibus also envisages that certain tenders are only available to EU-based bidders and products that have been designed in the EU or where components originating from outside the EU do not exceed a 35% threshold of the estimated costs of the end product.

In addition, defence tenders are often complex, with contracting authorities placing strong emphasis on security, reliability and a proven track record. This can make accessing procurement driven markets especially difficult for start-ups and newcomers. 

To mitigate these risks, investors often target companies further up in the defence supply chain and which have a diversified customer base or which produce dual-use products that can easily by marketed to both the defence and civilian sector. 

National markets

Despite a converging EU policy framework, defence markets in the EU remain predominantly national. Governments will tender primarily for their national demands and design requirements are often driven by national priorities as well. This limits a company's ability to scale rapidly across borders and necessitates careful market‑by‑market strategies. In Germany, for example, the prohibition on stockpiling war weapons production and stringent export control rules further shape market access and supply planning. Essentially, weapons can only be produced if there is a government order backing production. Comparable national rules, including licensing and end‑use controls must be factored into cross‑border business models.

Defence specific compliance requirements

Compliance obligations in the defence sector are exacting and extend to both organizations and their products. Requirements relating to security, export controls, quality assurance, cyber resilience, and supply chain integrity are commonly passed on to subcontractors and suppliers.

Early‑stage companies can therefore face a disproportionate compliance burden relative to their scale, including the need to implement audited processes, maintain secure IT and facilities, and evidence robust screening and record‑keeping. Given the industry's proximity to the public sector, particular attention must also be paid to anti-corruption and sanctions compliance.