Investing in the German Defence Sector

Germany is rearming. Russia’s invasion of Ukraine and broader geopolitical tensions have pushed the European Union and its Member States, including Germany, to reassess their defence capabilities and reverse decades of underinvestment. Military budgets have grown sharply. By 2029 (in line with the EU's Readiness 2030 policy), Germany aims to be “combat 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 – not just on drones, tanks and ammunition, but also on infrastructure such as bridges, roads and ports. This 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 sets out key aspects to consider when investing in the German defence sector. 

A changing German mindset

Germany has enjoyed more than 70 years of peace, has been reunited for 35 years, and for many, even the potential threats of the Cold War are now a thing of the past. Mandatory military service has been suspended since 2011 and the German army, reduced in both size and capabilities, does not play a major role in German society. 

Things are changing. There is an ongoing debate about Germany's need to become more resilient as a society and to acknowledge new geopolitical realities. There is also a broad consensus that additional investments are needed – though political opinions vary on how spending should be financed and how funds should be allocated.

The federal government, states and municipalities are also reassessing their preparedness for various crises. And the German Bundestag – following heated debates – has recently reinstituted a mandatory military draft (though actual service remains voluntary). Overall, there are plans to increase military personnel from 183,000 in 2025 to at least 260,000.

Significant government funds for defence

The German government, until recently known for its budgetary discipline, has committed significant funds to its defence readiness: a EUR 100 billion debt-financed fund has been established specifically to bolster defence spending by the German military, in line with NATO targets. A larger EUR 500 billion debt-financed infrastructure fund makes funding available for various infrastructure projects throughout Germany. While not specifically earmarked for defence projects, many of the infrastructure projects (roads, bridges, ports etc.) are likely to have a dual purpose, both civil and military, and will boost Germany's resilience in the event of a crisis. Finally, military spending, along with spending on civil defence, intelligence services and cybersecurity, has been exempt from the constitutional "debt brake", meaning that additional debt-financed government spending is possible.

Germany's plans to bolster its defence sector are made in the context of an EU-wide policy shift. The European Union has adopted a strategic, long term defence policy. 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 Industry Programme), a regulation implementing EDIS with the aim of ensuring the timely availability and supply of defence products
• 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 and relax government procurement requirements, commits to apply state aid and merger control rules in a measured way and overall aims to cut regulatory tape in the defence sector. 

These policies, funding programmes and regulatory changes will also boost the German defence sector. There is a common theme: Germany and the EU are serious about boosting defence by mobilizing private capital, facilitating investments and broadening access to third-party financing.

Availability of financing

Historically, banks and institutional investors in Germany, as well as in the EU, were hesitant to finance or invest in defence-related activities due to ethical considerations, the EU’s demanding ESG framework or their own stringent investment policies. 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 the financing of defence activities, typically prohibiting only involvement in internationally banned controversial weapons (e.g. anti personnel mines, cluster munitions, biological or chemical weapons). The European Banking Federation has 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  and the German Bank for Reconstruction and Development (KfW) have also expanded their mandates to include security and defence. Activities eligible for support include European defence-related infrastructure, equipment, dual-use technology, and companies in the respective supply chain. KfW has also improved access to intermediated lending (i.e. via fund investments) to channel funds to smaller companies in the sector. 

The rise in defence investments and the large amounts of funds earmarked for sustainable investments have raised 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, which apply in Germany as well, do not exclude the defence sector from their scope, but they do impose compliance requirements. In a nutshell, an investment may not cause significant harm to other social or environmental objectives and must comply 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 and regarding possible enforcement risks from regulators and NGOs. 

The European Commission has 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 that proper risk mitigation measures are undertaken and assessments are conducted on a case-by-case basis. In Germany, BaFin, the Federal Financial Supervisory Authority, urges fund managers to be transparent about their defence investment strategies and has noted that in a recent survey 40% of consumers surveyed were opposed to considering defence investments sustainable.

Industrial players, start-ups, suppliers

The German defence sector is diversified. There are large, established primes, some of which are also publicly traded. They benefit directly from increased military budgets and typically have access to a full range of financing options. Significant investments, if any, are generally only possible at scale.

By contrast, many tier 1 and tier 2 suppliers in the defence supply chain are often small or medium-sized enterprises, in many cases family-owned. Some 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 in response to recent surges in order volumes.

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

Investors can also obtain indirect exposure to defence assets through investment funds typically structured as special Alternative Investment Funds (AIFs); UCITS vehicles are generally not suitable for such investments. There are no specific regulatory requirements in Germany for the establishment of funds that invest in defence assets; however, the respective management company may want to adopt their asset analysis to better cover defence related exposures (including any limitations to invest into defence assets by other laws). Moreover, investment funds offer a variety of investment structures, including debt instruments, mezzanine financings and equity investments. The larger German (and Luxembourg) investment fund management companies are in the process of establishing an increasing number of defence related investment funds.

Foreign Investment Control 

The European Union remains open to foreign investments, but 24 of the 27 EU Member States, now operate FDI screening regimes. In Germany, certain foreign investments are subject to national foreign trade law (mainly governed by the Foreign Trade and Payments Act (Außenwirtschaftsgesetz—AWG) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung—AWV)). 

Depending on the target’s activities, the AWV may require a mandatory filing or allow the Federal Ministry for Economic Affairs and Energy (BMWE) to call in a transaction for review. Defence-related transactions involving the acquisition of at least 10 % of the voting rights in a German target by any non-German acquirer (including from the EU) are subject to the mandatory ‘sector-specific’ foreign investment control regime. This includes German targets in the defence sector active in (i) developing, manufacturing, modifying or handling items listed in Part I Section A of the Export List (largely aligned with the EU Common Military List and the USML), (ii) developing or manufacturing defence-technology goods protected by a secret patent, (iii) producing IT security products or essential components designed to process classified information, or (iv) operating certain defence-critical facilities within the meaning of SÜG sec. 1(5) 2 no 1. With respect to goods on the Export List, mere possession is now sufficient to fall within the scope, meaning that downstream operators (e.g. logistics companies) may also be covered. 

Operators active in adjacent high-technology sectors (e.g., semiconductors, AI, robotics, space technology), including suppliers of dual-use goods, also fall within the scope of scrutiny under the cross-sectoral review mechanism. Depending on the percentage of shares acquired (with thresholds generally starting at 10-20 %), a filing may be mandatory and regulatory clearance needs to be obtained before completion of the investment.

Investments touching defence or other critical technologies continue to attract heightened attention at the EU level. 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 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. A political agreement has recently been reached on its revision, aimed at further harmonising FDI screening across the EU, with entry into force currently expected in Q2 2026.

The agreed reform is expected to require all EU Member States to operate national FDI screening mechanisms 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 (certain greenfield investments). These changes would have a significant impact on the German FDI regime, which currently does not cover greenfield investments and does not apply to all sectors mentioned above.

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, as well as location and site controls for sensitive operations. Investors may also be required to implement ring-fencing arrangements, information segregation, the local incorporation of certain functions, and data localization measures.

Government contracts: Opportunities and barriers

The German defence market is procurement-driven and the Bundeswehr is the largest customer. A defence company's success depends on its ability to win tenders. While the EU's policy instruments include measures to incentivize joint procurement (and Germany does participate in selected collaborative programmes), tenders driven by Germany's national demands are still the norm. 

Neither German nor EU law imposes a formal “Buy German” rule and non-EU based bidders are generally eligible unless specific security or security‑of‑supply concerns apply. In practice, EU policy priorities increasingly emphasise European industrial sovereignty. Some EU-sponsored funding programmes, for example, require that production of defence goods primarily takes place within the EU and exclude bidders who are controlled or managed by non-EU entities. In addition, decision makers are increasingly placing weight on in‑country capabilities, security clearances and assured supply chains. 

Furthermore, defence tenders are highly complex, with a 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 that have a diversified customer base or that produce dual-use products which can easily be marketed to both the defence and civilian sectors. 

Tenders are often perceived as slow and formalistic, constituting a bottleneck to fast and flexible procurement. For example, procurement projects with a volume exceeding EUR 25 million require approval by the budget committee of the German Bundestag. Germany's recently enacted Public Procurement Acceleration Act aims to simplify and speed up tenders. Procurement with partner nations is to be simplified, and conditions for small businesses are to be improved through advance payments. 

Specifically in Germany, scaling a defence-related business model is also limited by the constitutional prohibition on stockpiling war weapons, and any production outside of specific government tenders requires permits from the German government. This might also apply to start-ups, especially in the drone sector, creating an additional barrier to scaling for early-stage enterprises. In addition, stringent export control rules further shape market access and supply planning. 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 demonstrate 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.