The Rearmament Trade: Private Capital's Return to Defence

In early September, Cerberus Capital Management came within days of a deal to carve the defence arm out of Goodwin, a 143-year-old engineering firm in Stoke-on-Trent whose castings go into the Royal Navy's Dreadnought submarines¹. On 9th September the deal was agreed at £1.1bn, covering Goodwin Steel Castings, Goodwin International, Noreva, Easat and a pumps division, with completion expected in the first quarter of 2027 subject to regulatory approval². Taken on its own, that is just a large private equity deal in a corner of the market that until recently saw very few of them. What makes it worth dwelling on is the identity of the buyer. Cerberus was co-founded by Stephen Feinberg, who ran it until last year and now serves as the United States' deputy secretary of defence. He filed paperwork divesting from the firm, though that paperwork preserved a financial relationship with it, and since he took office at least four Cerberus-owned companies have won contracts from the department he helps run³. That is hard to read as an ordinary commercial transaction. It looks more like a quiet piece of statecraft, an extension of American reach into an ally's most sensitive industry, conducted through a balance sheet rather than a treaty.

The Goodwin deal is a good way into a change that has been building for two or three years. Private capital, having spent most of the past two decades treating defence as an industry it could not touch, has returned to it in earnest, and two things about that return are worth arguing. The first is that rearmament has rehabilitated defence as an asset class, in commercial terms and in reputational ones, and that the money is coming back through quieter and more careful structures than the great buyouts of the past. The second is that the same national anxiety now driving the spending has made governments wary of who ends up owning these companies, so that Europe increasingly wants its defence industry financed and held at home. A British firm like Goodwin can sit on the comfortable side of that instinct. A good many European firms are discovering that they cannot.

Why now

The demand side of the story is the simplest part of it. The world is a more dangerous place than it has been for decades. The Peace Research Institute Oslo counts more state-based conflicts today than in any year since 1946, when the Second World War had only just ended⁴. The wars in Ukraine and Gaza, together with the confrontation with Iran, have pushed governments everywhere to spend. Global military expenditure reached $2,887bn in 2025, the eleventh consecutive year of growth and the highest level SIPRI has recorded⁵, and in Europe the rise has been steeper still: EU member states spent €343bn on defence in 2024, 19% higher than the year before, and the European Defence Agency expects that to reach €381bn in 2025⁶.

Politics has hardened that pattern into a commitment. NATO members agreed in June 2025 to a target of 5% of GDP by 2035, of which 3.5% is core defence spending⁵. Britain intends to reach that 3.5%, though its ministers have yet to name a date even for the interim target of 3%⁷. Pressure from Washington to spend more has supplied the rest of the momentum. For an investor, this is the change that matters most, because it turns defence from a business with erratic, politically hostage demand into one with an order book that governments have effectively promised to keep filling.

From pariah to frontier

For most of the past twenty years, private equity kept its distance from defence, and its reasons were sound ones at the time. Many of the large institutions whose money the funds depend on ran negative screens that ruled out any exposure to weapons and munitions, which placed the sector outside the range of what a fund could comfortably buy. The industry was tightly regulated and carried the constant risk of falling foul of an arms embargo. At the top it was controlled by a small number of prime contractors whose grip on government contracts left little room for anyone new. And defence companies were, for the most part, capital-heavy hardware businesses that changed hands at lower multiples than the software assets private equity had spent years learning to prize. Put together, it was an industry built to repel the kind of investor who had done well elsewhere.

Two developments have worn that reluctance down. The institutions shifted first. A number of investors who once screened defence out have come round to the view that a properly funded defence base is now a condition of security rather than a stain on a portfolio, and the negative screens have loosened accordingly. The second change is the more interesting of the two, because it alters what defence investing actually consists of. A large and growing share of the money now goes into artificial intelligence, cybersecurity, drones, satellites and secure communications, technologies that serve civilian markets as readily as military ones⁸. This dual-use kit scales in much the way software does, which makes it comprehensible to investors who would never have bought a shipyard, and its civilian applications give an ESG-minded institution a defensible reason to take part. The digitalisation of defence, in short, has become the bridge over which private capital has walked back into the sector.

The funding gap

There is also a plain practical reason the industry needs outside money. Governments have raised their defence budgets far faster than private investment has followed, and someone has to close the distance between what states now intend to build and what their factories can actually produce. The strain is worst among the small and mid-sized suppliers that make particular components and sub-systems, many of them family-owned firms with neither the scale nor the capital to expand at the pace now being asked of them. A European Commission study in early 2024 estimated that defence SMEs faced a financing shortfall of €1bn to €2bn in debt and a further €1bn to €3bn in equity⁷. Banks have been reluctant to fill it, partly because these firms often cannot demonstrate the stable order book a lender wants to see, and ESG policies have kept a good deal of institutional money away as well.

Governments have started to invite private capital in openly. In September the UK head of Thales said the company was in discussions with the British government about drawing pension and infrastructure funds into defence, and pointed to the public-private arrangement behind London's Thames Tideway sewer as a possible model⁹. The logic is that, given a credible long-term signal of demand, patient investors would be willing to commit the billions needed to expand manufacturing capacity. Defence happens to suit patient capital unusually well. Its long development cycles and slow procurement timelines sit badly with the quarterly rhythm of public markets, but they suit a fund that is content to wait.

How the money goes in

What private capital does once it arrives is more varied than a wave of takeovers, and that variety tells you a good deal about the terms on which it has come back. Rather than buying companies outright, funds are increasingly taking minority stakes, forming joint ventures and financing supply chains. Apollo's partnership with the engineering group CIMIC, which produced the infrastructure services company Ventia, is a fair illustration from outside defence: the industrial partner brought the operational expertise, the fund brought capital and financial structuring, and both eventually realised their investment through a public listing. Working alongside an established defence name has a second benefit, in that it helps a fund manage the reputational and political sensitivities that still cling to the sector.

One strand of this activity deserves more credit than private equity is usually given, and that is the consolidation of the fragmented supplier base. A great many of the firms that make critical components are small, highly specialised and short of capital, and left to themselves they cannot modernise or grow to the scale the new demand requires. Bringing several of them together, installing better management and paying for better manufacturing is not the asset-stripping the industry's critics tend to assume. It is nearer to the reverse: taking small family businesses and building them into something that can last, and strengthening the wider European industrial base as it goes⁸.

The quietest part of the story is also, arguably, the most important, and it is private credit. Increasingly, funds are not buying defence companies at all but lending to them, and it is worth setting out why the arrangement works so neatly. Defence revenues are for the most part underwritten by governments, which makes the cash flows behind a loan about as dependable as corporate cash flows come. A lender can therefore charge the higher rates that mid-market credit risk normally commands while facing only a slim chance of actually not being repaid. Because debt confers neither ownership nor control, it also draws far less of the national-security screening that slows an equity deal down, and it is discreet in a way that suits companies reluctant to advertise a change of hands. High yield, genuinely low risk and a lighter regulatory path make for an uncommon combination, and it is a large part of why so much of the capital now entering defence arrives as debt rather than equity. The first European private credit fund devoted entirely to defence SMEs took its opening commitment only last year⁷.

Stretched valuations have pushed in the same direction. European defence shares spent 2025 setting records, and sellers have come to expect prices to match, to the point where some now want European buyers to pay what American ones would, terms that do not always reconcile⁸. When buying a company outright becomes this expensive, minority stakes, joint ventures and lending all begin to look the more sensible option, and that is broadly the shape the market has assumed.

What the numbers show

The deal data bears the pattern out, though it has to be read with some care, because the headline figure points the wrong way. PitchBook's numbers for the second quarter of 2026 show total aerospace and defence deal value down by almost 58% year on year, which reads like a sector in retreat¹⁰. It is not. That fall belongs to the aerospace side of the ledger, and to airlines in particular, which dragged the combined figure down. Defence on its own went firmly the other way. Deal value in defence roughly doubled, up 107% to $2.4bn in the quarter, while the number of deals rose from nine a year earlier to 44, an increase of nearly 390%. Over the first half of the year, defence investors closed 80 deals against 20 in the same period of 2025¹⁰. Anyone who stops at the 58% headline will draw precisely the wrong conclusion.

The gap between those two figures, a deal count that has surged and a total value that has climbed more modestly, tells you what sort of investing this is. The money is being spread across many smaller companies rather than piled into a few large ones, which is the signature of bolt-on acquisitions and growth-stage bets rather than the blockbuster buyouts that once defined the sector. The way out has opened up alongside the way in: public listings accounted for five of the 10 largest aerospace and defence exits in the quarter, among them a KKR-backed air ambulance operator and a British engine-parts maker with almost 250 years behind it¹⁰. A dependable exit does a great deal to make the entrance worthwhile.

Britain's exception

None of this is happening in a politically neutral setting, and it is here that the second argument takes over. As private capital has grown keener on European defence, European governments have grown warier about who comes to own it, and that wariness is now shaping transactions directly. One adviser at BCG caught the official mood in a phrase: "build it here, keep it here."¹¹ The concern reaches beyond defence in the narrow sense, taking in jobs, supply chains and control of the industrial base, but it presses hardest on the assets governments regard as sensitive.

For firms on the continent, this increasingly means that a sale to an American buyer has become difficult to complete. The private equity owner of Robin Radar, a Dutch maker of drone-detection systems, has reportedly been steering its forthcoming sale away from American arms makers, on the expectation that a US buyer would meet resistance from the Dutch government, and would rather accept a European buyer even at a price¹¹. The caution is not theoretical. In May 2026 the Dutch government blocked Kyndryl's acquisition of Solvinity, the cloud provider that hosts DigiD, the national digital identity platform, acting on the advice of its investment-screening authority¹². Poland has gone further still, placing its principal anti-drone manufacturer on a list of strategic companies whose sale it can simply refuse. Where a European government decides that an asset matters, it is now willing to keep it in European hands.

Britain is the instructive exception, and it is precisely why the Goodwin deal can go ahead where a continental version of it might not. Having left the European Union, the United Kingdom sits outside the bloc's foreign-investment screening regime, so a transaction such as Cerberus and Goodwin falls instead under Britain's own National Security and Investment Act, which lists defence among the sectors requiring notification. That Act will put the deal in front of British, and very likely American, authorities for review, but review is not refusal¹. Britain's defence industry is already bound tightly to the United States through arrangements like AUKUS, and Goodwin already supplies parts for American submarines as well as British ones¹, so an American firm owning a British defence supplier troubles London far less than the same prospect would trouble The Hague or Warsaw. The upshot is an uneven map. A British company can strike the sort of deal with American capital that its European counterparts, restrained by their own governments, are no longer free to make.

Rearming for what?

Where all this leaves the sector depends on which of three stories you take yourself to be watching. The first is that this is simply rearmament finding its financiers: a real and durable change in which private capital has taken up a settled place in an industry that genuinely needs it, and one that will hold even after the present wars have burned out. The second is larger and more optimistic. On this reading, defence spending is crowding in private investment more broadly, and through vehicles such as the EU's equity fund for defence research and NATO's innovation fund it is seeding technologies with civilian as well as military uses¹³. A continent long troubled by weak growth might, on that view, get a genuine industrial revival out of its security bill, which would be no small consolation. The third and most sceptical story is that a good deal of this is a bubble, and that capital chasing returns guaranteed by the state is only ever as safe as the state's appetite to keep paying. Britain, it is worth recalling, has signed up to 3.5% of GDP without yet fixing a date to reach 3. Guaranteed demand stays guaranteed only until a budget decides otherwise.

My own sense is that all three are partly right, which is not a tidy conclusion but is probably the honest one. The demand is real, and with no end in view for the conflicts behind it, it is likely to keep climbing as governments make up the ground they surrendered in the long years of under-spending. Some of the money will find its way usefully into the rest of the economy. And some of it will turn out to have been committed on the assumption that the guns keep firing. What is no longer in question is that private capital, so long a stranger to defence, is now settled firmly inside it and shows no sign of leaving. Europe is rearming in earnest. The more difficult question, and the one worth holding on to, is what it is rearming for.

This article reflects the position as of late September 2026. Cerberus's acquisition of Goodwin's defence unit was agreed on 9th September 2026 and is expected to complete in the first quarter of 2027, subject to regulatory approval.