The scope for investors in the defense industry as NATO increases spending, Europe scales up, and Silicon Valley leads in innovation
We’ve explored the rise of the defense sector several times in Preqin First Close over the past few months. Due to ongoing geopolitical insecurity, many eyes have been on developments in the space this year.
We covered the announcement of then prospective German chancellor Friedrich Merz to partially suspend the debt brake (Schuldenbremse), allowing up to €1tn in new spending on defense and infrastructure. We shone a light on European players, such as Helsing, as well as US ones, including Anduril. And we didn’t miss NATO members’ pledge to increase defense spending to at least 5% by 2035.
Here, we take a second look at developments on the global, NATO, US, and EU level, and what they mean for private capital.
Global military expenditure surges as almost all European countries up spending
According to the Stockholm International Peace Research Institute (SIPRI), global military expenditure increased by 9.4% in real terms to $2.72tn in 2024.
NATO members spent $1.51tn in 2024, accounting for 55% of global military spending. More than half (18) of the 32 NATO members committed at least 2% of their GDP to military causes. In Europe, defense spending rose by 17% to $693bn last year. Almost all European countries increased defense spending in 2024, apart from Malta, according to SIPRI.
Technological innovation key as NATO announces increase in defense spending
NATO’s Hague Summit Declaration in June included the pledge to increase defense spending to at least 5% of GDP by 2035. Of that, 3.5% is intended for core defense investment, while 1.5% will be part of a wider definition of critical infrastructure.
In 2025, European NATO members’ defense spending is expected to increase by 5.9%. It is reportedly on track to reach $480bn this year, with allocations by regional allies averaging 2% of GDP. An increase to 5% by 2035 would lead to $1.79tn annual funding.
An instrument for boosting innovation in defense is the NATO Innovation Fund. It’s focused on deep tech but also supports dual-use technologies. Financed by NATO’s 24 European nations, but independently of NATO, it has a potential €1bn-plus capital pool.
It recently went through changes in its investment leadership. Ulrich Quay and Sander Verbrugge joined as partners in July, with Patrick Schneider-Sikorsky the only founding partner remaining since the launch in 2023.
The fund can finance seed to series B rounds, with ticket sizes of up to €15mn. In September, as listed on Preqin Pro, it co-led an €8mn seed funding round for Kreios Space with JOIN Capital. Grow Venture Partners, Xesgalicia, and Tasivia Global also participated. Kreios Space plans to use the capital to launch its first two very low Earth orbit satellites (for more on the space industry, read our Second Look at it here).
In 2024, the NATO Innovation Fund signed a Memorandum of Understanding with the European Investment Fund (EIF) with the aim of driving technological innovation in the sector by inspiring more private capital funds to invest, broadening the range of equity sources available.
Europe’s challenge of translating historic turning points into practice
The German words ‘zeitgeist’ and ‘zeitenwende’ (historic turning point) are frequently used in the context of describing Europe’s changing attitudes toward defense investment. But how can those rhetorical instruments, which suggest a historic turning point in military spending (Zeitenwende), influence private capital in practice?
The New Martial Plan, a white paper by investment group Carlyle, suggests we are at the start of a ‘structural capital rotation toward Europe’ and a ‘private capital renaissance’, boosted in part by direct investment in defense and adjacent infrastructure that could be worth an incremental €9tn over the next decade.
A range of instruments to leverage more than €800bn in defense spending are highlighted in the European Commission’s strategic initiative, ReArm Europe Plan/Readiness 2030. These include greater flexibility on national spending and a €150bn loan instrument (SAFE) for joint procurement. Another important pillar is making progress on the European Savings and Investments Union to attract more private capital.
Preqin Pro currently lists 128 closed-end commingled funds open to investment with exposure to defense – 53 of them with a main focus on defense. Of those 128, the most dominant strategies are VC-focused (76), followed by buyout (15), and growth (13).
Within those funds, the majority (88) have a geographical focus on North America. Asia follows (18), with Europe just behind (14).
Preqin data shows Europe-focused VC defense deals totaled $949mn as of June 2025, surpassing the $690mn for the whole of last year.
Silicon Valley driving defense sector innovation in the US
Like Europe, the US is also upping its defense spending. It could exceed $1tn for fiscal year 2026, with a focus on innovation and modernization, according to US think tank, the Council on Foreign Relations.
AI is being increasingly utilized across the defense sector. In July, Google, Anthropic, OpenAI, and xAI were awarded government contracts to support the adoption of AI in tackling national security issues.
And in June, US defense technology company Anduril raised $2.5bn in a series G funding round, at a reported valuation of $30.5bn. Peter Thiel’s Founders Fund led the round with a $1bn investment.
Anduril’s valuation has more than doubled from $14bn in 2023. Established in 2017, the defense technology company points to its AI-driven approach to address changes in contemporary conflicts as a key growth lever. Last year, the company generated revenue of $1bn.
And there is further evidence that Silicon Valley, and California in general, has become an important breeding ground for defense VCs.
In May, Chaos Industries raised $275mn of series C funding, led by New Enterprise Associates and co-led by Accel. Chaos Industries is a technology company that specializes in defense and surveillance. In June, Impulse Space raised $300mn in a series C round, led by Linse Capital. The company focuses on in-space transportation services for the inner solar system.
Further significant VC-backed deals in 2025 listed on Preqin Pro include:
Divergent Technologies raised $250mn in a series E round last month, focusing on digital manufacturing to scale the production of defense components.
In July, Castelion Corp raised $350mn in a series B round to work on hypersonic missile systems for national defense.
In March, Epirus completed a series D round, raising $250mn. The company focuses on microwave systems for defense applications.
Saronic Technologies focuses on autonomous surface vessels for naval and maritime use. It completed a series C round to raise $348mn in February.
There are already 62 VC-backed deals listed on Preqin Pro for 2025 targeting defense with the US as a deal location, above the 41 for the whole of last year
We are at a turning point in defense, not only in Europe and the US, but globally. And it’s likely we’ll keep seeing increased investment.
Kerstin Weil is Assistant Editor of Preqin First Close.
Second look is edited by Libby Fennessy, Production Editor of Preqin First Close.
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