Across NATO and its allies, defense budgets are rising fast, driven by shifting geopolitical priorities around the globe. A large proportion of this new investment is allocated not just to primes and tier 1 defense suppliers but also to neo-primes and upstream tier 2 and tier 3 companies, where capital is required to develop frontier technologies, modernize platform capabilities, scale up bottlenecks, and onshore critical inputs.
This is more than a step change in spending. Accelerating innovation, expanding supply chains, as well as evolving public attitudes signal that the structure of financing is also in motion, with private financial institutions playing a growing role, often supported by public de-risking mechanisms.
The evolving landscape requires a significant uplift from a primary markets perspective in financing the scale-up of the defense value chain. For those participating in the secondary markets, there are new opportunities to create portfolios and funds for clients looking for increased exposure to defense. For both, this includes partnering with public capital providers through de-risking and bridging instruments, such as to build (parts of) an industry or scale a (new) technology.
Reflecting the growing role of public-private financing partnerships, governments are increasingly establishing dedicated de-risking ecosystems, often through purpose-built public institutions that BCG refers to as Security and Defense Financial Institutions (SDFIs), such as the US Office of Strategic Capital (OSC) and the planned-for multilateral Defence, Security and Resilience Bank (DSRB). Established multilateral institutions, including the European Investment Bank (EIB), are also expanding their defense mandates by offering guarantees and other public de-risking instruments to support private sector capital participation.
Market Dynamics and the Defense Finance Ecosystem
Around the world, national policies increasingly favor defense spending, with budgets rising both in absolute terms and as a share of GDP. Demand is rising not only for conventional defense platforms but also for upstream components ranging from energetics and propellants to electronics and precision castings. Alongside these traditional supply chains, new defense technologies and growth sectors are redefining modern warfare, with advancements in autonomous systems, directed energy weapons, hypersonic platforms, and AI-driven command-and-control software shifting procurement.
Rising budgets are only half the story. Additional investment drivers include an evolving industry structure, amid the emergence of neo-primes, and numerous tier 2 and tier 3 suppliers. Smaller companies are leaning into emerging themes such as demand for affordable mass solutions, software-defined systems, and localization. Drone technologies developed in Ukraine demonstrate the viability of mass-produced, locally manufactured solutions, and this model is now being adopted more widely.
Governments are responding by engaging with neo-primes and selected small and medium-sized enterprises (SMEs) earlier and deploying de-risking tools to generate financing momentum. The combination of new financing options and an evolving supplier landscape is creating an ecosystem in which both public and private sector capital are fueling innovation and supporting financing, especially in non-prime segments. (See Exhibit 1.)
One major theme is a growing shift toward dual-use products such as AI, autonomy, cyber, space tech, and sensors, to name a few. Because these technologies map to civilian use cases, they are making growth more financeable. Canada is among the countries that have embraced innovations such as connected, software-defined command and control, linking sensors and decision-makers across domains. Many European nations are investing in software capabilities to enable next-generation assets such as autonomous vessels, which have dual defense/commercial applications.
Understanding Financing Needs Across the Defense Value Chain
Growing defense budgets and the ramp-up of major programs are generating substantial financing gaps that investors and financial intermediaries could fill. But effective engagement requires a deep understanding of sector dynamics, including platform capabilities, government guarantees, dual-use cases, critical value chains, and regulatory constraints that differ by jurisdiction. In addition, decision-makers must be equipped to navigate unique dynamics across regions, sectors, operating models, and risk, as well as make tough decisions on investment strategy, return profiles, and commitment timelines.
One vital task is to identify the downstream capabilities that benefit from upstream investment. For example, the US’s new PrSM strike missile and Germany’s Type 212CD submarine will require components such as precision casting, advanced electronics, specialty materials, and critical minerals. The suppliers of these components themselves operate with varying levels of supply-chain dependency, which may make certain spots in the value chain more—or less—attractive for financing. (See Exhibit 2.)
One example of an investable opportunity is in unmanned aerial vehicles (UAVs), where we expect significant growth driven by AI, fog computing, scaling initiatives, and innovations in battery technology. UAVs require numerous sub-sector inputs, and data suggests that US and NATO (ex-US) annual spending will increase by 14.1% and 8.3% (CAGR), respectively, between 2025 and 2033. Platforms such as the US’s Collaborative Combat Aircraft (CCA) program and Poland’s Warmate, together with innovations emerging from Ukraine’s defense-tech SMEs and German defense-tech companies such as Helsing and Quantum Systems, drive demand along the full value chain, with financing requirements spanning warheads and fuses to guidance systems, mechanics, and motors. (See Exhibit 3.)
Structuring the Defense Financing Opportunity
While governments can provide demand signals through procurement commitments, financing the expansion of the defense industrial base requires more than public spending alone. Governments primarily procure defense capabilities rather than finance the capacity expansion needed to produce them, and elevated fiscal deficits further constrain their ability to do so. Every major NATO and allied nation ran a fiscal deficit in 2025, with many countries carrying debt that exceeded their annual GDP.
Against this backdrop, we see two distinct options for financial institutions from a primary markets perspective. First, financial institutions can participate in the scaling of the defense value chain by providing capital to expand production capacity and support procurement ramp-up across the ecosystem. Second, financial institutions can partner with public capital providers through de-risking and bridging instruments, particularly for strategically important assets and investments aligned with geographic sovereign strategies.
Defense Finance: A Fundamentally Different Proposition
Private capital markets have ample liquidity, with investors and financiers actively seeking attractive long-term options to deploy capital. Defense increasingly presents compelling investment characteristics, including resilient cash flows underpinned by sovereign procurement. However, public spending is currently primarily directed toward acquiring defense capabilities rather than financing the industrial expansion required to deliver them. For private sector capital, this creates a significant role in financing the defense ecosystem. But some work is required to travel from an investment strategy to the bottom line.
Defense financing is a fundamentally different proposition from its civilian counterpart. Government regulations, sanctions screening, and security requirements must be navigated, while the lack of a unified taxonomy means sectoral expertise is becoming table stakes in many markets. In addition, the market is characterized by large, multi-year tenders rather than year-on-year sales, and political dynamics impact many procurement decisions. Procurement models are often complex, sometimes involving multiple agencies and taking into account regulatory requirements, as well as factors such as export controls and confidentiality. Because defense procurement is closely tied to national security and domestic industrial policy, local providers are usually favored, so winning a seat at the table requires proactive commitment to target markets and build relationships.
In parallel, financing security, resilience, and defense has become increasingly normalized in mainstream thinking, supported by evolving sustainability and ESG regulations. Financial institutions are responding. For example, we have seen pension funds removing blanket exclusions and proactively pursuing defense exposures. Impact investors are issuing position papers calling for the integration of security issues into a broader vision of sustainable finance. One major global bank has issued a $1.5 trillion target for security and resilience financing, while another has issued guidelines for Civil Defence, Security & Resilience bond issuance.
The most effective investment strategies are tailored to individual geographies, reflecting factors such as local military and industrial structures, capital markets access, and public financing pools. Characteristics such as the increase in domestic defense budgets, R&D funding in defense, industrial manufacturing capabilities, and capital markets depth are also proving decisive in choosing where and how to invest. Private investors that master these variables will play a vital role and bring the advantage of commercialization expertise into dual-use segments such as AI and cyber, identifying where bottlenecks and critical supplier dependencies lie in the value chain.
Growth of the Public Sector: Financing, De-risking Tools & SDFIs
Another option for financial institutions lies in partnering with public capital providers through de-risking and bridging instruments. (See Exhibit 4.) Public capital is increasingly focused on areas where it delivers the greatest additionality given the depth of private capital markets and the strong credit quality of sovereign demand. We see two priority areas closely connected to sovereign objectives.
First is scaling emerging technologies and businesses to bankability. Part of the defense build-out is being driven by innovative companies developing new technologies and critical components. These companies often require targeted support before becoming fully bankable. A case in point is Germany’s July 2026 national start-up strategy, which introduces a vehicle for the federal government to take direct equity stakes in early-stage defense-tech start-ups and scale-ups to close this bankability gap. Building on such approaches, SDFIs can develop clear perspectives on strategically important materials, technologies, and components, supported by asset allocation strategies based on the long-term potential of companies to deliver. Product offerings can be designed to efficiently support smaller-scale financing in cooperation with corporate and investment banks and other private sector capital providers.
Second is strengthening essential capabilities. Governments are increasingly seeking to ensure access to critical resources, technologies, and industrial capabilities that are key to their sovereign national security priorities. As a result, SDFIs are likely to develop dedicated strategic agendas around these priorities and allocate capital accordingly. While much of this capital is deployed to crowd in private investment, certain strategically important assets and technologies may require direct public financing where sovereignty or national security considerations limit private sector participation.
The number and range of institutions offering support to the private sector is growing. (See Exhibit 5.) Leading private financial institutions are responding to these prompts, partnering with existing organizations such as the EIB and many national export credit agencies. In Australia, for example, Export Finance Australia administers a dedicated US$3 billion Defence Industry Growth Facility for the domestic defense industry. Still, a substantial opportunity remains for new entrants.
SDFIs are among organizations taking steps to crowd in alternative sources of private financing, for example, through the NATO Innovation Fund and the OSC. Public procurement pools such as Security Action for Europe (which has pledged €150 billion in loans up to 2030) are set to funnel billions of Euros to the industry in the coming years. In July 2026, a joint statement from the UK, the Netherlands, Finland, and Poland reiterated their commitment to the Multilateral Defence Mechanism, a new financing model designed to strengthen defense financing, stimulate joint procurement, and aggregate demand in critical capabilities. The lower interest rates available to these government-led initiatives are helping borrowers access cheaper financing.
The NATO Ankara Summit in July 2026 marked a further step forward, with NATO endorsing its Innovation Scale-Up Package. The package is structured around three pillars: an “aggregated demand signal,” a call to action to private sector capital providers, and the launch of the NATO Engine to expand manufacturing capacity. Building on the Rapid Adoption Action Plan’s goal of fielding new technologies within 24 months, these measures signal that NATO now views private sector capital as indispensable to scaling the alliance’s defense industrial base.
Priority Actions for Private Sector Capital
All participants in the emerging defense, security, and resilience financing ecosystem have distinct priorities and business models that require tailored capabilities and actions to succeed.
Corporate and Investment Banks
Instead of thinking in terms of a new business line, corporate and investment banks may be better served by viewing defense capabilities as an essential overlay across all their existing activities, from research and analytics to capital markets and credit provision. Success requires a two-step approach. The first is to identify the most attractive financing options by understanding sovereign priorities, defense value chains, and financing ecosystems. The second is to embed dedicated defense capabilities across the organization to consistently identify, originate, and execute defense financing opportunities.
Asset Managers and Asset Owners
For asset managers and asset owners, defense increasingly offers investment characteristics that align with long-term investment horizons, supported by resilient, sovereign-backed cash flows. Asset managers will want to assess their clients’ appetite for defense-related exposure, develop investment products, and integrate defense into institutional mandates to meet this appetite. Asset owners will want to align their defense-related exposure and policies against their constituents and align investments as appropriate with national or regional defense industrial policy (for sovereign wealth funds and state and provincial pension funds). Both will want to embed defense into engagement and stewardship approaches, as well as ESG policies.
Security and Defense Financial Institutions
As the newest actors in the ecosystem, SDFIs create the greatest value by delivering additionality—mobilizing private capital rather than competing with existing markets. This means serving as effective counterparts to private capital by providing clear market signals, deploying de-risking instruments efficiently, and directing financing toward strategically important technologies, capabilities, and companies across the defense value chain. These new SDFIs will need to define their mandate (which could differ by geography) and determine their intervention strategies (where and why) and product capabilities (how). They will also need to build robust processes along with back offices, impact frameworks, and other basic requirements for public financial institutions.
Aerospace and Defense Companies
For aerospace and defense companies, from primes and neo-primes to tier 2 and tier 3 suppliers, the central challenge is financing the capacity expansion required to meet growing procurement demand. Governments primarily fund the acquisition of defense capabilities rather than the industrial capacity needed to produce them, leaving companies to finance investments in tooling, facilities, workforce, and inventory ahead of multi-year and often uneven procurement cycles. A company’s capital structure and position in the value chain therefore play a critical role in determining both its access to financing and its commercial leverage. Given the new financing ecosystem, assessing the various pools of public and private capital available—and the advantages of tapping them—should be a critical part of any financing strategy.
What all this shows is that defense is not a single market, but rather a diverse, rapidly evolving set of technologies, applications, and industrial value chains, each with distinct financing needs, procurement dynamics, and risk profiles. Strategies that account for this diversity and include institutional capability building, alongside engagement with public sector de-risking tools, will set the stage for success.
