Mobilizing Private Capital for National and European Defense

In recent years, Europe has been confronted with a geopolitical and strategic reality it had thought was a thing of the past—one for which European governments have proven unprepared from military, industrial, political, and budgetary perspectives. This situation has arisen primarily as a result of decades of underfunding of European defense budgets and defense industrial policies that have failed to maintain a European defense industry with the production capabilities required by 21st-century battlefields. The complicated fiscal and economic situation currently facing the vast majority of European governments, including Spain’s, means that there are no easy solutions from a budgetary standpoint. It is in this context that European governments are compelled to partner with the financial sector and capital markets to mobilize Europeans’ savings and revive the innovative and industrial capacity of European defense.

The Funding Gap in the Defense Industry

After the end of the Cold War, the financial sector, following the example of European governments and companies, withdrew from the defense and security sector. As a result, for several decades, defense companies, especially small and medium-sized enterprises (SMEs), faced serious difficulties in accessing capital, financing, and banking services that are essential for any business. To make matters worse, in recent years, the prevalence of ESG criteria in the financial sector has exacerbated this funding gap.

While comparisons between the U.S. and Europe on military matters are always unwelcome, it is important to highlight that in the U.S., this funding gap and disconnect between the defense sector and the financial sector has never materialized, to the point that, for many investors, a transaction with a defense company is viewed as just another deal within their industry vertical. Furthermore, the depth of the U.S. venture capital ecosystem has been particularly successful in fostering military innovation.

All things considered, France is the only European country where this funding gap has been minimized and even resolved. Over the past decade, the French government has successfully guided domestic banks and investors through a model of cooperation between the government, the defense sector, and the financial sector, coordinated by the French Ministry of Defense.

Mobilizing Private Capital

Given the gravity of the strategic situation, especially since 2022, both the Member States as a whole and the European Commission have taken notice, and in recent years significant changes have taken place, ushering in a new political consensus that recognizes the need to mobilize private capital. This new paradigm implies not only that European defense and security can now be considered a new market for private investment, but also that private capital and the financial sector are becoming indispensable partners for national governments and the EU. This new public-private partnership in defense industrial policy provides some relief to national public budgets, though by no means replaces them, enables the industry to modernize and optimize its operations, and opens the defense sector to savings from European citizens.

The past two years, in particular, have seen the creation of a considerable number of new funds, both private equity and private credit, dedicated specifically to the security, defense, and aerospace sectors. Banks and large generalist fund managers have also updated their ESG policies and fund mandates. Although the vast majority of generalist investors are entering the sector very cautiously and still maintain exclusion policies related to weapons or ammunition, the widespread shift that has taken place throughout 2025 and 2026 is significant compared to the prevailing mindset up until 2022, which viewed the armed forces, and the industry that supplies them, as unnecessary, immoral, or merely a humanitarian instrument or one serving civil protection functions.

To a large extent, this significant change in the financial sector has been a political and institutional success for the European Commission and several Member States. The European Commission, in particular, concluded 2025, a year marked by the publication of its White Paper and the “ReArm Europe” plan, with two key documents that have legal implications for the financial sector: a Communication analyzing the application of the regulatory framework for green finance and ESG to the defense sector, concluding that this regulatory framework imposes no restrictions and encouraging the financial sector to include defense within the scope of sustainable investments; and a Delegated Regulation clarifying that the only defense-related items prohibited for investors are anti-personnel mines, cluster bombs, and chemical and biological weapons.

For its part, the European Investment Bank has played a key role by updating its own policies and showing private investors the way forward in financing strategic security and defense projects. In Spain, the ICO and the CDTI have also begun working with the sector.

The last major institutional goal remaining in terms of raising awareness within the financial sector is to normalize transactions with arms and ammunition manufacturers, although not all investors can be expected to be willing to engage with this part of the industry. A positive market trend would mean that different European investors would develop varying levels of appetite for the defense sector, with some willing to finance and invest in offensive weapons and others adhering to clear exclusion policies that allow them to invest only in dual-use products, cybersecurity, or areas of extended defense such as infrastructure.

Private Capital as a Complement to Defense Industrial Policy and Support for National Security

Beyond providing financing and capital to fuel growth in the defense sector, which are essential for companies in the sector to be competitive and efficient, private capital will play an important role in Spanish and European defense industrial policy. Given budgetary constraints, the NATO commitment to reach 5% of public spending, the deep fragmentation of the industry at the European level, and the inconsistency of defense industrial policy in recent years, the financial sector and private investors are well-positioned to complement defense policy by providing stability and long-term capital to strategic companies.

This public-private partnership for national security is mutually beneficial both for the government, which can rely on domestic capital for the long-term financing of SMEs and startups, regardless of volatile political cycles and budgetary fluctuations, and for investors who, by accepting the long contract terms for defense equipment and the sector-specific risks, may receive, in return, an indirect sovereign guarantee, since the state is the ultimate buyer. The potential of this partnership extends beyond purely industrial policy, encompassing extended defense and new key areas such as, for example, infrastructure for national security and housing solutions for the Armed Forces.

On the other hand, it is important to bear in mind that when dealing with investments from European or U.S. capital in strategic companies, there are obvious national security considerations, particularly regarding the transfer of intellectual property, the potential decapitalization of the company, or the dismantling of strategic production capabilities. Even though these risks can be managed through the Foreign Investment Board and direct government involvement in coordinating private capital, specifically opening the door to European capital would create additional benefits, particularly in terms of reducing the fragmentation of European defense, promoting the internationalization and exports of Spanish industry, and fostering pan-European consolidation of the sector.

A Financing and Investment Strategy for Spanish and European Defense

To achieve the goal of mobilizing the financial sector and fostering a culture of defense among investors, Spain would benefit from a national strategy for financing and investment, particularly under the umbrella of a new and reformed defense industrial policy. As a starting point, a key priority of this strategy would be to identify technological areas and industrial capabilities to promote, as well as the role that the ICO and other national and European institutions should play as mechanisms for transmitting defense industrial policy to the financial sector.

From a strategic perspective, in addition to drawing lessons from the U.S. capital markets and institutional design, the British example deserves attention from Spain, as the British Ministry of Defense (MoD) has undertaken significant institutional reforms in 2026. With the publication of the Defense Investment Plan, its multi-year budget plan, in the summer of 2026, the MoD confirmed key signals of demand for the defense sector and potential investors, going a step further by creating a Defense Investment Unit within its National Armaments Director Group to coordinate the mobilization of private capital. This new office will be complemented by the end of 2026 with a Defense Finance and Investment Strategy to define its scope of action.