In light of the military action in the Middle East, whilst geopolitical risk is always a key consideration for investors, there is no doubt it will have risen to the very top of the agenda this week.

Published: 10 March 2026
Authors: Holly Hirst

While the immediate political and humanitarian consequences are paramount, the conflict also reinforces a broader structural trend already visible across private markets: defence and security are once again central to government policy, capital allocation and investment strategy.

For UK private equity, particularly in the midmarket, this raises important questions as to whether such a shift may reshape how sponsors think about portfolio construction, sector exposure and transaction risk and, indeed, whether this shift is already afoot given the Russia-Ukraine war and other recent conflicts around the world.

Defence moves from excluded to strategic

For much of the past decade, we have seen a reluctance from PE funds to invest in the defence sector.  The common reasons quoted have been:

• ESG constraints: The idea of investing in defence has often been viewed as “untenable” with traditional interpretations of “ESG” and has often been seen as mutually exclusive to ESG, largely due to the perception that defence is mainly associated with weapons manufacturing and the difficulty in balancing this with the social objective of “peace” and compliance with international law.   Many investors have chosen to not open Pandora’s box and have opted to give the defence industry a wide berth due to these challenges.
• reputational sensitivity: Interlinked with the ESG constraints, sponsors have exercised caution in making investments in defence because their GPs and LPs do not want any reputational damage to result from making such investments.  It is for this reason that LPs have often requested specific investment restriction language around ammunition and the involvement of portfolio companies in its production, distribution, supply or trade, for example.  The last thing a sponsor wants is to be front page news for playing a part in a global catastrophe.
• deal complexity:  There are numerous hurdles in making these investments. These include complex due diligence processes resulting from the additional challenges presented by classified information requiring ‘clean team’ arrangements or security clearances, limitations on W&I insurance coverage, change‑of‑control triggers in government contracts, and extended timelines under the National Security and Investment Act 2021 (NSIA) or FDI regimes.  All of these complexities and potentials for delay are unattractive to sponsors who are under pressure to deploy funds promptly so they can quickly evidence returns.
• return on Investment timelines: Investments in the defence sector often have longer ROI timelines due to the complex procurement processes and R&D cycles in the industry; regulatory challenges; the deal complexities that will undoubtedly arise for the buyer on the ultimate exit and supply chain challenges, to name but a few.  As a result, holding periods of 8–10 years are not uncommon, compared to the more typical 4–5 years seen in other sectors. Therefore, these types of investment are likely to be more attractive to long term funds and “patient capital” funds or where there is the potential to transfer to “continuation funds” to achieve liquidity sooner.

Global military conflicts, combined with heightened cyber, space and infrastructure threats, have exposed the limits of public funding alone in sustaining modern defence capability. Governments are now not only increasing defence budgets, but actively seeking private capital to support supply chains, innovation and resilience.  As a result, we have seen a shift in the messaging coming from Governmental Entities, including the European Commission, in the last year around how ESG and reputational concerns can be navigated in defence sector investments with careful consideration.  The European Commission has been re-framing the concerns by indicating that investment in defence can align with the UN Sustainable Development Goals, stating that “the defence industry is a crucial contributor to the resilience and the security of the Union, and therefore to peace and social sustainability. Given its contribution to resilience, security and peace, the EU defence industry enhances sustainability.” This change in outlook and the fact that the industry is heavily regulated could be seen as mitigating the perceived adverse impact of making such investments.

Consequently, we are starting to see a cautious change of approach emerging, however. Crucially, midmarket investors are recognising that investment in defence is an opportunity that extends well beyond traditional weapons manufacturing. Areas such as aerospace components, cybersecurity, communications, data analytics, advanced manufacturing and space technologies — many of them “dual-use” — now sit firmly within scope. These businesses often serve both civilian and defence customers, making them more accessible to a broader range of sponsors.   In parallel, encouraged by the evolving stance of governmental entities, many sponsors and LPs are recalibrating their ESG frameworks to distinguish between prohibited weapons systems and defensive or dual-use technologies that support national and economic security and pension funds and insurers are re-engaging with the sector. For UK sponsors, this shift has broadened the pool of potential capital available and reduced the friction that historically accompanied defence-related investments.

Private equity deal activity: signals from the market

Several global private equity firms have begun exploring dedicated defence and security strategies.  In the mid-market, a prominent fund has actively invested in the UK defence supply chain, backing a drone training provider in February 2026 to support its growth across security and defence sectors.

In the US, a fund has agreed a $2.9bn take‑private of a major aerospace systems and components supplier. While large-cap in scale, the transaction is instructive: investors are backing defence-critical manufacturing assets with long-term customer relationships and strong aftermarket revenues.

At the industrial midmarket end, sponsors have been building defence-oriented platforms through acquisitions including pursuing classic buy-and-build strategies across fragmented aerospace and defence supply chains.

More generally, data providers report that European PE defence deals are on track to reach their highest levels since the Ukraine war, supported by rising national defence budgets and EU-level funding initiatives. Activity has focused on aerospace components, military engineering and defence-adjacent manufacturing — sectors where UK midmarket sponsors already have deep experience.

Defence as a portfolio diversification opportunity in an AI-heavy market?

The renewed interest in defence also reflects broader portfolio considerations. While artificial intelligence remains a powerful long-term growth theme, concerns are mounting around valuation and concentration risk. A relatively small number of AI-linked technology companies now account for a disproportionate share of market gains, prompting investors to look for assets that are less correlated to technology sentiment.

For private equity, defence and security offer a compelling counterbalance. Demand is underpinned by long-term government spending commitments rather than consumer cycles, and revenues are often supported by regulated procurement frameworks. For midmarket sponsors, these characteristics can provide downside protection at a time when parts of the technology market appear increasingly crowded.

Importantly, this is not an “either/or” decision. Many defence assets are themselves increasingly AI-enabled, allowing sponsors to retain exposure to technological upside while anchoring portfolios in strategically supported sectors.

Continued challenges

For sponsors who have not historically invested in defence, the jump to investing in such a sector will not happen overnight.  Such sponsors will need to acquire the knowledge required to invest in such a complex sector and potentially entertain lateral hires to build up their capabilities to knowledgably shift their focus.  Similarly, the opportunity to invest in these sectors will likely arise at “fund-creation” stage, so that the appropriate frameworks can be built into the fund documentation and the LPs with an appetite for such sectors can be approached.

For UK-focused transactions, regulatory risk remains central. NSIA has become a defining feature of defence and defence-adjacent dealmaking.  Mandatory notification requirements apply to a wide range of activities relevant to midmarket PE, including military and dual-use technologies, advanced materials, communications and data infrastructure. Even minority investments, internal restructurings or bolt-on acquisitions can trigger review, with extended timelines and conditional outcomes.

The current geopolitical environment is likely to sharpen scrutiny further, particularly where transactions involve foreign ownership, cross-border technology transfer or complex fund structures. For sponsors, NSIA risk is not a late-stage issue — it must be assessed at the outset, alongside valuation, financing and execution risk, along with balancing the cost of the more complex DD exercise that will likely be required given the challenges mentioned above.  Early regulatory analysis, careful transaction structuring and realistic deal timetables are now essential to maintaining certainty and protecting value.

Looking ahead

Recent escalations in global security tensions are a reminder that geopolitical risk is no longer a background consideration for investors. It is shaping government policy, market behaviour and capital allocation in real time.

For UK private equity, defence and security are no longer niche or opportunistic themes. They are becoming core components of midmarket investment strategy — driven by structural shifts in global security, evolving ESG frameworks and the need for portfolio diversification in an increasingly concentrated market.