The continent has increased its financial commitment to its own security, as it scrambles to compensate for an increasingly stretched and less committed partner in Washington. Weapons purchases alone won’t solve its procurement crisis.
The challenge is much deeper: an industrial base that is constrained by its inability to rapidly manufacture systems at volume and scale.
Where defense innovation once faced a so-called Valley of Death of bureaucratic and funding barriers, the new constraint is the Valley of Production: a system that’s too slow to meet urgent military needs.
The capability gap could take a generation to close, and that is time Europe does not have. Russia’s shadow war is accelerating as fighting in Ukraine grinds on, and there are ever louder warnings about Moscow’s capacity and desire to strike at NATO’s Eastern flank.
The technology to compress Europe’s production timeline exists; it is battle-tested in Ukraine and should be put to use. Private capital markets can be a catalyst to accelerate the growth of Europe’s defense industry if policymakers remove the barriers that have limited their involvement.
Ukrainian achievements in defense technology and deployment have redefined what is possible in asymmetric warfare while demonstrating an astonishing ability to rapidly step up production. Ukraine built more than 4 million drones in 2025 and plans 7 million this year, far more than all NATO countries combined. Examples of its innovation and development have transformed the battlefield:
- Magura naval drones have destroyed or damaged about 15 Russian warships in the Black Sea, including the first sunk by an unmanned surface vessel, and shot down a Russian Su-30 fighter jet. US manufacturer Red Cat has licensed production for the American market.
- Kvertus has built the Atlas electronic warfare network, linking approximately 8,500 jamming and detection units across 1,200km (about 750 miles) of frontline into a single AI-coordinated system, controlled from a single operator console.
- Skyeton’s Raybird (ACS-3) long-endurance reconnaissance UAV has logged more than 300,000 combat flight hours, carries a laser target designator and live first-person view (FPV) feed, and a hydrogen-hybrid variant is already flying combat missions.
None of these are prototypes, they are combat-proven, deployed-in-theater systems. The question is not whether Ukraine has built what Europe needs, it is how Europe can rapidly scale and extend these capabilities for its own security.
It’s not just the technology and doctrine that are different. The capital sources and risk environment have also shifted. In the US, Shield AI, Saronic, Epirus, and Castelion have all raised substantial private capital and developed products in anticipation of a shift in war-fighting doctrine, not in response to a formal procurement request.
Shield AI’s Hivemind autonomy platform was selected for the US Air Force’s Collaborative Combat Aircraft program at a $12.7bn valuation; Saronic is delivering autonomous vessels under a $392m Navy contract; Epirus’s Leonidas high-power microwave systems are deployed at CENTCOM; and Castelion has completed more than 25 hypersonic flight tests.
The traditional model of defense ministries defining their requirements, funding them with staged deployment of sovereign tax dollars, and the whole process being overseen by government auditors, cannot work for Europe.
It is holders of private capital, underwriting risk in anticipation of returns, that can provide the speed and risk tolerance for battlespace transformation. The role of governments is to set interoperability standards, commercial market boundaries, and reduce barriers to attracting investment.
Global venture capital commitment to defense rose from $0.5bn in 2022 to $2.6bn in 2024, and $4.7bn in 2025. For example, Bessemer Venture Partners led Auterion’s $130m Series B funding round (including $25m from the US Office of Strategic Capital) for AuterionOS, the combat-deployed open operating system, which is now powering allied autonomous drone operations from Ukraine to Taiwan.
As commercial risk stabilizes, private equity can then provide capital to scale growth. Multi-year defense commitments provide investors with a revenue base that aligns with a seven to 10-year fund cycle, providing greater certainty.
Three forms of private capital: Venture, private equity, and (alongside them in the capital markets) sovereign wealth, from Europe, the Gulf, and the US, offer capital pools that can both accelerate and motivate European defense capability at scale. Each faces its own unique friction that policymakers can fix.
The continent’s institutional capital, including pension funds, insurance companies, and sovereign vehicles managing trillions of euros on behalf of European citizens, would seem the logical anchor for European defense investment.
Paris-based Tikehau Capital is raising an €800m ($936m) aerospace and defense fund backed by Airbus, Safran, and Thales; Weinberg Capital Partners, another French company, closed its oversubscribed Eiréné defense fund at €215m; and the European Union’s Defense Equity Facility has already committed more than €160m, with the European Investment Bank backing a €1bn defense fund-of-funds in March.
This is domestic capital with a strategic reason to invest. The European Commission has already clarified that the EU’s sustainable finance framework allows defense investment, and it has narrowed exclusions to only those weapons prohibited by international convention.
Guidance is not enough: institutional capital responds to binding rules. The key step is to establish defense and resilience as a positive contribution within the EU’s Sustainable Finance Disclosure Regulations (SFDR 2.0) product categorization framework that’s currently being negotiated, and to confirm that banks will not be penalized by lending to defense, without which private capital deployment cannot help build European defense at scale.
These are European regulatory decisions requiring no new treaty, no new institution, and no new budget, and they are available to European policymakers now.
The second pool is Gulf-based sovereign capital seeking financial returns, social benefit, and economic diversification, and it is already flowing into defense.
EDGE Group, the UAE’s state-owned defense conglomerate, generated $2.1bn in exports in 2024 and has invested in Estonia, Switzerland, and Poland.
Structured well, this is strategic industrial capital. Structured poorly, it creates the exact sovereignty risks the EU’s FDI Screening Regulation is designed to address.
Capital from the US is the third pool, which is also available at scale.
Warburg Pincus launched its European Defense Investment Platform this April, for example, with Munich Re’s MEAG; Veritas Capital closed Fund IX at $14.4bn in September, with $15.3bn now raised across the strategy; and KKR, Carlyle, and Apollo are each building defense exposure.
This money will face friction from the EU’s Foreign Direct Investment (FDI) Screening Regulation, which was agreed in December and will apply from the second half of 2027. It makes screening for potential risks to security and public order mandatory for dual-use items, hyper-critical AI, quantum, and semiconductors, among other sectors. The policy is missing a single EU-wide FDI filing portal for multi-jurisdictional transactions, binding Commission guidance on risk assessments, and published safe-harbor structures that will be accepted as mitigation.
These are political decisions that remove specific, named frictions that are straightforward to identify and address. The capital is positioned, the technology exists, and the market is forming with or without European policy leadership.
There is a finite window of opportunity to direct this capital wave towards allied defense priorities, and Business, like Europe, does not have the luxury of time.
Three pools; three logjams; three unlocks. All executable now.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
