Investments in European defence tech companies have rapidly evolved from a niche segment into a dynamic growth market. Current geopolitical shifts, reoriented government procurement, and the increasing commercialisation and mass production of security-related technologies are driving a surge in venture capital and private equity investments in this field.
The defence sector is subject to a particularly complex and strict legal framework. An investor’s origin and actual influence on the company post-investment are crucial, as even small stakes can be significant if they include veto rights, board seats, or inspection rights. For investors from non-EU or non-NATO countries, the threshold for a “security-critical” categorisation is particularly low. In many cases, reporting obligations apply from a ten percent holding of voting rights, regardless of influence or company size. The reviews required under foreign direct investment procedures can take several months and demand careful planning.
Eligibility under security law is also a key aspect. Government clients require reliability not only from the company but also from its owners and the individuals acting on its behalf. Control rights, such as veto or extensive information rights, can jeopardise eligibility, especially if they allow investors from third countries to access security-relevant information. Solutions include limiting influence and information rights to an acceptable level or excluding certain defence programmes from such rights, in consultation with the relevant authorities.
Contract design in the defence sector includes closing conditions such as FDI approvals and security checks, limited rights to information on a need-to-know basis, clean reporting mechanisms, and the protection of IP and security-relevant data. In the event of changes to the ownership structure, clear board structures and reporting obligations are also key.
Due diligence in the defence sector calls for a very careful examination of security-relevant aspects such as export control, military equipment classification, IP protection, and know-how protection. Defence tech companies must meet strict integrity requirements, as inadequate compliance systems can lead to exclusion from public tenders and may directly impact the company’s value. Sensitive information can be classified, including up to the level of NATO Secret, often requiring a clean team to conduct due diligence.
Investments in the defence sector offer great opportunities but require foresight in planning and a high degree of legal precision. Taking legal particularities into account reduces risks and creates the basis for successful investments in defence tech companies.
