Is Europe Removing The Barriers To Defence Investment? What Investors Need To Know

For many years, defence investment occupied an uncomfortable position in private capital markets. While investors were willing to support aerospace, cyber and advanced technology businesses, defence-related activities were often restricted through fund documentation, environmental, social, and governance (ESG) policies and investor mandates. As a result, potentially investable defence and dual-use businesses frequently faced barriers to accessing capital.

That position is now beginning to change. In June 2026, Invest Europe launched new model Limited Partnership Agreement (LPA) language designed to support private capital investment in Europe's defence and dual-use sectors. The proposal introduces a significant shift in approach: defence investments should be treated as permitted unless prohibited under international law, rather than restricted by default.

Why has defence investment historically been restricted?

Historically, many investors applied broad restrictions to defence-related activities due to concerns around controversial weapons, sanctions, export controls, ESG requirements and reputational risk. Fund documentation often excluded "defence" or "military" activities without clearly distinguishing between prohibited weapons programmes and legitimate defence technologies.

This created challenges for companies operating in increasingly important dual-use sectors such as artificial intelligence, cyber security, autonomous systems, advanced manufacturing and space technologies. Many of these businesses serve both civilian and defence markets, yet restrictive fund language could limit access to investment despite the activities being lawful and strategically important.

As defence technologies have evolved, the gap between traditional investment policies and modern security requirements has become more apparent.

What is changing with Invest Europe's new LPA template?

Invest Europe's proposed model language provides a new starting point for discussions between fund managers and investors. Rather than assuming defence investment is restricted, the model establishes that activities should be permitted unless prohibited under international treaties. It specifically excludes weapons banned under international law while confirming that other defence and dual-use activities should not be excluded solely because of their connection to the defence sector.

Importantly, the template does not remove investor choice. Limited Partners and General Partners can still negotiate additional restrictions through side letters, governance arrangements or investment-specific provisions. However, the proposal aims to remove unnecessary barriers and encourage more consistent approaches across the market.

What is driving renewed investor confidence in defence?

The shift reflects a rapidly changing geopolitical environment. The war in Ukraine, increasing security concerns across Europe and growing focus on strategic autonomy have created renewed urgency around defence capability and resilience.

At the same time, NATO members have committed to significantly higher defence spending. At the 2025 Hague Summit, Allies agreed a target to invest 5% of GDP in defence and security-related spending by 2035, including expenditure on defence capabilities, resilience, innovation and industrial capacity.

The European Union has also introduced initiatives aimed at strengthening defence readiness, encouraging investment and supporting the growth of Europe's defence industrial base. These measures reflect a broader recognition that public funding alone is unlikely to meet future capability requirements.

As a result, many investors are reassessing defence as a strategic sector rather than a prohibited one.

What could this mean for private equity, venture capital and infrastructure funds?

For private equity investors, the change could create greater confidence when investing in defence suppliers, advanced manufacturers and businesses supporting national security priorities.

Venture capital funds may see particular opportunities in dual-use technologies. Areas such as artificial intelligence (AI), cyber security, autonomous technologies, communications infrastructure and space applications increasingly sit at the intersection of commercial innovation and defence capability.

Infrastructure investors may also benefit from growing demand for investment in critical infrastructure, logistics, data centres, secure networks and resilience-focused assets that support national security objectives.

However, greater investment opportunities do not remove the need for robust due diligence. Export controls, sanctions, procurement regulations, cyber security requirements and ESG considerations will remain important areas of focus.

What should defence and dual-use businesses consider when seeking capital?

For businesses seeking capital, the announcement is encouraging, but attracting investment will still require careful preparation.

Companies should be ready to demonstrate strong governance, compliance and risk management frameworks. Investors will continue to scrutinise export controls, sanctions compliance, customer profiles, supply chain resilience and cybersecurity arrangements.

Businesses should also clearly articulate where their products sit within the defence and dual-use landscape. Organisations that can demonstrate both commercial viability and strategic relevance are likely to be best positioned to capitalise on changing investor sentiment.

What does this mean for the future of defence investment in Europe?

Invest Europe's new LPA template is unlikely to remove every obstacle to defence investment. Investor mandates, regulatory requirements and reputational considerations will continue to influence decision-making. However, the proposal represents an important step towards normalising investment in defence and dual-use technologies.

As European governments increase defence spending and prioritise industrial capability, private capital is expected to play an increasingly important role. For investors, the opportunity will be balancing growth with appropriate risk management. For defence companies, the challenge will be demonstrating that they are investment-ready, compliant and aligned with Europe's evolving security priorities.

The direction of travel is clear: defence investment is increasingly being viewed as a strategic necessity rather than an exception, and Europe's capital markets are beginning to adapt accordingly.

Read the original article on GowlingWLG.com