Defence is emerging as one of the fastest-growing sectors for lenders, but as new technologies reshape the industry and face a funding gap, can private credit step in?

Investors across Europe and the US have spotlighted the defence sector as having structural tailwinds over the past year, much of which is due to governments increasing their focus on national security and spending for the industry.

In the US, President Donald Trump has called for US defence spending to increase to $1.5tn (£1.1tn) in 2027, while NATO has raised the bar further, with allies committing to invest five per cent of GDP annually in the space by 2035.

“We feel that there is very good sectoral tailwind for defence,” said Lorna Robertson, head of funds at UK-based alternatives manager Connection Capital. “We’ve had this view probably for about six to nine months.”

Robertson stated that investor sentiment in Europe has shifted towards the sector, with it being increasingly understood as protecting borders, infrastructure and data, rather than simply weapons.

“It’s about defence, not offence,” she added.

Read more: Private markets should eye specialist defence companies 

At the same time, technology is beginning to change the nature of industry, with defence-tech start-ups emerging across areas including artificial intelligence, software, cybersecurity, surveillance and sensing as well as autonomous systems.

This is creating an opportunity for private credit in the space, argues Scott Stevens, founder of Grays Peak Capital, which invests in defence through equity and credit, as “there are a lot more smaller players now”.

Previously in the US, defence was dominated by large prime contractors such as Boeing and Raytheon, which typically did not need access to credit or additional capital, Stevens said.

“However, now, there are a lot of small and mini prime contractors, [US defence-tech company] Anduril, for instance, being the most well-known entrant,” Stevens said.

“Most of these companies do need access to both credit and equity, so that is leading to additional demand.”

Read more: Private credit looks to fund defence supply chain

Alongside this, opportunities also lie in Europe, which is currently experiencing a defence-tech boom, but start-ups are struggling to access enough capital to scale, according to research by Celis, an investment screening institute.

The research found that European defence-tech companies are increasingly dependent on US capital, with 60 per cent of financing in funding rounds above $200m (£149.8m) coming from investors in the States, showing the opportunity for investors in Europe.

This article originally appeared in the Alternative Credit Investor October magazine, click here to view the full edition. 

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