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European Defense Effort: Could Private Debt Be the Optimal Financing Solution for Defense Industries ?

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Since the escalation of global geopolitical tensions in Ukraine and the Middle East, the issue of European rearmament and its financing has returned to the forefront of political and economic debates. 

In 2024, the Draghi Report called for the creation of a €100 billion fund to strengthen, accelerate, and support industrial defense production across Europe. More recently, in early March 2025, European Commission President Ursula von der Leyen proposed a plan named “Rearm Europe,” which could allow EU member states to mobilize up to €800 billion to finance a significant increase in defense spending. This announcement came just hours after Washington suspended all military aid to Ukraine, putting pressure on the European Union to ramp up its own support. 

While most European countries have increased their defense budgets in recent years, significant financing disparities persist among defense sector companies. Among those most affected are small and mid-sized enterprises (SMEs and mid-caps) within the Defense Industrial and Technological Base (DITB). 

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Why is securing financing such a challenge? 

Despite strong governmental support and the establishment of various financing programs at both the national and European levels, SMEs and mid-caps in the defense sector struggle to access these funds. The complex administrative and regulatory requirements often make these programs difficult for smaller firms to navigate. Additionally, major state institutions tend to favor large defense corporations over SMEs when allocating subsidies, due to concerns over governance and financial management. 

As a result, large defense groups typically turn to bond issuance to secure financing, benefiting from greater flexibility. For instance, Thales and Leonardo issued €500 million in bonds in 2020 and 2023, respectively, while Airbus raised over €3 billion in 2020. 

However, bond issuance remains inaccessible to SMEs, as it requires minimum financing thresholds that are too high. 

Traditionally, banks have been the primary source of financing for SMEs. However, financial institutions are often reluctant to finance defense companies due to perceived risks and sector-specific challenges. Furthermore, traditional financing solutions are often ill-suited to the operational needs of defense SMEs. Defense-related investments do not generate immediate returns and typically require a longer timeline before yielding positive cash flows. As a result, banks favor investments in companies with more predictable and stable revenue streams, even if they offer lower returns. 

Another challenge is the perception of the defense sector in relation to sustainability. Despite significant advancements in environmental responsibility, some investors continue to exclude defense from their portfolios, based on outdated ESG concerns. 

This financing gap was highlighted in the 2024 FAFE report, Survey on Access, which estimated that 40% of defense sector companies lacked adequate financing or faced significant difficulties in securing funding—25% more than SMEs in other industries. 

Private Equity: A False Solution? 

The complexity and strategic nature of the defense sector impose strict capital management and ownership requirements to ensure sustainable SME growth. Private equity investments, which typically involve equity dilution, could limit decision-making autonomy or lead to strategic misalignments that hinder long-term development. 

Additionally, private equity investors may struggle to anticipate the specific financing needs of defense SMEs and accurately assess their return on investment. Unlike other industries, the defense sector is weakly correlated with conventional economic cycles and is primarily driven by national and EU defense policies. 

Private Debt: A Key Lever for Financing SME and Mid-Cap Growth in Defense 

Given its speed and flexibility, private debt emerges as a crucial solution to support SME development in the defense sector. Strategic priorities such as reshoring production and increasing manufacturing capacity require tailored financing solutions, an area where private debt can effectively meet demand. 

Private debt offers rapid access to capital, enabling SMEs to secure the necessary resources to meet operational requirements. Its bilateral structure also ensures long-term visibility, helping companies stabilize cash flows while supporting growth. 

Furthermore, its customized approach provides a powerful lever to accelerate SME expansion by offering financing solutions tailored to their constraints and investment cycles. 

Finally, the defense sector, particularly its supply chain, holds strategic importance, benefiting from a specialized ecosystem capable of supporting companies in structuring their financial models effectively. 

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