In the current geopolitical context marked by a resurgence of war in Europe and rising tensions, addressing security and defence challenges has become an urgent priority for the European Union (EU). This urgency is particularly pronounced in the defence sector, where issues such as innovation, production of key systems, and securing value chains are of critical importance. European defence industry players are tasked with developing next-generation operational capabilities, technologies, and production capacity while mitigating dependencies across defence value chains. Additionally, increasing the market share of European dual-use technologies globally is essential. Moreover, small and medium-sized enterprises (SMEs) and mid-sized companies play a vital role in translating innovation potential into viable capabilities for security and defence, necessitating improved financial frameworks to support this transition.
The study’s objective was to obtain an overview of the funding needs of European SMEs (including start-ups) and midcaps developing defence technologies. The study also analyzed the investment barriers and drivers within the financial market and provided a comparative overview of the ecosystem of private equity and venture capital funds (EU and non-EU) investing in the defence sector. The study quantified the funding gap and analyzed its consequences for European companies and, ultimately, the EU’s security and strategic autonomy.
Key findings from the study revealed that 40% of SMEs find access to finance challenging, with a significant share refraining from pursuing bank loans or equity financing during 2021-2022. This limited access to financing can be attributed to the unique characteristics of the defence industry, stringent regulations, and ethical considerations. Although private investor interest in the defence and dual-use technology sector exists, it needs to meet current needs. Public sector involvement through specific programs and national promotional banks plays a crucial role in signalling to private investors and mitigating investment risks.
This study contributed to strengthening European policy actions supporting the defence industry by assessing the current financing needs across the value chain and the main actors in the investment landscape. It builds on the findings of the Commission’s Expert Group on the European Defence Fund’s Financial Toolbox report. The study used a comprehensive approach, combining various data sources to address both supply and demand aspects of funding in the defence sector. This included targeted consultations through surveys and interviews with representatives from the defence sector and financing landscape, along with desk research and the application of a methodology developed by the EIBG fi-compass to estimate the funding gap.
Results
The study identified an average equity financing gap of EUR 2 billion and a debt financing gap of EUR 1 to 2 billion for SMEs and Midcaps in the defence sector. It underscored the importance of addressing these gaps to ensure the competitiveness and resilience of European defence SMEs. Additionally, the study emphasized the need for continued collaboration between public and private sectors to facilitate access to financing and drive innovation in the defence sector, ultimately enhancing EU strategic autonomy.
Financing Challenges and Opportunities for European Defence SMEs