KfW Research: Investors have their sights on the security and defence industry

• Survey: 30 per cent of investors Germany have already invested in enterprises of the security and defence industry

• Segments with high dual-use potential are particularly attractive

• Nearly half intend to invest in companies of the security and defence industry at some time in the coming twelve months

The security and defence industry has aroused the interest of investors in Germany. This applies to investors in young, innovative enterprises (venture capital investors) as well as to providers of capital for established enterprises (private equity companies). In a survey conducted by KfW Researchand the German Private Equity and Venture Capital Association, 30 per cent of investors Germany reported having already invested in companies of the security and defence industry.

Their interest primarily focuses on businesses operating beyond traditional military domains, in other words, in which dual-use potential is elevated. Dual-use products have both military and civilian uses. This broader range of application raises the market potential of such products and, hence, the company's growth potential.

Thus, half to three fourths of investors describe the segments of cyberdefence, robotics, AI and surveillance and reconnaissance systems as very attractive. Nine in ten respondents consider the segment of communication systems to be rather attractive. By contrast, traditional military sectors such as weapons systems or military vehicles were rated lower on the attractiveness scale.

Nearly half (45 per cent) of equity investors predict that they will invests in security and companies in the coming twelve months. However, most investors are planning to do so on a purely opportunistic basis, that is, if an attractive opportunity should arise. It is so far uncommon for an investor to have a dedicated investment and fund strategy focused on commitments in the security and defence industry.

Investors regard regulatory hurdles and risks as the greatest obstacles to investing in the security and defence industry. Regulations in the environmental, social and governance (ESG) domains and their own position in the ESG area are perceived as particularly obstructive.

"In the coming years, the security and defence industry will acquire greater importance in Germany than it had in the past. Young, innovative enterprises have the potential to quickly develop solutions to new threats. That is also why equity investment in this area can be expected to continue gaining in importance,"

said Dr Dirk Schumacher, Chief Economist of KfW.

Whereas in 2019 the area of defence tech / dual use played hardly a role in the German venture capital market, attracting a deal volume of EUR 28 million, almost EUR 800 million was already invested in start-ups operating in this area in 2024.