A Zeitenwende for German Defence Finance?

7 Jul 2025 11:13 AM

The Speer Group ventures into the small world of German defence private equity. RUSI's Jonathan Eyal and Linus Terhorst interviewed its founders.

Europe wants to rearm. Yet, as European governments support Ukraine with material and seek to increase their own stockpiles, they discovered that 30 years of the peace dividend had changed the industrial base’s ability to satisfy these demands. Too often, production capacities were insufficient, supply chains unreliable and technology too dependent on non-European actors. The question arising from this is how to enable industry to fix these issues. One demand is increased spending, which will enable industry to increase capacity. On technology development, European governments all have major programmes that push forward key capabilities. In this area, governments and the European Union have all acknowledged the increasingly important role of enterprises not yet engaged in the defence sector. Many put together funding for innovative start-ups that see a defence application in the technology they develop. Across the continent, innovation hubs flourish, both on the national and international levels.

However, the so-called ‘valley of death’ persists for companies that develop new technology for defence solutions. As state seed-funding runs out or is simply not sufficient, big procurement contracts are still untenable for growing start-ups. In the civil world, this gap is closed by, amongst other forms of investment, venture capital. In venture capital, investors put large sums of money into a broad range of promising young companies. The small amount of companies that do succeed offer generous returns of investment. However, compared with the commercial sector, defence has seen relatively little of this type of investment in the past. The reasons for this are numerous: due to the cost involved in developing large platforms – on which many defence products depend – and the expertise necessary to build them, the defence industrial landscape is shaped by a handful of companies that closely observe the defence start-up scene and invest where they see potential, further consolidating their market position. Meanwhile, the peace dividend did not make defence an appealing, growing market. In any case, this market comes with caveats that may appear unattractive to some investors, as its often monopsonic structure (of only one buyer, the state) may seem difficult to navigate. Lastly, for some time, investing in defence was simply not fashionable, as parts of the public perceived it as unethical and campaigned for exclusions of the defence sector in sustainable branded investment vehicles.

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