In this edition of Aerospace & Defense M&A, read the latest on how rising defense budgets, prime contractor divestitures, and government demand for AI-powered and autonomous platforms are driving new private capital deployment opportunities across the U.S. and Europe. We also explore what these market trends mean for deal execution, including the structuring, regulatory, and diligence challenges sponsors must navigate around CFIUS, FOCI, European FDI screening, and fixed-price contracting risk.

Key Takeaways

The cycle is broadening, not slowing. Deal activity across M&A, PE, and VC continues to climb, with 2026 on pace to be one of the strongest years on record.
This is increasingly a private equity story. Most of 2026 year to date's largest transactions carried a PE sponsor on the buy- or sell-side.
Europe has become a primary engine of deal flow, not a secondary market. Rising national budgets and new EU-wide financing mechanisms are reshaping where capital is being deployed as well as dictating deployment speed.
Defense tech is redefining the sector's center of gravity. Software-defined defense, autonomy, and next-generation platforms are pulling ahead of traditional aerospace as the fastest-growing corner of the market.
Regulatory complexity has become a structuring question, not an afterthought. CFIUS, FOCI, and mounting political scrutiny of PE ownership mean the sponsors who treat national-security diligence as foundational are the ones best positioned to close and exit cleanly.

Aerospace & Defense — Perspectives on Private Capital Deployment | Ropes & Gray

What Is Driving Aerospace & Defense M&A Activity?

Aerospace & Defense M&A — Perspectives on Private Capital Deployment

Aerospace and defense continues to be one of the most active and strategically complex sectors for private capital deployment. Rising defense budgets, prime contractor portfolio rationalization, and government demand for AI-powered solutions, autonomous platforms, and resilient supply chains are creating new platform and add-on opportunities. To win in this market, sponsors need to navigate unique structuring challenges and underwrite regulatory compliance costs, government contracting risks, and exit optionality from the outset.

The data confirms that this trend is global, not purely U.S.-led. Europe's acceleration is the clearest proof point: NATO's 5% target, adopted at the 2025 Hague Summit, has moved from commitment to execution—at the July 2026 Ankara Summit, NATO reported that European allies and Canada had already reached a combined 4% of GDP in defense and security-related spending, representing roughly $258B in incremental investment across 2025-2026. For sponsors, these commitments are not only increasing addressable market size; they are also accelerating domestic industrial consolidation, encouraging new defense-focused fund formation, and creating cross-border opportunities that will require careful attention to procurement rules, local-content requirements, foreign direct investment screening, and exit planning. The U.S. remains the dominant market by deal value, supported by the largest absolute defense spending base globally. China's 24% deal-count CAGR reflects domestic defense-industrial consolidation, though cross-border investment restrictions and other constraints mean this growth is largely inaccessible to Western sponsors and instead represents a competitive dynamic to monitor.

Which Aerospace & Defense Subsectors Are Driving M&A Activity?

As U.S. and allied procurement priorities shift toward AI-enabled systems, autonomous systems, software-defined defense, counter-drone and missile capabilities, and space infrastructure, investors are increasingly targeting businesses positioned at the intersection of national security demand and scalable technology platforms. That momentum has made defense tech the fastest-growing aerospace & defense subsector by deal count, even as traditional aerospace continues to represent the largest share of overall deal activity and value. For sponsors, the opportunity is not simply exposure to defense spending, but the ability to build platforms around technologies that governments are actively prioritizing, funding, and integrating into next-generation defense architectures.

The subsector story is also a diligence story. Defense tech platforms offer growth exposure to priority procurement areas, but they carry diligence requirements—classified work compartmentalization, cybersecurity posture under CMMC, government data rights that may limit IP monetization, and customer concentration tied to single-agency funding lines. Traditional aerospace and components businesses may offer clearer industrial logic, but fixed-price contracting, supply chain resilience, and prime/OEM margin pressure should be reflected in quality of earnings, working capital, and financing diligence.

Top 10 Aerospace & Defense Deals (2026 YTD)

Date	Acquiror	Target (Seller)	Value ($Bn)	Subsegment	Country	PE-Related
Sep-26	GE Aerospace	Consolidated Precision Products (Warburg Pincus, Berkshire Partners)	$11.8	Aircraft Manufacturers Parts and Components	U.S.	Yes
Jul-26	Dubai Aerospace Enterprise	Macquarie Airfinance (Macquarie, PGGM, Sunsuper)	$9.0	Aerospace	Ireland	Yes
Jun-26	KfW Group	KNDS (Wegmann family)	$7.8	Air Land Sea Defense	Netherlands	No
Jul-26	Thales	Exail Technologies (Gorgé family)	$4.5	Air Land Sea Defense	France	No
Jul-26	Lockheed Martin	Ultra Maritime (Advent International)	$3.5	Air Land Sea Defense	U.S.	Yes
Jun-26	CVC Capital Partners	Smiths Detection	$2.7	Defense Tech / Services	U.K.	Yes
Mar-26	CACI International	ARKA Group (Blackstone)	$2.6	Aerospace	U.S.	Yes
May-26	Parker Hannifin	CIRCOR Aerospace (KKR)	$2.6	Aircraft Manufacturers Parts and Components	U.S.	Yes
Apr-26	TransDigm Group	Jet Parts Engineering & Victor Sierra Aviation (Vance Street Capital)	$2.2	Aircraft Manufacturers Parts and Components	U.S.	Yes
May-26	VSE	Precision Aviation Group (GenNx360)	$2.0	Aerospace	U.S.	Yes

Source: PitchBook (accessed 30 Sep 2026). Figures reflect Global defense-related transactions that were announced or closed between 1 Jan 2020 and 30 Sep 2026 and are assigned to the aerospace and defense industry as defined by PitchBook. PE deals include growth/expansion deals. M&A deals include control transactions only, and do not include joint ventures. VC deals do not include grants.

How Is the Macroeconomic and Policy Environment Shaping Defense Investment?

Across Europe and the United States, the defense investment environment has moved from strategic reassessment to execution. What began as a policy response to rising geopolitical risk has become a more deliberate push to rebuild industrial capacity, accelerate procurement, and draw private capital into mission-critical areas of the defense ecosystem. Recent initiatives point to a clear shift in tone: governments are no longer focused solely on higher headline spending, but on creating financing tools, demand signals, procurement reforms, and localization requirements that can translate ambition into deployable capability.

NATO

At the July 2026 Ankara Summit, NATO reported that European allies and Canada have already reached ~4% of GDP in combined direct and defense-related spending. NATO said the accompanying industry forum would yield 'tens of billions of dollars' in new procurement contracts.

European Commission

Security Action for Europe (SAFE): Aims to mobilize ~€800B for European defense investment, combining ~€650B of national fiscal space via the Stability and Growth Pact escape clause with a new €150B SAFE loan instrument and EIB support. SAFE generally requires at least 65% of component costs to originate within the EU, EEA-EFTA, or Ukraine.

U.S. Department of War

In November 2025, the Acquisition Transformation Strategy was released to increase private capital investment and to accelerate the creation of new companies. It also calls for clearer demand signals, longer contracts, and deeper engagement with private equity and venture capital firms through tools such as purchase guarantees, loan guarantees, SBIR, STTR, STRATFI, TACFI, and APFIT.
On 21 April 2026, the President’s FY2027 budget sought $1.5T in total defense resources (a 42% increase)—$1.1T in discretionary authority for the Department of War and $350B in mandatory reconciliation funding, prioritizing critical munitions and industrial-base expansion.
As of September 2026, Congress has not enacted FY2027 defense appropriations; the government is under a continuing resolution and the $350B reconciliation component remains unresolved, risking delays to contract awards.

Germany Ministry of Defense

On 14 November 2025, Germany became one of Europe’s most important rearmament markets by approving the government plan that sets aside €82.7B for defense spending in 2026.
On 15 January 2026, the Bundestag passed the Planning and Procurement Acceleration Act for the Bundeswehr. The law is intended to get equipment, material, and major systems to troops faster. Following this, Germany approved loitering munitions, space-surveillance radar, F-35 missiles, resilient tactical communications, MEKO A-200 frigate schedule-protection measures, soldier modernization, and F124 frigate upgrades.

Source: Atlantic Council, International Institute for Strategic Studies (IISS), NATO, The White House, SIPRI.

What Market Trends Mean for Deal Making

	Market Trend	Deal Making Implication
1	Primes are divesting non-core divisions to refocus on next-generation platforms and core mission systems.	Aerospace & defense carve-outs carry distinct execution complexity. Transactions must be structured to protect facility security clearances, navigate government data rights that attach to divested programs, and retain a cleared workforce.
2	Investments into Europe are increasing.	Sponsors must continue to navigate European FDI screenings. With no de minimis threshold and cross-member agreements in place, any transaction in Europe can draw scrutiny to operations in all 27 member states and through a burgeoning EU supranational process. In practice, timelines can add months to deal execution and present inconsistent conditions across jurisdictions.
3	Governments are intensifying scrutiny of supply chain nodes.	Regulators are demanding greater visibility into ownership structures, cybersecurity posture, and foreign influence for deals involving critical supply chain participants and assets. Early engagement with regulators and longer deal timelines can help mitigate the impact.
4	FOCI coverage is expanding, and interpretations of “defense” firms are broadening.	Defense-related regulatory scrutiny is no longer confined to traditional defense contractors. Dual-use and critical-capability businesses that never saw themselves as part of the defense sector are increasingly drawing the same level of regulatory scrutiny once reserved for traditional contractors. As the definition of defense expands, lines of business long considered commercial must be reexamined for potential exposure.
5	Congress is showing increased skepticism toward PE ownership of defense assets, including through oversight hearings and proposed disclosure requirements.	Sponsors must treat this regulatory architecture as a factor in acquisition structuring, holding-period governance, and exit planning. Sponsors should structure acquisitions, governance, and value-creation plans to demonstrate alignment with national security objectives.

A Look Ahead

More Fixed-Price Contracting

The U.S. Government is accelerating a shift toward fixed-price contracts. This is likely to squeeze OEMs as upstream firms seek to protect their margins. Valuation models should consider the risk of shifts in contract payment structures.

Emergent Technology Integration with Defense Infrastructure

Defense procurement is focusing on space, AI, and autonomous platforms, alongside more traditional defense technologies. Companies with a foothold in these sectors will become increasingly intertwined with national defense infrastructures and markets.

Public-Private Partnerships

The U.S. is expanding defense-sector loan facilities and buying equity in private defense firms. These are major funding opportunities, but present novel risks for private co-investors.

Exit Path Complexity

Sponsors should expect that CFIUS, FOCI, and security clearance requirements will shape exit optionality—limiting buyer pools for cleared assets, extending secondary sale timelines, and requiring early engagement with regulators on change-of-control implications.

Source: PwC, U.S. Department of the Treasury, S&P Glob. Mkt. Intel, SESAMm, Greenwich Cap. Grp., Cato at Liberty.