The era of speculative interest in European defence has ended, replaced by a disciplined, industrial-scale pursuit of production capacity and technological superiority. According to the April 2026 European Defence Market Update by Houlihan Lokey, the sector has entered a “capital maturity” phase where the primary focus is now on translating record order backlogs into tangible delivery.

For supply chain professionals and tiered manufacturers, the report highlights a critical shift: the market is no longer rewarding promises, but is instead funding companies that can demonstrate evidence of industrial scale and “cost-to-kill” efficiency.

The Production Gap: A Wake-Up Call for Manufacturers

The report draws stark conclusions from recent conflicts, particularly the U.S.-Iran hostilities. In the first 96 hours of that conflict, 943 Patriot air defence missiles were utilised, a figure that dwarfs the total annual global production of 620 missiles.

This “scalability of production” crisis is creating massive opportunities for suppliers within relevant munitions and air defence supply chains. The report notes that global militaries are increasingly desperate for novel, cost-effective solutions to combat emerging threats, particularly mass-produced projectiles built using off-the-shelf commercial components.

The “Amazon for War”: Disrupting Procurement

In Ukraine, the supply chain is being re-engineered in real-time. The report identifies the “Brave1” marketplace – described as an “Amazon for war” – where units exchange points for verified strikes to procure equipment directly. This model, coupled with the use of more than 4 million FPV drones in 2025 alone, signals a move toward high-volume, lower-cost “attritable” systems.

For traditional defence contractors, this represents a pivot toward “distributed sensing” and “distributed supply chains,” moving away from a reliance on a few centralised, high-value production sites that have proven vulnerable to strikes.

M&A and Public Markets: Funding the Expansion

The financial landscape for suppliers has thawed significantly:

  • The IPO Surge: In January 2026, ammunition and heavy equipment provider CSG executed the world’s largest defence IPO, raising €3.8 billion.
  • M&A Activity: Between January 2025 and April 2026, 133 M&A deals involved European defence targets. The report notes that 90% of buyers were European, with a heavy emphasis on “bolt-on” acquisitions designed to secure specific manufacturing capabilities and access growth markets.
  • Strategic Alliances: Primes are moving beyond simple partnerships. New joint ventures, such as the Rheinmetall Destinus Strike Systems and the ZVS Holding facility for artillery systems, are focused on “operationalising for mass-scale delivery.”

The “Security Dividend”

The report concludes that the historical “ESG penalty” that once restricted capital flow to defence suppliers has evaporated. In its place is a “security dividend,” where credit investors are rewarding companies that can prove operational efficiency.

As the GIUK Gap and Baltic Sea regions see increased grey-zone activity, the demand for uncrewed surface vessels (USVs), autonomous sensors, and AI-powered acoustic monitoring is expected to surge. For the supply chain, the message is clear: the funding is available, the orders are signed, and the industry’s eyes are now firmly on the factory floor.

Géraud Estrangin, a Managing Director in Houlihan Lokey’s Industrials Group said: 
“Houlihan Lokey’s 2026 European Defence Market Update highlights a sector that has graduated from a period of sentiment-driven recovery into a cycle of profound industrial and capital maturity.”
Unwinding of the ESG Penalty
“The ‘ESG penalty’ that historically constrained investment into defence is now reversing, giving way to a clear ‘security dividend’ across capital markets. Defence is increasingly being treated as essential infrastructure rather than a peripheral or cyclical allocation, prompting a broad re-rating from both equity and credit investors. This shift is underpinned by unprecedented visibility on government spending, record order backlogs, and a clear political mandate to rebuild Europe’s defence industrial base. Governments have unlocked record budgets, with European NATO members projected to spend €800 billion by 2030, up €300 billion from 2025 levels, signalling a structural rearmament rather than a cyclical upswing.”
Reopening of Public Markets
“One of the clearest manifestations of this shift is the re-opening of public markets as a credible and scalable liquidity engine for the sector. We are seeing a growing pipeline of defence businesses – particularly technology-enabled, asset-light platforms with strong order visibility – progressing toward IPO, reflecting a broader evolution from privately funded growth stories to institutional-grade assets.”
Corporate and PE M&A Activity
“In parallel, M&A activity has surged in line with heightened interest in European defence. Between January 2025 and February 2026, 75 transactions were completed involving European defence targets, spanning 19 countries, with cross-border deals accounting for approximately 40% of activity. Strategic buyers continue to lead -representing around 80% of acquirers – as they secure critical capabilities, strengthen supply chains, and accelerate delivery timelines in a capacity-constrained environment, while around 85% of buyers are European, underlining strong regional appetite.
However, we are also seeing financial sponsors increasingly positioning for the next phase of the cycle. Europe saw an all-time high of 179 PE defence deals in 2025, a total deal value of $55.6 billion, up 19% year-on-year. As the significant backlog at the prime contractor level begins to cascade through the value chain, translating into revenues and cash flows at the mid-cap level, we expect an ever more active role for private equity in scaling platforms and driving consolidation.
The hottest plays span aerial and space technologies – now a top target for investors seeking dual-use growth – to electronic warfare, armoured systems, and defence-infrastructure assets, areas buoyed by long-duration contracts and rising national readiness requirements.”
 
Fragmentation vs consolidation
“The challenge now is one of industrialisation – scaling innovation into repeatable, high-volume production within a fragmented and nationally anchored industrial base. That inevitably requires consolidation, but in Europe that has to be balanced against sovereignty concerns and national control of strategic assets, which remains a defining tension for the sector.”
Outlook
“Capital is now firmly in place and investor appetite is well established – the focus has shifted to execution. The companies that can translate demand into delivery at scale, while navigating a complex cross-border landscape, will define the next generation of European defence leaders.”

About the Report: The April 2026 European Defence Market Update is authored by Houlihan Lokey’s Aerospace and Defence team, providing analysis of public market listings, M&A transactions, and geopolitical impacts on the defence industry.