When private capital moves into the territory historically reserved for the Department of Defense (DoD) and its major contractors, the ripple effects reach across supply chains, innovation cycles, and accountability frameworks underpinning national security. The entrance of private equity firms into this space is not merely a financial trend. It reshapes how the United States funds, builds, and governs its defense industrial base.
How Private Equity Works – and Why It Matters
Private equity (PE) is less an industry than a financial method for control. These firms pool money from institutional investors like pension funds, endowments, or sovereign wealth funds and use that capital to buy or take over companies, often through heavy borrowing. The aim is to raise the company’s value quickly, sell it within a few years, and return profits to investors. The model depends on leverage, short timelines, and aggressive performance targets.
At its best, this approach can bring focus and discipline to sectors that have stagnated. PE’s advocates argue that when it is done responsibly, it channels long-term capital into businesses that might otherwise struggle to find financing, allowing them to expand, modernize, and hire more workers. In defense-related industries, that influx of funding can help smaller suppliers innovate or bring new technologies to the Pentagon faster than traditional contracting routes allow.
Yet the same features that make PE powerful in commercial markets can become liabilities in national security. Debt-fueled acquisitions make defense suppliers financially fragile; short investment horizons discourage spending on long-term capabilities; and private ownership reduces transparency. The Stockholm International Peace Research Institute warns that this trend is just one of the challenges to transparency in the arms sector.
Firms like The Carlyle Group, long known for its defense and aerospace holdings, and Arcline Investment Management, which acquired aerospace manufacturer Kaman in 2024 and created Signia Aerospace in 2022, show how PE has moved deep into the defense ecosystem. Their strategies highlight both the potential benefits and the structural risks of private capital operating in a field where the stakes extend far beyond profit.
The American Surge
PE and venture capital investment in aerospace and defense has exploded. Between January and mid-March 2025 alone, deal volume reached $4.27 billion, nearly matching all of 2024, with 83% of that capital flowing into North America, according to S&P Global Market Intelligence.
The DoD has welcomed this capital influx, arguing that private investment can help fill gaps in domestic production and innovation capacity. A Bain & Company report concluded PE “will help the U.S. close the investment gap, innovate faster, and improve the affordability of defense platforms.” Together, investor appetite and government demand are remaking the defense industrial base into a mixed public-private model.
Strategic and Operational Fault Lines
This transformation comes with risk. The Defense Business Board warned in 2025 that DoD supply chains generally contain five to six tiers but “often lack visibility beyond Tier 1 or 2 suppliers,” leaving vulnerabilities if a PE-owned contractor collapses.
Empirical research backs the concern. A study in Business and Politics found that PE-backed defense contractors were 4 to 9% more likely to go bankrupt than those without PE ownership, often due to debt burdens and shorter investment timelines. For the Pentagon, a single supplier’s failure can delay weapons systems or disrupt readiness, turning financial risk into strategic risk.
Innovation and Incentive Structures
PE has undeniably accelerated innovation in defense technology. Investors are backing firms developing autonomous systems, satellite sensors, and dual-use artificial-intelligence tools – these are technologies that can serve both military and civilian purposes.
Because PE investors often want quick returns, they may push defense companies to focus on the easy, high-profit parts of the business instead of the harder, long-term work of actually building or maintaining weapons production capacity. The Pentagon’s TransDigm scandal – where a contractor sold a $32 part to the DoD for $1,443 – demonstrated how profit-maximizing behavior can conflict with stewardship of public funds. Injecting private-equity incentives into that environment heightens both efficiency and temptation.
Oversight and Accountability
Private ownership also complicates public oversight in ways that go beyond convenience. Publicly traded defense primes like Lockheed Martin or Raytheon are subject to the Securities and Exchange Commission’s disclosure regime under the Securities Exchange Act of 1934. That law requires quarterly and annual filings, audited financials, executive-compensation reports, risk disclosures, and – increasingly – environmental, social, and governance (ESG) metrics. The SEC outlines some of these obligations in its Beginner’s Guide to Financial Statements. These filings are publicly accessible through the EDGAR database and allow Congress, investors, and the public to trace revenue sources, debt levels, and government dependencies.
Private-equity-owned contractors face no such obligation because their securities are not publicly offered or traded. Instead, they are privately placed under exemptions such as Regulation D or Section 4(a)(2) of the Securities Act of 1933, which are designed for sophisticated institutional investors rather than public markets. Their financial statements are provided only to limited partners, who are the institutional investors committing money to the fund, rather than to the public. Even major firms managing tens of billions in defense assets fall under lighter-touch reporting rules that require disclosure of fund structure and conflicts of interest but not detailed portfolio-company data. Although private-fund advisers register with the SEC under the Investment Advisers Act of 1940 and file Form ADV detailing fees and conflicts, those submissions do not include portfolio-company financials or performance data, and the SEC’s examination reports are confidential. The Commission’s own staff has acknowledged it cannot release information gathered from adviser examinations due to statutory privacy protections in the Freedom of Information Act.
This gap leaves defense oversight mechanisms operating partly in the dark. When a contractor is privately held through multiple acquisition vehicles or offshore entities, neither the DoD nor Congress can easily determine who ultimately controls the firm or how much debt it carries. The Government Accountability Office has repeatedly warned that contractor ownership and financial health directly affect performance risk, especially when high leverage raises the likelihood of default during production or deployment cycles. The GAO has also found opaque ownership structures in federal contracting create serious risks of fraud and corruption.
For policymakers, the problem is constitutional as well as practical. Article I vests Congress with the power to “provide for the common defense,” but that authority presumes visibility into the entities that actually build the arsenal. When defense suppliers are buried inside opaque private funds, the oversight chain moves one step further from the electorate, and one step closer to the confidential world of financial reporting that the SEC itself cannot publicly disclose.
The Global Dimension
Although the United States remains the center of this shift, private investment in defense is spreading worldwide. In Europe, government rearmament and rising security budgets are drawing in private-equity firms that once avoided the weapons sector. Reporting from the SuperReturn conference in Berlin describes investors increasingly targeting Europe’s defense sector as governments boost military spending. Analysts at Private Capital Solutions note this investment is not limited to traditional weapons makers. It extends into related areas such as artificial intelligence, drone technology, and private security services. These are sometimes called “dual-use technologies,” meaning tools or systems that can serve both civilian and military purposes. At the same time, relying too heavily on private investors could weaken government oversight and national control over defense industries. As this trend expands across NATO and its allies, countries will have to decide whether private money strengthens their security or simply makes it harder to see who controls the tools of defense.
Aligning Profit with Public Purpose
Private equity brings dynamism and capital to defense, potentially strengthening the arsenal of democracy. Yet it also imports the logic of high leverage, short exits, and opacity into a sector built on long-term trust and national mission. The ultimate test is whether the Republic’s security can coexist with Wall Street’s return cycles. If governance adapts wisely, private capital can reinforce readiness; if not, the nation’s defense might be optimized for quarterly gains rather than enduring strength.
