Investing in the long tail of European Defense

Europe's defense industry is accelerating, fueled by the Russian invasion of Ukraine and growing uncertainty in US-Europe relations. While it is dreadful that Europe is in this situation, private capital has an important role to play in strengthening security and resilience. As billions of investment euros flow into defense contractors producing missiles, drones, aircraft, armored vehicles, and naval vessels, investors also turn their attention towards smaller-cap companies in the longer tail of industries benefiting from the build-up. Where are these emerging value pools, and who are the companies to watch?

Our digital twin of the world economy highlights some industries where the defense build-up is creating positive ripple effects:

Communication and surveillance - systems and associated services such as radios, radars, satellite systems, and navigation systems. Telecom equipment maintenance for Defense alone has grown almost 15% p.a. since 2020

Services - a broad range of professional and industrial services, including defense logistics, training and skill development, qualification and quality assurance, procurement advisory and food catering. Defense-related service markets have grown 10% p.a. 2020–24. The Nordic region alone hosts over 100 companies in this sector, including a Swedish foodservice company that increased revenues by 40% from 2022 to 2023

Construction and real estate - spanning construction services, facility services and defense property management. This includes a Swedish company generating ~15M EUR in revenue from army base property management🛠️ Machinery — covering everything from power tools and hydraulic winches to additive manufacturing equipment for aircraft OEMs and submarine propulsion systems, with many companies achieving double-digit growth in recent years

Aerospace components — with major value pools in propulsion systems, avionics, transmission systems, and aerostructures
High tech — automation systems, defense specific software, and more are thriving, exemplified by a French manufacturer of electronic wiring harnesses for defense applications, achieving gross margins above 50%

In total, these industries represent ~1,700 European companies with >5m EUR sales to defense contractors and national militaries - over 80% of them privately held