Defense Financing: Shifting Perceptions, New Capital Flows, and Cross-Border Questions

Defense financing is moving from the margins of investment conversations toward a more active place in business and financing strategy. During a recent WLG Banking & Finance Group discussion, members discussed how government spending, investor policies, and changing market perceptions are reshaping financing opportunities connected to the defense sector.

The discussion, led by Matthieu Taillandier of Arendt & Medernach, was framed as a business-focused conversation rather than a geopolitical one. The conversation focused on how the defense sector is being viewed by lenders, investors, governments, and advisers, and how approaches continue to differ across jurisdictions.

Defense Is Moving Back Onto the Investment Agenda

Much of the conversation focused on the changing perception of defense as an investment category.

Matthieu noted that defense-related assets were, until recently, often viewed with caution by investors and asset managers. In some cases, they were excluded from portfolios because of ESG considerations or internal investment policies. That approach is beginning to change, particularly as defense is increasingly viewed through the lens of national resilience, infrastructure, technology, and security.

The sector is also broadening beyond traditional weapons manufacturing. Participants discussed growing interest in technology companies, aerospace, AI, supply chain businesses, and other defense-adjacent industries. As a result, financing and investment questions are becoming broader and more complex than when defense was viewed more narrowly.

Government Spending Is Driving Much of the Current Activity

In many markets, government spending remains the primary driver of activity.

Matthieu described a significant increase in defense spending, including expanded budgets, new initiatives, and programs designed to support broader defense capacity. He also highlighted Luxembourg’s early 2026 sovereign defense bond, which was directed to retail investors and fully subscribed within minutes. Although modest in size, the bond was significant as a market signal and reflected public willingness to participate in defense-related financing.

Benoit Vandervelde of CMS Belgium noted that Belgium has seen government plans to purchase defense equipment, though from a banking and finance perspective, the activity has remained more closely tied to public procurement than private debt raising.

Karla Maeji of TozziniFreire shared that while Brazil has approved a new federal budget focused on military investment, including ammunition, naval equipment, submarines, and aircraft. She noted that while Brazil has domestic companies in the defense industry, the country continues to rely on foreign companies doing business in the market.

Similar themes emerged elsewhere. Charles Chen of Zhong Lun noted that in China, defense-related financing remains closely tied to government-owned entities, major banks, and heightened confidentiality requirements. Jessada Sawatdipong of Chandler Mori Hamada observed that Thailand’s defense procurement is largely government-driven, though private financing could become more relevant over time. Yesim Api of Hergüner Bilgen Üçer explained that Turkey’s defense sector has grown significantly, particularly in drones and aerospace, but financing remains largely tied to the Ministry of Defense, national funds, and public banks.

Private Capital Is Reconsidering the Sector

One of the clearest developments may be the growing role of private capital and institutional investors.

Matthieu described how defense has moved higher on the investment agenda, particularly in the asset management industry. He noted that ESG frameworks, which previously led many funds to exclude defense-related activity, are being reconsidered in some markets. Rather than relying on a strict inclusion-or-exclusion approach, investors are beginning to look more carefully at governance, transparency, the nature of the defense exposure, and alignment with client objectives.

That evolution is also tied to the changing profile of the sector. Defense-related investment is no longer limited to traditional manufacturing. Technology, AI, aerospace, cybersecurity, and supply chain businesses may all raise questions about whether, and how, investors classify defense exposure.

Thomas Thordal Sevelsted of Bech-Bruun noted a similar development in Denmark, where pension funds have changed investment policies to allow investment in the defense industry. He pointed to increased investment activity involving suppliers and government-backed initiatives, reflecting a broader effort to bring more capital into the sector.

Market Maturity Varies by Jurisdiction

The conversation also highlighted that defense financing is not developing at the same pace everywhere.

In some jurisdictions, increased government spending and investor policy changes are already creating new financing questions. In others, defense remains a highly specialized sector with limited private market activity, significant government control, or high barriers to entry for advisers and lenders.

China was described as a distinct market because of the role of state-owned enterprises, confidentiality requirements, and classification issues. Brazil and Thailand appear to be at earlier stages in terms of private financing activity, with government budgets and procurement still playing a larger role. Turkey’s defense sector is expanding, but financing structures remain closely tied to public sources and state-supported mechanisms.

Those differences matter for clients and advisers. Defense financing may be attracting broader attention globally, but the legal, commercial, and practical issues differ significantly depending on the jurisdiction, the type of asset, and the role of public or private capital.

Cross-Border Opportunities Are Emerging, but Still Developing

Although participants identified clear market momentum, they were cautious about overstating the level of concrete cross-border defense financing activity.

Matthieu noted that certain initiatives may create cross-border opportunities, particularly where funding programs, asset management structures, and defense-related investment activity involve multiple jurisdictions. At the same time, participants did not identify a large number of specific cross-border defense financing transactions already underway.

That may change as government programs develop, private capital becomes more active, and defense-adjacent businesses seek financing across borders. For now, the market still appears to be developing rather than fully mature.

A Sector in Transition

Overall, the conversation reflected a sector in transition. Defense financing is no longer viewed only through the lens of public procurement or traditional military production. It is now tied more closely to technology, infrastructure, supply chains, ESG policy, institutional investment, and cross-border business strategy.

For clients operating in or alongside the defense sector, the key takeaway is that financing opportunities are expanding, but unevenly. The markets, investors, and regulatory considerations involved remain highly jurisdiction-specific, making local insight and coordinated cross-border advice especially important as the sector continues to develop.