Private credit sees opportunity in defence tech as mini prime contractors need capital

Investors on both sides of the Atlantic have spent the past year treating defence as a sector with structural tailwinds, a conviction that Alternative Credit Investor's report traces to governments' increasing focus on national security and the spending they have pledged to match it. President Donald Trump has called for US defence spending to rise to $1.5tn in 2027, and NATO allies have committed to invest 5 per cent of GDP annually in the space by 2035. The outlet's 5 October piece frames defence as one of the fastest-growing sectors for lenders and asks whether private credit can step into the funding gap as new technologies reshape the industry. The answer turns on where in the supply chain the money lands: the borrowers drawing attention sit well below the contractors that have long anchored the sector's capital markets.

Lorna Robertson, head of funds at the UK alternatives manager Connection Capital, told the outlet the firm sees very good sectoral tailwind in defence and has held that view for about six to nine months. What has shifted in her account is European investor sentiment, with the sector increasingly understood as protecting borders, infrastructure and data rather than simply weapons. It is about defence rather than offence, she said. The distinction bears on who will lend: a business framed as weapons procurement looks like a defence-industrial bet, while one framed as infrastructure and data protection reads closer to a technology exposure, and the two carry different underwriting questions.

Scott Stevens, founder of Grays Peak Capital, which invests in defence through both equity and credit, supplies the structural version of the argument. US defence was once dominated by prime contractors such as Boeing and Raytheon, which in his account typically did not need access to credit or additional capital. In their place has come a long tail of small and mini prime contractors, among them Anduril, which Stevens described as the most well-known entrant. Most of those companies do need both credit and equity, he said, and that is leading to additional demand. There are, in his account, a lot more smaller players now.

The two voices describe different markets. Connection Capital, a UK alternatives manager, is speaking to European sentiment; Stevens, whose firm invests in defence through equity and credit, is describing the American contractor market where the primes' replacements are multiplying. Both arrive at the same funding need, and the interesting part for a lender is the shape of the demand rather than its size. A prime contractor that never had to borrow is not a borrower a lender can call on when it wants one; a company that needs both equity and debt is.

The categories the report names — artificial intelligence and software through cybersecurity, surveillance, sensing and autonomous systems — matter to underwriting because the value in those businesses sits in code, contracts and people rather than in plant. That moves a credit committee's attention onto the customer relationship and the durability of the programmes a company is on, and it makes the equity beneath the loan do more of the work. That Grays Peak invests across equity and credit suggests the line between the two is not always clean at this end of the market.

Robertson's six-to-nine-month window is worth holding against the two spending numbers. A view held for that long as of publication reaches back two or three quarters, while the commitments carrying the thesis are dated 2027 and 2035. Lending ahead of contracted revenue is ordinary in private credit, but it leaves the loan resting on shareholders' willingness to fund a company through programmes that are still ahead of it.

The demand side here is public spending, which a credit committee prices on a different clock from a commercial order book. Commitments made now will be honoured, or not, by governments elected later, and the technology the loans would finance is itself moving quickly enough that the customer base could look different before the programmes mature. That argues for keeping tenors shorter than the spend and for reading those commitments as context rather than as revenue.

Europe carries the same pull and a thinner domestic capital base to meet it. The outlet describes a European defence-tech boom in which start-ups are struggling to raise enough capital to scale, and cites research from Celis for the concentration that results: 60 per cent of financing in funding rounds above $200m comes from investors in the United States. That dependence sits in the largest rounds, precisely where a European lender would have to compete to keep the financing domestic.

What the reporting does not put numbers on is the other half of a lender's conversation: where these loans price, at what leverage and against what collateral. The nearer question is who shows up to write the large European rounds, and whether the American share of that financing stays near the 60 per cent Celis found. Those are the rounds a domestic European private credit fund would have to lead to keep the capital at home, and on Celis's numbers most of the money in them has been arriving from the other side of the Atlantic.