Upscaling production and investment in the Netherlands

For a generation, the Dutch defense sector was defined by shrinking budgets and limited appetite from private investors, partly due to reputational caution driven by ESG concerns. That era is over. Today, banks report no reservations on lending to defense companies, and institutional investors have shifted their internal policies to permit defense allocations.

However, there are still constraints on capital deployment, including in relation to banks’ standard risk models; many of the early-stage innovators that are driving the sector’s evolution do not have guaranteed offtakes or the type of revenue certainty that lenders and investors require to build a credible investment case.

The root of the problem lies in a structural tension within traditional government procurement processes. Battlefield technology is evolving at extraordinary speed, and governments, understandably, are reluctant to lock in large volume commitments to technologies that may be superseded quickly. But that same flexibility deprives companies of the revenue visibility they need to secure financing.

Banks call for more transparency from the state

In response, banks have called for greater transparency from the government. This is not necessarily in the shape of firm orders, but instead clearer indications of how ministries view particular companies, their management teams and their products. There have also been requests for policymakers to do more on pre-financing, including by relaxing bank guarantee requirements that are difficult for lenders to provide to early-stage companies with minimal balance sheets.

The profile of defense companies attractive to private equity remains relatively narrow: proven suppliers to major primes or dual-use businesses with stable cash flows, a credible pipeline and a viable exit horizon. Companies that fit this profile and that are available for investment are now attracting major interest from potential investors, resulting in highly competitive auctions and substantial valuation premiums. Dual-use capabilities are particularly valued because they have a larger addressable market and a potentially bigger pool of possible buyers on exit.

Venture capital faces a different challenge. Strong entrepreneurs are needed to translate knowledge and technological innovation into viable businesses, but this process can be hindered when knowledge institutions retain IP without focusing on its economic application. The gap between early-stage innovation and production-ready scale remains a persistent problem in defense technology.

The emergence of hybrid venture capital/private equity structures

One emerging trend in defense is the rise of hybrid investment structures. We are now seeing venture capital and private equity financing being deployed within the same funding round. Private equity firms are also beginning to invest one or two rounds earlier than the pre-IPO stage at which they would typically commit, often taking governance positions in the process. Combined with public co-investment, these hybrid models offer a potential path to allow defense technology companies to scale sustainably.

Institutional investors, meanwhile, have shifted their policies but are not yet seeing enough concrete investment proposals to deploy capital at scale. They also depend on fund managers having both the ability and the willingness to identify opportunities in defense and related sectors.

There is significant interest in adapting PPP models, already proven in infrastructure and energy, to defense-supporting assets such as barracks. Even investors hesitant about direct frontline production can participate in adjacent capabilities (infrastructure, energy, IT, cybersecurity, and real estate) where the investment thesis is more familiar and the risk profile more conventional.

Structural solutions to de-risk investments

Beyond PPPs, several structural approaches were discussed to de-risk investment and create scale. Financing demand could be channeled through special purpose vehicles and multilateral financing mechanisms, including securitization-style approaches. The U.S. market offers an alternative solution: there, banks extend riskier credit to smaller defense companies but package it off-balance-sheet as an investable product, akin to a collateralized debt obligation (CDO) structure. Major original equipment manufacturers can also play a role, reducing risk and improving financing options for SME suppliers through supply-chain financing solutions.

Joint procurement at EU or NATO level, along with export arrangements, can increase both the scale and certainty of offtake rather than relying on individual governments.

Governments explore “production as a service” models

The rapid pace of battlefield innovation is challenging the traditional model of multi-billion-dollar, decades-long procurement contracts for heavy manufacturing products. In its place, some governments are beginning to explore “production as a service” arrangements whereby trusted companies with flexible production capabilities are provided with a threshold level of support as they continually adapt their products to maintain an edge. The emphasis shifts from fixed specifications to problem sets, combining flexibility with reliability.

For investors, this model requires a different kind of diligence. The value proposition is less about a guaranteed product order and more about a company’s production agility, its relationship with the relevant ministry, and its ability to iterate quickly in response to evolving requirements.

Call for more dialogue between stakeholders

The Dutch government has taken early institutional steps, including by establishing a new financing unit within the Ministry of Defence. But decisions about which companies to back, how to combine public and private financing, and how to structure selection processes remain in very early stages. The planned creation of a “Dutch DARPA” has been discussed as a potential catalyst for innovation and co-investment, though its precise set-up, responsibilities and relationship with the envisaged National Agency for Disruptive Innovation remain unclear.

A recurring theme was the need for better dialogue between public and private stakeholders. The French Ministry of Defense’s working-group model, which convenes government, industry, and financiers around specific financing challenges, was highlighted as a potential template.