Capital, capability and consolidation: How M&A will reshape aerospace and defence in 2026
What's driving deals and value in aerospace and defence?
By: Eliott Rawling
At a glance
- Capital is active and competition is intensifying, as primes and sponsors move earlier in the cycle to secure capability and scale.
- Valuations are rising ahead of revenue, with investors underwriting future visibility as procurement pipelines begin to crystallise.
- Technology is driving the agenda, with AI, cyber and autonomous systems commanding the strongest buyer interest across defence‑tech.
- Resilience is dictating deal rationale, from MRO platforms benefiting from aircraft shortages to suppliers critical to supply‑chain security.
- Dual‑use and UK sovereign capability are high‑conviction themes, supported by a growing pool of credible, acquisition‑ready SMEs.
The Aerospace and Defence (A&D) market entered 2026 with more momentum than at any point in the past decade. Geopolitical instability, rising defence budgets and a recovering commercial aviation cycle have not only lifted performance – they’ve reshaped portfolio priorities and accelerated consolidation across the sector.
The result: a market where capital is active, competition for quality assets is intensifying and strategic buyers are moving earlier in the cycle.
Global M&A at record levels
Source: Pitchbook Data Inc
Why appetite for aerospace and defence M&A is climbing
Despite strong political commitments to higher defence spending, most small and mid‑sized suppliers have yet to benefit. Long procurement lead times mean revenue visibility remains limited until 2027, creating a valuation and timing mismatch that is drawing in investors willing to underwrite future upside. At the same time, listed primes – supported by a re‑rated index – are using stronger equity positions to pursue targeted acquisitions and consolidate critical capability areas.
Stock markets have priced in future growth, with listed European companies seeing a 214% increase since January 2023
Source: S&P Capital IQ and Grant Thornton analysis
How geography is accelerating A&D investment
Borders, budgets and buy-side pressure
SIPRI Military Expenditure Database 2025, https://www.sipri.org/databases/milex
Proximity to Russia continues to dictate the pace of investment across Europe. Poland, the Baltics and Finland are deploying capital rapidly to upgrade capability and accelerate procurement, while Western European Governments remain more measured due to fiscal constraints. As budgeted spend converts into contracted programmes, revenue pipelines are firming up – improving clarity for buyers and intensifying competition for suppliers that sit closest to funded priority areas. For M&A, suppliers positioned closest to funded eastern‑flank priorities are seeing the sharpest rise in buyer interest due to clearer programme visibility.
What this means for M&A in 2026: Key themes & driving value
Technology is shaping the battlefield, assets with proven delivery capability will be in demand
AI, cyber and autonomous systems draw strongest competition as they align with funded programmes and deliver rapid advantage
Aircraft shortages boost MRO demand, making maintenance and aerospace manufacturing assets prime acquisition targets
Patient capital will be comfortable with the longer term outlook of high capital programmes
Dual‑use technologies attract strong investor interest, offering defence relevance, commercial scale and broader exit routes
OEMs intensify vertical integration, targeting certified suppliers that de‑risk programmes and secure critical components
Technology-driven battlefield
The war in Ukraine has accelerated the move toward software‑led warfare, with AI‑enabled targeting, counter‑drone systems and advanced swarming tactics now central to capability development. This shift is reshaping dealmaking, as buyers prioritise defence‑tech assets that enhance digital command networks and electronic‑warfare capability. Technologies spanning AI, cyber and autonomous or swarming systems are attracting the strongest competition, driven by their alignment with funded modernisation programmes and their ability to deliver immediate operational advantage. For corporates, M&A offers a fast route to acquiring new capabilities, enabling them to leapfrog internal development cycles and respond quickly to evolving, and growing, demand.
Maintenance momentum: MRO as the quiet winner of 2026
Persistent aircraft delays and stretched production slots are forcing operators to keep fleets in service longer, driving sustained demand for heavy maintenance. This resilience is pushing MRO and aerospace manufacturing assets up investors’ priority lists, with buyers targeting businesses offering dependable cash flow, technical capability and direct alignment to original equipment manufacturer (OEM) platforms. In 2026, competition is set to intensify for high‑quality MRO providers as both strategics and sponsors seek exposure to one of the few parts of the aviation ecosystem delivering consistent, capacity‑driven growth.
Supply chains go strategic
Supply chain constraints across aerospace and defence are pushing OEMs and tier‑ones to bring more capability in‑house. This is driving a sharper, more strategic wave of vertical integration, with acquirers targeting suppliers that control bottleneck components, hold critical certifications or enable delivery certainty on major programmes. Cross‑border activity is set to increase as buyers prioritise resilience over geography, and UK suppliers with strong accreditations and prime‑contractor relationships remain well positioned to attract premium valuations.
Dual-use platforms, dual advantage
Dual‑use technologies continue to attract strong investor interest as they offer both defence relevance and scalable commercial applications – a combination that strengthens earnings resilience and broadens exit routes. The UK is actively nurturing this segment, with government policy focused on expanding sovereign capability and accelerating SME growth. Our work delivering the MOD’s Defence Supplier Capability Development Programme is playing a key role in this shift, helping UK SMEs professionalise, scale and position themselves as credible dual‑use suppliers.
Clear skies ahead? The investor view
Long‑term fundamentals
Aerospace and defence remains one of the most attractive long‑term investment opportunities, driven by structural demand, constrained supply and multi‑year modernisation programmes that provide exceptional revenue visibility. This tailwind is supported by an easing of the long-standing stigma in Europe surrounding defence investment, reflecting a broader acceptance of its contribution to the continent’s longterm security architecture. This clarity gives investors a stronger foundation to underwrite deals with confidence. While regulatory complexity and extended procurement cycles can delay returns, they also favour investors who move early and take a patient, strategic approach – positioning themselves ahead of funding flows and value inflection points.
Capital/ESG dynamics
Investors still face scrutiny around ESG alignment in defence, but the landscape is shifting. Governments are openly encouraging private capital into capability programmes, and Limited Partner (LP) sentiment is gradually softening – especially where assets have dual‑use applications. As a result, buyers are concentrating on platforms that combine defence relevance with commercial use cases, giving them diversified growth, institutional acceptability and a broader exit universe.
Timing opportunity
Fiscal pressure means procurement execution will remain uneven, creating uncertainty – but also opportunity. The gap between announced budgets and actual contract flow is temporary, and when money does release into the supply chain, well‑positioned assets typically see an immediate uplift in demand, order coverage and valuation. For investors with conviction, now may be the optimal time to invest, securing exposure ahead of the spending cycle and benefiting when programme funding accelerates.
Taken together, these dynamics shape a clear investment window across the A&D ecosystem.
