Defence spending surge is driving defence and aerospace investment: implications for Australian and global players

A step‑change in defence budgets

Global military expenditure rose 9.4% in 2024 to USD 2.7 trillion, the steepest annual increase since the Cold War. It is expected this record high will continue to increase year-on-year as geopolitical tensions escalate and governments prioritise national security. At the 2025 NATO Summit, member states agreed to the Hague Summit Declaration requiring them to invest 5% of GDP annually in defence and security by 2035. This commitment comprises two essential categories of investment:

• 3.5% of GDP for core defence requirements, with each member state to submit annual plans demonstrating credible, incremental paths to reach the minimum expenditure; and

• 1.5% of GDP for protecting critical infrastructure and defence networks, civil preparedness and resilience, innovation, and strengthening the defence industrial base.

In parallel, governments have adjusted their fiscal frameworks and budget priorities to enable such military expenditure. Last year, Germany passed a package of constitutional reforms to exempt its defence and security-related expenditure from the federal budget's debt limitation rule, which limits the government's structural deficit to 0.35% of GDP. Poland is also considering a constitutional amendment to guarantee higher defence spending.

In 2026, Australia faces renewed pressure by the Trump administration to spend more on its own defence. Current spending hovers at approximately 2% of Australia's GDP ($59 billion for 2025-26), with projections to reach 2.3% of GDP by 2033-34.

The effect on defence and aerospace investment

An uptick in private investment in the domestic defence and aerospace industry is forecast, as prime contractors and their supply chains look to capitalise on opportunities presented by the Australian Government's need to meet its AUKUS commitments and address strategic challenges in the region. As the critical role that Australia plays in the stability of the Indo-Pacific becomes more apparent, the private sector is demonstrating an increased appetite to pursue transactions in Australia's defence and aerospace sector.

We have seen deal activity focused in the following three areas:

1. M&A – The rise in demand for certain technologies (such as, Australian-made drones and counter-drone systems), and a new emphasis on speed-to-capability has triggered M&A activity in the sector. Transactions involving suppliers of advanced capability and manufacturers of component parts are the most prevalent, as companies seek to boost productivity, secure novel technologies, and localise production close to their Australian customers.

2. Joint ventures – Prime contractors and SMEs are increasingly entering into joint ventures, strategic partnerships, and teaming arrangements which allow them to pool resources, IP and technical expertise in order to solve complex design problems and expedite the delivery of cutting-edge technologies to their Australian customers. While JVs are not new, participation by foreign primes in such ventures can give rise to complexities around IP ownership, non-compete requirements, technology transfers, and cross-border licensing arrangements.

3. Capital raisings – Australian defence technology and aerospace companies are increasingly attracting private equity investment, as investors recognise the growth opportunities presented by Australia's pursuit of a sovereign manufacturing and industrial capability. SMEs that play a critical role in the supply chains for Australia's naval shipbuilding, artificial intelligence, and space technology programs are particularly appealing to investors and fund managers.

We also anticipate that more Australian-based companies will begin to scale internationally by tapping into foreign markets with a strategic need for innovative defence and aerospace technologies. This is supported by the establishment in March 2025 of the Australian Defence Strategic Sales Office, which provides a centrally coordinated platform to promote and advance export sales of select Australian capabilities to international partners.

Legal and regulatory considerations

As defence technology and aerospace companies take steps to expand their Australian operations, enhance domestic production capacity, and capitalise on growing demand, they must carefully consider the regulatory requirements specific to doing business in Australia.

Key considerations for these businesses include:

• Regulation of critical infrastructure – Australia's Security of Critical Infrastructure Act extends beyond the security of traditional utilities to include specified "critical defence industry assets", triggering registration and reporting requirements for responsible entities or direct interest holders of those assets. Defence‑related infrastructure may also be captured indirectly, such as communications, space technology, and certain transport and port assets supporting defence activities. Defence-linked assets of strategic importance may also be designated as Systems of National Significance under the Act, triggering stringent cybersecurity obligations.

• Merger control – On 1 January 2026, Australia introduced a mandatory merger clearance regime, which requires that any acquisition that meets certain financial thresholds be notified to the ACCC and cannot be put into effect unless and until ACCC clearance or a waiver is obtained or the transaction is otherwise exempt. Those thresholds may apply to both one-off acquisitions as well as serial or creeping acquisitions.

• FIRB approval – Foreign investments in Australian entities, business and land are screened under a national interest and security regime administered by the Treasurer, with advice from the Foreign Investment Review Board (FIRB). Investors and acquirers should bear in mind that FIRB approval is required for specified transactions by foreign persons (including any investment involving the development, manufacture or supply of critical goods or critical technology that are, or are intended to be, for a military use, or an intelligence use, by defence and intelligence personnel, the defence force of another country, or a foreign intelligence agency), and the Treasurer may prohibit or reverse a transaction that is contrary to Australia's national interest.

• Supply chain resilience – A complex patchwork of regulations impose environmental, social and governance (ESG) obligations on businesses operating in Australia, particularly those with global value chains and operations across numerous jurisdictions. Investors, acquirers and in-house counsel should undertake careful due diligence of supply chains and operations to understand ESG risks and identify where compliance uplift is required.