US defense investment gap reflects market barriers and shortage of investable opportunity, not any shortage of capital--Bain & Company and AIA report

• Abundant capital and increased defense company valuations mask real gaps that risk disruptors from succeeding and incumbents from replenishing depleted stockpiles
• Large public defense companies trade at valuation multiples similar to utility companies in a signal that investors still worry about capped returns and limited upside
• Defense venture capital has grown tenfold since 2019, but for every dollar the government has committed to new-entrant companies developing next-generation technology, private investors have put in seven — a gap that risks stalling promising technology before it can be deployed
• Private equity, a critical exit path for venture-backed defense start-ups, has largely stayed on the sidelines, putting further early-state investment growth at risk

BOSTON and ARLINGTON, Va., Sept. 28, 2026 /PRNewswire/ -- The US has no shortage of capital for defense but confronts systemic risks to replenishing stockpiles and adopting disruptive technology because of a shortage of investable opportunities, Bain & Company and the Aerospace Industries Association (AIA) conclude in a major new analysis released today.

While private investor interest in defense has surged in recent years, the Bain/AIA study, The State of Investment in Defense: Unlocking Growth, finds that market conditions are inhibiting capital from flowing to critical bottlenecks in the industrial base. (See also: Full Report in PDF; Executive Summary.)

The Bain/AIA report identifies persistent barriers that constrain investment in US defense R&D, production capacity, critical inputs, component manufacturing from mid-tier suppliers, and emerging technologies, in findings that draw on 50 stakeholder interviews conducted between April and August 2026 with prime integrators, new defense market entrants, suppliers, investors, and industry thought leaders.

"Existing investment and business models aren't sufficient in this new environment," said Michael Sion, partner in Bain & Company's Aerospace and Defense practice. "Private defense investment growth of all kinds is required to address capacity and innovation constraints that are risks to national security. There is ample capital and pent-up investor interest, but needed funding will flow only when conditions make business cases easier to close."

Capital is flowing in aggregate — but investors still see capped upside

The Bain/AIA report finds that private capital is not scarce for the defense sector as a whole. Market capitalization of publicly traded US aerospace and defense companies reached around $1.6 trillion in 2025, nearly double its 2019 level, and defense-related venture capital has grown tenfold since 2019, from roughly $1 billion to around $10 billion.

Yet the characteristics of that capital tell a more cautious story. Large, publicly traded defense prime contractors now carry valuation multiples similar to those of utility companies – evidence that the report concludes shows investors continue to price the sector for low risk and stable, capped returns rather than growth. This profile makes it harder for investors to accept the upfront capital investment risk that will expand production capacity for munitions and other high-demand systems.

"This report demonstrates that America has the capital, technology, and industrial expertise required to meet the moment and deliver the capabilities that the warfighter needs," said Eric Fanning, President and CEO of the Aerospace Industries Association. "However, continuing to build capacity in the defense industrial base requires long-term, stable public and private investment. What we need now is a more predictable environment that rewards performance, reduces unnecessary friction, and enables investment to flow to the areas most critical to national security."

"Investor interest in defense has clearly grown," added Michael Sion. "But interest has to bridge the gap between risk and return for investments in critical inputs, technology transition, and new production capacity. Closing that gap is what turns today's momentum into real capability."

The difficulties imposed by the dynamics of the defense investment market are compounded by a challenging macroeconomic backdrop, with nominal defense budget growth of roughly 3% to 5% a year alongside inflation of 3% to 4% and interest rates above 4% layered on profit margins that are already among the lowest of any large US capital-goods industry. The market available to sustain new private investment is far less certain than aggregate figures suggest, Bain and AIA caution.

Private equity has meanwhile stayed largely on the sidelines of defense-focused businesses, preferring businesses that serve both commercial and defense markets. Defense-focused PE buyout volume has held at roughly $1 billion to $3 billion a year, representing a small fraction of the sector's public-market value. The Bain/AIA analysis notes that well-established, traditional PE investor preference for predictable cash flows has historically been a poor match for the risk and return profile of the defense space. Yet PE is also a critical exit path for venture-backed companies, and without it, their paths to liquidity become more uncertain, the report concludes.

The report also identifies market constraints further upstream. The US remains fully reliant on imports for 16 critical minerals while most refining capacity sits outside the country, and sub-tier manufacturers of essential castings, forgings, semiconductors, and precision components report some of the most acute capital shortages in the industrial base, the analysis notes.

A venture capital boom is outrunning the industrial base it's meant to build

The clearest sign of a mismatched investment market for defense is in venture capital. VC investment in defense has grown roughly tenfold since 2019 as investors are drawn to software, AI, autonomy, and a handful of breakout successes. But the analysis notes that this capital is currently concentrated at the earliest stage of company formation, while the factories, materials, and manufacturing capacity needed to put equipment in the hands of US forces remain constrained by market conditions that venture funding alone cannot fix.

The scale of the mismatch shows up starkly in the numbers: for every dollar the US government has committed to date in production funding for new-entrant companies, private investors have put in seven, the report finds based on analysis by the Silicon Valley Defense Group. The report warns that this gap risks stalling promising technologies before they ever reach frontline forces: not because of technical technology failure but because there is no fit-for-purpose financing model to carry innovative platforms from prototype to scaled production. Conditions that will allow the next generation of disruptors to break through and that will enable capacity growth for current industry leaders are not yet sufficient, the report suggests.

The gap can be closed

The Bain/AIA report proposes addressing the challenges with coordinated action across six priorities, noting that the greatest impact comes when government, industry, and investors move together. Among the priorities, the report calls for direct linkage of risk and reward in contracting, arguing that until defense contracts allow companies to earn returns commensurate with the risk they take, the most important investments will never be proposed.

Closing the gaps in private defense investment depends on a healthy capital environment, predictable demand, and policies that give businesses the confidence to invest for the long term, the report concludes. It finds that this will take movement from every side of the defense space at once: government sharpening of demand signals, industry investing against those signals, and investors extending longer-horizon capital to companies with a credible path to expanded production. "The defense investment gap will not close through enthusiasm alone," the report states. "It will close when business case conditions make private investment rational — and that is a solvable problem."

Media contacts

Bain & Company:
Dan Pinkney (Boston) — [email protected]
Mike Simon (New York) — [email protected]
Gary Duncan (London) — [email protected]  

Aerospace Industries Association:
Marta Hernandez — [email protected]
Emily Hayes — [email protected]  Tel: 319 429 1533

About the Aerospace Industries Association (AIA)
Founded in 1919 and based in Arlington, Virginia, AIA is the premier trade association representing the nation's major aerospace and defense manufacturers, with more than 340 member companies advocating for policies that strengthen the country and spur innovation. AIA is led by Eric Fanning, President and CEO.

About Bain & Company

Bain & Company works with leaders worldwide to solve their toughest challenges and deliver enduring results. Since 1973, we've partnered with clients, including private equity and portfolio companies, to build the capabilities they need to stay ahead of change and help them redefine their industries. We measure our success by our clients' success, and we proudly hold the highest levels of client advocacy in our field.

Bain is consistently recognized globally as one of the best places to work. We operate as one global team, uniting strategists, industry and functional experts, technologists, and advisors with a vibrant ecosystem of technology partners.

Notes to Editors  

Bain & Company was founded in 1973 and today has 19,000 employees across 67 cities in 40 countries. We have worked with more than two-thirds of the Global 500 and more than 9,000 companies worldwide. Bain has pledged to deliver $2 billion in pro bono consulting to nonprofit, public-sector and charitable organizations by 2035. The firm is consistently recognized as a Leader in major analyst rankings across multiple areas, including digital business, innovation, strategy, experience design, customer experience, and carbon-zero transformation.

SOURCE Bain & Company