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Opinion Private credit
Germany plans to invest EUR 108bn on defence in 2026 and EUR 152bn in 2029
by John West & Aurelia Seidlhofer
John West
Global commentary editor
Mergermarket
Aurelia Seidlhofer
Senior correspondent
Mergermarket
Procurement struggles and foreign investment rules mean German defence spending isn’t quite the boon to private credit it might seem
They say “only Nixon could go to China”, but German Chancellor Friedrich Merz has now been twice: first metaphorically, then geographically.
The Atlanticist fiscal hawk first shot down Germany’s debt brake, unlocking the potential for EUR 1tn in defence and infrastructure spending as Europe strives for strategic autonomy from the US — which is much in focus following the latter’s strikes in Iran. Then he undertook a 48-hour trip to Beijing alongside dozens of German executives, aimed at securing greater understanding from President Xi Jinping over the two economies’ industrial interconnectedness.
This diplomatic reset is worth pursuing. Solving Europe’s competitiveness conundrum requires greater involvement from China, both as investor and consumer. Such an overture is “helpful to stop things getting worse”, one cheery Frankfurt-based dealmaker argued. Nonetheless, the route to meaningful progress is even more long-haul than Merz’s flight home.
Looking for the ‘Merz miracle’
With Chinese cooperation a slow burn, infrastructure progress hard-won and markets besieged by AI dislocation, capital rotation into heavy-asset industries provides an opportunity. Both Europe’s economy and its 2026 M&A pipeline are consequently more reliant than ever on a ‘Merz miracle’ resulting from his defence spending.
Germany plans to invest EUR 108bn on defence in 2026, with that annual spend rising to EUR 152bn by 2029. This latter figure would represent a threefold increase since 2023.
This has not gone unnoticed. DAX-component OEM giant Rheinmetall has seen a tearing share price run, shooting some 2.5-times higher since US President Donald Trump’s second election victory in November 2024.
Thyssenkrupp’s late-2025 spin-off of battleship and submarine player TKMS has found favour with investors, climbing 25% from its Frankfurt debut in October through to the end of February. Meanwhile, Berlin is reportedly looking to acquire a 25.1% blocking stake in Franco-German tank manufacturer KNDS ahead of a possible EUR 20bn IPO later this year.
Perhaps less understood is the impact this defence-focused fiscal expansion is having among Germany’s famed Mittelstand of mid-sized, often family-owned, industrial supply chain companies. Auto parts players heavily exposed to Germany’s ailing car industry are repurposing their efforts to make tank components and munitions. One dealmaker pointed to a company making property fences that is eyeing reclassification as a defence play, given greater national security interest in protecting airports and materiel production facilities.
Many executives at the Enforce Tac trade fair in Nuremberg last month were first-timers who had seen an uptick in defence-related orders. This included companies making machinery related to cutting materials, along with others producing cables and providing electricity sockets.
An opportunity for PE firms
This backdrop is particularly attractive for private equity firms that have secured LP sign-off to invest in the sector or raised dedicated defence funds. Stable cashflows are likely, given the rush to plug Europe’s capability gap. And geopolitical headwinds causing chaos across international trade projections can support sector conviction — just look at the success of Czechoslovak Group’s IPO book-build in the eye of the Greenland storm in January.
As ever, there are also risks. Germany is not immune to the curse of military procurement headaches. Colossal spending is being forced through decision-making processes that have insufficient bandwidth.
Furthermore, the German government has effectively turned up in a bridal boutique holding a fistful of euros and shouted: “I want a wedding dress!” Prices are rising fast and the prospect for public opprobrium, or even scandal, related to some purchases is high. Meanwhile, asymmetric warfare conditions what materiel should be bought. Yes, Mercedes-Benz is rolling olive-green trucks from its production lines, but will low-cost drones be able to destroy over-engineered armoured vehicles?
Even if investment committees can get comfortable with this landscape, foreign direct investment screening is inevitably becoming stricter. KKR’s successful stake-building in German satellite group OHB, which closed in 2024, would be almost unthinkable now, one dealmaker said. Given the sponsor is US-led, it would surely fall foul of federal positioning on strategic autonomy.
Nevertheless, Merz’s bazooka is already reshaping Germany’s corporate landscape — and shoring up an M&A pipeline cluttered with software, wider tech and business services names.
