How Sovereign Wealth Funds Are Quietly Buying European Defence Companies

Gulf sovereign wealth funds and Asian state investors are building significant stakes in European defence companies. Here is who is buying what and why European governments are not stopping it.

The sharp increase in European defence company valuations since February 2022 — Rheinmetall's market capitalisation has increased approximately sevenfold, BAE Systems has more than doubled, Leonardo has grown significantly — has attracted sovereign wealth fund attention that is beginning to create the kind of foreign ownership patterns in strategic industries that European governments have historically treated as security concerns.

The Abu Dhabi Investment Authority, the Kuwait Investment Authority, Singapore's GIC and Temasek, and the Norwegian Government Pension Fund — technically a sovereign wealth fund despite its characterization as a pension fund — have all increased their holdings in European defence companies over the past two years. In some cases these holdings cross thresholds that, under EU regulations for 'critical sectors,' require notification to national governments and potentially approval.

The approvals have generally been granted, for several overlapping reasons. First, the investors involved are from countries that are allied with or friendly to the EU and are not perceived as strategic security threats. Second, the defence companies have actively sought the capital, and preventing them from accessing it would reduce their ability to finance the capacity expansion that European governments are simultaneously demanding. Third, the legal frameworks for blocking such investments — the EU's Foreign Direct Investment screening mechanism and national equivalents — were designed for hostile acquisitions, not for the kind of passive minority stakes that sovereign wealth fund investment typically involves.

The latent concern that some national security officials are voicing privately is less about immediate strategic risk — a minority stake in Rheinmetall does not give Abu Dhabi control over Rheinmetall's technology — and more about the long-term trajectory: as stakes grow, as voting rights and board representation follow, and as the companies become more financially dependent on foreign capital, the independence of European defence companies from non-European shareholder interests becomes less absolute.