The market is increasingly distinguishing between technological innovation and investable innovation.
MEGHAN WELCH | Managing Director, Brown Gibbons Lang & Company
BGL’s Welch says she’s seen PE investors growing more comfortable with stepping in earlier in a target’s lifecycle, though these sponsors need more than impressive tech- nology to take the leap. “The market is increasingly distinguishing between techno- logical innovation and investable innovation,” BGL’s Welch says. “Today, many sponsors are becoming more com- fortable stepping in earlier—but only if they believe they can materially accelerate that industrialization process.” Operational Resiliency Accelerating industrialization is a high bar to clear in the defense market, considering its supply chain and labor challenges. Deloitte reported in May that the three largest defense contractors in the U.S. have an order backlog amounting to $557 billion. McKinsey noted in June 2025 that labor
attrition in the U.S. A&D market remains at 15%, more than double the average across other sectors. When combined with a lack of market experience, the supply chain bottlenecks and talent shortages younger innovators face create a risk profile too large for many PE buyers. Some private equity dealmakers are willing to step in if a target either already demonstrated an ability to scale manufacturing and production, or presents a clear path to doing so with the financial and operational support PE can provide. Welch says sponsors active in defense tech see industrialization challenges as an opportunity to drive returns in targets that can overcome them. “The investment thesis is increasingly centered on operational value creation rather than purely financial engineering,” she says. Private equity firms without the risk appetite for the most innovative businesses can still access other avenues into the defense market, however.
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