Geopolitical tensions, from the ongoing Russia-Ukraine conflict that began in 2022 to the escalating confrontations in the Middle East, are pushing energy transport security and air defense ammunition replenishment to the top of urgent agendas for large-scale military equipment procurement. Global alternative asset management giant Carlyle Group Inc. sees major investment opportunities in the defense sector extending well beyond a handful of large prime contractors, with a spotlight on small and mid-sized enterprises capable of rapidly and efficiently supplying cutting-edge battlefield technology chains and core military equipment production capacity.

Since September, Houthi forces have expanded their control near the Bab el-Mandeb Strait, prompting Saudi airstrikes on targets inside Yemen. The Saudi East-West oil pipeline, which serves as an alternative to shipping through the Strait of Hormuz, was also attacked and shut down. The combination of restricted strait navigation and attacks on land-based alternative transport infrastructure means energy export risks cannot be eliminated simply by rerouting. Citing two regional officials, the Associated Press reported on September 16 that Saudi Arabia sought air defense support from allies due to dwindling interceptor missile inventories. Saudi officials had not yet responded to the report at that time.

From an investment logic perspective, the demand generated by such conflicts goes beyond one-off ammunition resupply. It includes sustained protection for oil and gas facilities, ports, and military bases, as well as the industrial capacity needed to support large-scale, highly efficient delivery of critical defense equipment. European aerospace and defense stocks have outpaced the benchmark Euro Stoxx 600 index by a wide margin in recent years, reflecting a historic re-rating of this theme. Yet Carlyle appears more focused on opportunities beyond the largest players.

From shipping route risks to defense production gaps, the investment opportunity is not limited to defense supergiants. Ian Fujiyama, head of Carlyle's aerospace, defense, and government business, said over three decades of excessive consolidation have created a structure with "a few giants at the top, insufficient mid-sized companies, and numerous innovative small firms at the base." He cited a 140% increase in aerospace and defense M&A deal volume over the past six months alongside a 60% decline in average transaction size, indicating that activity is increasingly concentrated at the smaller end of the market—not a 140% rise in total industry deal value. Carlyle's acquisition of military-grade encryption firm Secturion Systems and its participation in funding Castelion, a developer of low-cost hypersonic missiles, correspond to opportunities in secure communications and scalable manufacturing, respectively.

The "middle market" here refers to company and transaction size, not implying that defense technologies are low-end. The potential value lies in helping companies with proven technological capabilities overcome hurdles in funding, production, and customer expansion. According to a document previously submitted to the U.S. Congress, the Pentagon's $67 billion emergency funding request for the current fiscal year includes $18.2 billion to replenish the most advanced Patriot missile systems, naval Tomahawk cruise missiles, and the Army's THAAD high-altitude intercept system. This serves as a confirmation signal that the global defense industry is shifting from "geopolitical transactions" to a "supercycle of sustained inventory replenishment and production expansion driven by strong demand."

The most powerful marginal beneficiaries are undoubtedly air defense and missile defense systems, precision-guided munitions, and their upstream supply chains—not simply fighter aircraft platforms. Patriot, THAAD, Standard series missiles, AMRAAM, Tomahawk, anti-ship missiles, and long-range rockets all share characteristics of high consumption, low inventories, and lengthy replenishment cycles. Demand will transmit down the chain from complete missiles to seekers, radars, solid rocket motors, propellants, warheads, data links, and command-and-control systems.

Rather than focusing solely on complete missile orders, deeper analysis should focus on critical supporting segments such as seekers, propulsion systems, and guidance electronics. However, demand transmission does not mean all components grow proportionally. Mid-sized specialized suppliers with proven delivery records capable of serving multiple programs may be better positioned to absorb incremental demand than companies with only R&D concepts. Yet production expansion costs, cost overruns, and government funding uncertainties could delay the conversion of order growth into free cash flow.

Another main line worth tracking is the systematic battlefield technology demand driven by mid-sized defense firms in "drone-counter-drone-electronic warfare-ISR-military AI" sectors, rather than isolated bets on a single type of aircraft. The value of these battlefield technologies depends on reliability, system compatibility, and actual deployment capability. Ukraine is advancing joint drone production with the U.S. and the EU, with its long-range drones exceeding 3,000 kilometers in range. The EU's "Readiness 2030" strategy explicitly prioritizes ammunition stockpiles, air defense systems, AI-enabled drone swarms, space services, and military mobility.

U.S. defense giant RTX previously disclosed U.S. Army counter-drone tests combining KuRFS radar, Coyote kinetic and non-kinetic effectors, and software upgrades, demonstrating the direction of coordinated development in detection, identification, tracking, and engagement capabilities. Secturion, acquired by Carlyle, provides NSA-certified hardware encryption products that protect sensitive data across air, sea, and ground systems, further evidence that defense investment opportunities extend beyond supergiants and ammunition manufacturing.

Carlyle's aerospace, defense, and government business head Ian Fujiyama said emerging mid-sized defense firms entering the U.S. defense industry bring abundant investment opportunities as the government seeks greater private sector participation. "We've seen over three decades of excessive consolidation in this space, leaving only a few companies at the top while the middle layer has hollowed out," Fujiyama said in a recent media interview. "There's a very deep ecosystem of innovative small companies."

In May, the private equity firm launched a dedicated fund to support and nurture smaller defense companies. In July, it announced the acquisition of Secturion Systems, a provider of military-grade encryption technology. Transaction terms were not disclosed. In a deal announced in August, Carlyle led Castelion's $1 billion Series C funding round. Castelion is developing a low-cost hypersonic missile.

Fujiyama, a defense industry veteran with nearly three decades of coverage, said current deal dynamics support Carlyle's next phase of investment focus. "Look at the past six months—from an M&A perspective, the number of completed deals in aerospace and defense grew 140%, but average deal size fell 60%," he said in the interview. "There's very active deal-making at the relatively mid-sized or smaller end of the market."

Fujiyama added that the Trump administration has shown a "reopened attitude" toward public-private partnerships and accessing defense technologies already available in the commercial market. He said a "new atmosphere" has emerged in conversations that was not seen in previous years. The Pentagon's push for collaboration stems in part from the war with Iran, which has depleted inventories of some critical military materials.