With Government Support, A&D’s Maturation Attracts Midmarket Investors

While outlook is undoubtedly rosy across the A&D landscape overall, the conference highlighted several niches where investors and sellers are expected to see a particularly active market as they head into the new year.

Dealmaking in Defense

President Trump’s proposal for a defense budget worth more than $1 trillion has contractors eager to take advantage of increased government spending.

Experts discussed the opportunity during the event’s “Dealmaking in a Shifting Defense Landscape” panel, during which one panelist described today’s environment as “one of the most exciting times in my career.”

The opportunities for smaller, mom-and-pop technology innovators is particularly strong, the experts noted, as strategics seek targets that can augment existing capabilities to strengthen their competitive edge when pursuing government contracts.

But PE sponsors are also driving up the competition—and therefore price tags—for the best assets. One speaker even recounted one transaction in which a sponsor paid 22x TTM EBITDA.

In this climate, sellers may find themselves in a favorable position as founders and owners look to retire and explore their exit options. While selling to strategic or a private equity firm can be a lucrative path for operators looking to retire and in sudden need of an out, one panelist also highlighted the minority ESOP opportunity for founders interested in alternatives to a traditional sale, leveraged buyout, or 100% conversion to ESOP.

The panel also touched on the state of artificial intelligence adoption among defense technology innovators. While AI has been a hot topic across the middle-market M&A landscape—particularly in tech-heavy pockets like defense—speakers acknowledged that it remains early days for AI to prove an effective valuation multiplier.

“There is a lot of hype around AI, but very few businesses are actually implementing it in any significant manner,” noted one panelist. “There’s a lot of smoke, but not a lot of fire.”

The one potential exception to this, they added, is on the production and manufacturing side of the market, where AI and robotics are quickly gaining traction.

Looking ahead, writing code is another area of defense tech likely to see significant disruption from AI, one expert said. As this trend develops, businesses must prioritize data security. “Privacy will be paramount,” they added.

Space Exploration Matures

Among the most prominent themes discussed during the event’s “Beyond the Horizon: M&A Opportunities in Aerospace and Space Exploration” panel was the maturation of the space sector to a point where private equity sponsors feel increasingly comfortable backing these assets.

In the past, panelists noted, many of these businesses relied on venture capital and billionaire investors to finance R&D. “Space technology is so unique, and the environment of space is so challenging,” noted one speaker. “Things blow up a lot—and that makes it hard to raise capital, but it’s very capital intensive.”

2020 may have been a time when billionaires viewed space experiments as passion projects to invest in, but 2025 brought real-world adoption and demand for space infrastructure and defense technologies. Innovators today are focused on critical areas of the market, like integrated tech to improve landing systems, or robotics on the manufacturing floor for space tech components.

The aerospace sector is also benefitting from the nation’s expanded defense budget as the ecosystem is viewed as a critical component of military operations today.

With that in mind, PE sponsors are keeping a close watch on the space as it continues to evolve. “You’ll see smaller layers (of technology) consolidate to create a tech stack that is interesting enough to get acquired later,” one panelist predicted.

As dealmaking in the aerospace sector expands, however, the panelists also highlighted several key challenges developing in the market, most notably in the supply chain.

The regulatory environment is “one thing that scares investors,” a panelist said, adding that certification of suppliers can be a helpful risk mitigation tool. Even so, they continued, many of the parts used in aerospace assets are manufactured using Chinese parts, creating a new layer of regulatory and security risk that could thwart sponsor support unless parts manufacturing is reshored to the U.S. and its allies. “The supply chain will become increasingly contested,” the panelist said. “And we’re not taking a lot of steps to fix that right now. It will require a tremendous amount of investment, both public and private, to address.”

Finding Relevancy Today

Rounding out the conference was the “What Do the Bankers Think?” panel, which offered a chance for sell-side investment bankers to sound off on how A&D businesses today should be thinking about their exit.

While R&D is important to drive innovation forward, private equity investors and strategic acquirers today are seeking targets that can address needs in the here and now. “Selling means presenting an asset to help someone get on an opportunity unique to this moment in time,” one panelist said. “People pay a significant premium for time. So, how do you get relevancy today, rather than in two to three years?”

Offering a product or solution with a proven ability or demonstrating a strategic understanding of the current market landscape can help sellers obtain multiples in the high teens, panelists said.

Looking into 2026, the experts anticipated valuations will remain elevated or climb even higher, particularly in industry niches like commercial air, where demand for aircraft, parts, and MRO services continues to outweigh supply. The availability of financing to meet more aggressive pricing on these deals is also on the rise as private credit grows more active in the space.

There are still plenty of pockets across A&D that continue to focus on experimental R&D. As a result, many unknowns remain as to who will become the winners of key government contracts for initiatives like the Golden Dome or air traffic control modernization. As such, one panelist said, investors are likely to bet on the suppliers of those primes to derisk that uncertainty, rather than attempting to predict the next big prime or platform.

In the medium-term, panelists acknowledged that it is unclear what A&D government spend may look like with a new presidential administration a few years from now. But in the short term, will 2026 be a banner year for A&D M&A?

As one panelist put it: “Let’s all hope so.”

Carolyn Vallejo is ACG’s Senior Editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit acg.org.