The European Union’s (EU) anti-drone system strategy will require substantial private capital investment to gain altitude.

Successfully launching a European counter-drone industry has become a mission-critical pillar of the continent’s drive for strategic autonomy, as Russia increases incursions into airspace supposedly protected by the North Atlantic Treaty Organization (NATO).

Breaches over the past month highlight a tricky problem for military planners to solve: where missiles cost millions, drones can be effective at far lower cost.

Kaja Kallas, the vice-president of the European Commission (EC) and the EU’s foreign policy chief, last week said that the bloc’s new anti-drone systems should be ready by 2027 and fully operational by 2030. The EU’s aerial defence roadmap has an emphasis on deterring further Russian expansion on the continent following its 2022 invasion of Ukraine (and its 2014 annexation of Crimea).

Warfare of the future is likely to involve huge clusters of drones, so any entrepreneur who can find cheap, scalable technologies to deal with incursions will have a ready-made business case. Vertical integration with major defence OEMs with secure rare earths supply chains – a key input for drone motors – could also come onto the agenda in the future.

“There’s clearly strong momentum and rising investor interest,” Andriy Kolodyuk, founder of AVentures Capital and chairman of the Ukrainian Venture Capital and Private Equity Association (UVCA), said. “The European defence ecosystem is recalibrating, and drones – especially counter-drone technologies – are now at the core of this shift.”

The year-to-date (YTD) data for European drones deals by disclosed volumes have hit a decade-long high, with EUR 264m over six deals that disclosed a value, according to Mergermarket data. This beats the previous high of EUR 171m over ten deals that disclosed a value in YTD23.

There have been 20 deals overall in YTD25, which ties with YTD21 and YTD22, but falls just short of 23 in YTD18 and 21 in YTD17, and YTD24.

The largest deal so far came in May, before Russia’s slew of incursions beginning last month. This was a EUR 160m Series C fundraising by Quantum Systems, a German-Ukrainian provider of artificial intelligence (AI)-based aerial intelligence systems with unicorn status and big plans. This is the largest deal overall since the beginning of 2016.

Defence funds take shape

Ukraine is likely to play a key role in Europe’s emergent anti-drone strategy, particularly through joint ventures at first. The country’s drone/counter-drone industry has a product development cycle of three-to-six weeks, which is unprecedented, as previously flagged by Dealspeak EMEA in June, before the Russian incursions into NATO and EU airspace.

Necessity is the mother of invention – and Ukraine’s domestic defence and tech industries have answered the call.

In recent months, there has been much work behind the scenes laying the groundwork for LPs to get more capital to work via private equity investments in defence companies. As these changes have taken hold, defence has rapidly become an investment focus for many investors, not least with Germany’s EUR 500bn military investment plans crowding in substantial private capital.

Rigeto, a Munich, Germany-based deal-by-deal investor, is exploring defence investments, this news service learned over the summer. Meanwhile, Tikehau Capital has raised EUR 600m against a EUR 800m target for a fund focused on aerospace and defence.

Among strategic players, the aforementioned Quantum Systems is close to completing two acquisitions as it seeks to strengthen its positioning in software for autonomous systems.

While opportunities to deploy capital are growing, access to raw materials is getting squeezed.

Chinese restrictions on rare earths exports have chilled several industries, and the drone space is no exception. Drone makers use elements such as beryllium, gallium, germanium, and indium for operational effectiveness, while other elements, such as neodymium, praseodymium, and dysprosium, are needed for motors.

The Aerospace, Security and Defence Industries Association of Europe (ASD) last week said China’s export controls “underscore the urgent need for Europe to make its supply chains more resilient”. The ASD added the industry is “actively pursuing alternative sources” of key raw materials.

Africa could supply 10% of the world’s needs within five years. One company to watch in this context is Africa Mining & Metals Group (AMMG) of South Africa. In July, the company’s director Seten Naidoo told Mergermarket that it wants to make acquisitions to secure rare earth minerals. “Africa is our playing ground,” he said, adding that it seeks project-focused debt and equity when needed.

It’s not too much of a stretch to imagine the major defence OEMs getting more directly involved in sourcing rare earths – and drone/counter-drone players securing JVs or full takeovers to benefit from this vertical integration.

The not-too-distant future might well involve listed OEMs running the rule on sponsor-backed drone players in the EU, sourcing raw materials in Africa, and then testing innovative counter-drones tech on the continent’s eastern flank.

There is much work to do – and capital to be deployed – to make that vision a reality.