Dominic Hudson
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value in an ever-changing world. I am your host, Dominic Hudson, Head of Investment Banking for Europe and APAC. Today we are reflecting on developments across the defense, industrial and infrastructure landscape through 2025 and examining how regional dynamics and capital markets trends are shaping the path ahead, including the convergence of defense with infrastructure and space, the pressure on industrial capacity and the commercial pathways emerging across markets. To help make sense of all of this. I'm joined by Cliff Bayer, Head of Aerospace, Defense and Government Services, Rob Jurd, Head of Industrials for Europe, and Claire Sturgess, Head of Canadian Industrials and CME Investment Banking.
Dominic Hudson
Kicking off with my first question to each of you. What is the 2025 defense backdrop that's shaping the wider industrial outlook for 2026 across the U.S., Europe and Canada? Cliff, perhaps I can kick off with you.
Cliff Bayer
From a spending priority perspective within the US, defense has increased, both in absolute dollars and as a percentage of GDP. Some of the key priorities include ship building. It's largely being driven by China's shipbuilding capacity, which is 200 times larger than in the US. The second area that we're seeing a high degree of spending priority in is in the unmanned aircraft and drones and counter-drone technology. To put it in perspective, a drone costing a few $1,000 could disable the $60 million navy ship by destroying its electronic systems and making it unusable. The third area of spending priority that we're seeing in the US is missile defense.
Dominic Hudson
Rob, I'll go to you next.
Rob Jurd
I think there have been numerous milestones in Europe since Russia's invasion of Crimea in 2014, when spending across Europe was only 1.2% of GDP. The prior goal of 2% will only be reached this year, and new targets of 3.5% were confirmed at the NATO summit. It's important to note that equipment spending in Europe was only around 20% of the total in 2014. That has also doubled into 2025 to around 40%. As it relates to your question, on the wider industrial backdrop, note that the 3.5% I mentioned is related to core defense. This will drive revenue for aerospace and defense companies both in North America and Europe. However, a further 1.5% has been committed to, which relates to infrastructure, cyber security and resilience, and these are likely to be provided by non-defense and dual use companies. The order of magnitude of spending in Europe is going to be an additional incremental close to 600 billion per annum. In contrast, the combined 2024 revenue of the largest 10 defense companies is roughly 50 billion euros. This is the reason why European defense companies are trading at all-time highs, and research analysts are still expecting north of 10% growth for most and north of 20% growth for some players. Lack of European alignment between countries and fiscal priorities remains a headwind for the industrial base, and many CEOs have been vocal about this challenge.
Dominic Hudson
All right, Claire, if I can go to you next.
Claire Sturgess
Canada heads into 2026 with a much more focused defense posture than it's had over the last number of years, that's driven by significant spending increases in response to NATO commitments. And appreciation of the geopolitical threats in the Arctic and closer alignment with both the US and Europe.
Canada also plans to reach 2% of GDP in defense spending this year and maintain a trajectory towards the NATO defense investment pledge of 5% of GDP by 2035. Our recent federal budget also included over $80 billion over the next five years to rebuild and reinvest in the Canadian Armed Forces, so that's a meaningful change over the last decade. Spending in Canada is expected to emphasize sovereignty, defense modernization and improved surveillance. So will include both core military capabilities and also dual use infrastructure and security investments. Importantly, the government has also announced the creation of a new defense investment agenda that will overhaul our approach to procurement with a ‘Buy Canada’ mandate, with the objective of building a real domestic supply chain, and we expect this to benefit businesses in the aerospace, ship building, advanced manufacturing, cybersecurity, AI and quantum technology sectors, among others.
Dominic Hudson
All right. Thanks, Claire. My next question is, how is cross-border collaboration between Canada and Europe evolving, and what does it signal for industrial participation and joint programs across the space? Rob, I'll turn to you first.
Rob Jurd
In general, the aerospace and defense sector has long been characterized by joint ventures and collaborations, whether it be in space, land systems or the air domain. The recent Canadian European alignment is a prime example where Canada is exploring the possibility of procuring the Swedish Gripen fighter jet. This would require manufacturing collaboration between Saab and Bombardier. Further, the Canadian defense company CAE signed Saab up as its preferred supplier for its global eye airborne early warning system. This aircraft will be manufactured in collaboration between Saab and CAE. But the important point here is that this will not only be for the Canadian market. The intention is for that to be for the export market as well. So, we are seeing real proof points in the last year, in particular, about further cross-border collaboration. But it is important to note that Canada and Europe still remain highly dependent upon the U.S. and U.S. defense companies.
Dominic Hudson
Claire, if I can go to you next for a Canadian perspective.
Claire Sturgess
From the Canadian standpoint, Canada and the EU are clearly moving towards deeper industrial cooperation, including information sharing on defense initiatives and joint work in building supply chains. There have been a few recent announcements that signal opportunities for the Canadian industry. One is a commitment to a significant increase in Canadian spending on European space agency programs, and that should increase contract opportunities for Canadian companies, and the second was Canada's announcement that it was joining the EU's military purchasing fund, or safe. And safe should unlock some meaningful defense opportunities for Canadian companies, as it really widens Canadian access to European funded defense projects. Canada is the first non-European country granted preferential access to safe, which I think highlights the real opportunity for collaboration between Canada and Europe.
Dominic Hudson
Rob, how are manufacturers managing persistent capacity constraints across labor suppliers and infrastructure, while modernizing and industrializing production lines to improve throughput, reliability and long term competitiveness?
Rob Jurd
Yeah, this is especially relevant in Europe, where supply constraints are most acute. Global supply disruptions due to tariff changes and other geopolitical impacts have exposed structural capacity gaps across numerous areas, for example, in electronic subcomponents. Thus, the topic of sovereign capability in Europe also relates to sovereignty, not only of defense capabilities, but also of the defense supply chain. Modernization is underway, and it's helpful that Europe has a highly skilled labor base. And historically, Europe has been ahead, alongside Japan and most recently, China, in discrete automation, for example, in automotive manufacturing and robotics. A counterpoint is that executives from some of the automotive companies in Europe have been quite vocal earlier this year against shifting production capacity towards defense. This adjustment could take some time in terms of utilizing the existing industrial base and European industrial companies that don't have current exposure to the defense sector. Defense manufacturing, with the exception perhaps of small drones, is typically more bespoke in any event than high volume. For larger systems, particularly in areas like ship building, which are quite labor intensive, know how has shifted to Asian companies from Europe as well, but in the Nordics, in Germany, there are a number of well capitalized players like Kongsberg and TKMS who are also investing in their capabilities.
Dominic Hudson
Alright, thanks very much, Rob. I'll go to my next question, how is the wider industrial landscape intersecting with defense, across infrastructure, supply chains and dual use technologies, and what does this mean for growth opportunities heading into 2026? Cliff, if I can turn to you first.
Cliff Bayer
We've seen a tremendous amount of investment into disruptive technology within defense. What we're seeing is that the legacy defense primes typically build large, long-term programs to government specifications, while companies such as Anduril, and Shield AI operate more like tech startups, quickly developing and iterating on software driven hardware solutions. This approach is supported by a military that is increasingly seeking to break away from slow, traditional procurement and embrace innovation. The key to their innovations – prioritization of software, and we've seen a number of new program wins where some of these defense disruptors are winning new contracts away from some of the larger defense primes. Thanks.
Dominic Hudson
Claire, if I can turn to you for your views on that convergence.
Claire Sturgess
Absolutely. In Canada, some of our largest aerospace and defense businesses are focused on dual use technologies, including MDA Space, renowned for satellite components and robotics and a great example of a Canadian champion. We have a wide range of other players focused on satellites, as well as pioneering drone technology and Earth observation capabilities. I think the dual use tech spillover becomes particularly relevant in the Canadian context when we think about Arctic sovereignty and surveillance. Today, we're trying to connect the Arctic from a communication standpoint and develop intelligent tools to observe how that environment is changing from a climate perspective, and we actually know very little about what's happening over the Arctic, and Canada is critical to our allies, both the U.S. and European, in building a strong Arctic defense system. So, it's a relevant case study as we think about employing technologies to achieve both commercial and defensive objectives.
Dominic Hudson
All right. Thanks very much. Where is the next wave of capability investment heading, and how are non-traditional entrants reshaping competition, especially in space? Rob, perhaps I can start with you.
Rob Jurd
Defense tech startups are entering procurement cycles faster than before. We’re seeing that from European perspective, in UAV companies in autonomy, software first systems. However, there's still a greater proliferation of these startups in the US versus Europe. Systems now need to be interoperable from the start, versus retrofitted as this is how new platforms are being developed. This means open architecture, common design standards are areas where there's a particular challenge in Europe, potentially because many of these companies aren't software-first. Space is a next frontier where there is significant investment, although most of what we've seen in terms of private capital, particularly in Europe, still relates to launch capabilities, which are far behind U.S. capabilities from SpaceX and other players. So, in terms of pure play defense technologies, there's been less from European perspective than we've seen in in the space domain.
Dominic Hudson
All right. Thanks. Rob. Claire, if I can go to you next on the capability investment and where is it heading.
Claire Sturgess
I think we're beginning to realize in Canada how critical the sector really is. Approximately 20% of Canada's economy relies on space infrastructure, and losing maneuverability or control is estimated to potentially cost our economy a billion dollars of GDP per day. With that backdrop, one of the key priorities for Canada is developing sovereign launch capabilities. Canada is actually the only G7 country that can't launch itself into low orbit, and we've seen dedicated federal funds allocated to investing in companies who are focused on launch in our recent budget. One of the most important catalysts for the space sector in Canada is expected to be from the upcoming release of our defense industrial strategy that will focus on the highest priorities for defense spending, and we expect space will be a likely beneficiary of that new strategy. Domestic companies who participate in satellite communications and Earth observation capacity in particular are expected to be well positioned for new investment in the sector.
Dominic Hudson
I’ll go to my next question, where is transaction activity emerging, and how are ESG concerns and cross border regulatory frameworks shaping deal pathways in 2026. Cliff, if we can start with you.
Cliff Bayer
Yeah, we're seeing a large uptick in M&A activity focused on the defense space, and I think a lot of that as a result of, defense has now changed and is really a growth sector. So, to put it in perspective, when you when you look at the last 12 months, the RBC North America defense supplier index has increased about 52%. The RBC European aerospace and defense supplier’s up around 60%. The S&P500 is up around 13% so massive outperformance within defense. RBC had the opportunity to represent defense supplier called LMB. We worked on the sale, which was announced in February of this year, and the acquirer, the buyer, was a US public company. And I think that's a really good example of US companies trying to position themselves for the increasing level of European defense spending, as Rob talked about earlier. And I think we're going to see, we're going to see more of that as European defense spending increases. I think we're, you know, I would expect to see probably more transactions at the mid-level, at the mid cap range, as opposed to large cap.
Dominic Hudson
All right, Cliff, thanks. Rob, appreciate your views as well on the activity that you're seeing at the moment.
Rob Jurd
Yeah, I think that that point that Cliff made around large-scale consolidation is quite pertinent from a European perspective as well. There was an expectation that there would be greater large-scale consolidation, similar to what we saw when BA and EADS were looking to merge 15 years ago. That hasn't happened in this wave of valuations going up and increased spending. That's predominantly because countries in Europe are also focusing on fostering their own industrial and defense champions. So, from an M&A perspective, we have seen a focus, perhaps more on the supply chain for OEMs to ensure capability delivery is there. There's also been a focus from large defense companies on trying to assess how to invest and partner with defense tech companies, particularly from a backdrop where many of these companies are significantly larger. The defense tech companies are significantly smaller, are very people based, and they want to make sure that they can still foster innovation by acquiring those businesses. We've seen a big focus around private capital. So, from that perspective, whether it be private placements, the activity has continued to increase there with defense tech businesses, but also private equity firms looking to establish dedicated defense funds also committing to invest significantly in Europe. Historically, that was because of the valuation differential between defense companies in Europe and the U.S. That's flipped around now, but we see that there is a significant desire to deploy private capital into the sector, in the context of governments not being able to necessarily fund the growth and the public markets also not necessarily being able to fund that growth significantly. On the public market side, there have been quite a few IPOs in the last few years with defense related businesses, rank existence last year, this year, TKMS. So, there has been quite a lot of new capital formation in the public markets, given where valuations are, and there are a couple of deals that should be coming in the near term in the public markets as well.
Dominic Hudson
So Rob, how are strategics and private capital players approaching defense tech and supply chain investments as the sector scales?
Rob Jurd
I think from a European perspective, strategics are looking at it in two ways. I think firstly, from a defense tech perspective, they are looking to work in partnership, take minority investments, but in particular, coming up with unique structures to perhaps have a minority or a very small anchor investment to support a company, but then really signing MOUs and working with them to supply capability. So I think that's really been one of the key areas. Private capital players are either from a venture capital perspective, setting up dedicated funds, as have private equity firms, but that is still quite nascent. And the reality is, because valuation levels have been so high, it has been difficult to try to pick the right winners. We do see in certain areas, there are unique companies, Kraken technologies in the UK, which manufactures literal combat systems for the maritime space, which is very interesting at this at this point in time, being quite unique in the area that they operate. But if you look across UAV, counter-UAV, for example, it's been quite difficult to really figure out where the winners are going to be because there is a proliferation of new entrants in some of these areas, as there are relatively low barriers to entry with some of them.
Dominic Hudson
How are equity markets responding to aerospace and defense names heading into 2026 and what are you seeing in terms of issuance, windows, investor appetite and valuation trends across regions?
Cliff Bayer
I think we're going to continue to see strong outperformance of defense as an end market as reflective in share prices. We've had the benefit of operating as a bookrunner on 85% of all aerospace and defense equity issuances since 2022. And some of the more recent defense-focused names that we've been involved with, include Kratos, AeroVironment and V2X. And, so the amount of equity issuance that have gone on, that's transpired in the last few years has really been unprecedented. And I think we're going to see a lot more private equity names in particular looking at an IPO as an exit mechanism versus just versus a sale. You know, in the past, sellers, private equity names in particular, have been hesitant to exit through IPOs, just given the lock up and given the time that it's required to get a company ready for an IPO. But just given where sector valuations are today, companies are evaluating that quite seriously. To put it in perspective, the defense primes in the U.S. trade anywhere from 16 to 20 times off of forward EBITDA. And if you were to look back five, six years ago, those were in the single digits. So, you're seeing almost a doubling of public market valuations in the last five to six years, which is pretty meaningful.
Rob Jurd 14:20
What we have seen from a European perspective is a much higher allocation in IPOs over the last few years to European investors, predominantly as a result of ESG concerns being alleviated through government pressure, but also through investors themselves. So the ESG aspect has become less of an issue. It is still going to be a concern for certain investors, private equity investors, and public investors alike in certain areas, which is why certain companies, like missile system businesses, MBDA and others that are currently private, might likely stay private, but we have seen a complete shift in investor sentiment towards the defense sector over the last couple of years, in particular.
Dominic Hudson
So, Rob, might just ask you any additional comments regarding access to an activity in in public markets.
Rob Jurd
Generally in the public markets, investors are quite global, and they're looking at companies from a global perspective. So, what we are seeing is that in new capital formation, there are a lot more IPOs in the US market, in the defense sector, still, because of liquidity in that market, many investors, much deeper pools of capital. So that is still going to be a theme. The one topic that is interesting from a European perspective is that in certain countries in Europe, there are still going to be export control restrictions that are differentiated so we're seeing private companies that are looking to raise public private placement capital in Switzerland, for example, redomiciling to the Netherlands, looking to list potentially on the Euronext market, which is seen as more of a neutral market for other companies that might have operations in Germany and France, for example.
Dominic Hudson
Go to my next question, it’s question for all three of you, what's top of mind for clients, and how is RBC helping clients navigate the challenges and opportunities in the investment landscape as we move into 2026? Claire, if I can start with you.
Claire Sturgess
What we've heard from our clients is that they want from governments a strong vision for what a robust defense sector, including the space sector, should look like. What are our national priorities for defense, and how can we create progress in modernizing a procurement process that prioritizes Canadian tech and innovation. I think a commitment to defense spending, which we've talked a little bit about today, should bring much needed stability and visibility into the sector and allow Canadian companies to make build decisions that are suited to Canada as a key customer. From investors, our clients are hoping to raise awareness and try to develop a deeper capital pool here in Canada. Our clients are encouraging us to take on the opportunity of educating investors around the defense ecosystem, including in the space system, which remains a very niche and poorly understood sector within the investment community here. In the U.S. and Europe, private capital has helped to create a new generation of companies. Dual-use and commercial capabilities are driving a real growth opportunity. What we need here is to encourage private capital in Canada, along with strategic, predictable government spending, to de-risk investment for many of our early stage and growth stage defense companies, to allow them to succeed.
Dominic Hudson
All right, thanks. Claire. Cliff, if I can go to you next.
Cliff Bayer
The one thing that's really clear is the global threat environment is only increasing across the globe, and what we're seeing is companies looking at how to best position themselves to support global economies in that regard. And all that takes capital, right? We've seen private equity groups such as Bain or Blackstone or Apollo set up funds to invest in longer term minority levels to support some of these emerging defense technology companies. We've also even seen some of the defense prime set up venture capital firms internally. So like Lockheed Martin has a venture fund. Raytheon has a venture fund. And they're all looking at supporting companies with emerging technologies in the form of a minority. So, what we'll see in 2026, is just how people look at different ways to help finance this growth, whether it be through the private markets, the public markets, or through debt capital.
Dominic Hudson
Thanks very much, Cliff. Rob, I'll hand to you to round out the question.
Rob Jurd
I think, from our perspective, it's about the one RBC platform advantage. In particular, when I think about the strength that we've got in Europe across a number of different sub sectors in power, utilities and infrastructure, for example, there is a convergence that is happening in Europe, in particular, in the defense sector. So, one for me, it's as Cliff said, it's the provision of capital, whether it be debt, equity, private placement or public markets. I think that's one area. The other is trying to help to think through, from a client perspective, this convergence that is happening as we're seeing more dual use technologies, non-defense companies, making forays into the space. And then I think lastly, what is also important is the government connectivity that we have with European governments and with North America, with Canadian, and U.S. and supporting, working together with and helping to create those connections between government and the private sector. I think that's another area that we are excited to be a part of at RBC.
Dominic Hudson
That's a great point to end on.
Dominic Hudson
And to our audience, you've been listening to Strategic Alternatives, the RBC podcast. This episode was recorded on December 4, 2025. Listen and subscribe to Strategic alternatives on Apple podcast, Spotify or wherever you listen to your podcast. If you enjoyed the podcast, please leave us a review and share the podcast with others.
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