How Defense and Space Are Becoming the Next Frontier for Investors, From an Investing Pro

Why It Matters

The combined budget tailwinds create a durable, multi‑trillion‑dollar market, while neo‑primes offer superior returns compared with traditional defense contractors, reshaping how capital can capture defense and space growth.

Key Takeaways

• Global defense spend projected $6.4 trillion by 2035
• Space economy expected to triple to $1.8 trillion by 2035
• Neo‑prime firms report gross margins above 40%, versus 8‑15% for legacy primes
• VC funding to defense tech hit record 8% of global VC in 2025

Pulse Analysis

The strategic landscape is being reshaped by unprecedented fiscal commitments. NATO allies have pledged to lift defense spending to 5% of GDP by 2035, and the United States is eyeing a $1.5 trillion budget for FY 2027—roughly a 75% increase over 2025 levels. Parallel to this, the commercial space sector is on a rapid expansion trajectory, with satellite launches projected at 12 per day and total market size climbing to $1.8 trillion. These macro forces are not isolated; they reinforce each other, turning defense and space into intertwined pillars of future economic growth.

At the heart of this surge are the emerging "neo‑prime" companies that blend defense contracts with Silicon Valley‑style agility. Firms like Anduril, valued at about $60 billion, leverage AI, autonomous systems, and vertically integrated production to deliver capabilities that legacy primes—such as Lockheed Martin and Raytheon—cannot match in speed or margin. While traditional primes operate on cost‑plus contracts yielding 8‑15% gross margins, neo‑primes routinely post margins above 40%, reflecting their software‑first business models and ownership of intellectual property. Venture capital has recognized this shift, directing nearly 8% of all global VC capital to defense tech in 2025 and driving a 20% annual market growth rate.

For investors, the implication is clear: private‑market exposure to neo‑primes and space infrastructure offers a high‑return, high‑margin avenue that public markets have yet to fully price in. However, these opportunities demand patience and specialized expertise, given their illiquid nature and longer holding periods. New fund structures are democratizing access, but success hinges on partnering with managers who possess deep domain knowledge and a track record of sourcing top‑tier ventures. As defense and space budgets continue to swell, the convergence of these sectors will likely produce a new generation of high‑growth, technology‑driven assets that could redefine the investment frontier for the decade ahead.