Washington Is Now a VC: Inside the New Aerospace Deal Boom

The U.S. Department of War has turned into an active investor in aerospace and defense companies, deploying everything from project-level and corporate debt to equity and equity-linked products. That's the single biggest shift reshaping A&D dealmaking, according to Vinson & Elkins partners Sebastian Tiller and Ben Heriaud, who laid out the changing market in a recent firm conversation on the practice's outlook.

How big has the industry's scope become?

Aerospace and defense has outgrown its conventional definition, Tiller said. Traditional A&D products and systems remain a major part of the business, but the industry is "rapidly integrating emerging and sophisticated technologies, including artificial intelligence, to create new and powerful solutions for both government and commercial applications." It's also crossing into adjacent sectors like mining and digital infrastructure.

The industry remains capital-intensive, Heriaud noted, and the federal government has become "increasingly interested in stepping in as a source of capital."

What's driving the growth?

Several forces are converging at once:

• Geopolitical tension. As international conflicts have intensified, governments have prioritized expanding, strengthening and modernizing their A&D capabilities, pushing demand to new heights.
• New entrants. Smaller, emerging companies — often backed by the same investors who fund software businesses — have "altered the competitive landscape across the A&D market," Heriaud said.
• Artificial intelligence, which A&D companies are building into existing systems and new platforms.
• Dual-use technology. Tools that once served mostly government customers are finding commercial applications.

The result: A&D is drawing outsized investment versus many other industries, with capital flowing through project financing for greenfield and brownfield developments, direct equity from venture capital, private equity and strategics, plus IPOs and other public equity transactions.

Why is the supply chain pushing M&A?

A&D depends on complex supply chains that were not built for today's demand levels. Governments and industry participants are now securing access to critical products and preventing them "from being absorbed by perceived geopolitical adversaries," Heriaud said. That pressure is driving an industrial-base rebuild.

It's also driving deals. Tiller cited two M&A catalysts: vertical integration, as companies bring key suppliers in-house rather than depend on outside vendors, and scale, because winning large government contracts requires proving the capacity to deliver volume.

What makes A&D deals harder?

Due diligence runs deeper than in other industries. Tiller said it typically focuses on the target's supply chain, national-security compliance, cybersecurity regulations, government contracts rules, and trade and export controls. Intellectual property is another focus area, particularly protecting IP rights and securing sensitive data — a set of concerns that increasingly shapes disclosure in capital markets deals.

Foreign ownership adds a new layer. Rules restricting ownership by Foreign Entities of Concern, codified in the One Big Beautiful Bill Act, "imposed constraints that the market is still working through," Heriaud said. A&D companies now must manage foreign ownership in their capital stack carefully or risk jeopardizing government business relationships.

Antitrust is also in play. Tiller said companies pursuing supply-chain integration should prepare for scrutiny when a target supplier has historically served competitors, with regulators focused on potential "lock-out" scenarios.

How exactly is the government investing?

Three departments — Commerce, Energy and War — each pursue different but complementary mandates. The Department of War's Economic Defense Unit has developed a strategy built on three tests, per Heriaud: does the company's business solve a perceived strategic vulnerability in the defense industrial base; does its governance structure protect national security interests; and would public investment help attract additional private capital.

The unit's transactions reflect exactly that logic, providing support to businesses that address the government's needs and serve the national interest while keeping mission-critical technologies out of adversaries' hands. The structures have been bespoke and wide-ranging, which Heriaud reads as a government refining its capital solutions to meet specific needs.

Who wins in the next few years?

Two differentiators, the partners agreed. Scale, for companies betting on large government programs and their high production demands. And practical technology adoption — Heriaud's point that long-term viability "depends more on what customers will support, and less on what is possible to build." Companies that design around real-world use cases will attract customers, investors and acquirers; those with prohibitively expensive products or unrealistic applications risk falling behind.

The stakes are structural, not just tactical. How well market participants manage risk and opportunity now, Heriaud said, will determine what future opportunities they can pursue — and on what terms.