“Defense does not face a shortage of capital.” — AIA-Bain’s central finding
“Defense does not face a shortage of capital. It faces barriers that make expanded investment, particularly in critical bottleneck areas, more difficult,” the study commissioned by the Aerospace Industries Association (AIA) and performed by Bain & Company states. The report, based on 50 interviews with primes, startups, investors, banks and Pentagon officials plus AIA member survey data and analysis, maps where private money is flowing into U.S. defense and where it is not.
Critical minerals: gallium, germanium, and MP Materials
One of the clearest gaps the study identifies is domestic refining for critical minerals such as gallium and germanium, which are used in missiles, radar and magnets. Bain notes mining and refining are capital‑intensive, vulnerable to global commodity cycles, and in some cases reliant on machinery produced abroad — factors that give private investors pause. The Defense Department has already taken an unusual approach: the study notes a $400 million direct equity investment in MP Materials last year. AIA President Eric Fanning told Breaking Defense that government funding “is pivotal for ensuring that the US retains access to critical minerals,” adding, “This is a place where there needs to be some government investment.”
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Protect the town officeSub‑tier manufacturing gaps: semiconductors, castings, solid rocket motors, energetics and sensors
The AIA‑Bain report highlights second‑ and third‑tier suppliers as another underfunded part of the industrial base. Critical components — advanced semiconductors, castings and forgings, solid rocket motors, energetics and sensors — are typically produced by smaller suppliers that may be privately held or that allocate much of their capacity to commercial customers.
Bain found those suppliers face three linked problems: limited access to capital because of their size; production profiles that make rapid scale‑up difficult without a firm order or contract; and a lack of infrastructure to hire and train employees quickly, particularly in less densely populated geographies. Suppliers told AIA‑Bain that a reliable Pentagon demand signal is essential; the study explicitly recommends that long‑term contracts would “drive supplier investment and productivity.”
Venture capital surge, private equity lag
The study documents a dramatic expansion in venture capital directed at defense tech: VC investment rose from about $1 billion in 2019 to roughly $10 billion in 2025. Successes such as Palantir and SpaceX helped spur investor interest in space, AI, drones and software. Still, the report points out that U.S. VC toward defense remains low relative to the broader technology sector, with only about 5–6 percent of global venture capital funds going to defense companies.
AIA‑Bain draws attention to a structural funding gap when companies move from R&D to production. “There is no ‘fit‑for‑purpose’ investment model for the space in between — when a promising technology has not yet been demonstrated and produced,” the report states. By contrast, private equity participation in defense remains modest — roughly $1 billion to $3 billion annually — with most PE capital favoring businesses that do significant commercial work and exhibit predictable cash flows. The study notes private‑equity leaders see change coming as market growth and acquisition reforms alter investment calculus.
How policymakers, suppliers, and investors are affected
- Policymakers and the Pentagon: The study was commissioned “in the hopes of explaining to federal decisionmakers how to incentivize more private investment,” AIA President Eric Fanning said. The Defense Department’s direct equity move into MP Materials shows one path the government has taken and underscores the study’s point that some bottlenecks may require government capital.
- Second‑ and third‑tier suppliers: Smaller manufacturers told AIA‑Bain that firm orders and longer contracts are critical to secure financing and justify workforce and capacity investments; without those demand signals, many cannot attract the capital needed to scale.
- Investors (VC, private equity, retirement funds): The report finds most investment dollars still come from public markets — retirement funds and other investors seeking stable cash flows — even as VC dollars grow rapidly. Private equity remains cautious, gravitating toward firms with commercial exposure and predictable volumes.
A pointed takeaway for decisionmakers
The AIA‑Bain study reframes the debate: the U.S. defense sector’s problem, according to the report, is not an absence of capital but structural barriers that prevent money from reaching critical bottleneck areas — critical minerals refining, sub‑tier components, and the production phase between R&D and scale. Its prescriptions are concrete: government investment in certain long‑cycle, high‑risk mineral projects and procurement signals such as long‑term contracts to unlock supplier investment and productivity. Whether those measures will redirect the surge of market capital from equities and VC into the specific industrial capabilities the Pentagon and suppliers say they need remains the central practical test the study sets for federal decisionmakers.
