For decades, Canada has produced world-class innovation while leaving defence and security largely outside the mandate of domestic private capital. The result has been a familiar pattern: early technical leadership, followed by foreign acquisition once scale capital and procurement certainty were required.
The 2025 Federal Budget and the creation of BOREALIS begin to change that dynamic by tying defence procurement and industrial strategy to long-term economic resilience. By establishing dedicated financing through the Defence Investment Agency and BDC’s new Defence Platform, the Canadian government has created a functional floor for the sector. For private capital, that floor matters. It introduces predictability into a market that historically lacked it.
External Demand and Allied Markets
Shifts in U.S. trade policy and defence prioritization have altered access and reliability assumptions for allied markets. European governments, facing sustained security pressure and constrained domestic capacity, have accelerated procurement while diversifying suppliers. Canada’s expanded engagement with European defence and space programs, including access to ESA frameworks and joint development channels, reflects this shift.
The scale of this opportunity is evident in the emergence of defence-tech as a standalone asset class across allied markets. In the United States, PitchBook data reported by Business Insider shows U.S. defence-tech funding at more than USD $19 billion in 2025, up from roughly USD $10 billion in 2024. In Europe, defence and security-tech venture funding reached USD $5.2B in 2024, while total NATO-aligned defence-tech VC funding rose to USD $13.7B in 2025, more than doubling from 2024.
This gap represents the recapitalization challenge. The innovation and manufacturing capacity exist. The capital scale does not.
Canada’s data tells a more cautious story. CVCA Intelligence captures approximately CAD $2.5 billion in disclosed transactions over the last decade, primarily in private equity. Even when the scope expands to include dual-use verticals, Pitchbook data reveals just over CAD $7 billion deployed across 547 deals and it remains a fraction of allied benchmarks.
This disparity reflects a deeper structural friction. While U.S. and European markets reward scale, Canadian firms have historically faced a sovereignty gap, forcing technically superior assets to exit once growth capital and procurement certainty are required.
Canada and European partners are now responding by accelerating domestic industrial capacity. Treating defence production and security infrastructure as economic necessities has clarified where private capital participation is now structurally possible. To recapitalize the country, Canada must move from exporting early innovation to retaining and scaling it domestically.
Allied Innovation Programs as Channels
As allied markets expand procurement and accelerate contracting, governments have also put formal infrastructure in place to move dual-use technologies across borders and into operational settings. NATO’s Defence Innovation Accelerator for the North Atlantic (DIANA) operates a network of test centres and accelerator sites designed to help firms validate and scale dual-use capabilities within allied environments. In parallel, the NATO Innovation Fund has been structured as a €1 billion venture capital vehicle focused on deep technologies relevant to defence, security, and resilience.
Canada’s participation in these frameworks is reinforced by domestic platforms designed to link firms into allied demand. Halifax-based The Centre for Ocean Ventures & Entrepreneurship (COVE), and CVCA’s Invest Canada ’26 conference co-presenting sponsor, has become a focal point for testing and commercialization of dual-use technologies in areas such as maritime surveillance, autonomous systems, and ocean security. Through direct engagement with the Royal Canadian Navy, NATO partners, and allied procurement bodies, COVE provides Canadian companies with access to non-domestic validation pathways and operational customers.
Access to this allied infrastructure functions as a capital filter. Participation itself becomes a signal of operational readiness.
Early Indicators in the Canadian Ecosystem
This shift from theoretical R&D to mission-ready deployment is already visible across the country. University–industry collaboration in Canada has shifted toward applied research programs structured around deployment and certification. Centres focused on advanced materials, sensing, communications, cold-environment systems, autonomous platforms, and cybersecurity are operating with multi-year funding and direct partnerships with defence agencies and prime contractors. Program design reflects delivery timelines and compliance requirements.
At the company level, Canadian firms are securing contracts and partnerships in quantum sensing, space systems, naval and aerospace manufacturing, and dual-use drone platforms spanning wildfire detection, Arctic monitoring, and security applications. These activities demonstrate customer demand and operational capability within regulated procurement environments.
Historically, Canada lacked purpose-built platforms dedicated to defence and national security. That began to shift with firms like ONE9, which focuses on national security and defence at the Series A stage, where procurement validation and civilian revenue intersect. Following a multi-year partnership, ONE9’s venture business was acquired by Kensington Capital Partners in March 2025, forming the backbone of Kensington’s Sentinel strategy.
This institutionalization of the sector marks a critical inflection point. As the asset class matures, the transition from technical potential to broad capital participation requires a clear-eyed distinction between genuine mission-readiness and opportunistic rebranding.
Capital Participation and Constraints
While these early indicators are promising, the transition from technical potential to scaled capital participation remains complex. Private equity participation has scaled through privatizations and growth financings, yet venture participation is often constrained by legacy LP side letters. In response, GPs are increasingly moving from broad defense exclusions toward granular screens that distinguish between controversial weapons and national resilience infrastructure.
This shift is already underway among major European allocators where defence-related exclusions are being revised through side-letter amendments. As global allocators revisit these positions, Canadian institutional LPs face parallel questions around mandate scope, risk tolerance, and domestic exposure.
Crucially, these updated LP exclusions are increasingly differentiating between direct weapons manufacturing and broader activity in cyber, space, and critical infrastructure. This allows private capital to engage earlier where contracting authority and certification pathways are established. Where those elements remain fragmented, participation concentrates later or follows customers offshore. That trend can be reversed by establishing standardized frameworks for domestic investment.
For Canadian GPs, the path forward to anchoring this capital requires proactive transparency such as providing LPs with specific compliance frameworks for dual-use tech and export-control exposure before the first drawdown. This shifts discussion toward compliance, disclosure, and execution risk.
As funding pools like BOREALIS and VCCI scale, there is a real risk of portfolios repositioning. Investors must separate durable platforms from reactive rebranding that lacks a legitimate procurement pathway. Credible dual-use companies are distinguished by operational readiness which includes validated customers, existing security clearances, and revenue that spans both civilian and allied military buyers. Key disclosure factors now include revenue mix, export-control exposure, and contract duration.
When investors lead with this level of detail, they provide the structured capital necessary to anchor innovation at home. Ultimately, these market dynamics determine whether a company’s headquarters stays in Canada. Technical capability exists here, but without predictable procurement and structured capital, the path of least resistance leads south.
Canada sits between two outcomes. Capital has supported enabling technologies across space, cyber, advanced manufacturing, and sensing, but whether those platforms scale domestically or exit abroad now depends on procurement certainty and disciplined capital participation. Treating economic sovereignty as a competitive asset, rather than a constraint, is the final unlock. In 2026, a modernized defence procurement strategy makes Canada a rational destination for long-horizon capital. The opportunity is to anchor that capital in the platforms that will define Canada’s security for the next 50 years.
