Strategic considerations for defence investments

Canada’s defence industry is undergoing a generational transformation, creating exciting new opportunities and important considerations for domestic and foreign companies and investors. At Torys’ Strategic Considerations for Defence Investments breakfast last week, the firm’s multidisciplinary defence group explored key considerations when financing an investment, critical aspects of building or acquiring a defence business, and how to successfully partner with government.

What you need to know

• Canada’s defence buildout is creating significant demand and opportunities for private capital across infrastructure, dual-use technology, critical minerals, AI, and other areas central to the country’s defence and national security capabilities.
• Investors and companies need to navigate intellectual property, national security foreign investment reviews, export controls, and other considerations when financing, building, or acquiring a defence business.
• Companies need to partner effectively with government as Canada reforms defence procurement, prioritizes domestic economic benefits, and sends a long-term demand signal to attract investment and strengthen the country’s defence industrial base. 

A new era in Canadian defence

The Canadian defence industry is undergoing a massive shift amid an evolving geopolitical landscape and renewed prioritization of domestic defence capabilities. This presents a significant opportunity for private capital.

The changes to defence investment in Canada are striking. The federal government allocated $82 billion to defence in its 2025 Budget and the country is on track to spend 5% of GDP on defence by 2035. Canada’s first Defence Industrial Strategy is designed to prioritize Canadian firms, streamline procurement, and foster investment in Canada’s defence industry. The country’s new national security policy is preparing for all contingencies, up to and including potential conflicts.

At the Strategic Considerations for Defence Investments breakfast, Torys’ defence team examined the key legal, regulatory, and strategic considerations shaping the new operating environment. Here are the key takeaways on:

• financing a defence investment;
• building or acquiring a defence business; and
• partnering with government.

Financing a defence investment

• Defence investment is a broad concept and extends well beyond traditional defence assets such as munitions and weapons. It encompasses the infrastructure and logistical and administrative capabilities needed to support defence activity, dual-use technologies, critical minerals, AI, a more resilient electricity grid, and much more. Given the scale of projected spend, private capital, both domestic and foreign, will be essential to supporting Canada’s defence buildout.
• Foreign investors in the Canadian defence sector will be subject to national security reviews under the Investment Canada Act. Investors from NATO, Five Eyes, and other allied countries should expect expeditious routine screening and unconditional approvals, but there will be exceptions. Other investors may have longer processes and rigorous conditions.
• Defence investment will require investors to adapt to different financing and risk-allocation models. Alongside P3 structures, we expect long-term offtake arrangements, federal and/or provincial guarantees, and debt capital off-ramps to become increasingly important. Lenders may need to become comfortable with financing structures that rely on long-term contractual arrangements rather than traditional security over the underlying assets and/or equity. Where the government is a partner, agreements will need to contemplate circumstances in which commercial use of dual-use assets is displaced in the event of a conflict or other national security event, and appropriate compensation mechanisms in those eventualities.
• Drones, AI, and advanced technology are opening new areas of investment in defence. We are seeing a shift towards venture-style financings for these types of defence investments, attracting a blend of broad-based VC funds, and a large investor who wants to get in early.

Building or acquiring a defence business

• The control of IP is relevant in the “Build-Partner-Buy” framework of the Defence Industrial Strategy. Who controls the background IP leads directly to where a defence business sits on the spectrum. What matters is whether the background IP is already in Canada, or if it can be brought in and built here. As well, where a defence business fits in Build-Partner-Buy will likely dictate whether it can own and control foreground IP.
• Although there is a regulatory push for transparency about AI and other innovative technologies, this is not necessarily inconsistent with confidentiality controls over proprietary technology or national security-related data. Businesses need to consider public sector and regulatory transparency demands at an early stage of building or acquiring a defence business, to ensure appropriate confidentiality measures are addressed.
• Understanding and complying with the various security regimes, including the Controlled Goods Program and the Contract Security Program, is critical when dealing with controlled materials and government-sensitive information—whether you are a defence business that needs the information to bid on, or supply goods and services subject to these regimes, or you are looking to acquire a defence business which will require you to diligence and understand their operations.
• The conversation on ESG and defence investment has significantly changed. The question has shifted from whether an ESG policy allows for defence investment to what types of defence investments it permits. Negative screens for defence are increasingly being removed or narrowed.

Partnering with government

• The federal government is looking for partners to build with speed in defence. It seeks to build up domestic industry and engage business in protecting Canadian sovereignty. Entities that understand the objectives of both combatting foreign interference, and partnering with like-minded allies in collective security, will be prioritized.
• Canada’s Defence Investment Agency (DIA) was created to streamline the procurement process. Proposed legislation would make it a Crown corporation, and would also allow the DIA to make loans, give guarantees and acquire shares; the DIA would also look at building industrial capacity in Canada.
• Canada is modernizing its Industrial and Technological Benefits (ITB) Policy to maximize benefits to Canada’s defence industrial base. By requiring contractors to undertake business in Canada equal to the value of their contracts, the Policy leverages large defence procurements to generate economic activity.
• Canada is now a member of the Security Action For Europe (SAFE) initiative, a loan program of up to €150 billion that is managed by the European Commission. Canadian companies have preferential access to defence procurements financed by the SAFE Instrument and can participate in consortiums with European companies.

In summary

There is a whole-of-government effort underway to strengthen Canada’s defence industry. The defence buildout is happening in real time, record amounts are being invested, and the focus is on the return on investment to Canada. Sound strategies on financing investments, building or acquiring a defence business, and partnering with government can help companies successfully evaluate and execute transactions in Canada’s new defence ecosystem.