Defence, space go SPACs

DEFENCE and space start-ups are increasingly expected to turn to special purpose acquisition companies (SPACs) to tap public markets as investor interest in the industries grows and companies race to expand capacity.

For early-stage businesses with government contracts but uneven revenue and long development cycles, the route could offer a faster and more flexible way to raise capital than a traditional initial public offering (IPO).

According to a recent Reuters report, six defence and space or satellite-related companies have announced SPAC mergers so far in 2026, accounting for about 10% of all such deals.

That compares with just three deals across the whole of 2025, based on SPACInsider data.

SPACs are shell companies that first raise money through an IPO before merging with a private business, effectively taking that company public.

Unlike a conventional IPO, a SPAC deal allows the private company and its investors to negotiate a valuation and financing arrangements before the transaction is completed.

That certainty is particularly attractive to smaller defence and space companies, whose fortunes can depend heavily on government contracts, unpredictable development schedules and lengthy procurement processes.

“A SPAC merger can offer a more flexible route for companies with government contracts, strategic backing, or a clear growth pipeline, but not yet the revenue scale, margin, or predictability,” IPOX vice-president Kat Liu tells Reuters.

The attraction could become more apparent as defence and space spending gathers pace.

Reuters says at least seven other companies in the sectors have gone public through traditional IPOs so far in 2026, according to London Stock Exchange Group data, suggesting that companies are trying to make the most of a strong market window.

At the same time, a wave of blockbuster IPOs is creating another opening for SPACs.

Smaller companies can use a negotiated transaction to reach public markets without having to compete directly for investor attention with mega-sized listings.

One example is US defence company Ursa Major, which agreed to a US$2.3bil SPAC deal last month.

The company develops propulsion systems for missiles and rockets.

Matching demand

Chief executive Chris Spagnoletti tells Reuters that customer demand was running ahead of industry supply and that the transaction would give Ursa Major the capital needed to address the shortfall.

“A traditional IPO would have meant taking our timing from the market rather than from our customers, and we didn’t want the schedule set by whatever next year’s window looks like for defence,” Spagnoletti says.

“Public market capital lets us expand domestic production at the ​moment customers are asking for more capacity, more speed and better pricing.”

Space-related businesses are also attracting attention as government and commercial spending on satellite networks and communications rises.

The public listing of Elon Musk’s SpaceX has added further investor interest to the sector, while Reuters reported earlier this month that hypersonic flight company Stratolaunch was preparing for an IPO.

Private-market valuations are pointing in the same direction.

Sierra Space’s valuation rose more than 50% over three years to US$8bil at its March funding round, according to the Reuters report.

The broader defence backdrop is also providing a tailwind.

National security has moved higher up the agenda under US President Donald Trump, whose administration is seeking to strengthen US defences and replenish stockpiles depleted by arms shipments to allies and munitions used in the Iran conflict.

Trump has proposed a sharp increase in US defence spending for 2027, with the national defence budget expected to total about US$1.5 trillion, compared with the enacted US$901bil budget for 2026.

Meanwhile, the changing nature of warfare is creating opportunities for newer companies.

Drones have taken on a growing role in conflicts in Ukraine and the Middle East, encouraging start-ups to develop lower-cost systems and newer technologies that could compete for government business traditionally dominated by established defence contractors.

Prominent connections

The sector is also attracting prominent political connections.

Eric Trump, the president’s son, is an investor in counter-drone company Space-Eyes, which has agreed to go public through a SPAC deal, and has backed drone maker XTEND. Donald Trump Jr has also been involved in several defence and space investments.

More SPAC deals could be on the way.

Nine SPACs are currently seeking defence or space targets, with about US$2.35bil held in trust, according to SPACInsider chief executive Kristi Marvin.

Quantum Space and Elroy Air announced SPAC deals in June. Quantum Space develops spacecraft for orbital mobility, satellite servicing and refuelling and has more than US$88mil in secured government contracts.

Elroy Air, meanwhile, won a US$46mil, multi-year US Army contract to develop an autonomous hybrid-electric aircraft system.

Still, the SPAC route is not without its trade-offs.

While it can provide quicker access to capital and greater flexibility, existing shareholders can face dilution, particularly when private investment in public equity financing is involved.

There have also been concerns around investor protection and whether SPAC transactions face the same level of scrutiny as traditional IPOs.

Analysts, however, say those risks can be manageable.

“SPAC investors don’t necessarily need to see revenue, let alone profit, to buy into a promising startup,” Renaissance Capital senior strategist Matt Kennedy tells Reuters. “Despite the fact that some big-name SPAC mergers have fallen from their recent highs – for example, Rocket Lab, Intuitive Machines, and AST SpaceMobile – the two-year chart looks a lot better.”