(Fixes typo in paragraph 7)

By Emma-Victoria Farr and Andres Gonzalez

BERLIN (Reuters) -Global investors and advisers gathered at their annual conference in Berlin are looking at channelling funds into Europe's defence industry, seeking to profit from governments' ramped-up military spending and revive a sluggish private equity market.

Private equity and venture capital-backed investment in Europe's aerospace and defence sector is dwarfed by that funnelled into the U.S. and Canada, which have absorbed 83% of all such investment since 2020, according to S&P.

Once a controversial topic for investors in Europe concerned with environmental, social, and governance investment policies, the continent's defence sector is now drawing private equity funds, said seven advisers and fund executives - some of whom are attending the SuperReturn conference this week.

European money managers have been reconsidering policies on investing in defence, under pressure from clients and some politicians to loosen restrictions and help fund the continent's race to re-arm and reduce dependence on the U.S.

"Defence used to be a topic that received automatic exclusion, now even some ESG-focused investors are looking to deploy capital to support European defence," said Sophia Alison, EMEA Direct Lending Portfolio Manager at Macquarie Asset Management, who was attending the conference.

"That's a very tangible shift from 12 or 18 months ago."

While none of them gave estimates of how much funding might shift to Europe from the U.S. and Canada, private investors are looking in particular at opportunities in space technology, both for military and civilian use.

Several panels on investing in Germany were held on Tuesday, ahead of the first main conference day on Wednesday when tennis star Serena Williams was set to address an estimated 5,500 attendees.

Germany's recent infrastructure and defence investment programmes, including its 500-billion euro ($570 billion) initiative approved in March, have bolstered the country's attractiveness to private equity firms.

"We feel the momentum and change in sentiment that Germany and Europe are more in focus than before," said Simon Pex, managing director at Carlyle Europe Partners.

"The more positive political sentiment in the country might accelerate economic growth in a positive way. Germany could be a good place of opportunity in the next decade."

DEALMAKING STYMIED

Despite the optimism around Europe's defence spending, broader private equity dealmaking remains constrained by the threat of recession.

The value of private equity assets sales through the initial public offering market in Europe has dropped to an average of $3.7 billion in the last four years, a fraction of the more than $17 billion on average in the previous four years, according to Dealogic data.

Investors are heading into their fourth straight year of muted realisations from their portfolios, said Joana Rocha Scaff, head of Europe Private Equity at Neuberger Berman.

"Despite many investors' initial optimism about a benign macro backdrop for 2025, the turbulence and noise since January has weighed on investment activity, delayed exits via M&A or IPOs and in doing so tightened liquidity conditions," she said.

At the current pace, 2025 will become the fourth consecutive year with private equity asset sales below $144 billion, the average since 2014, Dealogic data shows.

($1 = 0.8771 euros)