Attracting private capital to defence: A powerful growth opportunity for the UK

To make the most of the new investment that the government has provided, we must do more to attract private capital to the sector and expand the supply base.

The rise of dual-use technologies

Just as government investments in space technologies have spurred commercial growth, investments in defence-related innovation could yield broader economic benefits.

No longer confined to military-specific platforms, the strategic defence landscape has shifted from domain dominance achieved via “hardware” to information superiority, with advanced decision-making powered by AI and autonomy. In fact, of the fourteen critical technology areas identified by the U.S. Department of Defence as vital to maintaining the country’s national security, only three – hypersonics, directed energy, and integrated sensors – were deemed defence specific. The rest, including AI, semiconductors, and autonomy are dual-use, serving both military and civilian markets. 

Defence today offers an industrial petri dish to test and mature technologies, presenting investors with a range of opportunities. A diverse range of high potential businesses, from hyperscalers and IT providers to SMEs with novel technologies, are today are faced with a generational opportunity to contribute.

The missing ecosystem

The defence sector has become financially isolated, constrained by regulations and governance structures that were once appropriate but now outmoded. Historically, private capital played a significant role in defence development, but that support has dwindled. Today, defence spending is concentrated among a few national champions, with traditional prime contractors receiving the majority of funding. Until recently, these primes have been largely ignored by the markets and are therefore incentivised to return revenues rather than reinvesting. Meanwhile, venture capital has largely withdrawn from the sector, with defence-tech receiving less than 2 percent of VC funding. ESG concerns and regulatory constraints have further deterred private capital, in turn limiting the number of dual-use companies willing to supply defence.

Despite these challenges, there are signs of hope. Publicly traded European defence stocks have begun to command values on par with their US peers, with valuations rising an estimated 50 percent in the last year. Investment in European start-ups working on defence and related technologies also jumped an estimated 24 percent in 2024 to c. £4bn, outpacing growth in venture capital in adjacent technology areas. However, much of this investment has been concentrated in a few high-profile deals, with a persistent gap in growth-stage funding. Notably, around 65 percent of European defence-tech funding originates from the U.S., raising concerns about sovereign capability development in the UK.

How do we bring investors back to the ecosystem?

The need to normalise investment in defence is now pressing if we are to bring the broader tech-industrial base to the fight. Success will require a radical expansion of public-private cooperation, rooted in better mutual understanding of one another’s markets.

1. Create conviction through better communication 

Investors need market conviction to commit capital. The market needs a clear demand signal with well-articulated, long-term requirements. Australia’s re-equipping strategy serves as a model, where transparent communication has enabled corporations and VCs to make informed, sustained investments. The National Security Innovation Fund (NSIF) has made progress in engaging select businesses, but broader investor engagement remains necessary.

2. Reduce the culture of conservatism

Despite numerous efforts to streamline defence procurement, risk aversion persists. While new mechanisms have been approved to expedite procurement and lower bidding risks, they remain underutilised. These measures must be proactively adopted to attract new market entrants and foster innovation.

3. Sustained sponsorship for SMEs

As with any diversification challenge, sponsorship will be required to support business entry as broader reforms take-hold. For example, the U.S. DOD utilises set-aside procurement programs reserving certain contracts exclusively for SMEs, fostering competition, innovation, and growth within the defence sector.

In the UK this means opening large scale procurements to new entrants and encouraging integrated consortiums such as Team Protect on project CRENIC. In turn, these procurements should be supported to ensure traditional hurdles are met and overcome. The Chancellor’s commitment to spend a minimum of 10 percent of the equipment budget on new tech is a strong step forward.

4. Secure capital at scale

Unlocking sovereign advantage requires “capital at scale to scale”. The UK has struggled in this regard. Implementing the Mansion House Treaty would encourage more VC-level investments by institutional investors. Current pension fund eligibility requirements restrict sector investment, and encouraging operators to revise these constraints could provide a significant financial boost.

5. Ensure market liquidity

While safeguarding against adversarial capital is critical, excessive restrictions could stifle sector liquidity. Reducing barriers to transactions in dual-use companies will help establish an exit track record, making defence investible. As momentum gains in the market, any concerns around overseas investment should be weighed against the ongoing ability of businesses to access capital – ensuring that the UK remains open and investor friendly.

Defence as an engine of growth

Matching UK defence capability to evolving threats requires new funding that can only be delivered through public-private cooperation. By recognising and investing in defence, public and private funders can help the sector to become a core engine of stimulus and growth. And the rewards will be much broader than defence and security, unlocking social and economic prosperity that ensures a secure future for the UK.