Private Capital in UK Defence
This paper examines how UK defence sector challenges and policy reforms impact private capital investment, focusing on procurement, investor risks and innovation barriers.
Overview
This paper analyses how the UK government can increase private capital investment in the UK defence sector to help finance the development of innovative technologies and scaling up production capacity. The paper finds that, while the government’s defence spending will remain the primary driver of growth in the sector, changes in the way it procures defence equipment, communicates with investors and controls investments in defence companies could attract more capital towards defence.
Key Recommendations
- Embrace Risk in Faster Procurement: Develop a political communication strategy that openly addresses the risks of faster, more accessible procurement, articulates long-term goals and makes clear that some risk is acceptable in pursuit of overall success.
- Centralise Market Intelligence: Establish a market insights and analysis unit within UK Defence Innovation (UKDI) to consolidate information from across UKDI, DSTL, DE&S and other MoD bodies, identifying companies with strong potential for strategic UK onshore industrial capability.
- Coordinate Investment: Create a defence investment coordination forum to institutionalise communication with trusted private investors, ensuring capital reaches areas with high potential and value for UK national development.
- Streamline Investment Screening: Establish a certification regime for trusted defence investment funds, allowing vetted funds to be exempt from repeated notifications if their structures protect sensitive information and prevent undue influence.
By implementing these recommendations, the UK can foster a dynamic defence innovation ecosystem, accelerate procurement and attract global private capital, maximising the sector’s contribution to UK national security.
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Introduction
In its landmark Defence Industrial Strategy (DIS) published in autumn 2025, the UK placed particular emphasis on the defence industrial base's ability to contribute to national security and economic prosperity. The strategy asserts that backing UK-based businesses across the defence supply chain will increase the industry’s ability to continue and increase production in a crisis or war. The government also believes that innovative defence can create strong positive effects on local economies in the UK. Its ambition is that successful defence spinouts and start-ups will create an ecosystem of expertise, entrepreneurial culture and infrastructure that non-defence businesses can take advantage of, enabling British manufacturing to gain momentum and driving geographically dispersed growth.
Achieving these objectives requires significant investment into companies' production lines and research and development activities. But although the UK government has agreed to increase defence spending in line with the new NATO target of 3.5% of GDP by 2035, current budgetary constraints restrict the government's ability to follow through on these investments.
In this context, politicians and the UK Ministry of Defence (MoD) have been looking for sources other than government money to enable the necessary capital expenditure in production capacity and R&D that is needed to achieve its stated objectives. With defence spending eventually increasing, the government hopes that investors will see potential gains in supporting innovative ventures or suppliers seeking to scale up their capacities. These hopes have been further bolstered by a surge in demand in the European defence market driven by consumption in Ukraine and the rebuilding of Western military capabilities and stockpiles.
WRITTEN BY
Dr Linus Terhorst
Research Fellow, Defence Industries & Acquisition
Military Sciences
- Jim McLeanMedia Relations Manager+44 (0)7917 373 069JimMc@rusi.org
Footnotes
The UK government is currently considering legislation that would limit the maximum payment terms and delays in payment that primes can impose on their suppliers, indicating that late payments (from the time of invoicing) are an issue across the industry. The MoD already includes a maximum supplier payment delay in its qualification framework for contractors. While general considerations, such as limited liquidity or an interest in boosting nominal operating results ahead of reporting, are important factors for publicly traded companies in paying late, defence companies face the additional complication of long delivery-to-payment timelines.
Due to the commercial sensitivity of this information, this is not something companies are willing to disclose publicly. The author has had multiple conversations where this was confirmed by stakeholders in both start-ups and primes.
The way the government measures the time-to-decision period is complex. It only measures the days during which the government is performing the assessment. When it asks companies for further information on the transaction and the involved parties, the counting can, depending on the type of information, be stopped, and resumed only after the government receives the information and proceeds with the assessment. To assess the process’s impact on transaction risks and investor appetite, there should also be a metric that measures notification-to-decision, independent of the underlying processes. Industry surveys on the time taken and costs incurred to prepare notifications would also be helpful.