UK defence spending rises, but private capital still shuns the sector
UK defence spending is rising, but slow procurement, ESG-style exclusions and reputational risk are still deterring pensions, VC and banks—limiting firms’ ability to scale output for European rearmament.
Key facts
- ADS estimates the UK defence industry contributed £15.8bn last year, up 70% over a decade (as cited by Politico).
- Dealroom/NATO Innovation Fund data: UK drew $2.9bn of Europe’s $8.7bn defence/security/resilience startup funding in 2025; Dealroom defence-tech metric: US $19.6bn (first 9 months 2026) vs UK $932m.
- MoD top 10 suppliers account for 40% of procurement expenditure; MoD “low-complexity pathway” averages ~60 days to contract, while major competitions can take ~6 years (as cited).
3 minute read
The UK government is increasing defence expenditure and the domestic defence sector’s economic footprint, but investors and industry sources argue that private capital remains structurally constrained from scaling British defence suppliers. Politico reports that ADS estimates the defence industry contributed £15.8 billion to the UK economy last year, up 70% over the past decade, while UK spending with industry and SMEs has risen and London has committed to NATO’s 3.5% of GDP defence spending target by 2035. Despite this, market participants describe a persistent shortfall in pension, VC and private-equity inflows, leaving many firms dependent on government contracts that are concentrated among a small cohort; the MoD’s top 10 suppliers account for 40% of procurement expenditure.
The investment gap is presented as partly a scale-and-speed problem. Dealroom and the NATO Innovation Fund data cited by Politico show the UK attracted $2.9 billion of Europe’s $8.7 billion in “defence, security and resilience” startup funding in 2025. Yet on a narrower defence-tech measure, Dealroom found US firms raised $19.6 billion in the first nine months of 2026 versus $932 million in Britain, an $18.7 billion gap. The UK’s 2025 Modern Industrial Strategy pledged to halve the defence VC funding gap with the US by 2035, but the government could not provide Politico with its own gap estimate or explain how progress would be measured—an issue for investor confidence and accountability.
Procurement velocity is repeatedly highlighted as a determinant of investability. A European defence VC manager contrasted US “pitch days”, where sub-$158,000 contracts can be awarded the same day, with UK timelines. The MoD’s “low-complexity pathway” averages roughly 60 days to contract, while major platform competitions can take around six years. For venture-backed firms, these timelines can be incompatible with typical runway, and they weaken the demand signal that de-risks private investment.
Politico also details “cultural queasiness” and rule-based exclusions as continuing barriers. Defence can still be treated as an excluded sector in fund mandates alongside other “sin” industries, and the European Investment Fund—despite relaxing rules—still restricts investment in weapons and ammunition firms. A practical manifestation is de-banking: an investor alleged Revolut closed a drone company’s account after learning it made drones; Revolut confirmed defence/armaments are on its risk list and such businesses cannot open or hold accounts. For Europe, these frictions matter because UK suppliers are part of wider European supply chains and export ecosystems; constrained finance and financial-services access can slow scale-up of drones, sensors and dual-use manufacturing that European militaries increasingly need.
Politico flags near-term policy moments—an upcoming UK budget, a defence investment summit and a forthcoming strategy—as potential levers. Suggestions cited include directing the British Business Bank to allocate more capital to defence, encouraging pension funds to increase exposure, and easing export pathways so firms can scale even when the UK is not the anchor buyer. An industry source also criticised the £400 million annual UK Defence Innovation budget (about 0.5% of the defence budget) as insufficiently persuasive to VC, implying that without stronger public co-investment and clearer demand, private capital mobilisation may remain episodic rather than systemic.
Source: Politico.eu
