UK Defence Sector And The Role Of Government, Private Capital, And The Primes

Last month, Charles Russell Speechlys in collaboration with G3 hosted a breakfast seminar to unpack what the Defence Investment Plan (DIP) really means for UK SMEs. We explored where the money is being directed to, the role of private capital and what successful engagement between the Government and the private sector looks like from the perspective of investors, industry leaders and SMEs.

The long-awaited DIP confirmed the UK Government’s commitment to increasing defence spending to 2.7% of GDP by the end of the decade.  To maximise the Government’s significant investment in artificial intelligence, autonomy, cyber capability and digital integration and to successfully deliver the Strategic Defence Review, the Government, prime contractors (the Primes) and investors (including family offices) each have a role to play.

Whilst the Government’s investment in defence will remain the primary driver of growth in this sector, how can the Government attract private capital needed to boost and finance the development of innovative technologies and scale up production capacity at the appropriate pace?

Role of the Government

The Government’s investment in defence will remain the primary engine of growth in this sector, but its role extends well beyond government spending. The strategic framework set by the Government champions sovereign capability, resilient supply chains, expansion of manufacturing capacity and domestic industrial growth while recognising that the defence sector is a powerful driver of innovation, investment and economic prosperity.
 
To attract private capital, the Government will need to reform the way it procures defence equipment, communicates with investors and regulates investment in the defence sector / defence technology companies. In practice this means:

• Accelerating procurement: acquiring, testing, deploying and upgrading capability fast enough to keep pace with technological change and demands, and making procurement processes accessible to a broader range of suppliers. 
• Clarifying risk appetite: articulating clearly which risks are acceptable, thereby lowering bidding risks and giving investors the confidence to commit capital. 
• Streamlining the regulatory environment: revisiting national security screening requirements under the National Security Investment Act 2021 and subsidy control rules to prevent the defence sector from being financially isolated and overlooked by investors.
• Bridging industry and capital: convening key industry players, the Primes and investors to share expertise, align priorities and unlock new sources of funding.

Role of the Primes

With the Primes sitting at the top of the defence food chain and acting as key customers and integrators for many SMEs, the Primes play a critical role in pushing innovation forward. Their focus will naturally centre on major programmes, pipeline visibility and future spending priorities.

In the past, the Primes may have been largely overlooked by the capital markets, thereby creating an incentive to return revenues to shareholders rather than reinvest in capability and innovation. As investors’ attention returns to the defence sector, the Primes have an opportunity to:

• Collaborate with defence technology businesses and other participants in the defence supply chain: forming joint ventures or consortiums with companies developing AI, autonomy, cyber and data-enabled capabilities.
• Champion SME participation: actively supporting the entry of small and medium-sized enterprises and giving smaller innovators access to major programmes. 
• Reinvest in innovation: investing in research and development and the scaling of next generation technologies.

Role of Investors

Private capital can act as an accelerator and enabler, but it is not a substitute for government funding. Investors can provide the scale of investment required beyond public spending alone, helping to expand manufacturing capacity, strengthen and diversify supply chains and accelerate the scaling of the defence industrial base alongside government procurement.
 
For investors to commit capital, they need more than strategic plans from the Government. Investors need clear, long-term demand signals and well-articulated programme pipelines and future requirements that underpin credible investment opportunities.

VC investors can back start-ups that are at the forefront of innovation. PE investors can help consolidate fragmented supply chains, bring hands-on operational support and the commercial discipline needed to help businesses scale. Family offices and other long-term capital providers can support sovereign capability development across the growth stage, not only in high-profile deals.

To break down siloes between the Government and the private sector, investors can focus on:

• Navigating the regulatory landscape: familiarising themselves with the National Security and Investment Act 2021, the Defence Reform Act 2014, the Single Source Contract Regulations 2024, the Procurement Act 2023 and export control rules whilst developing considered approaches to due diligence when dealing with classified material.
• Engaging with Government: communicating the regulatory constraints investors face when investing in the defence sector. Fostering a dialogue with the Government in which the Government understands what investors need to deploy capital and investors learn to navigate policies and how these are implemented in the defence sector. 
• Reassessing ESG policies: assessing if existing ESG policies are preventing or limiting investors from investing in dual-use companies or defence-linked investments. 
• Investing across the growth spectrum: supporting not only late-stage transactions but also growth-stage funding that builds sovereign capability.

Our Expertise

Chares Russell Speechlys advises across the full spectrum of the aerospace, defence & security sector, supporting governments, contracting authorities, prime contractors, defence technology companies, investors and manufacturers. We help our clients navigate commercial, regulatory and strategic challenges.

Our experiences include M&A transactions; investments; joint ventures; intellectual property, data centres and technology licensing; cyber, data and digital capability; government contracts and defence programmes; defence technology, artificial intelligence, technology transactions and strategic commercial arrangements.