4 August 2026
The UK government has committed record sums to rebuilding its defense industrial base. Public funding alone will not be sufficient.
Britain is rearming at a pace not seen since the Cold War.
On June 30, the government published its Defence Investment Plan, committing £298 billion to defense funding over the next four years, including £15 billion of new spending on top of last year's Spending Review.[1]
By 2027-28, the UK will spend 2.7% of GDP on NATO defense — solidifying its position as the alliance's third-largest contributor, behind only the US and Germany.
The plan is explicitly industrial as much as military. Lessons have been learnt from wars in Ukraine and Iran: the priority has shifted toward cheaper, mass-produced, precise systems, and toward the manufacturing capacity to sustain them. There is a clear recognition that credible deterrence depends on a supply chain able to produce at pace and at scale.
The UK government is candid that it cannot do this alone and hopes to crowd in private investment. Analysts expect the equipment upgrade program to face challenges given increase in costs in recent years across the defense industrial value chain.[2] Meanwhile, the most dynamic capabilities — drones, AI-enabled targeting, small-satellite systems — are increasingly produced by start-ups rather than established manufacturers, or primes, and such firms may struggle to access growth capital.[3]
Defense has long been treated cautiously by financial institutions, but a decade-long, government-backed procurement pipeline may change the risk calculus.
Funds holding substantial equity positions can use equity-backed financing to extend private credit into this expanding supply chain, helping fund the build-out of factories, production lines and the firms that will fill them, securing an attractive return in the process.
UK’s defense renaissance
Equity markets read the signal immediately. The FTSE 350 Aerospace & Defence index rose almost 5% in the two days after the announcement, extending what had already been an extraordinary run.[4] The FTSE 350 Aerospace & Defence index is up roughly 540% over five years, against 120% for its US equivalent.
Defense firms or those associated with them are experiencing a golden period. World military expenditure hit a record last year, the 11th consecutive year of growth, with European NATO members increasing spending at the fastest rate since 1953.[5]
It means UK firms stand to benefit from rearmament commitments well beyond Britain.
But the most dynamic growth opportunities involve firms that are not yet listed at all. Even more so than other European nations, the UK’s clear policy roadmap has created an enabling environment for this new generation of defense tech firms. Whitehall recognition also confers prestige and eases access to larger markets such as Australia and the US.[6] World-class universities and a dense network of aerospace, software and advanced-manufacturing suppliers can lead to faster innovation capabilities.
Accessing their growth as an investor is challenging as it requires access to venture or private equity funds. Alternatively, such fast-growing firms (and their suppliers) are often also keen to access private credit given growing working capital needs.
For example, Helsing, a German defense start-up, recently raised $1.8 billion at a valuation of $18 billion.[7] Last year, it built a drone factory in Plymouth to produce AI-enabled submarine-hunter drones.[8] Others from across Europe have raised funds and announced expansion of UK operations.[9] That funding will ultimately mean increased orders for all kinds of inputs that will need to be provided by British small businesses, increasing their working capital requirements.
The throughput problem
Smaller firms still struggle to meet tender requirements. Ministry of Defence data shows 45% of core department payments went through non-competitive sourcing in 2024-25, and the value of new small- and medium-sized enterprise (SME) contracts fell year-on-year even as budgets rose.[10]
Governments are structurally conservative buyers, and not always by choice: more than half of UK defense equipment spend goes directly to the primes — partly out of habit but also because an SME cannot underwrite a submarine.
The obstacle for defense upstarts is therefore less about proving the technology than proving the throughput. Having spent 2025 raising capital and building prototypes, the sector's constraint in 2026 is achieving manufacturing scale — converting facilities into reliable, repeatable output. That requires financing factories and production lines, and government money may not reach every firm in the supply chain that needs it.
Investors might have to tread cautiously if they are seeking to access this growth. Buying equity at current valuations can be costly.
Meanwhile, they will also have to depend on political continuity at a time when British politics is entering a period of change; no investor can be certain how successive administrations will treat defense budgets or the firms that depend on them.
For equity holders who have already profited handsomely from the sector's re-rating, equity-linked financing offers a way to keep backing the industry without increasing equity exposure.
Borrowing against appreciated holdings rather than liquidating them gives investors the firepower to extend private credit to the factories, production lines and supply-chain firms that the procurement pipeline needs but cannot itself fund.
The world is becoming a more challenging place; the scale of rearmament across world capitals is a response to that risk.
Increasingly, the capacity is being built in Britain.
[1] https://www.gov.uk/government/news/15-billion-new-funding-boost-to-transform-armed-forces-and-keep-the-uk-safe
[2] https://www.aerosociety.com/news/the-uk-defence-investment-plan-delivering-the-goods/
[3] https://www.aerosociety.com/news/the-defence-investment-plan-a-defining-moment-for-uk-air-and-space-power/
[4] https://www.cnbc.com/2026/07/01/defense-stocks-uk-investment-plan-gilts-bae-systems.html
[5] https://www.sipri.org/media/press-release/2026/global-military-spending-rise-continues-european-and-asian-expenditures-surge
[6] https://www.dsei.co.uk/news/defence-tech-firms-flocking-uk
[7] https://www.reuters.com/business/aerospace-defense/europes-helsing-raises-18-billion-valuing-defence-group-18-billion-2026-07-13/
[8] https://interestingengineering.com/military/uk-helsing-submarine-hunter-drone
[9] https://www.theguardian.com/world/2026/may/10/defence-sovereignty-europe-builds-low-cost-weapons-drones
[10] https://www.gov.uk/government/statistics/mod-trade-industry-and-contracts-2025/mod-trade-industry-and-contracts-2025
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