Defence: investing beyond the headlines

The debate over the UK’s Defence Investment Plan has highlighted a broader issue: defence spending is no longer a matter of government policy. The resignation of John Healey as defence secretary, Dan Jarvis’ appointment, and the renewed scramble to revisit the plan have turned military funding into a test of whether the UK can convert strategic anxiety into tangible military capability.

The political hook is immediate: June 2026 reporting suggests Healey resigned after Downing Street offered £13.5bn towards an £18bn gap in major defence projects, while the proposed trajectory would take spending to 2.68% of GDP by 2030, below the 3% level he had sought, and that the government remains committed to.¹

Looking beyond the headlines

For investors, the political debate is less important than the direction of travel. Regardless of the precise timetable, the UK and many of its allies are committing to sustained increases in defence spending. The key question is not whether more capital will be deployed, but where it will be directed and which businesses could be best placed to benefit.

UK defence spending is rising, with the Strategic Defence Review committing the government to 2.5% of GDP by 2027 and an ambition to reach 3% in the next Parliament, subject to fiscal and economic conditions.² NATO has raised the bar further, with allies committing to invest 5% of GDP annually by 2035, including at least 3.5% for core defence and up to 1.5% for resilience, infrastructure, innovation and the defence industrial base.³

The spending backdrop is no longer theoretical. SIPRI (Stockholm International Peace Research Institute) estimates that global military expenditure reached $2.887tn in 2025, with Europe up 14% year on year.⁴ PitchBook’s analysis points to a similar structural rearmament cycle: Central and Western European military spending was around 59% higher in 2024 than in 2015, while Eastern European spending was around 164% higher. It also estimates that European defence tech VC investment rose from $1.2bn in 2020 to $4.2bn in the first nine months of 2025, while deal counts remained broadly between 220 and 330.⁵ Market analysis suggests UK Ministry of Defence (‘MoD’) expenditure could move from roughly £54bn in 2023/24 to roughly £74bn by 2028/29, while North American and European defence M&A transactions rose to 55 in 2025, with year-to-date 2026 running ahead of the equivalent period in 2025.⁶

Those figures may provide a powerful tailwind, but higher budgets do not constitute an investment case. The MoD still has to choose between programmes, allocate budgets, run procurement, manage suppliers and bring equipment into service. For companies in the supply chain, and for the investors backing them, the decisive issue is whether a policy priority becomes a funded programme, whether that programme becomes a contract, and whether that contract converts into revenue on a timescale that supports the investment case.

The changing face of defence

The ESG debate has shifted too. Defence was once treated by many allocators as politically sensitive, ethically contested and often excluded before detailed analysis had begun. That view is less convincing in response to the changing geopolitical landscape, including the war in Ukraine, heightened tensions with Russia, the growing frequency of cyber attacks and increased focus on European security. For many investors, security and national resilience are now seen as complementary to broader social and economic stability rather than at odds with them. As a result, defence is increasingly being assessed on its individual merits, with greater attention paid to the role it can play in supporting long-term resilience and strategic capability.

This is not a blank cheque. Many investors will remain cautious around weapons, ammunition and highly sensitive military systems. The more important development is that there is a growing distinction between companies that produce weapons and those that provide the technologies and services that enable modern defence. These include software, secure communications, training and simulation, mission-critical components, logistics, maintenance, cyber security, intelligence, surveillance, space infrastructure and dual-use technologies. Many of these businesses support both defence and civilian applications, offering investors exposure to the broader defence ecosystem without direct involvement in weapons manufacturing.

Selectivity matters

For private markets, the most potentially attractive opportunities are often in these enabling businesses. Beneath the large defence contractors sit specialist companies embedded deep and operating across supply chains, maintenance and support providers, software, secure communications, advanced manufacturing and dual-use technologies serving both civilian and defence customers.

Many of these businesses possess highly specialised expertise, proprietary technology or long-established customer relationships that can be difficult to replicate. They may also benefit from more diversified revenue streams, lower perceived ESG risk and a broader range of potential exit opportunities than businesses whose fortunes depend on a single defence programme or customer.

A potential growth opportunity can emerge where a specialist business has already established itself through a core defence contract but has technology or expertise that can be applied more widely. In those cases, the initial MoD relationship provides credibility, validation and technical depth, while the next phase of growth may come from widening the customer base to include security-conscious corporates, infrastructure operators, non-governmental organisations, emergency services, police forces or overseas partners facing similar challenges.

Selectivity is particularly important at this stage in the cycle. Traditional investment measures do not always capture the strengths of businesses operating within the defence sector. A company may appear to have customer concentration because revenue comes through one department or prime contractor; the better question is whether that revenue is diversified across programmes, platforms and end-users. A supplier may look niche yet occupy a position in a mission-critical system where switching costs are high. In practice, that revenue may be spread across multiple programmes, platforms and end users, providing greater resilience than first appears. Similarly, a business may serve a highly specialised market while occupying a critical position within a defence programme, making it difficult to replace. Equally, even a company with strong technology and favourable market conditions may struggle to achieve sustainable growth if it lacks the necessary certifications, manufacturing capability, regulatory clarity or a clear route through the procurement process.

Drones illustrate the importance of looking beyond broad investment themes. They have become an essential part of modern defence, but it is still too early to know which companies will emerge as long-term winners. Rather than investing in the theme alone, investors should focus on where lasting competitive advantage exists, whether through proprietary technology, specialist expertise, manufacturing capability, established procurement relationships or integration into wider defence systems.

The risk of ‘tourist’ capital

Access and expertise matter. Defence is not a sector where investors can rely on rising spending from the top-down alone. Success depends on procurement knowledge, regulatory understanding, export-control expertise, customer relationships and insight into programme priorities which are all part of the underwriting toolkit. As more generalist investors enter the market, there is a growing risk of capital chasing the theme rather than the underlying fundamentals. The strongest opportunities are likely to be found in businesses addressing enduring capability needs, rather than those simply benefiting from current enthusiasm.

For professional investors, many of these opportunities lie beyond the large listed defence companies. Lower mid-market specialists, founder-led businesses, software companies and dual-use technology providers can offer growth potential, particularly where specialist sourcing and rigorous due diligence uncover businesses with sustainable competitive advantages.

Defence has moved from a sector many investors avoided to one that now demands careful analysis. The revaluation is justified by a more challenging geopolitical environment, Europe’s need to rebuild capability, rising NATO spending commitments and the growing technological complexity of modern warfare. Potential opportunities are unlikely to come from following defence as a fashionable theme alone. They are more likely to come from understanding where spending lands, from identifying the specialist private businesses that address critical capability gaps and are well placed to potentially benefit as investment translates into long-term demand.

Important information

This article is provided for general information purposes only and reflects the author's views at the date of publication. It is not intended to constitute investment research, investment advice, a recommendation, or an offer or invitation to engage in investment activity. References to sectors, industries or market developments are provided for illustrative purposes only.

It should be noted that increased defence spending does not guarantee commercial success for individual businesses. Procurement delays, programme cancellations, budget reprioritisations, regulatory requirements and execution challenges can all affect whether anticipated opportunities translate into revenues or investment returns. Investments in private companies are medium to long term, high risk and illiquid. There is no guarantee of returns, valuations may be uncertain and capital could be lost if something goes wrong.

Sources

1. The Guardian, “New defence secretary to ‘reprioritise’ UK plan for military spending, say sources”, 14 June 2026.
2. UK Government, Strategic Defence Review 2025: Making Britain Safer — secure at home, strong abroad, June 2025.
3. NATO, Defence expenditures and NATO’s 5% commitment, April 2026.
4. SIPRI, “Global military spending rise continues as European and Asian expenditures surge”, April 2026.
5. PitchBook, The Rise of European Defence Tech, Emerging Tech Research, October 2025.
6. Lincoln International, Investing in Defence, market update presentation, May 2026.