Investing in a better economy 2025 – Private capital in defence

The British Private Equity & Venture Capital Association (BVCA)’s report ‘Investing in a better economy‘ outlines the importance of private capital to the UK economy and potential areas for future growth. At the end of 2024, UK-based private capital funds are said to have £190bn of capital yet to invest. The defence sector is identified as an area with untapped potential for private capital investment and growth.

Why defence?

Defence is an area that has traditionally sat outside of private capital strategies. However, the BVCA notes that the recent Strategic Defence review (a summary of which for customers and suppliers in defence can be found here The SDR 2025: Top 5 Takeaways for Customers and Suppliers in Defence – Burges Salmon) included recognition of the role private capital plays in supporting the defence industry. The paper also states that Government policy from the past year has been successful in creating an investment environment that is fit for purpose, while recognising that there is still more to do.

Presently, in the context of the Government’s commitment to increase defence spending to 2.5% of GDP by 2027, private capital is already co-investing with the National Security Strategic Investment Fund, the UK Defence Innovation Fund, and NATO’s DIANA accelerator. Technologies employed in the defence sector often have dual-uses in the civilian sector, further increasing private capital’s potential interest in defence sector investments.

Barriers to private capital

However, there remain significant barriers (whether actual or perceived) to private capital investment in the defence industry. Concerns about reputational risk stemming from past-ESG commitments – despite the Financial Conduct Authority clarifying that defence investments are not prohibited by its rules on sustainability¹ – concerns about NSIA clearance and associated costs, or concerns related to a lack of exit opportunities all are seen as preventing private capital investment in defence firms. Concerns regarding access to government contracts also stand as a barrier to investment, and as such the BVCA is also calling for reform to procurement rules and access to government contracts, particularly for mid-market and scale-up investors.

Perhaps because of these challenges, the defence sector represents a unique opportunity for private capital to get in “on the ground floor” with an industry that is experiencing strategic shifts and significant Government investment for the first time in decades.

How we can help

With the rise in Government spending on defence, and the increased focused on home-grown defence procurement, there are increasing opportunities for private capital to be involved in the defence sector. Burges Salmon has significant experience advising across the defence sector and working with private capital. Combined with specialist knowledge in defence procurement and NSIA matters, we are well placed to assist with a range of transactions in this space.

If you would like to discuss the issues raised in this article, please contact Alex Lloyd or Chris Doherty.

Here is the previous article in our mini-series.