The UK Government must move from taking advice to taking action
On 22 April, the UK’s Ministry of Defence (MoD) announced that the Defence Investors’ Advisory Group (DIAG), through which officials consult private-sector institutional investors on unlocking investment in UK defence firms, would be expanded and made permanent. Simultaneously, it announced a Defence Finance Zig-Zag secondment programme intended to embed financial expertise in government. These measures reflect the logic of the government-commissioned Strategic Defence Review (SDR) and Defence Industrial Strategy (DIS), both of which frame private capital as essential to industry-led innovation and growth. The DIS aims to grow the next UK-based defence unicorn, a privately held startup with a valuation exceeding £1 billion, and to halve the gap between UK and US venture capital defence funding. DIAG’s expansion is certainly a tangible step towards informing government on how it might leverage private investment. But taking advice is easier than acting on it.
UK-based defence companies, and particularly SMEs, face systemic issues when attempting to attract private investment. The government has recognised these barriers but offered limited evidence that they will be resolved. First, as noted in the DIS, government must show prospective early-stage investors a pathway to potential scale. To do so, it should both signal that it will spend more on defence and outline in what capability areas this demand will manifest. While the government will raise defence spending to 2.6% of GDP in 2027, much of this is likely to be absorbed by the existing shortfall in the MoD equipment programme. That uplift therefore offers private investors limited incentive to back emerging capabilities unless the government can show that they will become funded procurement priorities. A further commitment to spend 3% on defence remains remote and, in the government’s language, subject to economic and fiscal conditions.
The larger problem is whether industry and investors can see where future demand will emerge. A Defence Investment Plan, scheduled for release in Autumn 2025 and intended to outline government procurement priorities for the next decade, has been consistently delayed without clear communication regarding when it will be published. BAE Systems CEO Charles Woodburn has stated that delay in the Investment Plan has discouraged investment by generating uncertainty. If this is true of a major prime contractor, the problem is likely to be sharper for SMEs with limited capital and cashflow.
SMEs are further disadvantaged by other structural headwinds. As outlined in the DIS, a perception of defence as ‘unethical’ deters investment from institutions concerned with ESG. SMEs also spend proportionately more on compliance-related costs, while low-margin cost-plus contracting is poorly suited to firms whose valuations depend on rapid scaling and repeatable demand. The DIS promised a Defence Finance and Investment Strategy aimed at addressing these problems by early 2026, supported by DIAG. Yet it remains unpublished and goes unmentioned in the April press release.
In aiming to produce a defence unicorn, the UK government has set a lofty goal requiring large-scale private investment. Helsing raised €600 million in a Series D funding round, following a €450 million Series C round in July 2024. Quantum Systems raised €340 million across 2025. European defence technology can attract capital at scale when investors see credible routes to state-backed demand. DIAG may help government understand what investors need, but capital will follow demand signals, not consultation alone.
Further Reading
Further Reading
Ministry of Defence (2026) https://www.gov.uk/government/news/unlocking-private-investment-to-drive-uk-defence-as-an-engine-for-growth
Ministry of Defence (2025) https://assets.publishing.service.gov.uk/media/68bea3fc223d92d088f01d69/Defence_Industrial_Strategy_2025_-_Making_Defence_an_Engine_for_Growth.pdf
TheCityUK and ADSGroup (2025) https://www.adsgroup.org.uk/wp-content/uploads/2025/05/Finance-and-investment-for-UK-defence.pdf