Can private capital close the UK’s warfare readiness gap?

Sir Richard Knighton acknowledged that the UK is having to make “difficult trade-offs” on defence, amid reports of a possible £28 billion shortfall in spending plans.

With threats mounting across all fronts – from Europe to the Indo-Pacific – the Ministry of Defence (MoD) is having to do more with stretched budgets. The government plans to increase defence spending to 2.6% of GDP by next April. But if we want to keep pace with today’s technology-fuelled threats, the UK cannot rely on government funding alone. Private capital is a missing ingredient in closing the military-readiness gap.

For investors, the defence sector can often appear complex and off-putting. Tight regulation, IP controls, and defence procurement habits push banks and private equity to more straightforward bets in other markets. Case in point: less than 2 percent of VC funding went to European defence tech in 2024.

While there are early signs of improvement – investment roughly doubled last year – a stubborn gap still persists. Growth-stage innovators remain underfunded and big defence-infrastructure projects struggle to attract deals.

So what will it take to draw private capital into defence? The MoD can’t do it alone, but it can use policy levers and procurement reform to galvanise investor support.

First, defence needs to change how it buys to give high-growth companies a better chance of accessing capital. Everyone wants a UK equivalent of Helsing, the AI defence unicorn that is now one of Germany’s most valuable start-ups. But those firms only emerge when investors can see predictable buying volumes, throughput, and MoD-brokered routes to market. Revisiting some of our strict competition, single source pricing, and IP rules would boost investor confidence.

Second, we need to create the financial tools that connect investors to the UK’s broader defence needs. Housing, logistics, energy, and digital infrastructure – all critical areas for defence – are familiar to the markets. They’re sectors they lend to, or invest, in every day. Even requirements closer to the sharp end – like satellite infrastructure, equipment, or training – are assets and business models that investors readily recognise.

But what’s missing are the financial products that let the MoD structure credible deals on these areas, while meeting Treasury, commercial, and value-for-money rules. To do this, defence needs to work with the financial services sector to design new funding mechanisms that make investment easier.

Third, the MoD has a huge opportunity to supercharge UK exports by making exportability a key factor in how it evaluates and awards contracts. That would bring the Strategic Defence Review’s ‘NATO-first’ approach to life, so that British kit is designed with overseas sales in mind.

Warnings on the UK’s lack of warfare readiness should be a wakeup call. The MoD is already pushing hard to drive progress. But around the world, nations are racing to strengthen their security, and we owe it to ourselves – and our allies – not to fall behind. Closing the readiness gap means opening the door to new partners, new financing, and new ways of working. And that includes a deliberate departure from ‘business as usual’ on defence funding.

This article first appeared in LBC.