97% of UK defence firms likely to raise significant external funding over the next 12 months to accelerate growth
New research by global law firm White & Case reveals that 97% of UK defence companies and defence technology start-ups surveyed are likely to raise significant external funding over the next 12 months to accelerate growth and meet soaring demand for defence technologies.
Defence firms intend to make full use of the various capital sources on offer
Firms are considering blended finance solutions, with 49% of businesses looking to raise equity finance in the next 12 months, 47% debt finance and 39% government grants.
Defence technology start-ups are more likely to target equity than established defence companies (59% versus 49%), given many are still developing products and remain pre-revenue, making debt less suitable at this stage. Meanwhile, established firms are more likely to target debt (51% versus 41%), particularly if they have already secured major government contracts.
Among businesses seeking equity finance, government-backed investors are seen as the most attractive source at 37%, narrowly followed by corporate venture investors (36%), strategic corporate investors (34%) and private equity firms (34%). Venture capital investors (30%), family offices (20%) and sovereign wealth funds (12%) further illustrate the breadth of potential funding sources.
For private and venture capital, defence technology now represents a compelling long-term investment proposition
With growing government budgets, contract visibility, recurring revenues and high barriers to entry, the sector has become highly attractive, and the hesitancy that once caused some funds to avoid it has softened.
The investment case extends beyond current conflicts and even defence. Heightened geopolitical tensions have accelerated the drive to bolster resilience, with governments prioritising onshoring and developing sovereign capabilities to reduce reliance on other countries, creating longer-term demand for new technologies. Additionally, technologies initially developed for military use could have future civilian applications in much larger markets.
Daniel Turgel, partner and co-head of global law firm White & Case’s Global Technology Industry Group, commented: “With global military expenditure soaring, defence firms are looking to scale rapidly to meet growing demand for the latest defence technologies. However, scaling defence technology start-ups is expensive business and, given their significant capital requirements and high cash burn rates, many earlier-stage firms are likely to undertake successive funding rounds to ensure they have sufficient runway to support growth.
“For the most promising businesses, there is no lack of equity financing. A wall of private capital is looking for a home in defence technology as previous investment restrictions are relaxed and investors rush to gain exposure to a highly attractive sector, with long-term structural growth tailwinds that extend beyond current conflicts and even defence itself.”
Tom Clarke, partner in the Global M&A practice and Global Private Capital Industry Group at global law firm White & Case, added: “While there has been a marked increase in interest among overseas investors, it is no surprise that UK investors remain, for now, the predominant source of expected capital for these companies, with the number of businesses expecting investment from UK sources alone outstripping investment from APAC, the US and the Middle East combined. This reflects the UK’s unique strengths in matching capital with investments, underpinned by a mature VC ecosystem, deep pools of private capital and ready access to global money markets.
“The UK’s private markets already have a strong track record of generating more fintech unicorns than any country outside the United States, and are now poised to repeat that success in defence technology. Home to some of the world’s most exciting and innovative early-stage defence technology companies, supported by a leading legal framework and an extensive network of experienced investors and advisers, the UK could potentially see significant fundraising announcements over the next 12 months, making this an exciting sector to watch.”