At the most fundamental level, UK national defence and resilience, and the resilience of financial and related professional services infrastructure, are an increasingly important foundation for the UK's ability to present itself as a trusted, predictable and stable partner for international trade and investment, and for its role as a leading International Financial Centre.
Equally, the UK's credibility on national security and defence matters to its wider political and economic relationships with key partners. This has always been true with the US, and to some extent with other NATO allies. It is now also an increasingly important pillar of the UK's relationships with partners such as those in the Gulf and Japan.
Private investment and finance can support innovation, growth and resilience in the defence industry, and can help increase UK national capabilities and support cooperation with international partners. As a channel for trusted domestic and international capital, the industry is important to the choices the UK wishes to make about its sovereign capabilities, and about its relationships with international partners in managing secure supply and dependencies.
Global and UK context for defence financing and investment
The invasion of Ukraine is a reminder that major conflicts are not limited to the military. A nation's ability to sustain itself in such a conflict depends on its ability to mobilise wider economic and social resilience. In the same way, effective deterrence requires investment in national security capabilities and in broad-based resilience. This kind of resilience cannot be turned on quickly; it needs sustained, long-term effort.
The UK’s Strategic Defence Review (SDR) highlighted three core messages. First, the UK should maintain a “NATO first” approach, recognising that the US is no longer willing to carry a disproportionate share of the burden, and that the UK and Europe must take greater responsibility within NATO. Second, it called for renewed investment in existing commitments, while also preparing for emerging threats and the capabilities likely to shape future conflicts, particularly dual-use digital technologies in areas such as space, AI, cyber and quantum. Third, it emphasised the need to rebuild national resilience across society. It is increasingly clear the industry is already directly exposed to a "hybrid threats", which is demonstrated, for example, in increased cyber risk. There is a growing focus on businesses needing to protect their own civilian infrastructure, such as data centres and subsea cables. Equally, there is a strong case for a more structured way for the industry to provide "reserves" of skills and expertise, particularly in digital capabilities.
With respect to supporting the objectives of government’s SDR and the long-awaited Defence Investment Plan (DIP), it is important to separate public sector funding from private sector financing and investment for defence.
Funding ultimately depends on UK government contracts and, given that global defence spending is growing faster than UK spending, international export orders are also important for growth. Private finance and investment can help bring forward and scale up defence capabilities, improve efficiency and lower costs, using different mechanisms. But this only works if demand is clearly signalled, and if investable propositions, with a commercial return on capital or investment, can be clearly identified. And, with competition for international investment in the sector increasing, there is a risk that UK defence and dual-use companies will follow this public investment and move to other countries. For example, by the end of the decade, German defence spending may be greater than that of the UK and France combined.
The work of TheCityUK’s Defence & Resilience Group to support the UK defence-finance ecosystem
TheCityUK’s Defence & Resilience Group (DRG) brings together TheCityUK's members with private sector firms from the defence industry, and with providers of critical national infrastructure to provide solutions to meet the aims of the SDR and the DIP within a limited budget. The early work of the DRG has focused on how to mobilise different pools of private capital and reduce frictions across the UK procurement-defence industry base-finance ecosystem:
1. Private equity and venture capital to provide scale-up investment for UK-based defence firms. Some challenges remain around approaches to ESG, but the wider issue is how to help defence companies grow and scale up while staying in the UK, particularly where they are essential to delivering UK sovereign capabilities.
2. Banking finance for small and medium-sized enterprises (SMEs) in the defence supply chain. The biggest financing challenge is for SMEs in the supply chain of the large defence prime contractors (the "Primes"). There is a role for public sector guarantees and public-private risk management (through UK Export Finance, the British Business Bank and the National Wealth Fund) to support lending to SMEs. This needs to go together with reform of MoD procurement, so that SMEs can access the working capital they need.
3. Longer-term "patient" capital for defence and critical national infrastructure. Recognising the problems with PFI-type (Private Finance Initiative) financing models, there is an opportunity to unlock value and free up the government's balance sheet. This could be done by creating long-term, revenue-generating assets in the defence estate, including military accommodation, and across other areas of critical national infrastructure.
4. Horizontal regulatory and process frictions. From regulation to private sector onboarding processes, there are opportunities to reduce frictions and costs for defence and FRPS firms. One example could be a "Compliance Passport". This would let SMEs, financial institutions and regulators rely more on MoD due diligence, so they avoid duplicating compliance work.
With the DIP now published, the next important milestone will be MoD’s Defence Finance and Investment Strategy (DFIS), which will set out how the UK government will work with private capital to identify specific projects to deliver its overall ambitions.
Cross-border dimensions and the role of the industry in international security partnerships
While it is crucial that the UK creates the right domestic environment, the government has underlined that international private sector partnerships, and "safe foreign investment", will be essential to delivering the UK's Defence Industrial Strategy. Similarly, the DIP notes that delivering the scale, speed and resilience needed "will require government to use its spending, procurement and financial institutions to attract domestic and international private capital". As a gateway to international capital and centre of expertise, UK-based financial and related professional capabilities can also support the aims of partners and allies.
First, on funding. The financial and related professional services industry’s experience of and expertise in the role of multilateral funding mechanisms (for example, the European Investment Bank, and development and climate finance through multilateral development banks (MDBs), can be harnessed to address questions such as the UK's participation in multilateral or multi-party funding and procurement mechanisms. There is a live debate on the relative merits of the UK-Netherlands-Finland-Poland Multilateral Defence Mechanism (MDM) and the Canadian-led Defence, Security and Resilience Bank (DSRB) and how they might complement each other or be merged. There is also the question of UK cooperation with the EU's Security Action for Europe (SAFE) programme.
Second, managing the role of international partnerships, supply chains, and the sources of capital behind them will be essential to the UK's efforts to balance the need for sovereign capabilities with secure, reliable supply. The UK will continue to depend on partners for certain technologies and inputs, such as critical minerals and access to technology platforms. This requires the UK to work with the private sector to signal in which sectors, and from which partners, it is seeking this investment, and how this intersects with legislation such as the National Security and Investment Act.
For example, the recent UK-Japan Joint Declaration on Economic Security Cooperation sets out a joint ambition to "promote trade and investment opportunities in strategic sectors" and to "facilitate deeper coordination between our strategic finance agencies", in order to support secure supply chains. There is now an opportunity to work with private sector financial institutions in both markets, including through TheCityUK’s Japan Market Advisory Group, to consider how to turn this intention into action.
Within Europe in particular, there is a shared need to rearm, to revitalise NATO, and to shift more of the burden away from the US. The debate about defence procurement reform and access to private finance is similar to the one in the UK. However, the UK-EU cross-border financing environment is fragmented (for example, the effect of EU regulation on lending by third-country banks into the EU), and national preferences continue to dominate. So far, this has held back closer UK-EU defence cooperation. However, there remains a live debate and there is an opportunity for the industry to argue that increasing European scale requires both complementary procurement and more efficient cross-border financing. Our recent bilateral engagement with Germany, the Netherlands and Italy has found strong appetite for this.
Finally, there are ways the UK can learn from the experience and examples of other markets, and work together on practical challenges. These might include:
Experience of supporting innovative defence and dual-use companies from growth through to acquisition. One example is the US IQT investment platform, which acts as a strategic bridge, connecting US and allied intelligence agencies with venture-capital-backed, dual-use technology start-ups.
Lessons on procurement reform, and on building the government-defence-finance ecosystem. Australia's approach to procurement, and its long-term public investment plans, give the private sector and investment community greater transparency and visibility, and are often cited as examples to follow.
Comparison of public sector accounting practices. The UK's practices can lead to a more conservative approach to its public sector balance sheet for capital investment or leasing. Adopting other approaches, such as those used in the EU, could unlock more public money.
There could be a case for a collective call to reform prudential regulatory requirements for bank lending to the sector, and for insurance providers, where these requirements are embedded in international standards.
Ultimately, increasing defence and resilience in the UK and amongst its allies will depend not only on higher public spending, but on the ability to mobilise private capital, deepen international partnerships and create a clearer investment environment for firms across defence, critical infrastructure and financial and related professional services. TheCityUK’s work through the Defence & Resilience Group is about translating these ambitions into practice, ensuring that the UK’s international financial centre strengthens both national security and long-term economic competitiveness.