Defence spending is surging. Investment opportunities abound, as conflict and geopolitics have catalysed a surge of interest in the sector. Private equity funds, sovereign investors, and venture capital are increasingly drawn to defence and dual-use opportunities, attracted by long-term demand signals, government backing, and geopolitical urgency. However, beneath this momentum lies a persistent disconnect: investor assumptions about defence businesses often diverge sharply from how procurement and delivery function in practice.
The gap between procurement reality and investment expectation is a primary driver of underperformance. Successfully navigating the complex terrain is becoming an essential skill for an increasing number of funds making their initial defence investments.
We will always need defence, right?
Today’s geopolitics makes defence look like a uniquely attractive investment. It shows demand stability (underpinned by expanding government budgets), multi-year programme announcements, and strengthening political and social consensus around rearmament. This narrative of predictable, long-duration revenue streams is bringing interest from many investors. However, the reality of military procurement is far less certain.
What begins as a clearly defined capability can become an over-specified, technologically ambitious system that is difficult to deliver at scale. History offers many notable examples in this respect…
Defence demand is not simply a function of budget allocation; it is mediated through complex requirement-setting processes, shifting strategic priorities, and iterative programme design. Requirements evolve, often materially, over the life cycle of a programme. What begins as a clearly defined capability can become an over-specified, technologically ambitious system that is difficult to deliver at scale. History offers many notable examples in this respect, from the TSR2 supersonic low-level strike aircraft of the 1960s to the recent Ajax armoured fighting vehicle.
This is a novel risk for investors. Headline demand does not translate cleanly into executable contracts.
Have you got it in black?
The United Kingdom’s (UK) defence is not unique in its persistent pursuit of ‘exquisite’ requirements, with little attention paid to industrial feasibility. Programmes are frequently designed to deliver cutting-edge capability, with narrow specifications and high-performance thresholds. While arguably militarily desirable, this approach often overlooks the realities of manufacturing capacity and supply chain resilience.
Thus, for many companies positioned to benefit from increased defence spending, the habit of adding cost to programmes to build new manufacturing may cause them to struggle to convert the opportunity properly. Investors may assume that increased engineering complexity means larger margins. However, in defence, additional requirements frequently do not come with additional funds. The result is either eroded margins or fewer final systems delivered.
Those close to the money benefit from being close to the design and development process. In practical terms, the more advanced the requirement, the less predictable the commercial outcome.
Knowing how and knowing why
All this being said, cross-industry synergies are being found, particularly in firms with expertise in mass manufacturing. Companies grappling properly with the tension between requirements and technology are designing to match manufacturing capacity, rather than building new machinery to match designs. They are resisting the pressure to augment every component, funding extensive in-house Research and Development (R&D), and offering solutions prior to any official requirement set. This means that those who understand several industries will have novel opportunities.
Everybody’s problem: The supply chain
A further divergence between procurement and investment assumptions lies in the defence supply chain. Investors often assess target companies based on their position within a programme: whether prime, Tier 1 supplier, or niche capability provider. However, this linear view can obscure the supply chain fragility that affects the entire nation.
Defence supply chains are not currently configured for rapid scaling. They rely on specialised components, limited suppliers, and long lead times. Efforts to increase production volumes, particularly in response to geopolitical shocks, have exposed bottlenecks that were previously invisible. Rare earths are perhaps the most visible manifestation of this, but so are specialty alloys, substances used in explosives, and other industrial chemicals.
This introduces second-order risks to investments: revenue growth can be highly constrained by upstream limitations and cost pressures driven by scarce suppliers. A company’s ability to capitalise on demand is often not determined by its own capacity, but by the resilience of its ecosystem.
Security is not a dirty word
Nobody is surprised that security is a constraint when working in defence. A business must be sharp on its own physical and cyber security, and have an excellent understanding of its own supply chains and its employees. Vulnerabilities can repel customer interest or fatally damage the prospect of a contract.
In addition, the security assessments to do business are usually controlled not by the customer, but by a separate vetting agency within His Majesty’s (HM) Government. This bureaucracy must be navigated, but companies can make this easier or harder for themselves with thoughtful choices of employees and suppliers.
Finally, anyone close to defence operating commercially across borders will be familiar with the term ‘ITAR’ – the United States’ (US) International Traffic in Arms Regulations. Every country has its own version, and they can be highly constraining for defence businesses operating across borders. Most investors understand regulatory risk; this is defence’s additional dimension.
Overseas market access can be limited, as the regulations can cover controlled components, technical data, and services. Needless to say, these rules can limit and complicate exit options.
What the heck is TEPIDOIL?
A further complication, but also an opportunity, is the depth and breadth of support the customer expects. Governments have learned – albeit imperfectly – that it is rarely enough to procure just the equipment. A ‘capability’ needs people trained, software updated, infrastructure built, and the logistics serviced throughout its life.
The British acronym for these elements is TEPIDOIL.* America uses the less mnemonic DOTMLPF-P.** Technology aggregators, or defence primes, are excellent at packaging these aspects; investors must understand where their companies fit in this ecosystem and the associated costs.
* Training, Equipment, People, Infrastructure, Doctrine, Organisation, Information, Logistics
** Doctrine, Organisations, Training, Materiel, Leader development, Personnel, Facilities, Policy
Procurement timelines versus investment horizons
Perhaps the most fundamental misalignment is temporal. Private capital typically operates on investment horizons of 3-7 years for private equity, or up to a decade for infrastructure or sovereign funds. Defence procurement, by contrast, can operate on timelines that can extend well beyond a decade.
…investors need a different mindset for defence. Traditional private equity playbooks, focused on rapid value creation and exit, require informed application in this sector.
This creates a tension where investors seek exit pathways, but procurement processes work to long, uncertain development cycles. Even when contracts are secured, revenue realisation may be back-loaded, contingent on milestones, or subject to renegotiation. For funds operating under time constraints, this can materially impact returns.
So, investors need a different mindset for defence. Traditional private equity playbooks, focused on rapid value creation and exit, require informed application in this sector.
Ever-shifting goalposts
The political cliché that ‘there are no votes in defence’ is losing its power, while the social cliché that military activity is inherently unethical is shifting. There have even been suggestions to add an ‘S’ for ‘Security’ to the framework of Environmental, Social, and Governance (ESG), although this might be more a red herring than coherent plan. Dual-use technology is valuable to watch as leading in this space, especially as the line separating single-use from dual-use blurs further. These aspects are changing for investors, and should be factored in when building investment strategies and their narratives.
Not a bridge too far
The apparent disconnect between procurement and investment assumptions can appear profound. However, with the right communication, the incentives of HM Government, the British Armed Forces, and investors can be highly aligned. Investors who can see past the undulations of security, tolerate the jargon, and think deeper than budget announcements or programme headlines will be rewarded.
Compelling macro energy drives the current wave of defence investment. The broadening appeal and necessity of defence investments for a balanced portfolio will further increase the premium on those investors adept in this terrain.
Wg. Cdr. Ben Goodwin MBE is an Adjunct Fellow at the Council on Geostrategy and a fighter pilot with experience in Iraq, Syria, Afghanistan, Eastern Europe, and Central Africa. He has been posted to the Ministry of Defence and the North Atlantic Treaty Organisation in Brussels. Previously, he worked at the trading arm of a large bank, focused on foreign exchange and government bonds.
This article was written by the author in a personal capacity. The opinions expressed are his own, and do not reflect the views of HM Government or the Ministry of Defence.
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