Experts warn the U.K. and Europe are lagging behind the U.S. on getting private capital into their defense industries — and are calling for a massive cultural change to supercharge the sector.

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LONDON — The U.K. is increasing military spending, but outdated rules and cultural reservations are keeping private investment from reaching the country’s defense industry, investors, industry figures and experts warn.

The defense industry contributed £15.8 billion to the U.K. economy last year, an increase of 70% over the past decade, according to industry body ADS. The country has also committed to NATO’s target of spending 3.5% of GDP on defense by 2035. Government expenditure on industry, weapons and small and medium-sized enterprises all increased in the past year.

But Britain has so far struggled to bring substantial private money — from pension funds, venture capital and private equity — into its defense industry.

That leaves many firms without the funding they need to grow and supply Europe with weapons and other capabilities — particularly when they lack government contracts that can sustain their operations. The Ministry of Defence’s top 10 suppliers account for 40% of procurement expenditure.

“European private capital is flowing into defense at a rate not known in decades, but it still lags far behind our American counterparts," said a U.K. defense industry figure who was granted anonymity to speak freely.

Britain led Europe in venture capital funding for defense, security and resilience startups in 2025, attracting $2.9 billion of the continent's $8.7 billion total, according to start-up monitor Dealroom and the NATO Innovation Fund. But on a narrower measure of defense-tech investment, Dealroom found American firms raised $19.6 billion in the first nine months of 2026, compared with just $932 million in Britain — a gap of $18.7 billion.

The British government's 2025 Modern Industrial Strategy pledged to halve the U.K.'s defense venture capital funding gap with the U.S. by 2035. However, the government was unable to provide POLITICO with its own estimate of the gap or clarify how it would measure progress toward the target.

“As of about a few months ago, we’re up to 42 different venture funds in the United States that either fully or predominantly invest in defense or dual-use technologies. In Europe you have three, arguably four, credible defense investors that are early stage," said Nicholas Nelson, founder and managing partner of European defense-focused venture capital fund Archangel.

The four European defense investors — Archangel, Lakestar, Expeditions and Project A — all invest in the U.K., but Archangel is the only British fund.

“We are now seeing money moving into the market alongside positive platitudes from government on supporting the industry, but without meaningful investment from [the British government] we sadly can’t expect this increase to sustain itself,” the U.K. defense industry figure quoted above said.

Nelson said the U.K. government is also slower than the U.S. to invest through awarding contracts to defense companies, a key signal for investors deciding where to put their money. He said he had taken part in U.S. “pitch days” — fast-track events where military agencies listen to pitches from defense firms and can award contracts the same day, if they are under $158,000.

In 2026, the MoD's dedicated "low-complexity pathway" for quick procurement decisions is averaging around 60 days to contract, Jim Carter, the MoD's director general for commercial and industry, told the House of Lords. Historically, standard British defense procurement competitions can take around six years for its major platforms, such as warships and aircraft.

Slow contracting is not the only barrier to investment. Investors and industry figures also point to restrictive rules around who is allowed to invest in defense, and concerns about the reputational risks of doing so.

Some European funds have historically avoided investments in defense, alongside pornography, alcohol and tobacco.

“[Europe], for whatever reason, over the past few decades decided that there’s a reputational risk around investing in weapons. Luckily Putin is sort of helping us get over that now, but it's taking some time," Sam Burrell, a partner at venture capital firm Expeditions and an early-stage investor in European defense and security, said.

“The Americans are just a bit less queasy than Europeans around investing in weapon systems.”

These restrictions can be written into limited partnership agreements, the contracts that set the rules for how investment funds can use their investors’ money.

The European Investment Fund, which says it contributed to almost a quarter of all venture capital raised by European funds in 2025, still restricts investment in weapons and ammunition firms, despite relaxing its defense investment rules this year.

That hesitancy has persisted even as governments have called for more defense investment following Russia’s full-scale invasion of Ukraine and escalation of hybrid attacks against European countries. It has also led to tensions between companies and their backers.

Florian Seibel, co-founder and co-CEO of drone-maker Quantum Systems, has said he was forced to build a separate firm that made lethal drones after investors opposed investing in weapons. That new company, Stark, is now one of Europe's top defense startups.

Burrell said that earlier this year, a company his fund had invested in opened an account with Revolut, a British digital-only bank and fintech company. He said Revolut closed the company’s account after learning that it made drones.

A Revolut spokesperson said that the company has a list of industries that carry risk factors — including weapons, defense and armaments. Businesses from those industries cannot hold or open an account with them. "This may evolve in the future," they added.

The U.K.’s upcoming budget, to be announced this month, followed by a defense investment summit and strategy later this year, could give the government an opportunity to make private investment in the sector more attractive.

Asked how the government could stimulate more private investment, Burrell said it could direct the British Business Bank, a government-owned bank that invests in companies and venture capital funds, to allocate more of its capital to defense firms.

“The answer really is to encourage pension funds to increase their exposure to defense funds," he added.

“That’s the biggest pool of private capital available and the easiest one to get moving with some kind of government reform.”

A second U.K. defense industry figure, who was also granted anonymity to speak freely, told POLITICO that the government could also help defense companies grow and contribute to the U.K. economy by making it easier for them to export.

"If the U.K. market isn’t big enough to attract big VC money, we need a better or clearer route to export from the U.K. — even if it's something the U.K. isn't buying."

They described the UK Defence Innovation budget — an annual £400 million fund for defense breakthroughs, making up roughly 0.5% of Britain’s defense budget — as "pitiful."

"If a VC looked at that, they would see a government not serious about innovation,” they said.

MI5 has launched the AI Threat Assessment Centre to help Britain respond to state threats, terrorism and bioweapons.

Germany needs a replacement program for next-generation fighter jets after the FCAS project with France collapsed earlier this year.

The arrest is the seventh in connection to the investigation into a security incident at the airbase, which led to the U.S. withdrawing B-1 bombers.

The Pentagon’s decision to relocate B-1 bombers from the British air base comes after months of frustration in the Trump administration over Britain’s defense spending.