Private market participants seeking opportunities in the defence sector should look beyond large contractors and focus instead on founder-led businesses, software companies and dual-use technology providers, argues UK investment firm Connection Capital.

In a briefing note, authored by its head of funds, Lorna Robertson, the firm notes investment opportunities are unlikely to materialise by following defence as a “fashionable” theme alone.

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Connection Capital says investors need to improve their understanding of where spending lands and to identify the specialist private businesses that address critical capability gaps and are well placed to benefit as investment translates into long-term demand.

Beneath the large defence contractors sit specialist companies, maintenance and support providers, software, secure communications, advanced manufacturing and dual-use technologies, serving both civilian and defence customers.

With the rearmament of Europe taking central stage, Connection Capital says investors should focus on where lasting competitive advantage exists. This requires careful analysis of proprietary technology, specialist expertise, manufacturing capability, established procurement relationships and integration into wider defence systems.

However, Robertson also warns that traditional investment measures do not always capture the strengths of businesses operating within the defence sector.

“A company may appear to have customer concentration because revenue comes through one department or prime contractor; the better question is whether that revenue is diversified across programmes, platforms and end-users.”

She adds: “Equally, even a company with strong technology and favourable market conditions may struggle to achieve sustainable growth if it lacks the necessary certifications, manufacturing capability, regulatory clarity or a clear route through the procurement process.”

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NATO allies have committed to invest 5 per cent of GDP spending annually to defence by 2035. This includes at least 3.5 per cent for core defence and up to 1.5 per cent for resilience, infrastructure, innovation and the defence industrial base