UK Defence Unicorns

defence unicorn

Over the weekend, Ukraine launched one of its largest drone attacks on Russia since the start of the war, hitting Moscow. It is reported that drones made in the UK were involved.

It demonstrates how much warfare has changed in five years and should be a wake-up call to European NATO governments.

The new methods of warfare are also seeing significant changes within the defence industry. This is reflected in the growth in defence ‘unicorns.’ A ‘unicorn’ is a start-up business venture which rapidly achieves a value of over $1bn. The US has seen an explosion in unicorns in recent years driven by the AI boom. However, the UK is now seeing the growth of its own unicorns in the defence sector as European governments seek to boost defence spending and learn from the drone warfare in Ukraine and the Middle East.

Cambridge Aerospace, a UK defence contractor founded only two years ago, has recently achieved a valuation of £2.5bn following its latest round of funding to support growth. Cambridge Aerospace develops and manufactures interceptor systems for use against drones and missiles. It currently provides interceptors for the UK’s Armed Forces.

The other two UK defence unicorns are UFORCE and Kraken Technology. UFORCE aims to unify Ukrainian defence technology developers and manufacturers into a single platform to deliver proven aerial, maritime and ground unmanned platforms. Kraken Technology specialises in technically advanced littoral, surface and subsurface capabilities. These have been another feature of the war but offshore Ukraine.

Growing defence budgets, increased geopolitical tensions, strong government support and demand for drones, AI and cyber capabilities have led to a record level of defence start-ups so far in the UK. The UK stock market also comprises a number of quoted defence contractors as well as manufacturers who produce high-tech military components for weapon platforms.

This is all a far cry from just a few years ago when, as we highlighted in Alpha Bites, how new ethical investing rules imposed on the financial sector were preventing defence companies from accessing funding from banks or pension funds from investing in the sector!

The defence unicorns and start-ups will be looking to sell their products and capabilities to defence forces globally. However, supplying the UK’s Armed Forces is an important factor in securing orders from the UK’s allies, so the government needs to be as supportive as possible. We wait to see whether new Defence Minister Wes Streeting has any more luck than his predecessor John Healy in convincing new PM Andy Burnham to step up defence spending. Currently, the new PM seems to be focusing his attention on the UK’s cost-of-living.

 

What have we been watching?

 

Global equity indices are close to all-time highs but more challenging crosswinds in bond markets. Expectations for a US interest rate hike by the Federal Reserve (Fed) were dialled back last week but have been accompanied by a significant steepening in the US Treasury yield curve. This suggests the longer-term outlook for US interest rates is less positive. Concerns about higher oil prices, elevated government fiscal deficits and the growing demand in the US for capital to fund the massive AI investment boom have been putting upward pressure on bond yields. For example, the US government issued $25bn of 30-year Treasury bonds last week with a yield of 5.2%, marking the highest yield since 2001.

 

Read our latest investment insights from Alpha PM

 

Brent oil moved higher last week, and this morning is steady at $88, reflecting the fact that a further military escalation appears unlikely, at least in the short term. This follows comments from US Treasury Secretary Scott Bessent, who confirmed that the latest phase of the Iranian conflict has shifted towards an economic and physical blockade, describing the measures as a ‘combination of economic isolation like the world has never seen before.’ However, the Gulf region remains volatile and Iran’s Revolutionary Guard are still claiming that no ship can safely transit the Strait of Hormuz without approval. There were also unconfirmed media reports that Iran’s allies in Yemen, the Houthi rebels, had targeted a Saudi Arbian oil refinery.

 

In the US, the market dialled back its expectations for an imminent interest rate hike by the Fed. Core inflation (CPI) in July slowed to 2.5%, while producer price inflation (PPI) was also lower than expected, holding steady, which meant that the year-on-year reading fell back to 4.7%. US retail sales in July were also weaker than expected, supporting the case to postpone any interest rate hike.

Finally, an AI headache for the government? UK households are increasingly turning to AI to file objections and appeals and seek compensation. The resulting deluge of complaints known as ‘agentic flooding’ risks overwhelming government departments. These range from tax appeals to welfare claims to parking ticket objections. For example, the backlog in employment tribunals is reported to have risen by 55% so far this year!

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