SMALL CAP IDEA: When will defence minnows get their cut of military spending boom?

The defence sector has been in the spotlight for almost four years.

The war in Ukraine, instability in the Middle East and the growing threat from China have put the UK and its western allies back on something close to a Cold War footing.

The wholesale increase in budgets has buoyed companies such as BAE Systems, Rolls-Royce and Babcock. Share price valuations have gone stratospheric.

While it has been a golden era for these so-called prime contractors, the picture has been more nuanced for smaller players. 

But after a period of stasis, there is reason to believe that the tens of billions being invested to shore up UK defence capabilities are starting to trickle down through the ecosystem.

Small and medium-sized enterprises (SMEs) are an important part of the defence manufacturing and procurement network. They are often the nimble, lateral-thinking ‘doers’ that deliver innovative solutions that large, blue-chips often struggle with. 

The decades-old challenge is how to involve these innovators in a meaningful way, and it is one that has eluded successive governments.

Tens of billions being invested to shore up UK defence capabilities

It is at this point that RC Fornax enters the picture. The business is run by Paul Reeves, who brings frontline defence experience from the Royal Air Force as well as time spent working with major contractors.

He founded the company with Daniel Reeves in 2020 to operate in corner of the market in a way that is both smarter and able to deliver tangible financial benefits compared with the status quo.

The idea was simple: Build the right engineering team quickly and make sure the work gets done.

Instead of behaving like a recruiter shuffling CVs or a heavyweight consultancy sending in a PowerPoint squad, RC Fornax has built a community of specialist engineers. When a major contractor needs support, whether systems, software, mechanical or project management, the company can drop in a ready-made team that plugs straight into the project.

Crucially, RCF takes responsibility for outcomes. Rather than charging by the hour, it agrees to deliver a defined piece of work under a Statement of Work. In practice, that means: ‘Give us this part of the programme, and we will deliver it.’

It is a model gaining traction as the industry shifts away from labour-only contracting and towards work that is packaged, scoped and accountable.

Speed is part of the attraction. Defence programmes are notorious for long lead times, but RCF can spin up a team far more quickly than traditional routes allow. It also handles compliance with IR35 (off-payroll working rules) for clients, avoiding the administrative gridlock that contractors and employers typically face.

What sets the company apart is not a single innovation but a blend of qualities rarely found in one place. These include hand-picked talent, quick mobilisation, flexibility as requirements change and a management team made up of people who have delivered defence projects themselves.

That is the core business. It is only part of the story, however, because RCF has an innovative AI platform which we explore later.

Those who have followed the RCF story since it listed earlier this year will know life as a public company has not been plain sailing. Its issues, some external and others self-inflicted or the natural growing pains of being newly listed, have been chastening for Reeves and his senior team.

Yet there is an argument, a valid one, that adversity has forged a more durable company that is now better placed to capitalise on opportunities in a booming sector.

The first challenge came in the form of Britain’s Strategic Defence Review. This process occurs roughly once a decade but was long overdue. While the net impact will be greater defence investment, the immediate effect has been to delay contracts RCF had expected to book this year.

As a private business, it might simply have been a case of ‘keep calm and carry on’. As a publicly listed company, the contract hiatus prompted a guidance downgrade which hit the share price.

At the same time came the growing-pains element. This included the higher costs of being quoted and a management team distracted by capital markets. Added to that was an imperfect mix of new hires and a sales pipeline more anchored in hope than reality. It is clear why RCF endured what the late Queen Elizabeth might have described as an annus horribilis.

Reeves and his team have taken swift action and some difficult decisions to right the ship. They have re-engineered the sales process and rebuilt relationships by better understanding clients’ needs. In doing so, they have been able to offer solutions that provide customers not only greater efficiency but cost savings.

At the same time, RCF is diversifying outside of defence to mitigate impact of delays associated with this industry. And its technology and innovation department is evolving to bridge tech solutions in academia and other SMEs with front line capability.

‘What we have had to do is identify the problem and improve the processes. And it is important we do not make the same mistakes,’ says Reeves. ‘The opportunities we had at the start of the year have not disappeared. They were simply delayed [by the latest SDR].’

He remains confident the business case set out earlier in the year remains intact, although pushed back a few months. RCF is back up to over 40 billable engineers, rising from 15 at the low point, and Reeves is ‘very hopeful’ that figure will reach 100 by the end of the financial year.

‘We feel very, very comfortable with that,’ he adds. ‘We are going to go out and put ourselves on a path of under-promising and over-delivering, which is what everybody told us they wanted.’

Investors were prepared to back the reset with about £2.3 million, providing the working capital needed to deliver the new sales RCF is now winning. The cash will bridge the gap between starting work and being paid, and it will fund development of a new AI platform provisionally named Procure X.

Put simply, the technology could, if successful, lead to create an ‘Amazon-style’ platform for defence projects. Reeves becomes animated when discussing it.

One of the biggest bottlenecks in UK defence has little to do with engineering. It is procurement. Last year the Ministry of Defence awarded £16.2 billion in new contracts, yet almost 40 per cent went to just 10 suppliers. Smaller firms, often the ones doing the most interesting work, rarely get a look in. This is not because they lack capability, but because the system makes it painfully difficult for them to compete.

RCF sees this as a structural problem rather than a talent one. A risk-averse culture defaults to familiar incumbents even when faster and more innovative options exist. The company is trying to build a way around this.

Its answer is Procure X, an AI-driven marketplace designed to match verified SMEs with buyers in minutes rather than months. It is best thought of as a modernised procurement gateway. Defence buyers can find specialist suppliers, see what they offer and engage without the usual paperwork and delay.

Procure X sits on a stack of tools RCF is developing.

Smart Scope This is an automated Statement-of-Work generator that takes project documents and produces a contract-ready SoW. It is already in minimum-viable-product form and can produce reports showing the skill sets a project requires.

Smart Team Instead of trading CVs, this creates digital skill profiles and assembles teams automatically. Buyers can see who fits the job, make substitutions and identify SMEs who would otherwise be invisible.

Smart Bid This tool bridges SME capabilities and real procurement opportunities. It helps smaller firms understand where they can bid, what they can deliver and how to package it into a complete solution.

Together, these tools aim to remove the friction that keeps SMEs on the sidelines. If successful, procurement becomes quicker, clearer and more transparent, and buyers gain access to a wider pool of talent.

RCF sees Procure X as the foundation for a new SME alliance and eventually a scalable commercial platform that could reach well beyond defence.

In simple terms, the company is trying to move from being a problem-solver inside projects to becoming the connector that rewires the system itself.

Now for the cautionaries. I can only tell the story as presented, through conversations with management and my own background research. Investors should always conduct their own due diligence.

As RCF has shown, it is not always in charge of its own destiny. Contracts can be delayed and objectives reset. At the heart of it all is the Ministry of Defence, staffed by civil servants who may be unaware that small strategy changes can have significant effects further down the chain.

That said, if Reeves’ confidence in the current sales pipeline is borne out over the next six months, the present share price will look anomalous.

For all the market’s mid- and small-cap news go to www.proactiveinvestors.com

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