Lawmakers are urgent the Pentagon for extra particulars concerning the division more and more buying fairness stakes in protection firms as a part of the trouble to strengthen the nation’s protection industrial base.
Throughout a current Home Armed Companies Committee listening to, lawmakers from each events mentioned they assist the Protection Division’s use of latest financing instruments to rebuild fragile provide chains, however need “clear answers on when equity investments are the right approach.”
“How does the department determine when equity investments are necessary? And how do you deal with the possible market implications or distortion that could be caused by that?” HASC Chairman Mike Rogers (R-Ala.) mentioned.
Whereas not unprecedented, the federal authorities has traditionally immediately intervened within the financial system solely during times of extraordinary disaster. In the course of the 2008 monetary disaster, as an illustration, the federal government injected billions of {dollars} into the banking, auto and insurance coverage sectors to assist stabilize the financial system.
However the authorities’s present method is completely different — fairly than ready for a disaster, the Trump administration has determined to proactively take possession stakes in firms deemed vital to nationwide safety.
Final yr, the U.S. authorities acquired roughly a ten% stake in Intel, turning into the corporate’s greatest shareholder. Intel designs and manufactures semiconductor chips that energy every part from telephones and laptops to nationwide safety programs.
In January, the Protection Division introduced a $1 billion fairness funding into L3Harris’s Missile Options’ enterprise.
Undersecretary of Protection for Acquisition and Sustainment Michael Duffey advised lawmakers that whereas the Pentagon depends on conventional instruments equivalent to grants and loans, fairness investments are an “important tool that we can apply to build resilience and reduce fragility within the defense industrial base,” and that “delivers a few critical and additional capabilities.”
Duffey mentioned by making a situation the place an “industry partner puts their own skin in the game,” firms have stronger incentives to broaden manufacturing capability. Authorities funding additionally attracts further non-public capital.
“It creates a partnership with industry, an opportunity not only for the government to provide capital to lead to the kind of growth that we need such as in the L3Harris deal, but it also crowds in additional private capital,” Undersecretary of Protection for Acquisition and Sustainment Michael Duffey advised lawmakers.
“Part of that deal was for L3Harris to put their own billions of dollars against what we saw as a very high demand for growth within the solid rocket motor industrial base, and by making that investment and attracting the additional capital from L3, we were able to create multiples of leverage of the government’s investment,” he added.
Duffey additionally mentioned that fairness investments may present higher worth for taxpayers as a result of the federal government can ultimately promote its stake and get better its funding, in contrast to grants that he known as a “sunk cost.”
“I think it’s a good value for the taxpayer. [Grants] have been the traditional way that we have stimulated growth. With equity, there will be an exit and that funding will return to the taxpayer, to the government. That is inherently, I think, a positive for the taxpayer and the government in terms of stimulating growth while seeing a return on that investment,” Duffey mentioned.
As well as, every deal comes with “clear milestones on what we expect the industry partner to make of their own investment,” based on Duffey.
“That was part of the deal was, as we make an investment, they make a counter investment, and then we have established milestones of when those investments will be made, so that we can ensure that investment is stimulating the growth that is required and the reason we entered the investment in the first place. During the course of the investment we are looking at this as an economic stake in the company. We are not pursuing control,” Duffey mentioned.
Lawmakers requested Duffey to supply an in depth report on the place the cash goes, how the businesses are utilizing the funding and what the Protection Division plans to do with its possession stakes.
“The department’s making significant equity investments in companies to ramp up their capability and manufacture. Not a new concept, it’s been around, I think, forever. How are you monitoring the use of that investment? And ultimately, what will the department be doing with the equity that it has acquired as a result of those investments?” Rep. John Garamendi (D-Calif.) mentioned.
Senate Armed Companies Committee Chairman Roger Wicker (R-Miss.) mentioned equity-based investments “make good strategic sense in many cases, particularly where no free market exists,” however acknowledged that “opinions range widely between and within our two political parties.”
“While not public, Ranking Member Reed and I had a long series of discussions with our House counterparts last year about legislation regarding equity investments. I anticipate that conversation will continue in earnest this year,” Wicker mentioned throughout a SASC listening to on Feb. 24.
If you want to contact this reporter about current adjustments within the federal authorities, please electronic mail anastasia.obis@federalnewsnetwork.com or attain out on Sign at (301) 830-2747.
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