Who says the federal government should own part of a private company? That’s no longer a theoretical question.

Terry Gerton The government just announced it was taking equity stakes, totaling more than $800 million in seven companies in the semiconductor industry. I’m old enough to remember that government’s main role used to be fairly straightforward. It funded research, it set the rules, and it let the markets sort out the rest. What has changed now that has agencies taking direct stakes in companies instead of just providing incentives?

Joel Fetter There’s really an evolution in how people are thinking about the relationship between the public and the private sector. And like you, I was raised on the idea that government wasn’t the solution. Government was part of the problem. But we’re in a different world now. We’re in the world where there’s a lot more competition between ourselves and some of our key strategic adversaries for this production capability. And I think it’s really raised the question of what is the most appropriate way to align resources to achieve things that are the national interest. And so this wave of equity investments that we’re seeing is really part of that experimentation for how do we drive things faster, quicker, in a way that is more secure for American supply chains?

Terry Gerton Many of these recent investments have been made under the auspices of the CHIPS Act. And a lot of folks would argue that Congress never intended the funding that it provided through the CHIPS Act to be used for direct equity stakes in companies, that it was supposed to be incentives or grants. How do you respond to that? What did Congress really intend? And are these investments in line with the statute?

Joel Fetter Well, I certainly can’t opine what Congress intended because I wasn’t in the room where those happened. Certainly you can see the language that is in the bills. And it is novel, right? But there is, I think, a very compelling argument that needs to be explored, which is if the government’s going to go make large-scale investments in value-producing enterprise, why should those just be grants? Why shouldn’t the government consider an equity stake, whether an equity state directly or as a warrant so that the future of the growth of those enterprises could be monetized and potentially plowed back into new investments in the American base? So far from me to opine on the legal questions. I think that’s a domain for others to explore. But the fact of expanding the concept of programming to include those. Is one that we’re seeing, you know, in other countries, and maybe it’s time to start exploring with what that looks like here.

Terry Gerton I think my rejoinder to your hypothetical there would be that government is not supposed to be in the business of shifting the market or of picking winners and losers, and that when it takes equity stakes, it does in fact put its thumb on the scales of free markets. And while other countries may do that, historically, that’s been against the norms in the United States. Do I have that right?

Joel Fetter Yeah, it has been against the norms of the United States. There’s two features to, I think, the bulk of the equity investments. First is that they’re non-controlling by and large. There’s a golden share in the U.S. Steel deal, but most of them are roughly 10% acquisitions. So the government is a shareholder, but it’s not necessarily sitting there, as I understand it, in the boardroom dictating strategy or policy. The control of these enterprises remains firmly within the private sector leaders, just as it always has been to mobilize the resources, to focus on cost discipline, et cetera, to build out businesses that will succeed and the government’s sort of a passive investor. In terms of the appropriateness, I think it really goes back to a questioning of what the role of government is. And we were raised in an environment where I think there was a lot of competition, the Cold War. Russian state-owned companies were not necessarily deemed to be, you know, world beaters. They were not seen to be as innovative. And we’re in an environment now where we’re competing against the Chinese, which has shown a remarkable ability to blend public capital with sort of mercantilist industrial policy to capture large portions of really crucial markets. So to be looking at it, you now, through the lens of what’s the appropriate application of that concept here in the United States within our economic structures, you, it’s Question that begs asking.

Terry Gerton Joel Fetter is Managing Director at Clark Street. So Joel, let’s take it one more step. Even if the government stake is non-controlling, what does it say to investors and the market if the Government itself is taking a stake in one of these companies?

Joel Fetter So far it’s said a lot and quite positive. If you look at the ability of companies to go out and raise capital on public markets after the announcement of a deal, it’s been very high. So, so far, we’ve seen a very favorable response to many of these deals.

Terry Gerton And what happens if, as the terms play out, those companies lose money?

Joel Fetter That’s a topic that we’ll have to see how that evolves. If they lose money and the government stake is underwater, somebody who’s been cutting these deals might say, well, look, if it was just a grant, we would have lost the money anyways, but at least this way we have a stake that we could cash in and move to some other investment that is aligned with our priorities.

Terry Gerton It certainly seems as if in the near term, at least, this is going to be a new norm for this administration. If it continues to take a more active role like this in investing in an equity way, are there safeguards that become more important? Controls, balance that you would want to make sure you’d see in place?

Joel Fetter Absolutely. The government being a shareholder in these companies and having a fiduciary interest in their outcomes, there are areas where it will rub up against potential conflicts. If it has a stake in, say, a nuclear company and it’s also regulating that nuclear company, how does that play out? What are the appropriate firewalls within the government to ensure that happens? If you’re putting money into mining companies, what’s the appropriate way to ensure that that interest is advanced from the government’s fiduciary perspective, while also ensuring that environmental reviews and considerations like that are still, you know, the public interest is still safeguarded through the other avenues of government.

Terry Gerton The examples you just raised are clear examples of cross-agency coordination, where one agency may take an equity stake, but another is the regulator or the oversight body or the auditor eventually. Are you seeing any evidence yet that agencies are thinking about those internal controls and cross- agency collaboration to establish those guardrails early, before something happens?

Joel Fetter We’ve urged all our clients that are in this space that they really need to consider their actions within the context of a conventional operating environment. So if you have to go through NEPA procedures, you should absolutely go through those NEPAs procedures, not considering whether the government may or may not have an equity stake, because oversight remains a tool of Congress that they will use. And then there’s also state and local considerations. You want to make sure that your project is not going to get high centered on agitated local stakeholders that feel like the government isn’t looking out for their interest, so it’s now their job to do that.

Terry Gerton Do you feel like in federal agencies there is the existing expertise to manage these kinds of investments? Who’s got the responsibility for ensuring returns?

Joel Fetter I’ve been extremely impressed with the quality of the people that have brought in from investment banking to underwrite these deals in particular. That is the initial phase of this, the underwriting phase. We’re going to move next into the management phase and the government will need to recruit and retain a cadre of personnel that is able to monitor these investments and make judicious decisions about how to manage those.

Terry Gerton Alright, so we’re starting this sort of adventure with some high tech, you know, chips in Silicon Valley sorts of companies, but the expectation might be that the market horizon will expand. We might find ourselves in quantum or fusion or advanced manufacturing. What will tell us over the next few years whether this investment approach is actually paying off in the way we think it could?

Joel Fetter It will show that it’s paying off to the extent that we are able to actually validate the accelerated timelines that are achievable under public-private collaborations of a significant scale. So to the extend that we’re actually able to get fusion companies away from, you know, towards the demonstration of the first of a kind. To the extent we’re able to get semiconductor fabricators, you now, fabs up and running that are economically competitive, that are producing chips that people want to buy at a price they can afford, that will be the determining factor.

Terry Gerton And if you’re GAO or an IG, what are you doing right now to have conversations with your agency leadership to make sure that they’re thinking ahead for your eventual visit?

Joel Fetter Yeah, GAO and, you know, the overseers, the oversight bodies, they have a have a significant role going forward. And they’re going to have to, you know, staff up as well, because the types of questions that will be need to be answered around diligence, around how equity is being managed, are different from the ones that they’ve had to handle before. And there are these legal questions that that you pointed out that will also factor into what their findings may be. So their role will be redefined as well. And this is one of the things that’s really exciting about being a government executive in this period is that you really have the opportunity to put your finger on the scale on how this goes, whether it’s a thing that worked, whether it was an experiment that works, or whether it is one that is challenged.