Lawmakers are pressing the Pentagon for more details about the department increasingly acquiring equity stakes in defense companies as part of the effort to strengthen the country’s defense industrial base.
During a recent House Armed Services Committee hearing, lawmakers from both parties said they support the Defense Department’s use of new financing tools to rebuild fragile supply chains, but want “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.) said.
While not unprecedented, the federal government has historically directly intervened in the economy only during periods of extraordinary crisis. During the 2008 financial crisis, for instance, the government injected billions of dollars into the banking, auto and insurance sectors to help stabilize the economy.
But the government’s current approach is different — rather than waiting for a crisis, the Trump administration has decided to proactively take ownership stakes in companies deemed critical to national security.
Last year, the U.S. government acquired approximately a 10% stake in Intel, becoming the company’s biggest shareholder. Intel designs and manufactures semiconductor chips that power everything from phones and laptops to national security systems.
In January, the Defense Department announced a $1 billion equity investment into L3Harris’s Missile Solutions’ business.
Undersecretary of Defense for Acquisition and Sustainment Michael Duffey told lawmakers that while the Pentagon relies on traditional tools such as grants and loans, equity 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 said by creating a scenario where an “industry partner puts their own skin in the game,” companies have stronger incentives to expand production capacity. Government investment also attracts additional private 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 Defense for Acquisition and Sustainment Michael Duffey told 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 also said that equity investments could provide better value for taxpayers because the government can eventually sell its stake and recover its investment, unlike grants that he called 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 said.
In addition, each deal comes with “clear milestones on what we expect the industry partner to make of their own investment,” according to 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 said.
Lawmakers asked Duffey to provide a detailed report on where the money is going, how the companies are using the investment and what the Defense Department plans to do with its ownership 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.) said.
Senate Armed Services Committee Chairman Roger Wicker (R-Miss.) said equity-based investments “make good strategic sense in many cases, particularly where no free market exists,” but 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 said during a SASC hearing on Feb. 24.
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