As business partners go, few are more powerful and well-funded than the Pentagon.
But the Trump administration’s accelerating push to take direct financial stakes in private defense and critical minerals companies — a divisive strategy among Republicans on Capitol Hill — raises a host of political, ethical, legal, financial and even long-term strategic questions for the U.S. military.
It’s a vivid example of how rapidly and fundamentally the American defense sector is transforming in real time, as the U.S. eyes unorthodox and controversial steps to light a fire under a domestic industrial base that has fallen behind China in key areas.
So far, the Trump administration has taken direct equity stakes in more than 20 private companies, according to a tally compiled by the Cato Institute, a Washington think tank.
Many of those investments have come through the Commerce Department or other government agencies. The Pentagon itself has taken or intends to take equity stakes in at least four private firms: one in an L3Harris spinoff company that will produce solid rocket motors for munitions, and the others in companies that mine and process rare earth elements and other critical minerals.
Those stakes represent billions of dollars.
The issue is in the spotlight this week because a provision in the fiscal year 2027 defense spending bill now being debated in Congress would give the Defense Department’s Office of Strategic Capital new authority to take such ownership stakes in private firms. Companies that produce necessary underlying components for missiles, drones, high-tech weapons and other systems deemed critical to U.S. security could be at the top of the list for potential investments.
But even Republicans who support the massive National Defense Authorization Act have questions about the strategy’s underlying wisdom.
“The concern that I have with it is that I don’t want to pick winners and losers necessarily. And at what point do you suddenly start using one company because you have an interest in it? I think there’s some discussion that’s going to occur yet on that,” Sen. Mike Rounds, South Dakota Republican, told The Washington Times on Tuesday.
Critics say the potential conflict of interest Mr. Rounds referred to could become a major problem in the future. What happens, for example, if the Pentagon feels compelled to rely on crucial products or services from a company in which it has a financial stake, even if a competitor offers something better?
Authority to invest
The federal government has a long history of giving loans, grants or other financial aid to private businesses. Such programs typically prioritize a particular product or technology that the government views as important, often for national security reasons.
In-Q-Tel, the venture capital firm operating under the purview of the CIA, has existed since 1999 and has invested in emerging technologies, including artificial intelligence and biotechnology.
But all of that is very different, some industry insiders argue, than the government using taxpayer money to take a direct equity stake in a private firm, thereby giving itself a clear financial interest in ensuring the company not only survives but also generates significant profits over years or even decades.
“We’ve been investing in U.S. industry in other ways forever, and I think that’s quite appropriate, particularly where you have very high risk, fundamental research that has to be done before something can move toward a commercialization phase, whether that’s in quantum computing or AI” or the internet, said Miles Arnone, the CEO of Re:Build Manufacturing, which works with startups and established companies to help revitalize manufacturing in the U.S., including in the defense sector.
“I think when you get to ownership, that’s a different matter,” Mr. Arnone told The Times’ Threat Status Podcast in an interview airing on the upcoming July 17 episode.
“Ownership creates a situation where — what happens to the parties that are competing with them that are not owned by the government, are they disadvantaged? Are there moral hazards there? And I think there very well could be,” he said.
Deep pockets
The Trump administration wants a $1.5 trillion defense budget for 2027. While current House and Senate spending bills fall short of that number, the Pentagon will almost certainly see a major funding increase next year. That means there will be more money to potentially invest in private companies viewed as central to U.S. national security.
Critics say the Pentagon’s direct investment strategy so far has raced ahead without clear statutory authority.
The equity stakes have been announced through the Defense Department’s Office of Strategic Capital, which has taken a crucial role in the Trump administration’s effort to drive money toward key areas across the defense industrial base.
The office is increasingly becoming a major power center inside the Pentagon. On Wednesday, the Pentagon announced the creation of the National Security Fund Finance program inside the Office of Strategic Capital. Defense officials said the program will “provide loans to qualified investment fund managers, who will combine OSC loans with private capital to invest in portfolio companies focused on addressing U.S. national security shortages related to critical minerals and materials.”
That new system will give the Pentagon an additional avenue through which it can funnel money to companies working in key national security areas, such as rare earth elements and critical minerals.
Following the money
The Senate’s version of the National Defense Authorization Act would seem to simultaneously codify and place guardrails on the Office of Strategic Capital’s authority to invest in companies providing “critical minerals, materials, and chemicals,” along with “batteries.” The bill would limit the Pentagon’s equity stake to 40% of all investments in the company — meaning the Defense Department could not be the majority financial stakeholder in a private company.
Individual investments in a company also would be capped at $500 million.
That provision isn’t in the House’s version of the NDAA. It remains to be seen whether it survives in whatever version of the defense spending bill ultimately reaches President Trump’s desk.
The equity provision is one piece of a controversial NDAA that was blocked by Democrats in a Senate vote on Tuesday. The defense spending bill typically enjoys bipartisan support but Democrats opposed it this week because of the Trump administration’s handling of the Iran war, among other critiques of the legislation.
The $500 million cap is notable because in January, the Pentagon announced a deal to invest $1 billion in a new company to be spun off from defense industry giant L3Harris that will produce solid rocket motors. Solid rocket motors are key components of advanced missile systems.
America’s stockpile of those systems has been dramatically reduced because of the U.S.-Iran war and American arms transfers to Ukraine, Israel and other allies. Replenishing the nation’s arsenal has become a top priority for the Pentagon and policymakers on Capitol Hill, who have warned that the U.S. risks being dangerously short on key weapons systems in the event of a major conflict.
At the time of the announcement, Michael Duffey, under secretary of war for acquisition and sustainment, said the investment signified a major change of strategy in how the Pentagon views its relationship with the industrial base.
“We are fundamentally shifting our approach to securing our munitions supply chain,” he said at the time.
The NDAA language doesn’t explicitly mention munitions or solid rocket motors, so it’s unclear whether the $500 million cap would’ve applied to the L3Harris deal — if such a deal would’ve been allowed at all under the proposed new equity-investment authority.
The Pentagon also has taken a stake in MP Materials, which mines and refines the rare earth elements used in electric vehicles, cell phones, fighter jets, advanced weapons, and other 21st-century products. The company said in a press release this month that the Pentagon “agreed to purchase $400 million of a newly-created series of the company’s preferred stock convertible into shares of the company’s common stock, and a warrant permitting DoD to purchase additional shares of the company’s common stock.”
Warrants allow the Pentagon to buy more stock in the future at a locked-in price. The Pentagon reportedly has such arrangements with companies such as Vulcan Elements and ReElement Technologies, despite not currently holding a direct stake in them.
Trilogy Metals said the Pentagon is making a $35.6 million strategic investment in the company’s domestic copper mining operations. That equity stake agreement is expected to close on July 31.
The Pentagon also will take a 40% stake in a $7.4 billion Tennessee mineral smelter in partnership with Korea Zinc, according to Reuters.
Those examples do not include billions of dollars in Pentagon loans to private firms through the Office of Strategic Capital, or other equity stakes taken by the Commerce Department, Energy Department, or other federal government arms.
Critics say the strategy is both ethically dubious and unnecessary.
“If Congress believes a small defense company needs capital that private markets will not provide, it can appropriate grants or use other tools. The Pentagon already has the authority to use contracts, cooperative agreements, and grants for eligible research and development projects,” Tad DeHaven, a policy analyst at the libertarian Cato Institute, wrote in a recent analysis. “Ownership means continuing federal financial interest in a company’s valuation, which is precisely what creates the favoritism, conflict of interest, and political pressure risks Congress should be avoiding.”
• John T. Seward contributed to this story.
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