Government equity investments open a new frontier for industry

The Trump administration’s appetite for direct equity investments in strategic industries may seem distant from the world of government contracting, but it is reshaping how the government thinks about deploying capital and will have an impact on the defense industrial base.

Since the start of Trump’s second term, the administration has made 10 direct equity investments in private companies. This is highlighted by a $1 billion investment in the L3Harris Technologies rocket motor business, while others include stakes in Intel and several mineral suppliers.

That increase in activity led the advisory firm Clark Street Associates to form a partnership with Finalis, a broker-dealer and deal infrastructure platform provider. They will work with companies interested in pursuing their own equity deals with the government.

“Government funding and private capital have historically operated on separate worlds. Grants and loans are on one side, equity and mergers and acquisitions are on the other,” Federico Baradello, founder and CEO of Finalis, said Friday in a webcast jointly hosted with Clark Street. “That separation is breaking down at an accelerating pace.”

The government's investments to-date have focused on semiconductors, energy, defense, artificial intelligence and critical minerals.

“We’re seeing the federal government deploy capital in ways that look less like traditional procurement and more like private investment,” Baradello said. “This creates a new set of questions.”

The administration has leaned on national security and supply chain vulnerabilities as its primary argument for making these deals.

Also speaking on the webcast, former Army Secretary John McHugh said the administration sees the investments as a way to bring back critical defense industry capabilities to the U.S.

"We probably, without due diligence, allowed some of the critical nodes of national defense be [moved] offshore such as microelectronics and other kinds of supplies,” McHugh said.

Besides national security, the Trump administration likes the speed and flexibility direct equity investments give.

Steve Empedocles, Clark Street Associates CEO and another webcast speaker, said many officials in the administration also have an investment banking background and that gives them a different mindset.

“There have been funding vehicles for investing in things that are in the national interest. It just hasn't been equity investments, it's been grants and loans,” Empedocles said. “Typical grants and other funding mechanisms for the government move at a glacial pace and can take a year or substantially more than a year to go from start to a closed deal.”

The equity investments also bypass typical congressional involvement. McHugh said it can take between two and three years to get money approved for an investment.

“I don’t think Xi Jinping wakes up in the morning and says, I want to do X, and it takes three years to get it underway,” he said.

“I think that is one of the primary reasons the government should want to do this, and I think does want to do this, is it is not tied to the congressional cycle,” Empedocles added.

There is a potential for returns because these are investments, not a grant or loan, there is.

“There are liquidity opportunities, and in principle, this could become an evergreen fund that never goes through that three-year process,” Empedocles said.

Empedocles added that the administration has been using funds that it is authorized to use. Congress is not involved so far, but that will likely change.

“Congress is going to become involved, and so, there's a lot we don't know yet about how, for example, return on investment is going to be reinvested,” Empedocles said.

The panelists agreed that equity investments are not a replacement for traditional grants and loans.

“Those are still vehicles. They're still valuable,” Empedocles said. “I would take advantage of them in every case that you can. This is just a new tool that the federal government is using."

The panelists said they expect the field to be wide open for the next 18-to-24 months. But after that, the window of opportunity will narrow.

“The money that’s available right now is going to shrink,” Empedocles said. “Right now is the time.”

“The dinner bell is ringing,” McHugh said.

Watch the full Finalis-Clark Street webcast below: