PAYNE INSTITUTE COMMENTARY SERIES: COMMENTARY

By Brad Handler and Matthew Safran

August 7, 2026

In June, the House and Senate Armed Services Committees advanced the FY2027 National Defense Authorization Act (NDAA), Congress’s annual defense policy bill. The legislation covers hundreds of defense programs and policies but one small provision, Section 1051, tackles a different challenge: managing the risks of an untested facet of the current administration’s more muscular industrial policy.

Section 1051 would explicitly authorize the Department of War (DoW) to take equity stakes in companies involved in critical minerals, critical materials, critical chemicals, batteries, and other strategically important industries. It also establishes clear limits on how that authority may be exercised. It calls for establishing a dedicated Department of Defense Equity Investment Account, administered by the Office of Strategic Capital (OSC). No investment could exceed 40 percent ownership of a company and individual investments would be capped at $500 million. The legislation also includes substantial oversight provisions: the Secretary of Defense would be required to notify Congress before investments are made, conduct regular ownership reviews, certify that DoW holds no board seats or voting control and ensure that the government acts solely as a passive investor rather than participating in company management.

PLAYING CATCH-UP TO THE ADMINISTRATION

Section 1051 appears to reflect that Congress is seeking to endorse, but again, put guardrails on, a policy shift taken by the current administration (see Figure 1). The DoW, Department of Commerce and Department of Energy have taken equity ownership in more than a dozen companies over the last 18 months. Most have been in critical minerals, although high profile examples in other industries include Intel and U.S. Steel; most recently Commerce signed letters of intent to invest $2 Billion across nine companies engaged in quantum computing. Historically, the Federal government has relied primarily on loans, loan guarantees, grants, technical assistance, and purchase commitments to companies in support of development and manufacturing goals.

Figure 1: Proposed Equity Investment Parameters vs. Recent Administration Investments

Federal equity ownership is not unprecedented. During World War II, Congress authorized the Reconstruction Finance Corporation to purchase capital stock in defense-related corporations and created subsidiaries such as the Defense Plant Corporation to finance and own industrial facilities essential to the war effort. During the 2008 financial crisis, the federal government acquired ownership stakes in companies to stabilize financial markets, including General Motors, Chrysler, Citigroup, and AIG. In this latter case, Congress explicitly authorized those investments through the Emergency Economic Stabilization Act with the expectation that they would be temporary. By the time the program concluded in 2014, the government had exited all its equity positions.

The current investments, however, may prove more lasting as they are intended to strengthen strategically important industries for U.S. national defense and secure and re-establish domestic supply chains, which is likely to take years-to-decades.

PROSPECTS FOR PASSAGE

Congress has enacted a defense authorization bill every year for more than six decades, with recent NDAAs typically beginning voting in July and receiving final approval in December. The House approved the FY2027 NDAA last month and floor consideration has been delayed in the Senate.

There has not been an effort to remove equity authority from the Bill. There has been some criticism of the practice, however, from two directions. Libertarian Republicans, including Sen. Rand Paul, have questioned whether government equity ownership represents an inappropriate expansion of federal power. Meanwhile, several Democratic lawmakers have focused on risks related to transparency, conflicts of interest, and oversight of recent OSC investments. Many of Section 1051’s ownership limits and reporting requirements appear designed to address those concerns.

AN EXTENSION, NOT DIFFERENT IN KIND

The government taking equity in strategic industries should be seen as part of a continuum of government financial support. Loans create taxpayer exposure; loans and grants also involve the government “picking winners” and thus also create the conditions for companies to vie for political influence. Further, loans can similarly signal that the government intends to support the company for the long term and thereby encourage private capital to also invest (arguably long term debt does this more powerfully than a small equity stake in a publicly held company).

This last point is critical because private capital stocks of equity and debt dwarf government resources. Further, the United States possesses world-leading private capital markets and control an outsized share of global private capital, which can be considered competitive advantages.

Equity nevertheless introduces considerations that distinguish it from other forms of support. In exchange for upside potential, equity occupies the lowest position in the capital structure and therefore exposes taxpayers to greater downside risk if an investment fails. Equity ownership also enhances the incentive for government to try to maximize the value of its investment in the near term in ways that can conflict with broader policy objectives or sound corporate governance. (Again, Section 1051 attempts to mitigate these concerns through limits on ownership stakes, restrictions to minority positions, prohibitions on board representation, and reporting and oversight requirements.)

And equity support is a blunt risk management tool compared with lending and even grants. Loans can target specific risk mitigation — to offer just one example, government can be responsible for specific “first losses” related to political or construction-related events — and thereby obviate those risks for private lenders. And the DoW, e.g., through its Defense Advanced Research Projects Agency (DARPA), commonly ties grant funding to completion of specific milestones, limiting government exposure (albeit that this relates to early technology investments).

Equity’s use as a government intervention tool may ultimately be determined by a more prosaic reason: it’s “cost”. Government interventions are “scored” in a Federal budget. Whereas loans are scored using an assessment of the likelihood of getting repaid, equity has not been addressed to date (and is likewise not in the current NDAA) and thus remains at 100%, i.e., the total commitment gets booked as an expense in the year the commitment is made regardless of the prospects of earning a return. (Notably, the administration’s equity stakes to date have been funded within authorizations that were also fully scored.)

Whether equity ultimately proves to be a superior, or even less “expensive”, policy tool is uncertain. But the ownership limits, governance restrictions, and reporting requirements in Section 1051 are important constraints on the practice. Rather than embracing government ownership as a new norm, Section 1051 treats equity as a limited tool intended for specific circumstances that seeks to limit the scope for government meddling and misuse.

ABOUT THE AUTHORS

Brad Handler
Director, Energy Finance Lab, Payne Institute for Public Policy at Colorado School of Mine

Brad Handler is currently Director of the Energy Finance Lab of the Payne Institute for Public Policy of Colorado School of Mines. The Payne Institute primarily focuses on energy and mineral security; the responsible production of energy, including methane emissions reduction; socioeconomic development; and Native American sovereignty. The Energy Finance Lab conducts finance and economics research supporting the Payne initiatives with emphasis on oil & gas, mining, carbon capture & storage and geothermal. It seeks to help catalyze private capital investment, including with market-based solutions, to meet energy security and climate goals.

Prior to joining Payne, Brad worked as an Equity Research Analyst at several investment banks for 20 years covering the Oilfield Services & Drilling sector. While on Wall Street, Brad published regularly on the state of the sector including demand implications of changes in the global energy markets (and the Shale Revolution), additions to OFS capacity and the competitive landscape, the financial health of individual companies and the opportunities and challenges presented by technology innovation. External recognition includes being ranked Top 3 Oilfield Services analysts in the annual Institutional Investor magazine survey, the most widely recognized survey of Sell Side analysts by asset management professionals, and he has presented at numerous industry conferences and company seminars.

Brad’s experience prior to equity research includes business line management and strategic analysis at an industrial gases firm and commercial lending. Brad has a B.A. in Economics from Johns Hopkins University and an M.B.A. from the Kellogg School of Management at Northwestern University.

Matthew Safran, BA Economics, UC Santa Barbara
Matthew Safran is a student researcher at the Payne Institute. He is pursuing his B.A. in Economics at UC Santa Barbara.

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The mission of the Payne Institute at Colorado School of Mines is to provide world-class scientific insights, helping to inform and shape public policy on earth resources, energy, and environment. The Institute was established with an endowment from Jim and Arlene Payne and seeks to link the strong scientific and engineering research and expertise at Mines with issues related to public policy and national security.

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DISCLAIMER: The opinions, beliefs, and viewpoints expressed in this article are solely those of the author and do not reflect the opinions, beliefs, viewpoints, or official policies of the Payne Institute or the Colorado School of Mines.