Key Takeaways
- • The Pentagon's Economic Defense Unit (EDU), created by Deputy Secretary of Defense Stephen Feinberg by memo and operating without congressional authorization for months, is taking equity stakes in defense and energy supply-chain companies, according to The American Prospect.
- • The Pentagon has made four direct equity investments outside the Office of Strategic Capital (OSC), totaling $775 million, all in critical minerals companies, since the Senate Armed Services Committee approved its draft NDAA.
- • The Senate Armed Services Committee's draft NDAA would strip the EDU of its authority to lead equity investments, grant OSC sole express authority for private stakes, bar OSC's head from board seats, and require DoD to furnish term sheets for equity deals from the last two years.
- • The administration's budget request for Defense Industrial Base offices would rise sharply, with OSC requesting more than $20 billion this year versus $300 million last year, and roughly $70 billion for Industrial Base Analysis and Sustainment and Defense Production Act programs versus $2 billion.
- • Congressional Democrats blocked the NDAA package on a Senate floor procedural vote in July, leaving the Pentagon's equity investment units free to continue operating.
Summary
According to The American Prospect, an obscure Pentagon investment office known as the Economic Defense Unit (EDU) has emerged as a beneficiary of the congressional stalemate over defense spending, which has stalled in the Senate for months. Deputy Secretary of Defense Stephen Feinberg established the EDU earlier this year and appointed George Kollitides, a former executive at Feinberg's former private equity firm, Cerberus Capital Management. Kollitides was recently the subject of a ProPublica investigation over his role in steering a $350 million Department of Defense contract to a consulting firm where he was a partner until weeks ago. The EDU operates without congressional authorization, according to the report, and a source described it as a "venture capital firm-type entity" that evaluates government deals and determines the government's stake in them.
The Senate Armed Services Committee's draft National Defense Authorization Act (NDAA) would curtail this approach. The draft would strip the EDU of its ability to lead equity investments and grant the Office of Strategic Capital (OSC) sole express authority to take stakes in private companies, though the OSC has been making such investments without that authority. In exchange, the OSC head would be barred from taking board seats at portfolio companies and would have to report company ownership to Congress before finalizing any investment. The draft would also require the DoD to furnish term sheets for all equity deals made in the last two years. The committee draft passed with the support of four Democratic senators, but Democratic lawmakers blocked the package on a Senate floor procedural vote in July, largely over the 50 percent boost in overall funding.
Despite the proposed restrictions, the Pentagon has continued direct equity investments using funds outside the OSC. Since the committee approved the draft, the Pentagon has made four such investments totaling $775 million, all in critical minerals companies. The budget request also signals expanded ambitions: almost one-third of the requested defense budget increase would go to Defense Industrial Base investments managed by the OSC, EDU, and Industrial Base Policy office. The OSC request rose from $300 million last year to more than $20 billion this year, and the Industrial Base Analysis and Sustainment and Defense Production Act request rose from $2 billion to $70 billion.
The OSC, set up under the Biden administration to provide federal financing to small defense manufacturers, has shifted in the last two years toward substantial loans and direct equity stakes in rare earth mining companies. According to ProPublica, the OSC also helped broker the administration's Venezuelan oil deal, including board seat arrangements for a U.S. government-led energy venture. The Pentagon previously told The New York Times the OSC "does not take equity stakes in private companies," but the administration later announced a "35% equity stake" in that venture. Congressional committee spokespeople declined or did not respond to comment, and a DoD spokesperson said the department values its working relationship with Congress.
The Senate Armed Services Committee's draft National Defense Authorization Act (NDAA) would curtail this approach. The draft would strip the EDU of its ability to lead equity investments and grant the Office of Strategic Capital (OSC) sole express authority to take stakes in private companies, though the OSC has been making such investments without that authority. In exchange, the OSC head would be barred from taking board seats at portfolio companies and would have to report company ownership to Congress before finalizing any investment. The draft would also require the DoD to furnish term sheets for all equity deals made in the last two years. The committee draft passed with the support of four Democratic senators, but Democratic lawmakers blocked the package on a Senate floor procedural vote in July, largely over the 50 percent boost in overall funding.
Despite the proposed restrictions, the Pentagon has continued direct equity investments using funds outside the OSC. Since the committee approved the draft, the Pentagon has made four such investments totaling $775 million, all in critical minerals companies. The budget request also signals expanded ambitions: almost one-third of the requested defense budget increase would go to Defense Industrial Base investments managed by the OSC, EDU, and Industrial Base Policy office. The OSC request rose from $300 million last year to more than $20 billion this year, and the Industrial Base Analysis and Sustainment and Defense Production Act request rose from $2 billion to $70 billion.
The OSC, set up under the Biden administration to provide federal financing to small defense manufacturers, has shifted in the last two years toward substantial loans and direct equity stakes in rare earth mining companies. According to ProPublica, the OSC also helped broker the administration's Venezuelan oil deal, including board seat arrangements for a U.S. government-led energy venture. The Pentagon previously told The New York Times the OSC "does not take equity stakes in private companies," but the administration later announced a "35% equity stake" in that venture. Congressional committee spokespeople declined or did not respond to comment, and a DoD spokesperson said the department values its working relationship with Congress.
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