WASHINGTON — Faced with Chinese tactics of creating private equity firms and investing in American technologies, the Pentagon is preparing a new tool, one it hopes will lead domestic investors to increase spending in companies vital for the defense-industrial base.
Ellen Lord, the Pentagon’s top acquisition official, unveiled the launch of the Trusted Capital Marketplace program, or TCM, on Friday, a public-private partnership that will convene trusted sources of private capital with innovative companies critical to the defense-industrial base and national security.
The program, which is the result of Section 1711 of the fiscal 2018 National Defense Authorization Act, represents a pilot program to support small and medium-sized companies that produce emerging defense and commercial technologies.
The program was stood up “just a few weeks ago,” Lord said, and there is a contract out there now for the development of a website to act as a meeting point between vetted funders and companies looking for a cash infusion. The goal is to fully roll out the program in July.
Why launch this effort? As with so much in the Pentagon right now, the answer lies in the Pacific.
“China is increasingly attempting to erase research and developments gains by leveraging and manipulating economic tools, like investment in U.S. companies with technology critical to our national security,” Lord said, singling out an incident in 2016 when a Chinese-backed private equity firm attempted to buy out a major American producer of field-programmable gate array chips, a critical technology for the Pentagon.
The Committee on Foreign Investment in the United States blocked that attempt, but Lord noted that while CFIUS can say no, it does nothing to actually provide a solution for how those smaller companies should get the vital dollars they need to keep the doors open.
And in the case where a company may not fall under the view of the committee but where the Pentagon would still prefer to keep Chinese eyes off the firm’s research, TCM could provide an alternative to accepting foreign dollars.
Details on how the program will work are scant. Lord noted that by law she can’t directly tell a funder that a company might match up with them, and vice versa. Instead, it seems TCM will largely be a vehicle where a pool of funders and a pool of companies looking for funding can connect and learn about each other.
That’s particularly useful for small companies, which often don’t know how to go about reaching firms with big pockets. But it will require a specific group of funders who are willing to put mission ahead of pure cash flow.
Traditionally, venture capital or private equity investors are primarily looking for return on investment when considering what companies to back. The individuals and companies talking with the Pentagon about TCM, however, will be doing so with eyes open that their investments are made partly out of patriotic duty, with less instant financial benefit.
“This is going to be a situation where we have individuals, family foundations, [private equity funds] that are interested in our national defense, interested in making a return on investment, but this might not be the best return if all else were equal,” she said.
“We have some incredible patriots who have come to us and said: ‘We are interested in putting our money somewhere that will make a difference for our national defense.’ Frankly I think there is an unmet need that somebody like [the] government could provide an ecosystem to make it work.”
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.