A small group of bankers and equity partners are having an exceptionally successful year somewhere on K Street, in a glass building you’ve probably passed by without noticing. They don’t manufacture missiles. Submarine hulls are not welded by them. The majority of them have never been on a base. Nevertheless, the Pentagon has become one of Washington’s quietest financial success stories thanks to its $886 billion budget, which is bloated, poorly audited, and vigorously defended by both parties.
It’s an odd observation. We all know the cast of the typical defense spending narrative: Lockheed, Raytheon, Boeing, Northrop, and General Dynamics. The renowned five. They appear in every news article about the military-industrial complex, every congressional hearing, and every opinion piece written by Bernie Sanders. However, over the past eighteen months, the budget has grown so much and the procurement model has changed so drastically that a completely new type of beneficiary has emerged: financial intermediaries, private equity sponsors, IPO advisors, and boutique investment firms that have positioned themselves between the Pentagon’s appetite and the contractors attempting to feed it.
The change became apparent when the Defense Department invested $1 billion in direct equity in L3Harris’s missile division. This deal closed in April, and an IPO draft had already been submitted to the SEC. Go over that sentence once more. The Pentagon, the world’s biggest purchaser of weapons, is now investing in stocks. positions in equity that convert during a public offering. This implies that roadshow companies, underwriters, attorneys, and structuring advisors are all now included in the supply chain. Investors appear to think that this is only the start.
Speaking with those on the outskirts of the world gives me the impression that the laws have evolved more quickly than the public conversation surrounding them. Earlier this year, Michael Duffey, the head of Pentagon acquisitions, declared that the agency is “done writing checks to industry for capacity expansion with no promise of the return.” That is not the language of a Pentagon official, but rather that of a chairman of a sovereign wealth fund. Additionally, the people you need around you change once you start thinking like a fund manager. Bankers are necessary. Deal lawyers are necessary. You need someone who understands the differences between an Anduril plant in Mississippi and a closed-die forging facility in Arkansas.
Although Hegseth’s figures, which include $50 billion in private investment spread across 39 states and 250 deals, are unverified, the trend is evident. Contractors are being forced to finance their own factory expansions due to multi-year procurement contracts that can last up to seven years. That entails borrowing. In other words, structured finance. This implies that a fee is collected on every transaction by someone, somewhere, and that these fees compound in ways that the public spending charts are never able to fully depict.
It’s difficult to ignore the irony. For many years, the Pentagon’s spending was criticized for enriching a small number of prime contractors. The private credit funds and merchant bankers who would otherwise be funding pharmacy roll-ups or carwash chains are in the best position to assist those primes in finding that skin, at a generous spread, of course. Defense is now considered an asset class. An uninteresting, stable, government-backed asset class with margins so low that energy infrastructure appears thin.
It’s really unclear if this is a healthier model or simply a more advanced version of the same old waste. Seven consecutive audits have failed the Pentagon. Major programs now take an average of twelve years to deliver initial capability, according to the GAO. That is obviously not resolved by putting a layer of Wall Street between the taxpayer and the tank. It simply means that more people are compensated in the process.
It’s remarkable how quiet everything is. Not a single press release. No fanfare from Congress. Deal memos, term sheets, and a gradual reorganization of the real winners when America consistently chooses to spend more on defense than the next nine nations put together.