Warren, Blumenthal, Khanna Introduce Bill to Limit Private Equity's Ability to Profiteer Off of Defense Contractors

Warren, Blumenthal, Khanna Introduce Bill to Limit Private Equity's Ability to Profiteer Off of Defense Contractors

The Critical Defense Ownership Review Act would help protect our national security and increase DoD scrutiny of mergers and acquisitions between private equity firms and defense contractors.

Text of Critical Defense Ownership Review Act (PDF)

Washington, D.C. - Today, U.S. Senator Elizabeth Warren (D-Mass.), Ranking Member of the Senate Banking, Housing, and Urban Affairs Committee, Senator Richard Blumenthal (D-CT), Ranking Member of the Homeland Security & Governmental Affairs Permanent Subcommittee on Investigations, and Representative Ro Khanna, Ranking Member of the House Armed Services Subcommittee on Cyber, Innovative Technologies and Information Systems, introduced the Critical Defense Ownership Review Act. This bill would increase Department of Defense (DoD) oversight of mergers and acquisitions involving private equity (PE) and defense contractors.

"Private equity investment in the defense industry has skyrocketed," said Ranking Member Warren. "This bill would ensure that the Department of Defense addresses the risks posed by private equity takeovers and anticompetitive deals that make our supply chains more vulnerable, drive up taxpayer costs, and pose significant risks to our national security."

"For too long we've let private equity treat the defense industrial base like a profit center, buying up critical contractors with little scrutiny over who's really in control," said Congressman Ro Khanna (D-CA). "This bill restores basic oversight so the Pentagon knows when a private equity firm is quietly taking control of a contractor critical to our national defense."

Private equity investments into defense contractors have skyrocketed in recent years, with private equity firms closing over 1,500 deals involving defense contractors and investing $15 billion in nearly 140 defense-related deals in 2021 alone.Research has found that defense contractors owned by private equity are almost 10% more likely to go bankrupt than non-PE owned defense contractors and that private equity takeovers "frequently result in credit downgrades to acquired defense contractors." Additionally, the lack of transparency into private equity's foreign investors raises serious national security concerns as they acquire defense contractors with access to sensitive information.

Private equity firm roll ups have also contributed to increased trends of consolidation among defense contractors. A 2023 U.S. Government Accountability Office report identifies the consolidation of defense contractors as a national security risk and found that although the DoD is required to evaluate threats to competition when evaluating mergers, the agency has not routinely done so and its policy fails to provide clear direction about which assessments should be prioritized to ensure the resilience of the defense industrial base.

The Critical Defense Ownership Review Act would:

• Require the DoD to review transactions that would result in a private equity firm indirectly or directly controlling or owning a 25% stake in a defense contractor.
• Codify into law existing factors the DoD currently uses to review mergers, including the impact of the merger on national security and the industrial base, the effects on competition for DoD contractors and subcontractors, and any potential threat to sourcing risk for the DoD.
• Require the DoD to evaluate the financial stability of the investment management company seeking to acquire a stake in the contractor as well as the resulting financial stability of the firm post-merger - a factor that has historically not been part of DoD's merger review.

• Require the DoD to conduct a triennial review of mergers and acquisitions involving defense contractors. This review would assess the financial health of acquired firms and the overall impact of the mergers and acquisitions on national security and our critical infrastructure and technologies. The DoD would be required to submit this report to the congressional defense committees.

This bill is endorsed by the Project on Government Oversight (POGO), Quincy Institute for Responsible Statecraft, and The Open Markets Institute (OMI).

"We applaud Senator Warren for introducing two measures to address the role of private equity in the defense industry. With the dramatic consolidation among military contractors since the end of the Cold War, it is important to monitor the impact of additional mergers and acquisitions in this market," said Greg Williams, Director of the Center for Defense information at The Project On Government Oversight. "This legislation significantly strengthens monitoring both before such transactions are executed, and on an annual basis."

"Private equity in the defense sector monetizes the industry in ways detrimental to our national security. If we want defense spending to actually make us safer, we need to be wary of the Pentagon deepening ties with private-equity backed firms, which lack transparency and have incentives to push U.S. foreign policy in directions that do not serve the American public's best interests," said Ben Freeman, Director of the Democratizing Foreign Policy program at the Quincy Institute for Responsible Statecraft. "These amendments are a great step towards increasing scrutiny of these private equity actors in defense, as we work towards stable and right-sized investments in national security."

"Evidence from across the economy shows that private equity firms are not responsible stewards of the companies they acquire, threatening the supply and quality of goods and services essential to American wellbeing," said Audrey Stienon, Open Markets Institute Industrial Policy Program Manager. "DOD must increase its oversight into the impact and potential risks posed by increased private equity activity in defense sectors."

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