OVERVIEW

This memo summarizes a 2 MAR 2023 discussion between Dr. Jason Rathje, Director of the Pentagon’s Office of Strategic Capital (OSC), and BENS members. OSC is trying to incentivize private capital investment into higher risk / deep technologies and “industrial transformation” (i.e., advanced manufacturing practices / common infrastructure expansion)

OSC IS PURSUING TWO STRATEGIES TO INCENTIVIZE PRIVATE CAPITAL

Syndication - Matching private investment with OSC’s RDT&E funding.

Leverage - Mitigating risk for private investors through government-backed loan guarantee programs. Specifically, OSC launched the Small Business Investment Company (SBIC) Critical Technologies Initiative (CTI). The SBIC program is one of the U.S. Small Business Administration's (SBA) financial assistance programs. An SBIC is a privately owned and managed investment fund that's licensed and regulated by SBA. An SBIC uses its own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses. OSC / SBA does not invest directly into small businesses through its SBIC program but provides funding to qualified investment management firms with expertise in certain sectors or industries. OSC has partnered closely with SBA to tailor the SBIC CTI program to better support the inherently longer-term deep tech investments. OSC can provide leverage up to $175M per licensed limited partnership that must be matched by at least a two-to-one ratio (e.g., two dollars of OSC leverage for every one dollar of private capital put into the fund.) Later this summer, OSC hopes to start accepting applications for the SBIC CTI.

WHAT ARE SOME POTENTIAL CHALLENGES FACING OSC?

  • Demonstrating value in the short-term despite an inherently long-term investment time horizon.
  • DoD does not have a federal credit authority, forcing OSC to work through SBA.
  • Mapping initial investments to transition partners and warfighting gaps.

OTHER IMPORTANT FACTS

  • OSC reports to the Strategic Capital Advisory Council (S-CAC), which is co-chaired by the Undersecretary of Defense for Research and Engineering and the Undersecretary of Defense of Acquisition and Sustainment. The S-CAC also includes the Undersecretary for Policy, the Comptroller, the Director of the Cost Assessment Program Evaluation Office, the Joint Staff J8, and the Service Acquisition Executives. The first S-CAC meeting is slated for this summer.
  • Also, this Summer, OSC intends to release its investment strategy. The strategy will assess technology areas, capital availability, and liquidity opportunities.

OSC SEEKS BENS PERSPECTIVES ON THE FOLLOWING:

  • How to facilitate co-investment opportunities with allies and partners.
  • How to optimize government-backed loan guarantees/tools to incentivize private capital.
  • Identifying specific opportunities (e.g., companies and/or technologies) where OSC’s government-backed loan guarantees/investment tools can make an outsized impact.