Contracting

The government’s role in innovation may be changing from customer to investor

"If a relatively small number of companies become the preferred recipients of government financing, they could accelerate consolidation," said Paul Murphy.

Terry Gerton

July 14, 2026 3:02 pm

8 min read

Guest:	Paul Murphy
Title:	Senior data analyst, Bloomberg Government
Summary:	If agencies are no longer willing to wait for markets alone to deliver critical technologies, what comes next? Some are moving upstream, investing in companies and technologies much earlier than traditional procurement would allow.

The Federal Drive with Terry Gerton provides expert insights on current events in the federal community. Read more interviews to keep up with daily news and analysis that affect the federal workforce. Reach out to Terry and the Federal Drive producers with feedback and story ideas at FederalDrive@federalnewsnetwork.com.

Interview transcript

Terry Gerton We’re going to talk about something that’s getting some attention, but not a lot of discussion, the government taking equity stakes in private corporations. For years, the government just showed up as a buyer. You built something and they decided whether or not they were going to buy it. Now it’s showing up earlier and helping finance the company itself. What has changed in the market and the ecosystem that made that shift seem necessary to the government?

Paul Murphy The OSC, the Office of Strategic Capital within DoD, is a statutorily authorized program. It’s been around since the latter part of the Biden administration. But you’re right, it represents a fundamental shift in the government’s procurement role, from simply buying products to helping decide which companies receive federal financing before contracts are even awarded. That may accelerate critical technologies. But it also gives the government much greater influence over which firms succeed in the marketplace.

Learn how real-time insight is reshaping federal IT decision-making in our newest ebook, sponsored by Tanium. Download now!

Terry Gerton The government’s always been focused on objectivity, clear, transparent terms and may the best company win. This feels a little bit like taking bets earlier in the process. What’s the concern there?

Paul Murphy Well, you know, it could change competition in important ways because companies backed by government loans or equity, it’s not just, you know, taking investment stakes, but it’s also a large part of it right now is loans, these companies that receive this financing could gain advantages in attracting private investors, expanding production, and even winning future contracts. The concern is that firms without access to those programs may find themselves competing on an uneven playing field long before a government procurement even begins.

Terry Gerton And you made an interesting point there. It also changes the government’s incentive in the longer term as an equity holder, they have an interest in the long-term profitability of this company, which may change how they consider future investments or purchases, right?

Paul Murphy Yes. You know, we’ve seen in the past, particularly in the late aughts, where the government took equity stakes in solar companies, I believe it was Solyndra, and that didn’t pan out financially. Congress isn’t questioning the goal of strengthening the industrial base, as much as they’re asking who decides where these billions of dollars go and whether the decisions are free from political influence or conflicts of interest. Once the government becomes both an investor and a customer, lawmakers are worried that oversight becomes more complicated and the public confidence in the procurement process can be harder to maintain. And DoD’s 2027 budget proposal, requested $20 billion for the office of strategic capital, but the $20 billion is not the discretionary money, that’s the mandatory money that would be used for loan subsidies. And so if OSC makes, and they’re projecting that that $20 billion could be leveraged into $200 billion in loan authority, which was like nearly a quarter of the total value of procurement in fiscal 2025, so they’re assuming like a 10 times leverage ratio. And when they make loans, you know, they’re saying that that $20 million could turn into$ 200 billion in loans. They’re assuming a very low failure rate on the projects that this money would fund. I mean, they’re assuming that the government is only on the hook for, you know, $1 million out of every $10 million that they loaned. That’s very low. And historically, I think that’s proven to be questionable given, you know, the government’s experience in equity investments. So the leverage ratio is very optimistic. The oversight is minimal. The money is going through a mandatory or is proposed to go through a mandatory budget account, Congress still has to decide that that’s not set in stone. Just, yeah, that’s, not actual appropriations. That’s, you know, money that still has be awarded. So, and then with all the questions coming from, you know, members of Congress, from Elizabeth Warren and others, I think there’s going to be more discussion about just how realistic, you know, the leverage ratio is, predictions of success and failure, conflicts of interest, of course. And a general accountability, you know, how is this investment money, how are the decisions being made to award this investment?

Terry Gerton Paul Murphy is a senior data analyst at Bloomberg Government. Paul, as we’re setting the stage here, both kind of conceptually and practically, this practice isn’t distributed across government. It’s really focused in some very specific areas. Walk us through the agencies that are playing here and the industries where this is focused.

Paul Murphy Well, there are dozens of what are called critical defense technologies. I believe the original list start out over 40, they’ve tweaked it and consolidated down to anywhere from six to maybe a dozen, but it’s technologies that DOD has identified, particularly DOD, but also the Department of Energy and Commerce have identified that are critical to U.S. National security because they feel that the U.S. Is falling behind China and other companies in the production of rare earths. The U.S. has been significantly dependent on China for rare earth materials, but they’re also concerned about magnets that go into drones and navigation equipment. They’re concerned about quantum computing and the ability of quantum computers made by foreign companies to hack highly secure U.S. computers and networks. So I think what’s driving this is a perception that the U.S. has gaps in its ability to fulfill its security requirements. And so they’re looking to try and leverage investments, loans and equity investments, to pace the production of these weapons and equipment more in line with the pace of commercial procurement.

Terry Gerton And so how does this financing approach get at that solution set, right? Rather than just buying and giving firms contracts to help them explore and develop these critical technologies, why is the current thinking that it’s better to have an equity stake? How does it change the production problem?

Sign up for our daily newsletter so you never miss a beat on all things federal

Paul Murphy Well, I think part of the idea, I don’t claim to have all the answers, but I think part of idea is that by giving companies money ahead of actual procurements, it gives them the ability to decide where to invest that money, whether they need to invest it in plant equipment, in people, in training, in supply chain modernization, it gives them more control, but it flips the model, the traditional model of federal procurement from what has been the case since the Cold War, where the government decides what it needs and prioritizes, sets the strategy and sets the policies and decides what equipment it needs, and establishes requirements for particular kinds of weapons. It puts a lot more power, control, and even influence in the hands of the private sector, where the government is now looking for the private sector to tell it. What it should buy and trying to keep pace with the technology that the industry and the commercial sector is creating. And I think this may have grown out in part because of shortcomings it sensed in its ability to do counter missile attacks during the Israeli, but also the Iraq war, but especially more recently, I think there’s been a lot of discussion about the use of drones in Ukraine and ability to counter massive drone attacks from foreign countries into Ukraine and what technologies are needed to do that. And then building from that, you know, you have the surveillance and the magnets and the rare earths that are needed to power the batteries and the equipment in these very much smaller scale pieces of equipment. So I think that’s in part what’s driving this.

Terry Gerton In conventional acquisition, we have a long history of how that process is supposed to work, who’s competitive, how you compete. As we shift to this more equity-focused investment approach, does that change who is going to be able to do business with the government and how they do business with the governments?

Paul Murphy Potentially, yes. If a relatively small number of companies become the preferred recipients of government financing, they could accelerate consolidation, make it harder for new entrants to compete and shift capital towards firms viewed as government favorites, rather than those the market would have selected on its own. So we’ve seen a lot of consolidation in the federal supply chain over the last two years, particularly with small businesses. This could tilt capital markets toward these kinds of technologies that strategically selected companies are able to produce. There’s the whole question of who’s deciding what companies should be strategically selected becomes very important. That’s where I think Congress is particularly concerned, is who’s making the decisions and on what basis are these decisions being made.

Terry Gerton And from what you’re seeing, is this a temporary shift in focus or does this really mark a long-term transformation of the government contracting market?

Paul Murphy Well, I look at the funding to try and answer this in part. And, you know, Congress has preserved this OSCE funding, this $20 billion for now, but it has not embraced this expansion. It suggests that lawmakers want to move more cautiously than the Pentagon has requested. The debate is increasingly shifting from whether government investment should exist to how large it should be. I think that’s the question Congress wants to discuss most urgently and discuss what safeguards are needed, how to ensure financing decisions remain transparent, how to ensure competition in the procurement process and how to keep it insulated from political influence because we’ve seen in some of these loans, for instance, the big Vulcan Elements loan back in November 2025, where OSCE issued a $620 million conditional loan, you know, for the development, the build out of, of fly chains for rare earth magnets. One of the investors in that, kind of one of the backers of that company is 1789 Capital, where Donald Trump Jr. is a partner and members of Congress have, you know, asked DoD for more accountability in how these decisions are being made and what potential conflicts of interest might exist.