Private equity firms could face increased congressional scrutiny come November as lawmakers focus more closely on the industry’s growing presence in the defense sector, legal experts said.
While lawmakers will continue examining private equity’s involvement in the defense industry during the final months of the 119th U.S. Congress regardless of the outcome of the midterm elections, congressional investigations could increase should Democrats flip control of the House or the Senate.
“Democratic control would bring not only greater focus on private-sector oversight, but also committee chairs with subpoena authority and the ability to compel documents and testimony,” Holland & Knight legal experts wrote.
Arya Hariharan, public policy and regulation attorney at Holland & Knight, said recent congressional oversight letters reflect growing concern among lawmakers about how acquisition strategies used by private equity could impact the long-term stability of companies that provide critical national security services and materials.
A group of Democratic lawmakers, for instance, recently questioned Defense Secretary Pete Hegseth about the department’s increased reliance on private equity investments following reports about the Pentagon creating a team of its own investment bankers to help facilitate up to $200 billion in defense deals for private equity firms.
“Research shows that private equity-backed defense contractors — because of their aggressive debt-laden acquisition strategies to takeover defense contractors — are more likely to go bankrupt than their peers,” the lawmakers said in a letter to Hegseth. “One expert warned private equity firms are able to ‘extract value from defense contractors and exit without accountability,’ leaving taxpayers footing the bill.”
“Furthermore, private equity firms increase supply chain instability in the defense industry – raising costs and making it harder for the department and other contractors to secure the materials it needs to build and maintain our nation’s critical defense systems. As private equity continues to acquire and merge contractors, the remaining fewer contractors face less competition, innovate less and have increased leverage to inflate prices,” they added.
In June, the lawmakers introduced a bill that would require the Defense Department to review transactions that would result in a private equity firm holding a 25% stake in a defense contractor. If passed, the bill would codify into law the factors DoD already uses when reviewing mergers, including how the deal would affect the defense industrial base and competition for DoD contracts and subcontracts. The legislation would also require the department to review the financial stability of the investment management company looking to acquire a stake in the contractor.
“Consolidation amongst defense contractors is not a new concern, but the involvement of private equity firms has injected, rightly or wrongly, a perceived risk to supply chain stability. When it is unclear to the appropriators or authorizers where capital is sourced or if foreign actors are involved, they are bound to ask questions of the industry to determine if there is a national security risk,” Hariharan told Federal News Network.
Lawmakers are also likely to scrutinize any conflicts of interest or ties between current government officials and private equity firms, as well as the use of “special government employees” to facilitate deals with the Defense Department or other federal partners, Hariharan said.
“With the Office of Strategic Capital looking to scale aggressively defense investment through private sector partnership, the industry should expect scrutiny of every new contract or partnership reached over the past two years,” Hariharan said.
The Defense Department is seeking approximately $20.2 billion for the Office of Strategic Capital in fiscal 2027 to support its loan program for companies working in priority technology areas. The fiscal 2027 budget proposal is a massive increase from the roughly $1.2 billion request in fiscal 2026.
In July, the Wall Street Journal reported that the office is hiring employees from a number of private equity firms and investment banks to build an in-house investment team with “unmatched access” to privileged information.
Given the current political climate, Hariharan said equity firms who have worked with the federal government should “expect congressional scrutiny and should start preparing now, not wait until after the midterms.”
“In the defense context, companies should review carefully the steps they took to secure a government partnership, any relationships with current government officials or individuals/companies closely associated with the government, and the underlying finances supporting any such partnership. This should be done in coordination with a company’s policy and communications teams, and, ideally, with the help of counsel well-versed at handling congressional inquiries,” Hariharan said.
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