How Private Equity Is Reshaping the Pentagon

Pentagon's Private Equity Transformation [0:00]

• Steve Feinberg, co-founder of Cerberus Capital Management, is the Deputy Secretary of Defense.
• Cerberus Capital Management has $70 billion in assets under management.
• Feinberg is reshaping the Defense Department to operate more like a private equity firm.

  "And that is causing some concern."

Cerberus Executives Join Defense Department [0:39]

• Feinberg brought four other Cerberus executives into the Pentagon.
• These executives are implementing significant changes to the department's business practices.
• Feinberg stated, "Contractors are willing to change with us. We'll prosper and grow. Those who don't and resist it will be gone."

Cerberus's Strategic Holdings [1:05]

• Cerberus Capital Management has holdings in healthcare, grocery stores, and real estate.
• The firm also has significant investments in the national security space, including defense contractors.
• These investments are in areas the Defense Department considers strategically important.

Subcom Investment [1:24]

• Subcom, a company that lays subsea fiber optic cables, is part of Cerberus's portfolio.
• Subcom has a relationship with the Department of Defense for laying cables.
• Cerberus restructured its investment in Subcom earlier this year, increasing its valuation six-fold to $2.3 billion from a 2018 purchase price of around $350 million.

Aron Development and 6G Network [1:48]

• Aron Development, previously little-known, is now working with the Department of Defense.
• The company is collaborating with major U.S. telecoms and tech firms like NVIDIA.
• Their project involves building a 6G wireless network, a technology potentially worth billions.

Office of Strategic Capital [2:11]

• Feinberg's influence stems from the Office of Strategic Capital (OSC), a new division created during the Biden administration.
• The OSC aims to align private capital with public national security goals.
• The budget for this office has been massively expanded since Trump took office.

Defense Department as Investor [2:35]

• The Defense Department is increasingly acting as an investor rather than just a customer.
• Feinberg's team manages approximately $200 billion for lending and taking equity stakes in private businesses.
• Deal-making relies on personal networks and trusted individuals.

  "The idea behind the office was that the U.S. needed to do a better job of aligning private capital and public national security goals if it was going to be successful on the world stage."

Potential Conflicts of Interest [3:07]

• The Department of Defense has historically been bureaucratic and inefficient, failing every audit.
• The influx of deal-making expertise is seen as needed by some within the department.
• However, Feinberg's proximity to Cerberus's interests raises concerns about potential conflicts of interest.
• Feinberg divested his Cerberus stakes to trusts for his adult children, meeting legal requirements but not preventing awareness of Cerberus's holdings and interests.

  "One of the questions that a lot of the people I spoke to have raised is why so many of them are so close to Cerberus, and whether or not they're thinking about return on investment in the right way."