U.S. lawmakers propose bill to tighten DoD review of private equity defense deals

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DoD review of defense deals

Highlights

Senators Warren and Blumenthal and Representative Khanna introduced the Critical Defense Ownership Review Act, requiring DoD review of mergers giving private equity at least 25% control of a defense contractor.
Proposed legislation mandates financial screening of private equity acquirers and post-merger contractor stability, plus triennial reviews on the national security and infrastructure impacts of defense sector M&A.
Supporters cite over 1,500 defense contractor deals and $15 billion invested in 140 defense-related transactions in 2021, with research showing private equity-owned contractors are nearly 10% more likely to go bankrupt.

Bill targets private equity control of contractors

As reported by the Senate Committee on Banking, Housing, and Urban Affairs, Senator Elizabeth Warren, Senator Richard Blumenthal and Representative Ro Khanna have introduced the Critical Defense Ownership Review Act to increase Department of Defense oversight of mergers and acquisitions involving private equity and defense contractors.

The bill would require the DoD to review transactions that would leave a private equity firm with direct or indirect control of, or a 25% stake in, a defense contractor. It would also write into law existing review factors tied to national security, the industrial base, competition among DoD contractors and subcontractors, and sourcing risks for the Pentagon.

The proposal adds a financial screening element that lawmakers say has not historically been part of the department's merger review. Under the measure, the DoD would need to evaluate both the financial stability of the investment manager seeking the acquisition and the post-merger financial condition of the contractor involved.

The legislation also calls for a triennial review of mergers and acquisitions involving defense contractors. That review would examine the financial health of acquired firms and the broader effects of those transactions on national security, critical infrastructure and key technologies, with findings submitted to congressional defense committees.

National security and competition concerns grow

Lawmakers backing the bill argue that private equity investment in defense has risen sharply in recent years and is increasing risks across the sector. They cite figures showing more than 1,500 deals involving defense contractors and $15 billion invested in nearly 140 defense-related deals in 2021 alone.

Supporters of the measure also point to research indicating that private equity-owned defense contractors are almost 10% more likely to go bankrupt than peers not owned by private equity, while takeovers often lead to credit downgrades. They further argue that limited transparency around foreign investors in private equity funds raises concerns when defense contractors handle sensitive information.

The bill's sponsors also link private equity roll-ups to broader consolidation in the defense industrial base. A 2023 U.S. Government Accountability Office report identified contractor consolidation as a national security risk and found that the DoD does not routinely evaluate competitive threats in merger reviews and lacks clear guidance on which assessments should take priority.

The measure has drawn support from the Project on Government Oversight, the Quincy Institute for Responsible Statecraft and the Open Markets Institute. Those groups say stronger pre-deal scrutiny and ongoing review could help address supply chain vulnerability, market concentration and the financial pressures that can follow highly leveraged acquisitions in the defense sector.

Our earlier coverage of consolidation in the UK naval shipbuilding sector looked at Balaena’s planned acquisition of Cammell Laird and two other shipyards as companies position for rising defence and maritime demand. We noted that the deal would expand repair and shipbuilding capacity across a larger network and comes as the UK moves toward a long-delayed defence investment plan and potentially higher defence spending, underscoring how ownership shifts can reshape critical industrial capabilities.

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