Lawmakers target private equity’s growing chokehold on arms industry

Yesterday, Democratic lawmakers introduced legislation that would scrutinize private equity’s growing influence over the defense industry.

“For too long we've let private equity treat the defense industrial base like a profit center, buying up critical contractors with little scrutiny over who's really in control,” Rep. Ro Khanna (D-Calif.) said of the Critical Defense Ownership Review Act. Khanna introduced the legislation in the House, and Sens. Elizabeth Warren (D-Mass.) and Richard Blumenthal (D-Conn.) introduced the same bill in the Senate.

“This bill restores basic oversight so the Pentagon knows when a private equity firm is quietly taking control of a contractor critical to our national defense,” Khanna said.

Pursuing a controversial and risky investment strategy, private equity firms make money by acquiring businesses, often using debt. They overhaul the companies — radically slashing operating costs in the process — and then sell them, or parts of them, at a much higher-price point. The cost cuts can severely undermine the quality of the goods or services the acquired companies provide; in PE-acquired hospitals, for example, patients became more likely to get new infections, fall, or face other harms, according to a study in a leading medical journal.

Given the risks of this approach, the bill would require the Department of Defense to review transactions that would give a private equity firm at least a 25% stake in a defense company. The DoD would also need to evaluate the financial stability of a private equity firm before and after it acquires a stake in a defense contractor.

The bill also requires triennial reviews of the financial stability of PE-acquired weapons firms to ensure that a given acquisition hasn’t adversely “affected the supply” of goods and services critical to national security.

Ben Freeman, director of the Democratizing Foreign Policy program at the Quincy Institute, which publishes Responsible Statecraft, called the bill “a great step towards increasing scrutiny of these private equity actors in defense.”

“If we want defense spending to actually make us safer, we need to be wary of the Pentagon deepening ties with private-equity backed firms, which lack transparency and have incentives to push U.S. foreign policy in directions that do not serve the American public's best interests,” he said.

PE firms have acquired more than 1,500 defense firms over the last two decades. They invested a record $17.7 billion in the sector from January to mid-October 2025, breaking previous annual records before the year ended.

As Shana Marshall, a non-resident fellow at the Quincy Institute, told RS: “Proponents of PE in the military industry say that [these investments are] about providing more resources to develop new weapons technologies, maintain U.S. superiority. This is a lie.”

“Typical PE acquisitions are funded with 60% to 90% loans (debt) and only 10% to 40% investor money (equity) because they want to minimize the risk to their own capital,” Marshall explained in a written comment. PE firms “want to get 'too big to fail'...and binding yourself to the Pentagon is the best way to do that.”

This risky approach could damage U.S. national security.

PE-backed defense contractors are less financially stable, meaning that they might not be able to deliver the products the DoD needs. As a 2024 Business and Politics study found, PE-backed weapons contractors are 4% to 9% more likely to file for bankruptcy than those without that funding.

Private equity acquisitions also drive defense industry consolidation, ratcheting up defense-related expenses for taxpayers.

“If [these firms are] just going to borrow other people's money, the government can do that itself and avoid paying the exorbitant PE management fees,” Marshall said.

It’s worth asking how rigorous Pentagon oversight over private equity would be in practice, considering how closely the DoD is cozying up to the industry.

The DoD established an Economic Defense Unit (EDU) early this year, which intends to “service private equity firms and pitch deals critical to national security, provide advice, and arrange loans,” to compete with China.

As Tad DeHaven, a policy analyst at the Cato Institute, previously told RS of the EDU: “Even if no laws are broken, this is exactly the sort of arrangement that invites insider dealing, political favoritism, and capital allocation based on connections rather than merit.”