The first round of private capital funds flowing through a joint Pentagon and Small Business Administration loan program will invest nearly $3 billion in more than 1,000 defense-technology companies.
The Pentagon announced on Tuesday its Office of Strategic Capital approved 13 private funds to participate in the first installment of its Small Business Investment Company Critical Technology Initiative, or SBICCT. Established last fall, the effort aims to draw private capital funding to companies advancing technologies like artificial intelligence, quantum computing, space and advanced materials that could have significant implications for national security. Each fund has access to up to $175 million in loans.
Over the last 20 years, the Pentagon has seen a drop in private capital investment into the technology areas it deems critical. Many of those areas are hardware intensive and require significant funding to generate a meaningful return for investors. Jason Rathje, who leads the Office of Strategic Capital, told reporters the SBICCT Initiative is specifically targeting that challenge.
“The ‘so-what’ of this program is it allows us to incentivize the capital markets to start investing more into our critical technology areas because it changes the return profile,” he said.
By partnering with the Small Business Administration, the Defense Department wants to take advantage of the organization’s track record of directing venture capital funding toward projects that have significant economic impact.
“This first group of SBICCT Initiative funds represents a consequential milestone in demonstrating the power of public-private partnerships to build enduring advantage by growing and modernizing our supply chains, strengthening our economic and national security, and benefiting the development and commercialization of critical technologies that are key drivers of our U.S. industrial base,” Heidi Shyu, under secretary of defense for research and engineering, said in a statement.
The Office of Strategic Capital was established in 2022 to drive private sector capital toward defense technologies. Tuesday’s announcement follows the Pentagon’s establishment last month of a $1 billion fund to provide direct loans to companies that make in-demand defense component technologies. The effort aims to help companies fund the construction of equipment needed to scale production across 31 technology areas it has deemed critical to U.S. national security.
“In our 2024 investment strategy, we talked about how we needed to build different strategies for different parts of the capital market and different parts of our critical technology space,” Rathje said. “What we have been able to do over the last year is really accomplish the programs, the financial products that OSC is offering.”
Lending tools like these are new to the Pentagon, but federal agencies like the Energy and Commerce departments have a long history of using credit programs to support key industries. OSC projects its SBICCT Initiative will continue to grow. More than 100 funds have expressed interest in the effort, and the Pentagon will now accept applications on a quarterly basis.
