Closing Bell - Manifest Space: Department of Defense’s $1 Billion Loan Program with Office of Strategic Capital Director Jason Rathje 10/3/24

Episode Date: October 3, 2024

The Department of Defense is prepared to award nearly $1 billion in loans to jumpstart technology critical to national security. The office, established in 2022, recently issued a Notice of Funding Availability laying out the criteria and application process for the Pentagon loans. The loans can be awarded to 31 categories ranging from quantum science to space propulsion. OSC Director Jason Rathje joins Morgan Brennan to discuss the new program and the intersection between technology and national security.

The Pentagon is preparing to award nearly a billion dollars in loans to jumpstart technologies critical to national security. This week, the Office of Strategic Capital issued a notice of funding availability, laying out the criteria and application process for these new Defense Department loans. OSC Director Jason Rathje says 31 tech categories have been identified, ranging from quantum science to biotechnology and nanomaterials, even space propulsion. U.S. government credit programs or lending programs are unique in kind of one key way, in that we can offer loans over the useful life of an asset, right? We don't have some profit objective that we're trying to achieve. Our objective is national security impact.

Now, the unique thing about lending programs as compared to other DOD programs is we do expect a return on our investments, right? Established just two years ago, the Defense Department's OSC represents a new economic model within the Pentagon, but is built on the successes of other federal credit programs. The office has begun doling out other capital as well. Last month, it awarded startup Ursa Major funding to ramp solid rocket motor manufacturing. This kind of notion of a defense industrial base that caters only to defense is kind of evaporating. We have an expanded industrial base. Semiconductors are vital to national security. They're absolutely vital to the Department of Defense. I don't know if anybody would say the semiconductor market is a part of the defense industrial base specifically.

And as that exposure to commercial industrial providers has definitely impacted the supply chain for the Department of Defense, the opportunity that we see to use these programs today is to work directly with dual use or solely commercial vendors that are part of the supply chain that the Department of Defense relies on, but does not directly procure from. On this episode, OSC Director Rathje on standing up the Pentagon's new lending arm and the intersection of tech and national security. I'm Morgan Brennan, and this is Manifest Space. Joining me now, Jason Rathje. He is the Pentagon's Office of Strategic Capital's Director, OSC. It's so great to speak with you today. Thanks for taking the time. No, thanks for having us. So I want to start really basic here. And before we get to the news of the week, just first take a step back because we're talking about an and the credit markets to increase investment in the industries and sectors that matter the most to national security.

And so as of this week, you have just under a billion dollars that you're basically now ready to begin to deploy. Absolutely. So we just launched a couple of days ago our first credit product directly to companies. It's a corporate finance product. It's focused on expanding access to capital to procure, refurbish, expand production lines with a focus on manufacturing, focused on the kind of core industrials that are required to support many of the sectors that we are prioritizing for national security. So who's going to be eligible for this money and how quickly can you dole it out? Or I guess this credit. No. So we have 31 sectors that were authorized by Congress to lend to. And it spans everything from bulk materials through quantum, biotech, semiconductors. So there is a very large market segment that we are going to be focusing on. The notice of funding availability just went live a few days ago.

For the next three months, we're engaging industry companies, investors, banks, lenders on areas where they see opportunities in the space. And then we'll start taking applications in January of next year. And then depending on how quickly companies or industry can absorb this credit to expand production

is how fast we're gonna move in terms of actually getting these loans out the door. And so what are some of the things that you'll be looking for as companies do begin to, and banks and firms do begin to engage with you, what are some of the things that you are going to be looking for as people do start to think about those applications early next year? We're looking for companies that have, you know, already have facilities that need access to

credit to expand production. We're focused on growth. Many of these industries are focused on our core to national security in which we're trying to drive competition and expand U.S. competitiveness in these industries, which means a focus on growth. You know, the manufacturing or, for example, space propulsion needs to meet the demands of the future space market. And we want to make sure that U.S. and our allies are able to expand production capacity in order to meet those demands of the future space market. And we want to make sure that US and our allies are able to expand production capacity in order to meet those demands of the future. The core product here, the equipment finance product will cover both hard and soft costs. So it's not just the cost for the equipment itself,

but also the cost for pre-installation or installation work. And the intent is to make sure that this facility can be actioned quickly. So we're not taking a long time, not only to get the loans out the door, but to get the manufacturing equipment in and start building. Why is this necessary? Why is it so important for the DOD to have this lending arm now? How does it fill a void that maybe doesn't exist out there in the private sector already? You know, a lot of the industries that we're targeting are capital-intensive industries that take a long time to generate returns, right, whether that's semiconductors or space.

And when you talk to the private capital markets, these industries require not only a significant amount of investment, but the duration of that investment to generate a return is unpalatable. And so companies that are engaging in this area might go to a bank, for example, for equipment finance, and the banks are offering tenors of three to seven years at high costs, which mean that these companies are unable to rapidly expand production facilities, right? They've got to, especially if their cash flowing is not sizable enough in order to pay back that type of tenor of facility. U.S. government credit programs or lending programs are unique in kind of one key way in that we can offer loans over the useful life of an asset, right? We don't have some profit objective that we're trying to achieve.

Our objective is national security impact. Now, the unique thing about lending programs as compared to other DoD programs is we do expect a return on our investments, right? There has to be reasonable assurance of repayment. So we're not going to lend into areas where we don't expect to see that return, but this is not a grant program,

meaning that it's very efficient for the taxpayer because we expect a return, but we're also working with companies, with industry partners that can absorb this facility and drive a level of commercial returns to be able to pay off the loan over the useful life of that asset. And the opportunity we see as a DOD to enter now is that we've seen successes of other federal credit programs broadly. The DOE has been running a loan program for quite some time. The Development Finance Corporation, the Export-Import Bank for longer, and Commerce under CHIPS just established their own loan program office. DOD has just come to this table. And so we're able to partner with

other folks like our ongoing partnership with the SBA to make And so we're able to partner with other folks, like our ongoing partnership with the SBA, to make sure that we're aligning programs where possible with a focus on national security and using OSC appropriations and funding to directly target areas that are not being targeted by these other government programs. It is interesting because you just pointed to examples of how this has worked. And I imagine measurements of success and how this has worked in other agencies and what that's meant for other industries. Why has it taken this long to see something similar implemented at DoD? It's a great question. I haven't been here for 40 years so I'm not quite sure why that is,

but what I will say is the industrial base has shifted in such a way, and I think the DOD has been really analyzing this for the last 10, 15 years. This kind of notion of a defense industrial base that caters only to defense is kind of evaporating. We have an expanded industrial base. Semiconductors are vital to national security. They're absolutely vital to the Department of Defense. I don't know if anybody would say the semiconductor market is a part of the defense industrial base specifically. And as that exposure to commercial industrial providers has definitely impacted the supply chain for the Department of Defense, the opportunity that we see to use these programs today is to work directly with dual use or solely commercial vendors that are part of the supply chain that the Department of Defense relies on, but does not directly

procure from. And so the opportunity that we see across the 31 covered technology categories, whether that's space or chemicals or materials, is that we have an opportunity to make sure that the assets that we need to support the department of defense are available in a secure manner when we need them one of the things that's really fascinating to me right now especially when we start talking about some of these defense tech startups and dual use technologies is there's been a real awakening particularly within i think the venture capital community uh towards these types of capabilities and looking to fund them. And you've seen a lot more money come into the space in the last couple of years

because of that. So how do you work alongside, when the opportunity does present itself, some of the private sector constituents? And do you feel like this is a situation where if you do the due diligence, you establish a baseline, it actually helps enable these companies to go out and to continue to get more funding elsewhere? At the end of the day, exactly to your point, Morgan, that we're here to lower the cost of capital. Right. That is the tool that we are we are we are implementing because these industries are capital intensive. So by lowering the cost of capital, right, where it might take eight times more venture investment to invest in a semiconductor startup than it does in a fintech startup, but we know that semiconductor startups

are absolutely vital to the future of national security. We want to be able to drive investment into these areas that investors, whether it's venture, private equity, or just big institutional banks, aren't interested in investing in just because the cost is too expensive. I think the opportunity that we have now as a DoD of building this type of organization is to bring in an underwriter's mindset, right? And that's something that I think is new and novel from a defense lens with an organization like the Department of Defense, who's been really focused on spending, now altering and

shifting into a lending mindset, focusing on opportunities where we are underwriting the industries that we require to drive investment into. I've been working with the defense tech dual-use startup ecosystem for almost 10 years now in my personal career. And the opportunity we've seen in building out OSC is that venture is a critical part of the mission set, but it's not the only part. The entire U.S. capital market is a national comparative advantage of the United States. How do we leverage that national comparative advantage to drive investment in these areas using some of these tried and true tools that are in other areas of the U.S. government, but now we're just bringing to bear in the department, but working alongside in a partnership model. This equipment finance product is the first of a number that we plan to roll out over the next few years as we continue to grow the organization

and the approach. We're keenly interested to engage with partners to understand where we can be of most help in this partnership modality. Right now, we have this notice of funding availability on the street. We also have a request for information through the Federal Registrar. of most help in this partnership modality. Right now we have this notice of funding availability on the street. We also have a request for information through the federal registrar. All of it's available on our website. We are highly encouraging companies, investors, banks to engage on our website, engage with us as an office so we can better understand how to apply this because this first billion dollars of investment is just the start. And the build out of these future products, we're heavily relying on the market telling us where

they can best use this to catalyze the growth, productivity, manufacturing, and the industrial base that we need. Now, you did already make an initial first investment, I believe, as well, right? Ursa Major, you were talking about space propulsion earlier. Is that the first, I guess, sort of toe in the water in terms of lending or have you made other deals or working on other deals in the meantime since then? The awards that we've done to date, which have not been loans, so this is our first organic DOD loan program that we're launching. But those awards have been focused on integration. So not to bore you with the details of the Federal Credit Reform Act, but effectively, we can't lend to things that are inherently federal. So we can't lend

to things that are purely defense. We have to focus either in dual use or commercial. At the end of the day, we want to make sure we can integrate those components into the Department of Defense. And so we also have some programs that pay for integration costs, whether that's, in this case, the test of an adevantly manufactured solid rocket motor to support the Navy. But those things are connected to our core loan programs, where we're focused as one of our big priority areas today is in advanced manufacturing because we know we need new approaches to manufacturing to meet the growing needs of a widening

Capability requirement for the department and we can do that by by leveraging They've been around for years, but now they're hitting the time where they can be integrated into core industrials. Our lending programs work with our... Notice of funds availability is our first loan program. Got it. Okay. And I just want to circle back on something you said before, and that's the fact that you have this background, you've been engaged, heavily engaged in defense tech for the better part of a decade, if not longer.

And I just, from your very unique vantage point, I just wonder, I would love to get your thoughts on how it has evolved and where you see it going. When I started in this space, you know, almost 10 years ago, there was really nothing, to be frank, right? There was, you know, the defense industrial base. There were some small businesses that were growing and doing really good work. But in the, you know, capital investment community, there was this focus on aerospace and defense. And there certainly wasn't a lot of venture investing in companies who were focused on the Department of Defense. That has exploded, right? And I think, you know, everybody has seen this massive growth especially over the last you know five or so years the opportunity that we see now moving forward is

we have to hit scale we have to hit production we have to be able to actually keep the industries that we need growing in a way that's conducive to the future national security needs the opportunity that we've also seen is that you can have a bunch of companies that are working directly for the Department of Defense, but they all rely on the same industrial base that our commercial industrial providers rely on, right? It all comes down to the same core manufacturers, which in a global perspective are built in such a way where they are very constrained to the areas where any type of economic shock like we experienced during COVID can greatly disrupt our supply chains. And so without access, understanding and growth of our supply chains and our core industrials

in a way that's conducive to future national security, where we can have a robust industrial base and the United States are with our allies, so we can have access to what we need when we need it, which is where OSC is really focusing on, these things can come together. It's not just about the end capability that the department needs to buy. It's about the entire supply chain that that capability requires to integrate. And that entire supply chain is the same supply chain that you and I are carved, right, or our kind of core tech components. And if we're not thinking about these things as interlocked, then I think we're doing ourselves a disservice. That does it for this episode of

Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.