A User’s Guide to Government Equity Investing

Evaluating a new tool

This is a cross-post with Factory Settings, an Institute for Progress publication led by the former senior leadership of the CHIPS Program Office. The publication seeks to chronicle the lessons learned from implementing CHIPS Act, both as they pertain to industrial policy, as well as challenges of state capacity. You can subscribe to Factory Settings here. The author, Arnab Datta serves both as Employ America’s Managing Director for Policy Implementation and the Institute for Progress’ Director for Policy Implementation. 

The Trump administration loves equity stakes. Only one year into this term, the federal government has utilized some form of equity instrument in multiple deals with companies across industrial sectors: MP Materials, Intel, Lithium Americas, U.S. Steel, Trilogy Metals, Vulcan Elements, and ReElement Technologies. The administration has reportedly considered additional stakes in other companies, and some officials have even floated participating in the upside of patent revenue derived from government grant funding. Not since the Great Depression has the government taken ownership stakes in private corporations at such scale and speed, and in this case, without explicit Congressional authorization.^[1]

The political reception has been mixed. Stalwart allies have criticized President Trump for what they see as unprecedented government intervention in markets, while progressives have cheered the taxpayer benefits of government investment.

Equity investments are now a visible tool in the government's industrial policy toolkit. This is a positive development: used judiciously, equity instruments can support industrial policy goals and protect taxpayers from asymmetric investment risks. But without a clear purpose, appropriate structure, and defined exit strategies, equity stakes risk becoming "rule by deal" — one-off transactions that benefit particular political interests rather than the public.

This piece proposes a four-part test for evaluating government equity investments: (1) whether there is defensible legal authority; (2) whether there is a clear purpose for intervening; (3) whether another tool could better support that purpose; and (4) whether there is a predetermined exit strategy to avoid bad incentives.

Equity can take different forms, each with different advantages and risks

The Trump administration has deployed a variety of means to acquire stakes in companies:

• Direct equity capital: Acquiring equity gives the government an ownership stake in the company.
• Equity options: The federal government can also use warrants, which are options to purchase equity stakes in the future at a fixed price.
• Veto power: The federal government can also acquire or maintain a veto power over certain business decisions even without an economic ownership stake.

The federal government’s use of equity isn’t inherently good or bad, but must be evaluated on its ability to minimize the downsides and maximize the benefits.

Why equity can make sense

Direct equity capital can be patient

Lending is often the prototypical tool when the government is filling a private sector financing gap. For example, the Office of Energy Dominance Financing (previously known as the Loan Programs Office) lends or guarantees lending for companies that have demonstrated technological viability but lack existing revenue streams or established credit profiles to access traditional project financing. Since these companies are closer to the steady revenue generation needed to service interest payments within a reasonable timeframe, the government can step in to provide a loan or loan guarantee. In this case, government lending can serve as a bridge from innovation to commercialization.

But there are situations where companies need a more patient form of capital. As Daleep Singh recently noted:

"There is a class of investments in projects or companies that require a lot of upfront capital investment, a very long time to generate a commercially attractive return — let’s say 10 years-plus — and that have a lot of risk that investors feel uncomfortable modelling. It could be geopolitical or regulatory — some type of risk that the government knows more about than they do. A lot of these are deep tech or physical hardware investments. The venture capital community tends not to fund these projects at pace and scale. But these companies require equity because they don’t yet have cash flows to service debt. That is the sweet spot of where equity stakes make sense."

Adding debt burden could worsen a firm's balance sheet precisely when it might need flexibility to continue making upfront capital investment. Innovative companies at the technological frontier often have uncertain timelines to profitability. "Learning by doing" in hard tech manufacturing requires time that debt financing doesn't often allow. Patient capital can make the government a strategic partner for firms whose success strengthens national or economic security. In the context of targeted industrial policy, equity investments can offer support without creating additional fixed obligations. Grants and refundable tax credits can also serve as patient capital, but they are expensive — they defray costs for recipient companies but offer no prospect of compensation.

Equity options can correct asymmetric risk and protect the taxpayer

When the government makes or guarantees a loan, the most it can earn back is the principal plus interest, but at the risk of absorbing the full cost of the project. That risk is compounded by the fact that the federal government’s forays into lending tend to be in riskier domains where the private sector is absent or less likely to invest, such as in nascent technologies or beleaguered but critical companies that need a bailout. That puts the taxpayer on the hook for asymmetric risk — capped upside but complete downside.

This asymmetry was the justification for the federal government attaching an “equity kicker” (warrants) to its loan bailing out Chrysler in 1980. Rep. William Green (R-NY) said as much in his defense of the provision:

"The equity 'kicker' that Congress insisted on is entirely consistent with the high risk; there is no reason for surrendering a penny of it... when a private entity provides a service and takes an economic risk, it demands and receives financial benefits. Why should the taxpayers, who provided a vital service and took a great gamble, be denied the same right?"

Chrysler ultimately repaid its loans seven years early, and the government made approximately $300 million profit from the kicker.

The 2008 global financial crisis bailout followed a similar script — the statute itself required that warrants or other instruments:

“be designed… to provide for reasonable participation by the Secretary for the benefit of taxpayers, in equity appreciation…; and to provide additional protection for the taxpayer against losses from sale of assets.”

The principle is straightforward: if taxpayers bear considerable downside risk, they deserve adequate upside participation. Equity options, such as warrants, can solve that.

Foregoing equity capital puts us at a geopolitical disadvantage

Our reluctance to exercise equity as a tool has placed the US at a disadvantage with its strategic competitors and adversaries, not because equity is inherently superior to the tools we typically deploy, but because our competitors can offer more attractive financial options to emerging countries looking to build out their energy and industrial infrastructure.

Take the case of nuclear energy. China and Russia compete via "build, own, and operate" models, providing 100% of the equity and debt to construct nuclear power plants. With lending as its only offering, the US can’t present a favorable option to already debt-saddled countries looking to expand access to reliable energy. When a deal requires patient capital or greater risk-sharing, the absence of statutory authority for equity investments impedes US competitiveness in strategic sectors.

The Trump administration and Congress moved to address this gap in 2018 by authorizing the then-new Development Finance Corporation to make equity investments. Unfortunately, as Employ America has previously written, that tool was underutilized because federal budget rules treated equity investments as grants.^[2]

The US need not exercise every tool our competitors deploy. But categorically excluding equity from our toolkit, regardless of whether it's the appropriate instrument, creates an artificial competitive disadvantage when equity may be a more attractive (or necessary) form of financial support.

Veto power can help the government exercise control in extraordinary circumstances

The federal government may want to exercise control over business decisions in certain extraordinary circumstances. During the Great Depression, enormous failures in governance across the nations’ banking institutions had eroded public trust in the financial sector. As the Reconstruction Finance Corporation took enormous steps to recapitalize the banking industry, it also used its voting rights to change banking practices and reduce moral hazard. The RFC held voting rights in thousands of companies across the nation and exercised them to impose compensation limits and replace officers of corporations. In this case, control was established via the voting rights attached to shares.^[3]

The risks of equity

Government could direct business decisions inappropriately

The most common criticism of the government taking equity is that the federal government’s incentives may be misaligned with those of the company. Equity capital in the form of common stock ownership carries voting rights, and ownership may entitle the federal government to veto power over decisions as wide-ranging as board membership, executive compensation, or investment priorities. There’s a risk that government input on these decisions would be informed by political considerations or bureaucratic preferences rather than commercial logic or shareholder value. This kind of micromanagement could undermine the very competitiveness the investment is meant to support.

A recent intervention had the government acquire a veto power without any actual economic ownership, the so-called “golden share” in U.S. Steel. This kind of a veto could offer a potential middle path: the government retains veto power over critical decisions without assuming the broader responsibilities and risks of being an economic shareholder. This could be valuable where foreign ownership or incentives to expand market access to adversaries create persistent national security concerns that require ongoing oversight rather than one-time contractual commitments. But this power can be wielded inappropriately in the conduct of industrial policy.

The golden share was negotiated as part of the Committee on Foreign Investment in the United States’ (CFIUS) review of Nippon Steel's acquisition of US Steel, under the authority of Section 721 of the Defense Production Act. The statute grants the government authority to review foreign acquisitions for national security risks and to negotiate mitigation measures.

But typically these measures are structured as binding contractual agreements, such as commitments to restrict technology transfers abroad, maintain data within US borders, or submit to government screening of board appointments. The statutory language authorizes CFIUS to "negotiate, enter into or impose, and enforce any agreement or condition" to address national security risks, which can venture beyond mere contractual terms.

National security is a broad concept and accordingly opens the door for abuse. The golden share allows the US government a veto power over any attempt to waive or reduce planned investments or to relocate jobs — two restrictions that are, at best, of questionable relevance to the national security of the United States.

Equity investments could signal favoritism

Direct equity capital also risks signaling government favoritism — if the government owns a stake in a company, it may be incentivized to push government contracts or grant funding towards that company. The perception of an advantage arising from a government equity stake could also pressure companies to seek equity from the government even absent a need for such capital, simply to maintain parity in a competitive ecosystem. This bolsters the critique that industrial policy incentivizes companies to lobby for individual deals. Additionally, without systematic criteria to provide government equity decisions may be, or even appear to be, political. Equity investment increases the risks of industrial policy appearing ad hoc, with no clear principles distinguishing when equity is appropriate versus other tools.

Equity investments could create incentives to stifle competition and innovation

Seeking to preserve the value of an equity stake could also incentivize the government to make bad policy decisions to avoid weakening its position. Moreover, equity investments are typically in individual companies and can undercut the market competition that breeds innovative, successful companies. As Peter Harrell and I wrote in Bloomberg’s Odd Lots newsletter on the MP Materials deal:

“The U.S. decision to back MP sidesteps this competitive process, effectively granting a monopoly franchise in magnet production. This risks locking the U.S. into a suboptimal path if MP fails to deliver on cost or performance, while crowding out rivals that could prove more innovative. Niron Magnetics is a Minnesota-based startup that is developing rare-earth-free magnet innovation — offering the promise of eliminating a key supply chain vulnerability via innovation.” ^[4]

Dean Ball recently wrote of a similar hypothetical: the pressure to maintain the value of the equity stake could intensify if some new entrant “obviates the need for the industry as a whole.” In a capital-scarce environment, backing a single incumbent could stifle competition and innovation. The strategic question is whether scarce public and private capital is going to firms with the best technologies. An equity stake rather than a competitive process risks the US missing an opportunity to foster a genuine race to the top. This would undercut a key goal of industrial policy as recently illuminated by Todd Fisher — effective industrial policy should have “a plausible corrective path that leads to a self-sustaining outcome.”

Shareholder interests might diverge from national security priorities

Shareholder interest and national security interests may not move in lockstep.This was an acute tension in the Commerce Department’s equity stake in Intel, as Mike Schmidt and Todd Fisher wrote last year in the Wall Street Journal.

Intel's products business, which designs chips for computers and servers, is large and profitable, with a 26% operating margin. But the CHIPS Act’s incentives program was established to support domestic manufacturing — a critical national security priority. The government was primarily interested in Intel's foundry business, the manufacturing arm that could produce chips for other companies. That business lost more than $13 billion in 2024, more than $10 billion in 2025, has almost no external customers, and carries a -58% operating margin. Because the government took equity, taxpayer exposure is now tied to overall company valuation, which is predominantly driven by the products business, and not the foundry business that justifies the intervention. If an investment decision created conflict between the successful products business and the weaker foundry business, it would put the federal government in an unenviable position: improve national security but harm taxpayers by weakening the successful business segment, or worse, strengthen the government equity stake at the expense of our national security.

Consider the following hypothetical: if Intel’s products business develops a cutting-edge chip design in the future, the government’s shareholding interest would benefit from exports to China, despite a relatively enduring, bipartisan consensus to limit high-end chip exports to China. This conflict would place policymakers in a challenging position.

The transactional nature of equity stakes also creates new vulnerabilities. With the US government as a significant shareholder, Intel becomes an attractive target for economic coercion. China could direct state-affiliated companies to stop purchasing from Intel, weaponizing the equity relationship to harm a government-backed competitor. What was intended to strengthen a strategic asset instead creates a new pressure point for adversaries to exploit.

A four-part test for evaluating government equity stakes

Given the potential benefits and the inherent risks to government equity investing, I propose a four-part framework for policymakers to evaluate whether equity is appropriate for a given objective.

1. Is there legal authority?

A government agency should establish basic legal authority and communicate it before utilizing an equity instrument. Currently, only the Development Finance Corporation has the explicit authority to provide equity capital. Absent explicit authority, agencies can defensibly argue that certain implicit authorities allow for the use of equity instruments. For example, as Employ America has previously argued, the authority to attach equity-like instruments inherently lies with the statutory requirement to protect taxpayer interest and to support deals with a reasonable prospect of repayment.

The administration has also exercised implicit authorities for equity purchases, most recently in the MP Materials deal,^[5] invoking the Defense Production Act’s (DPA) Title III authority to make “purchases of or commitments to purchase” defense resources. The statute also allows the president to “make provision” for a variety of purposes — a broad (but not explicit) authorization that would allow an equity purchase. In the case of the Intel stake, Commerce could be relying on an expansive interpretation of its “additional authorities” in 15 U.S.C. 4659, which include requiring recipients to “make payments… as a condition for receiving support” or to “enter into other transactions as may be necessary.”

Regarding these executive interpretations, Peter Harrell recently noted in Lawfare that “the executive branch may well be able to act unless Congress decides to intervene…” Ultimately, to place the use of equity instruments on firmer ground, Congress should grant explicit authority to agencies.^[6]

2. Is equity serving a defensible purpose?

The government should articulate a clear purpose or policy objective that the equity investment is intended to solve. With CHIPS, the aim was to incentivize domestic semiconductor manufacturing by building a domestic ecosystem, typically by overcoming cost differentials that make domestic production uncompetitive with Asia or elsewhere. Here, equity capital is less likely to make sense.

Only after establishing a precise goal can policymakers evaluate which tools are most effective for achieving it. The critical question is: how does equity support the overall policy mission, and what type of equity instrument best serves that purpose? The answer will depend on whether the goal is to correct asymmetric risk, provide patient capital, or exercise a veto power. Different purposes may call for different equity structures, common stock, preferred stock, warrants, or other instruments, each with distinct implications for returns, control, and alignment with policy goals. But the specific purpose must be articulated clearly in relation to the broader policy objective, and the structure of the equity investment should follow from that purpose.

The role of equity will vary depending on the policy mission. In the CHIPS context, Intel can easily raise equity in private markets; offering them $8.9 billion in direct equity would not address the core challenge of defraying the cost differential of building in the United States.

For established companies with access to capital markets, equity would more likely serve a risk-balancing function rather than a financing one; that goal is better served by warrants than by a direct equity stake. In CHIPS R&D programs, equity might serve a different purpose entirely. Nascent companies struggling to raise private capital may benefit from a government equity tranche, especially if the government is willing to take risks that typical equity investors won't. Here, government equity could catalyze additional private investment and help promising technologies survive the valley of death.

3. Could another tool, or combination of tools, better achieve the same purpose?

Different tools serve different purposes. And the government has a vast toolkit at its disposal: tax credits, loans, demand guarantees, regulatory policy, skilled labor programs, and equity capital and options. Equity instruments can serve unique purposes that other tools typically can’t, and sometimes only a combination of all these tools can achieve the intended outcome.

But companies can also raise equity privately. And a combination of tools, such as a loan coupled with a purchase guarantee, could accelerate that process. Where practicable, it may be preferable to deploy other tools (such as loans, purchase commitments, or tax credits) as necessary and avoid the government taking an ownership stake.

In the case of MP materials, the amount and variety of support the company is receiving is staggering: a price floor for neodymium-praseodymium oxide (NdPr), a guaranteed offtake for finished rare earth magnets, guaranteed EBITDA, a loan, all in addition to the equity investment. Each of these is serving a unique purpose in the value chain, but with this level of support the company could potentially raise capital privately given the level of government guarantee. Of course, this would put the government in the position of socializing losses associated with some of the tools (such as the loan) while subsidizing the investor’s gains. That’s where the use of an equity instrument may be appropriate, and the CHIPS office included “upside sharing” without taking an equity stake in the company.

Given the complexity of modern finance, the construction of these deals is more art than science. But the threshold for using equity when another tool or combination of tools could serve the same purpose should be high given the inherent risks.

4. Is there an exit strategy to minimize political or cross-policy pressure?

Designing an exit mechanism that operates independently of political interference reduces pressure to retain an interest past the point at which the objective has been achieved. If the sale process is somewhat automated and insulated from political control, cross-policy pressure would be minimized because there would be no “decision” to make.

The exact exit mechanism should be tailored to the type of investment and aligned with the purpose of entry. For venture-like investments at the technological frontier where taxpayers deserve upside for bearing early-stage risk, the government's shares could be structured as the first to be sold in an initial public offering. This creates a natural, market-driven exit without requiring ongoing discretionary decisions about timing or price. Alternatively, if the capital was intended primarily to be “patient capital” for some technological breakthrough on the road to commercialization, the trigger might be achieving commercial viability by some predefined production metric or when the technology is successfully deployed at scale. The key is establishing these metrics upfront before an investment is made, and automating the exit process as much as possible.

For investments where the government holds a large stake and a single sale could have significant market implications or force a discounted transaction, the exit could involve a timely disposition contracted to a private entity with expertise in managing such sales. The Troubled Asset Relief Program (TARP) provides a useful model — there, Treasury retained decision making authority but contracted with private asset managers to systematically dispose of equity stakes acquired during the financial crisis, removing day-to-day political considerations from sale timing. In another example, Traxys, the metals trading company, was contracted to bring over 7,000 metric tonnes of UF6 uranium to the market following the decommissioning of the Portsmouth, New Hampshire nuclear facility, and in a way that minimized market disruptions.

Predetermined exit strategies become far more complicated when things go wrong, and in a portfolio of early-stage or high-risk investments, at least some are bound to fail. What happens when a company misses predetermined milestones but has made genuine progress? Does the government exit mechanically, potentially destroying value and undermining national security goals, or does it exercise discretion, opening the door to the very political interference the exit strategy was meant to avoid? What about follow-on investments? If a portfolio company needs additional capital to survive, does the government participate to protect its initial stake, potentially throwing good money after bad? Or does it allow dilution or even failure, risking the loss of strategic capabilities? These decisions are inherently discretionary and politically fraught, and predetermined exit strategies alone cannot solve them. The government will inevitably face judgment calls that pit financial interests against strategic objectives, and no amount of upfront rule-setting can eliminate that tension entirely. That is all the more reason to ground the decision-making in a structure immune from other political pressures.

Strategic government investment is different from sovereign wealth fund management. Strategic investments often require concentration, big bets on specific technologies or companies deemed critical to national security. But over time, as objectives are achieved, concentration should give way to exit. The government should not be in the business of long-term portfolio management of individual companies. Once the strategic purpose is served, whether that's correcting asymmetric risk, bridging a capital gap, or establishing a viable domestic industry, unwinding should be maximally automatic and depoliticized.

Conclusion

Government equity investments need not be viewed as an ideological transgression. When structured thoughtfully, with clear legal authority, defensible purpose, consideration of alternative tools, and predetermined exit strategies, equity can advance national interests, strengthen critical industries, and protect taxpayers from asymmetric risk. The challenge is not whether to use equity, but how to use it well.

The Trump administration's embrace of equity instruments represents a significant shift in federal economic policy, one that requires careful guardrails to prevent "rule by deal" dynamics. But categorical opposition to government ownership overlooks equity's unique capabilities in certain circumstances: providing patient capital where debt is unavailable or would unduly constrain capital investment, correcting risk asymmetries where taxpayers bear downside exposure, and maintaining oversight in extraordinary situations. With appropriate frameworks that minimize political interference and maximize strategic value, equity can serve as an effective tool in the government's industrial policy arsenal without compromising market dynamism.