A User’s Guide to Government Equity Investing

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.

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…