A New Industrial Menu Emerges
& The Rise of Private Wealth
The American defense industrial base is undergoing a transformation more profound than any since the end of the Cold War. The infamous 1993 “Last Supper,” where Pentagon leaders instructed a roomful of contractors to consolidate or perish, resulted in a small handful of massive prime contractors. Today, a new dinner is being served. Instead of a single, heavy main course, the menu features a series of deconstructed entrées: lean, vertically integrated, and expertly assembled portfolios of capabilities. But we don’t yet know what these new dishes will look like, because it takes time to reorder the machinery of defense acquisition. As a case in point, it took a full three years for funding to properly align with the U.S. Space Force after President Trump willed the service into existence in December 2019. A critical question therefore looms over this new culinary landscape: are these dishes being crafted by Michelin-starred chefs creating resilient, world-class systems, or by short-order cooks assembling fragile conglomerates while the kitchen is still under renovation?
Underpinning this entire shift is a historical anomaly: for the first time, there is enough private wealth to allow non-state entities to oversee entire segments of what were once exclusively government functions. With private capital investment in defense and dual-use companies approaching $100 billion per year, the scale of available funding is unprecedented. Nowhere is this more evident than in the space domain. SpaceX has not just competed with government programs; it has effectively privatized the function of space launch for American astronauts and national security payloads, operating with an agility and cost-efficiency that government-led programs could not match. This is the new paradigm: private capital is no longer just a supplier to the government; it is becoming a parallel, and sometimes primary, engine of national capability.
Is it a coincidence that Stephen Feinberg, co-founder of PE giant Cerberus Capital,
is now the Deputy Secretary of Defense—the very official charged with
executing the reforms reshaping the industrial base his firm helped consolidate?
Private Equity’s Expanding Influence
This environment has attracted an unprecedented influx of private equity (PE) and venture capital, which now act as powerful, and often unforgiving, catalysts for change. The influence of PE is now felt at the highest levels of policy and execution. It is perhaps no coincidence that Stephen Feinberg, the co-founder of Cerberus Capital Management—a firm with a significant defense portfolio including DynCorp and Remington—was confirmed as the Deputy Secretary of Defense in March 2025, the very position charged with making the Pentagon’s intertwined processes work. For many founders, the allure of a massive capital injection can be overwhelming. In my own strategy work with clients, I have seen this play out firsthand. In one instance, the patriarch of a family-run defense business reflexively insisted he would “absolutely not” ever sell. Within a year, faced with the transformative potential of a PE partnership, the firm had sold a 49% stake, the primary shareholder was removed, and the company was absorbed into a larger “family of companies” overseen by the PE firm. Turns out everyone really does have a number. In another client session, a highly successful serial entrepreneur who has led multiple 100-plus-million-dollar companies offered a contrasting philosophy: “I always know my exit strategy with a price and a timeline I’m driving toward.” Most founders, however, lack this clarity.
Vertical Integration & Its Growing Risks
Two distinct models, both fueled by this influx of private capital, are reshaping the industry. The first is a deliberate push for vertical integration. While both Fairbanks Morse Defense and Cerberus have executed roll-up strategies in the maritime and services sectors. Another clear multi-domain example is AeroVironment’s $4.1 billion acquisition of BlueHalo in 2025. The deal brought together AeroVironment’s leadership in uncrewed and loitering munitions with BlueHalo’s core capabilities in space technologies, directed energy, and counter-UAS systems, creating a single, integrated portfolio designed to compete at the prime level across multiple warfighting domains. These are mere highlights of the surge underway.
This leads to the central risk of the new consolidation: are we simply creating narrower, more brittle points of failure? While these strategies are lauded for business efficiency, they also concentrate a wide swath of critical technologies under a single corporate umbrella. Should a highly integrated supplier face financial distress or a significant cyber-attack, the ripple effect across multiple domains would be immense. The failure would no longer be confined to a single component; it would jeopardize entire mission ecosystems. Of interest, half of my clients (small, medium, and large) have reported cyber or ransomware attacks over the years. Others kept it quiet or may be unaware of such events. Think it can’t happen to you?
Pentagon Reforms, Accountability,
and Title III Investments
The market-driven evolution of the industrial base is being met with a deliberate, and forceful, policy shift from the Pentagon. The recent, dramatic cancellation of the Navy’s Constellation-class frigate program—a flawed acquisition from the start—serves as a stark case in point. This is not merely a course correction; it is a signal that the tolerance for broken programs is ending. The move is reminiscent of Secretary of Defense Dick Cheney’s 1991 cancellation of the Navy’s A-12 Avenger II stealth bomber, a similarly troubled $57 billion program that was terminated for severe cost and schedule overruns. Just as then, the message to the industrial base is clear: accountability is back; it will be abrupt. This stunning failure provides the backdrop for the new “Warfighting Acquisition System,” championed by Secretary of Defense Pete Hegseth, who declared, “The defense acquisition system as you know it is dead.” Noone should doubt his sincerity but how fast or how fully this takes place remains to be seen. Don’t forget we’ve seen Better Buying Power 1.0, 2.0 and 3.0.
The COVID-19 pandemic unlocked the government’s financial surge tank.
Funding for Title III of the Defense Production Act,
used to preserve critical industries like rare earth magnets,
has grown nearly eightfold since 2020.
To complement these reforms, the government is also opening its own financial “surge tank”: Title III of the Defense Production Act (DPA). The purpose of Title III is to preserve and expand industrial capacity in areas where there might not otherwise be a sufficient commercial market. The inflection point for this tool was the COVID-19 pandemic. The CARES Act of 2020 injected $1 billion into the DPA fund, jumpstarting a dramatic expansion. After averaging just $95 million per year from FY2010-2019, Title III funding exploded to an average of over $730 million annually between FY2020-2025—an almost eightfold increase. This shows the government is increasingly willing to make direct, strategic investments to shore up critical production lines, acting as a powerful counterweight to purely market-driven forces. A prime, albeit extreme, example is the 2025 public-private partnership with MP Materials, where the DoD is using Title III authorities to guarantee prices and provide loans to restore the full domestic supply chain for rare earth magnets—a critical dependency for countless defense systems.
The industrial base may be reshaping from a pyramid to a diamond, with a powerful new middle tier of ‘neoprimes’ like Anduril and Shield AI. For small innovators, the path to success may no longer be solo entry, but partnership with these new, privately-funded integrators. This could even force the Big 5 to shed entire business units to stay competitive, much as Northrop Grumman
spun off its shipbuilding arm in 2011.
The New Middle Tier
& the Future of the Primes
This brings the fundamental structure of the industrial base into question. Today, the base resembles a pyramid: the five prime contractors at the top perform roughly 30% of the work; the next tier of 45 companies accounts for another 20%, bringing the total to 50%; a third band consists of approximately 60,000 small business set-asides; and the broad base is made up of hundreds of thousands of smaller suppliers. What shape should this reconfigured industrial base take? A flatter “diamond” with a much larger and more capable middle tier seems to be emerging. This new middle is populated by a class of well-funded challengers—dubbed “neoprimes” by investors like MilVet Angels—such as Anduril, Palantir, Shield AI, and the newly combined AeroVironment-BlueHalo. These companies are not just scaling internally; they are acting as consolidators themselves, acquiring smaller innovators to build out their portfolios.
For the thousands of entrants at the base of the pyramid, this has profound implications. This shift requires a new mindset, a point I often test in my own strategy work by asking prospects about their willingness to partner their way to growth. Most have not given it serious thought; the desire to simply “get bigger” is not a strategy. The most viable long-term approach for a small innovator may no longer be solo entry, but rather a strategic partnership with, or acquisition by, one of these emerging mid-tier powerhouses. Serving specific customer needs by integrating with a larger team’s capabilities often makes far more sense, recognizing that a small piece of a bigger pie can be the most effective path to growth. These neoprimes are becoming the new integrators and gatekeepers, curating innovation from the base and packaging it for the Pentagon. This creates a more dynamic ecosystem, but it also means that the dream of being a standalone disruptor may be replaced by the reality of being a critical component in a larger, privately-managed portfolio. The final, and perhaps most disruptive, question is what this pressure means for the Big 5 primes at the top. As the neoprimes capture the future of software, AI, and autonomy, could the traditional giants be forced to shed entire business units to stay competitive, much as Northrop Grumman spun off its shipbuilding division into Huntington Ingalls Industries in 2011?
The great reconfiguration has only just begun.
What Am I Reading?
Michael Connelly’s Resurrection Walk is a tightly written legal thriller of the Lincoln Lawyer series; it’s a focused, fast-moving investigation. The premise centers on Haller’s search for wrongful-conviction cases worth taking to court, and the book wastes no time pulling the reader into the mechanics of how these cases are built. Connelly’s pacing is crisp, the procedural detail is clear without being heavy, and the story maintains steady tension as new facts surface. DNA testing reflects just one technology the book explores.
The central mystery—whether a woman convicted of killing her husband can prove her innocence—unfolds with just enough twists to stay compelling without feeling contrived. Resurrection Walk is suspenseful and thoroughly satisfying for anyone who appreciates a smart, well-told crime story. A nice break from business books during the holidays.
