Firm Tied to Team Biden Looks to Cash In On COVID Response
Democratic heavyweights Tony Blinken, Lloyd Austin, and Michele Flournoy all have equity in a firm investing in government contractors. One watchdog calls the practice “gross.”
An investment firm with deep ties to at least one and possibly more members of Joe Biden’s would-be Cabinet views the government’s response to the coronavirus as a potential money-making opportunity, according to filings with the U.S. Securities & Exchange Commission.
Pine Island Capital Partners boasts on its website of its “leadership, investing, and networking expertise of our partners.” As the Daily Poster and the The New York Times recently reported, its list of “D.C. Partners” includes Tony Blinken, Biden’s nominee for secretary of state, who has been on leave from the firm since joining the Biden campaign in August. Also on the list are two leading candidates to run Biden’s Pentagon, Michele Flournoy and retired Gen. Lloyd Austin.
All three Democratic foreign policy heavyweights own equity stakes in Pine Island, but “would divest themselves of any investment in Pine Island if confirmed for a position in the administration,” according to a company spokesperson. A source familiar with the situation confirmed to The Daily Beast that Blinken plans to divest from any Pine Island holdings should the Senate approve his nomination.
On Sept. 23, in the closing weeks of presidential election, Pine Island, a private equity firm, unveiled an initial public offering for a new investment vehicle known as a special purpose acquisition company, or SPAC. SPACs are essentially “shell compan[ies],” as CNBC characterized them, created to buy other firms. Buying shares in these blank slates is essentially an exercise in betting on the acumen of the SPAC’s directors and advisers.
That makes Pine Island’s reliance on its team of prominent Washington insiders particularly significant, especially at a time when the government has appropriated and is set to spend hundreds of billions of dollars in response to the lingering pandemic.
“Capitalizing on their influential networks and drawing on their deep industry knowledge and experience,” the firm’s website says, “Pine Island’s Washington, D.C. partners work in tandem with the investment team to source deals, conduct analyses, win bids, close transactions, and directly advise the companies in which we invest.”
The firm raised $218 million for its new SPAC, which is specifically looking to invest in “defense, government service and aerospace businesses,” according to the prospectus, which was amended and re-issued on Nov. 13. And one specific area of government contracting it hopes to plumb for new business lies in the government’s response to the coronavirus.
“We further believe COVID-19 will be a tail wind for the sector in the long-term as federal, state and local governments implement new tools and services that heavily depend on inter-agency connectivity while constrained budgets will benefit from operational efficiency and automation, for which government services are well positioned to deliver,” its filing reads.
In other words, Pine Island’s new fund sees the government’s response to the coronavirus as a novel opportunity to cash in—not in terms of profiting directly off treating the lethal virus, but by investing in government contractors that federal and local agencies will turn to in its wake.
For companies in the government contracting business, it’s common to seek officials with experience and expertise in Washington. And former government officials with deep knowledge of and connections in the agencies that dole out high-dollar government contracts frequently secure gigs with companies looking to land that business.
But that “revolving door” between government and industry can create perverse incentives and conflicts of interest, ethics experts say. And it’s just that sort of business as usual that Mandy Smithberger, the director of the Straus Military Reform Project at the Project on Government Oversight, says is concerning in this case. “These kinds of conflicts are particularly disappointing given justified criticisms of how the Trump administration has repeatedly used the government to further personal and financial interests,” Smithberger wrote in an email. “While this isn't uncommon, it's still gross.”
“The nature of [Pine Island’s] business, and how they sold it to clients, makes it that much more incumbent on anyone nominated to go above and beyond to disclose clients and any government programs or policies they worked or advised on,” Smithberger said. “And anyone confirmed must make sure there are strong firewalls put in place between former Pine Island Capital officials and the firm and its clients.”
Pine Island isn’t exactly shy about its strategy of leveraging its relationship with politically connected individuals to boost its business. On its website, the firm listed two companies with defense applications, one an aerospace/automation machining company and the other a live-fire-training firm for “military, law enforcement and commercial companies.”
“We believe that there are still a significant number of potential targets with competitive advantages in ‘big data’ analytics, enterprise IT, secure data processing, seamless inter-agency technology integration, communications and training solutions that would benefit from our deep bench of advisers who contribute decades of relevant government and defense expertise,” the prospectus reads.
The document adds, “Our leadership team is well equipped to support a potential target on all key competitive factors of the government services market as we have unique insight into how rapidly changing technologies will directly impact the evolving preferences of defense, intelligence and federal government customers.”
On the management team of Pine Island is John Thain. Thain was the final chief executive of Merrill Lynch ahead of the 2008 global financial crisis caused by Wall Street and its acquisition by Bank of America. Reportedly, before Bank of America executives pushed Thain out in 2009, Thain requested a $30 million to $40 million bonus at the fall 2008 height of the crisis. He received none and denied asking for one.
Thain, according to his Pine Capital biography, is currently on the board of the deeply controversial rideshare and data firm Uber and is a member of the supervisory board of Deutsche Bank, which has come under government scrutiny in recent years.
It’s become increasingly common for Wall Street titans like Thain to set up SPACs, with well-known hedge funder Bill Ackman and early Facebook exec Chamath Palihapitiya among the managers. In 2020, the corporations raised around $64 billion, according to CNBC.
These deals can be particularly lucrative for the directors and advisers of SPACs. Traditional funds often need to raise money to buy up companies. By relying on public investors’ money to fuel their acquisitions, they can gobble up businesses—without ever putting up a dime of their own.
Ordinarily, however, the SPACs appeal is centered solely around their managers’ financial wiles.
Though its roots are in financial services, Pine Island has also assembled a team whose value to the firm appears primarily in the political sphere. In addition to Flournoy and Austin, its “Washington D.C. partners” also include former U.S. Senators Tom Daschle, Byron Dorgan, Saxby Chambliss, and Don Nickles, former House Democratic Leader Dick Gephardt, and former chairman of the Joint Chiefs of Staff Mike Mullen.
"Our deep bench of connected advisors and former government officials will be the catalyst to recruiting, retaining and developing an elite team of managers and employees, which we believe will enable us to exploit an opportunity in government services," Pine Island Acquisition Corporation wrote in its prospectus.
Federal political appointees can be required to divest their holdings in private companies if doing so would be “reasonably necessary to avoid a conflict of interest,” according to federal ethics rules.
Pine Island’s SEC filing is bullish on aerospace companies, precisely because it foresees “a gradual and volatile recovery” from the “post-COVID-19 status quo.” The firm believes it “can find opportunities to provide needed capital at attractive valuations to Tier 2 and Tier 3 suppliers in the highly fragmented global aerospace supply chain landscape,” according to the filing.
Its similar bullishness on the U.S. defense market, despite an expectation of Pentagon budgets falling from their gargantuan heights of a quarter-trillion dollars, reflects a faith in an increased demand “for advanced electronics, communications, sensor and detection processing and other technologies.” Pine Island says that’s something its team is “uniquely positioned to capitalize on given our combined investment experience and deeply connected partner group of former U.S. defense and government officials.”
Asked about the appearance in the prospectus of Pine Island anticipating to cash in off the post-COVID contracting environment, the Pine Island spokesperson told The Daily Beast, “the description of the implications of COVID-19 on future business prospects is a standard, ubiquitous feature of prospectuses right now for such investment vehicles regarding any industry.”