Security and Resiliency Initiative

Jay Horine:

Hi everyone, welcome to the first episode of our Security and Resiliency Initiative series. I'm Jay Horine, Global Head of the Security and Resiliency Initiative, and I'm joined by Doug Petno, Co-President of JPMorganChase and CEO of the Commercial and Investment Bank. One year ago, we launched the Security and Resiliency Initiative with an ambitious goal: to help strengthen the industries, technologies, and supply chains that underpin long-term economic security and resilience. Doug has been a strong advocate for this effort from the beginning and has had a front-row seat to its evolution over the past year. Thanks for joining us, Doug.

Doug Petno:

It's great to be here, Jay.

Jay Horine:

Let's start with how SRI came to be. Was there a moment or conversation that sparked how the effort came about?

Doug Petno:

It's a really interesting question. There was no single moment that caused us to launch SRI. It was really the unfolding of serious events that were happening around the world that caught our attention. And we were watching each of them very, very closely. I think it started in earnest when Russia invaded Ukraine. Following that, you had the "Liberation Day" and the after-effect of tariffs that were washing through global trade, and some of the export bans that exposed single points of failure in our supply chain and supply chains. And then you also saw, at this very same time, a very powerful emerging technologies like quantum and AI, accelerating rapidly. The need for the U.S. and its allies and major trading partners to actually be the end game winners in that became more pronounced. So it was really the confluence of all these things happening at the same time. In the background, we were also getting feedback from the U.S. military, somewhat in response to the geopolitical events, that the world needed to remilitarize, unfortunately. And not only did they need to find creative ways to do that and to finance that, they needed to build weapons and machinery and equipment that reflected the change in the character of war, which would really depend heavily on defense tech and new technologies. And military officials had actually reached out to J.P. Morgan and said, we're having a hard time. We're having a hard time securing those types of technologies with the procurement process. Can you help us? So when we took stock of all of these things, we said, hey, we really need to do something. This is a profound moment for us to do what we do best as a bank, bring together the broad-base capabilities of JPMorganChase, best investment bank, best capital markets provider, great advisory, subject matter experts, global perspective, and see if we can really make a difference. And do it at a scale that only J.P. Morgan could provide.

Jay Horine:

Building on that, why do you think this has resonated so strongly with clients, not only in the United States, but around the world?

Doug Petno:

I think people very quickly realized that they had supply chain vulnerabilities. And it goes all the way back to COVID. I mean, just think about the personal challenges that all of us faced during COVID, just sort of keeping your household running.

Jay Horine:

Yeah.

Doug Petno:

There was an industrial version of that. And the long, long list of single points of failure that were exposed during the pandemic. And then in the wake of "Liberation Day," in the aftermath of tariffs that went through global trade, we saw export controls shine an even brighter light on some very, very serious single points of failure in our supply chain. And I think the one that stands out to me is when the Chinese put an export control on rare earth magnets. We have rare earths in the United States, but we didn't have rare earth refining and certainly didn't have rare earth magnet production in the U.S. And those magnets are central to our industrial base and critical to our economy. So that one single item could really bring our economy, our industrial base to its knees. And so you do a little work, you quickly realize, it's not just that one item. There's a long list of critical minerals. There's critical chemicals that feed into the pharmaceutical and the healthcare industry. And the list goes kind of on and on and on. So these vulnerabilities were laid bare in the last several years. And we really were compelled to do something about it. It ties back to our purpose-driven strategy at J.P. Morgan, in this particular case is we needed resilient supply chains in order to survive whatever kind of geopolitical swings and whatever kind of market dynamics were to unfold. And so it really translated into the SRI initiative. And it's been a really profound first year for us.

Jay Horine:

So now, as we celebrate our first anniversary of this, and all these conversations you've had with global leaders and both private companies, public companies and the like, what surprised you the most after one year?

Doug Petno:

There are so many surprises. I think the most inspiring is the amount of people you included that wanted to run to the fire. We've assembled an amazing team of professionals who stopped doing what they were doing and kind of came...

Jay Horine:

They really did.

Doug Petno:

...gave everything up to come do this full-time. So that's really encouraging. There's a lot of people, the government included, that were already working on serious initiatives, private partnerships, focusing on using the government in a practical way to help sort of facilitate solving some of these problems. And there were many, many companies out there that were bringing innovation to bear. And if you sort of step back and think what is going to be one of the big defining things that gets us to where we need to be, it will be big advances in technology, big advances in industry and innovation. And as I said, we're not starting from scratch. There are many, many market participants with just unbelievable entrepreneurship. And these businesses are incredible. What they're doing across defense, supplied materials, manufacturing technologies. We've got startups and venture capitalists already seeking ways to solve those problems. It's really been quite fascinating to watch that over the last year.

Jay Horine:

One of the things that you and I have talked about is the quantum of capital, the size of what people are building, and how interconnected these things are, how you can't build this factory unless you have the energy and you can't have the energy... Talk about as part of what we're trying to do with SRI is facilitate these kinds of conversations, maybe the interconnection. That, for me, has been one of the surprises, just how interconnected and interwoven all of these things are.

Doug Petno:

There's no single loan or single financing. The solution is complex. You need policymakers, you need industrialists, you need capital formation, you need intermediaries, you need thought leadership, you need innovators. The word you use is the exact right word. It's an ecosystem of participants to get that done. And that's why J.P. Morgan, it was really special for us, just given who we are and our power to convene and Jamie's voice in the marketplace to be able to bring all of those parties to the table and to have everybody sort of run to the fire to solve these issues and to be part of the solution.

Jay Horine:

Public and private sectors have been somewhat independent, and now we see them in the U.S. and in our trading allies starting to work together. How do you think about the shift of the partnership in some cases of government, private and public companies to go towards these common goals?

Doug Petno:

I think that the challenges that we're facing in SRI are enormous. The amount of capital that we need to raise, the obstacles in front of us, the fact that some of our competitors and trading counterparties are behaving like mercantilist competitors where they're potentially keeping prices low. You're going to need the government, full stop, to be at the table and part of the solution. And so, it's been really quite constructive to see how involved they've been. We've had a long list of public-private transactions that have been purposely designed to solve some of these issues. And I think the MP Materials example sort of lit the fire in many respects. And then we've seen a series of other equivalent type transactions where, absent government involvement, we wouldn't be able to create a supply source for rare earth magnets in the way we did in that situation.

Jay Horine:

If we sit down a year from now, where do you think we need to be? We're doing policy stuff, we're doing workforce stuff, providing capital for people to start companies, build, and the like. But one year from now, what do you envision is the next step for us in being successful?

Doug Petno:

I think first, let's just take stock of what we've done in the past year. We started from nothing.

Jay Horine:

Right.

Doug Petno:

We put a team together of just a high quality team of professionals, built this boutique capability within JPMorganChase. We have a research effort, a policy effort, multiple financing work streams in place, several major projects that could really transform the economy. We've made points of contact across the U.S. economy, across the U.S. government, across multiple states around the U.S. So if you have to say, where are we going to be a year from now, it's easy to say we have high expectations. So I think we want to further advance against our financing goal. As you know, we've got one- and-a-half trillion dollar... So we expect to facilitate or originate over 10 years. We're well on our way there.

Jay Horine:

Yes.

Doug Petno:

We have a pool of equity capital we want to invest. I think we should continue to find good transactions there. We're not quite halfway through the original 10 billion. I think that number could be much, much greater. We have several policy initiatives around workforce development, shipbuilding, advanced manufacturing. Good policy could be really central to the solutions and the outcomes here. And I think our team having the power to convene and get all the right thought leaders, that's an important role. And then just education through our powers to convene, bringing people together, and through the thoughtful research that our new SRI-specific research effort is providing, educating all major stakeholders around the opportunities, the challenges, the complexities that we face. I would expect that a year from now, that would be even further developed. And then as we challenged ourselves, as you know, in our last Executive Advisory Council board session, what are two or three major transformational things where we have a chance to actually make a difference and to really bend the curve of the outcome there? And I think we're zeroing in on a few of those. I think a year from now, we'll surprise ourselves on how much progress we're going to make on that. So I'm tremendously excited about what we're doing. And, you know, the impact is is one thing. It's also just the inspiration for the company to see how this work is going to affect the security and resiliency of world markets. And it's just, these are huge challenges that we've waded into with courage, and with capital, and not just financial capital, with a lot of human capital.

Jay Horine:

It's really been remarkable, and I know there's a lot more to do. So thanks for joining me.

Doug Petno:

It's been great to be here. Jay, thank you. Excited about the next year.

Jay Horine:

Thanks.

END

Doug Petno:

We launched our trillion-and-a-half-dollar Security and Resiliency Initiative because we saw the desperate need to make changes in our supply chain and the way the country was responding to threats to our economic resiliency. We now have dedicated teams across industry subgroups, and we've hit the ground running.

Jay Horine:

The five main pillars of SRI are supply chain and advanced manufacturing, defense and aerospace, energy resilience, frontier technologies, and health care and pharma.

Troy Rohrbaugh:

We're part of our community. We want to do our part as a company to support what's critical for the country. And I think SRI is a critical piece of that.

Jay Horine:

We've built out the SRI team to work with the commercial and investment banking partners across global investment banking, corporate banking, and the commercial bank, both here in the United States and globally. We also are bringing together thought leaders, policy papers, and other mechanisms to get people to think about not just what they're doing today, but what they might be able to do in the future.

Doug Petno:

This started out in the U.S., but it's very quickly becoming a global initiative. And I think the impact will be felt for decades to come.

END

Derek Chollet:

The government has a critical role to play, but the private sector has an indispensable role to play in trying to ensure that the right investments are getting made to the right companies to ensure that we're innovating for our defense future.

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Mark Marengo:

Aerospace and defense specifically is a key foundation to our national security. So when you think of what the SRI initiative is designed to do, it's really about resolving our most critical national security issues. And aerospace and defense is one of the five key pillars that we've outlined.

Derek Chollet:

The way this has been designed, it's a recognition that J.P. Morgan has a unique role to play. Given our experience, given our history, given our clients across all of these sectors, we have a critical role to play and we're going to play it, right? Whether it's making this just a priority, whether it's putting $10 billion off our own balance sheet into the mix to invest, this is something we're going to do. But it's not just J.P. Morgan alone. It's something we're going to have to do in cooperation with U.S. and other governments as we expand this out, but then also with partners throughout the private sector, first and foremost our clients, but other partners in this space. Because it's a big challenge, a big set of problems that didn't happen overnight. We're not going to get out of it overnight, but we do have a critical role to play.

Mark Marengo:

So the government will spend roughly a trillion dollars...

Derek Chollet:

Could be 1.5 trillion.

Mark Marengo:

...on defense. So as you think about the capabilities where we see a lot of the investment dollars going, I think it's critical areas like AI and cyber. It's areas like drones. It's subsea capabilities, recognizing that that's going to be a very important capability. So whether that's submarines, whether that's unmanned subsea, whether that's subsea sensors, that is a very active area where we're seeing a lot of investment dollars going. And then I think, look, there's a lot of interesting next generation capabilities that in as long as I've been covering this sector, for over 20 years, there is more venture capital-backed next generation technology companies emerging than I've seen at any other point in time in history. And so I think there's a lot of focus on bringing those next-gen capabilities, making sure they get funded and bringing those capabilities to the warfighting domain.

Derek Chollet:

Technological innovation and military readiness are inextricably linked. They always have been. And this is a great example of an area where the synergies between the various components of SRI are absolutely essential because the work that, Mark, you're doing on the defense and aerospace side has got to be hand in glove with our colleagues working the frontier tech piece of SRI, also, by the way, with our colleagues working critical minerals and rare earths, because all of this is combined into military readiness. And so the investments in those domains will absolutely feed into our ability in defense and aerospace, and also building those synergies between companies in the frontier tech space that don't think of themselves necessarily as defense companies or aerospace companies, but will be creating technologies, innovating technologies that will change the way we think about defense and aerospace.

Mark Marengo:

Our goals with SRI are very much mutually aligned with the goals of the administration, which is to solve the most critical problems facing our national security. And so, through our active dialogue with them, we're able to deploy our capital and our resources to those areas that are most prescient to that.

Derek Chollet:

And what's been interesting for me to watch is how, first, the government, which obviously in this space, the defense and aerospace, has always understood and had a very close partnership with the private sector, I would say that's only really intensified and diversified in the last year and a half. And the government doing things that are not unprecedented in U.S. history, but certainly rare in recent history in terms of taking equity stakes in particular companies and really working so closely with the private sector in trying to bring about the kinds of investment that they judge are necessary for U.S. national security. But then the second thing that's been really interesting to watch, and something that SRI is critically part of in the defense and aerospace world, is working with partners. SRI is principally about the United States, but it's also about making partners stronger. And as partners are thinking about their national security needs and the resilience of their supply chains and the defense and aerospace reforms that they are undertaking, they are looking for the support of a global bank, a leading global bank like J.P. Morgan, for help. And we're learning a lot of lessons by our efforts to talk to companies about their investments and ways to help them in working with the U.S. government that we can apply to our partners around the world. Because we're seeing it's not just the U.S. defense budget that's going up to north of a trillion dollars. We're seeing a massive spike in European defense budgets. And that's something that's been a long time coming. And it's here, and it's going to change over time the defense and aerospace landscape inside Europe as well. And so, that's something that we think is important. We're excited about participating in, and so far, the conversations we've had with European clients as well as European governments has been quite positive, and they're very receptive and in fact eager to have our work and help with them in that effort.

Mark Marengo:

There's a lot more investment going into defense in Europe, right? We've taken a number of companies public recently that have been very, very successful deals, books that are massively oversubscribed. So there's a lot of capital flowing into defense as a sector, not only in the United States, but also in Europe.

Derek Chollet:

This is not going to change overnight, but I think we can already start to see, I think, in some of the work that we've been part of, in kind of that bending the curve in the right way where the most critical technologies, the critical industries, the critical innovations for the United States in terms of our own security writ large, that 5, 10, 15 years from now, we're going to be in a position where we're more resilient, where we're also going to be economically successful, right? And we're investing in systems of the future in a way that's going to make us all safer. And that's ultimately the larger mission here. And J.P. Morgan alone is not going to solve the problem, but we can use our unique capabilities and unique experience, and unique and diverse network to try to do our part to solve that problem. And I think we're already off to a good start, although there's a lot of work left to do.

Mark Marengo:

Well, a lot of work left to do, and I think you hit on one of the most important parts is that we're not going to solve this alone, right? We need partners, we need allies abroad, we need the government working in partnership with us, we need other banks, other financial institutions, other sources of capital that all can come together and ultimately work towards solving the long-term problems that we've all talked about.

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Benjamin Wilson:

We used to focus on having the capability to do all of this advanced manufacturing, and then we realized no matter how great the facilities are, they can't run without the inputs.

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Michael Johnson:

The Security and Resiliency Initiative, which we call SRI, really has five subcomponents to it. One is supply chain and manufacturing, which we're going to talk about today. One of the most important of those is supply chain and resiliency. It's really what started all this. In April of last year, when the supply of rare earth magnets got cut off, two months later, auto factories started shutting down here. That was a wake-up call for many of us that, wait, why are we vulnerable in this? And it's supply chain that leads through so much of this.

Benjamin Wilson:

The SRI initiative is all in service of figuring out the national security components of all these things that traditionally I don't think we as a country thought of as national defense or national security. We typically thought of that as weapons and munitions, whereas today we're thinking about it as generic pharmaceuticals, grid security, technology, and that's really the purpose of the initiative.

Michael Johnson:

It's interesting. I think we probably all at the same time around COVID, for the first time, really focused on supply chain for a different reason entirely. But then, as we've started to study this, you find so many areas that we just don't make the things we need to make, and so much reliance on other places. And a lot of what we're doing here is identifying those chains and finding a way to make them more resilient or bring them on shore.

Benjamin Wilson:

I also think what has been fascinating about this process is that you realize it's not just the big companies that are incredibly important to all of these different subsectors and supply chains and advanced manufacturing, but there's an enormous amount of small, family-owned businesses in all different parts of the country that really need the support and the capital to make the investments required to address all of these issues that we have in the broader supply chain.

Andrew Castaldo:

No, look, that's exactly right. I mean, the end manufacturer has to rely on dozens of individual suppliers of components and pieces for them to produce the ultimate end product that they're producing, whether it's for the government, for the economy, or heavy industry. And so, it's our job collectively to try to identify those weaknesses within the supply chain. And frankly, those are companies that probably need our help more than the larger companies. And so that's the areas that we can make a difference as a firm. I think that's the areas that our U.S. government is also focused on. And I think collectively, we can really try to fix the perceived problem of what's happened over the past 20 years.

Michael Johnson:

One of the things, interestingly, we're doing within SRI is we're identifying that second and third tier supply chain bin that you talk about. And one of the ways we're doing that, we do a lot of research, but the other way is to call our clients. Call people that build power plants or nuclear plants and ask them: What are you worried about? What's the second and third?" And what we hear is not what you read in the press. What we hear are, well, everybody's talking about transformers, but we need medium voltage transformers or we need molders. Or, you know, you find out, and now what we're doing is digging deeper and going and finding those small companies in many cases where we can lean in with advice, with balance sheet, with capital to help those. In many cases, not just de-bottleneck, but expand to meet the requirements that are coming up.

Benjamin Wilson:

We, up until recently, lived in a just-in-time economy. Companies were punished for having too much inventory. And now we are realizing, they're realizing, people around the world are realizing the importance of having stockpiles of things like pharmaceuticals, like inputs for advanced manufacturing. And a huge goal of our SRI initiative is to help people adjust to the new way they need to think about having access to the inputs they need to continue to function.

Andrew Castaldo:

There are a whole host of critical materials and other supply inputs that are critical to the overall functioning of our economy, and we need to figure out ways to onshore those materials and the processing of those materials. And so what we're trying to do is identify where are the weak links in the chain, across all of industry. It's not just the minerals, it's the processing, it's the refining of those minerals that really makes our overall economy go. And so I think, as a whole, we're reorienting and we're helping reorient the economy in a way that makes it function for the long term.

Michael Johnson:

The other thing about the conflicts that are ongoing now and have been ongoing is they impact the supply chains in multiple ways. So one is they raise the demand for certain things. Rare earth magnets is an obvious one into all sorts of things. But also, they hinder the ability to manufacture those because of either physical disturbances or supply chain or shipping disturbances, and so you get hit from both sides and, again, we try to go into those situations and find out where the bottlenecks are. Many of those can be facilitated by more capital. That's one of the things we help bring to bear.

Andrew Castaldo:

I'd say, look, another great example is what we've done in terms of starting to stand up rare-earth magnet production in the U.S. Until, you know, the past two to three years, that wasn't even something that people really thought about.

Benjamin Wilson:

But the recognition and the difference between today and as little as 18 months ago is, we used to focus on having the capability to do all of this advanced manufacturing. And then we realized, no matter how great the facilities are, they can't run without the inputs.

Michael Johnson:

One of the most fun things about the job that we do is we occasionally get to go walk a factory floor or see a facility. And there was a notion that advanced manufacturing can't really happen in this country. That's completely false. Like, I walked the floor of very advanced factories. I walked a floor that was probably 300,000 square feet. I saw four people. And they had robots doing cutting-edge technology, making things that people use every day. And what we've had is some of our clients come to us on the heels of the SRI announcement and say, "Hey, we're really good at manufacturing. We have spare capacity. Maybe we could use some of that for some of these younger companies who are trying to advance their technology. You know, we can help them scale up."

Benjamin Wilson:

Our clients' need for scale and the ability to strategically and holistically think about where they're putting their capital, that's also changed. It used to be looking for the lowest economic cost. Now, they're thinking more about where should those dollars go? Where is it going to be most stable? Where is that going to be part of a broader ecosystem that we are building within this country? And so, you're seeing a lot of announcements and action around investments in the United States that have either never happened or haven't happened in a very long time.

Andrew Castaldo:

And look, I think you are seeing, you going to continue to see large companies make investments down the supply chain, right, to make sure that they have the materials that they need. Again, to shore up the supply chain, I think we're going to see that be an important M&A trend over the coming 2 to 10 years, effectively.

Michael Johnson:

One clear example of the long-term impact of this investing is the Korea Zinc deal. That's a smelter that's going to be built in Clarksville, Tennessee. And that technology, and Korea Zinc was picked because they are the largest processor of nonferrous metals in the world. They have the most expertise. So we're going to take, going to build that facility and we're going to train our workers on their technology, their know-how, as you said earlier, and that is forever going to make 11 of the 13 critical minerals we have. And that will establish jobs and supply chains behind that, and feedstock behind that, and transportation. And there's a ripple effect of that that just keeps going.

Benjamin Wilson:

I'd build on that by saying, Michael, the key part of what you just said is we are building resiliency. The reason we call it the Security and Resiliency Initiative is because the ripple effect of all this investment over time is going to be a more resilient, more vibrant, more secure economy, therefore country, therefore world.

Andrew Castaldo:

And Michael, I think you said this, but effectively, it's not just, you know, the Korea Zinc project isn't just producing zinc, lead, germanium, gallium. Those materials are going to go into additional manufacturing processes that are going to be onshored into the U.S. or expanded in the U.S. And so there's this ripple effect. There's not just a zinc smelter. It's a zinc smelter that enables additional manufacturing within the country, which is just going to feed upon itself.

Michael Johnson:

Three years ago, we met with CEOs who said they didn't really worry about supply chain. They build an automobile or whatever, and the other parts showed up. A little bit of this happened through COVID, but more recently through some of the critical minerals and other shortages, back to lithium, they found that they just can't rely on that anymore. So they need to build, again, resilient supply chains that go one or two or three levels down. And that's going to be important now and it's going to be important in 10 and 20 and 30 years.

Benjamin Wilson:

And building onto that, Mike, we've had multiple shocks in the last decade, right? You had COVID. Now we have rising geopolitical tensions. And why it's going to be relevant is we don't know what the future holds. The last five years, six years have been pretty crazy. And so boards and management teams, in my mind, are now willing to spend the dollars, build the resiliency in the supply chain so that when whatever else comes next, they're not vulnerable, and therefore their products, their shareholders, their employees are not vulnerable. And that is a shift in mentality that is not going go away in the coming decade.

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Dr. Sarah Kapnick:

With matters in national security, you want to make sure that you have resilience against multiple different scenarios. And so a diversified energy mix is really important for making sure that you have that diversity in all of your supply chains, but also all the energy that's coming onto the grid.

Michael Johnson:

So the Security and Resiliency Initiative, which we call SRI, is a commitment on two fronts. It's a trillion-and-a-half-dollar commitment to facilitate and finance and invest in companies over the next 10 years that fall within security and resiliency in secure supply chains, in defense, in energy, in frontier technologies, and in pharma and healthcare.

Dr. Sarah Kapnick:

I find it's really important for the future of innovation of science and technology being commercialized because these new technologies, they're capital intensive. The SRI initiative is going to be so important for scaling these types of companies and really allowing them to grow so then we have access to those technologies. And all of the different areas that we're focused on funding and financing, they are what we will need in this changing world going forward. We need new types of pharma. We need new sources of energy. We need more resilient grids. We need quantum and other computing capabilities because that is the future that will drive economies. And so I'm really excited about all the activities that we're doing because we're really supporting the future of the economy.

Michael Johnson:

The scaling is such a great point. The trillion and a half dollars over 10 years, we would've already done a trillion dollars of activity, just our normal business, but we added 50% or $500 billion of additional scaling. And that's exactly because of what you said. It's that capital intensity of all these businesses that need it.

Dr. Sarah Kapnick:

Yeah. And if the private sector doesn't support these things, we will not see that growth and we will not see that innovation. So I'm hopeful that doing this is going to accelerate all that innovation and accelerate the economy in ways that otherwise wouldn't have happened if we had not made this initiative.

Michael Johnson:

So data centers in the US will start there, have been playing what I call a game of musical chairs for the last two years. And that's going around the country and finding spots of excess power because our grid, as you know, there's not one grid. There are many small grids and there are different levels of usage. And they were able to find places in Columbus, Ohio or Atlanta, Georgia, or Fort Worth, Texas that had latent power that was excess power and they could sign a 15-year contract and build it. That's all taken up. All the excess is gone. And now the real challenge is they have to bring power with them.

Dr. Sarah Kapnick:

Yeah, I agree. It was a race to collect all the low hanging fruit. And now people are realizing they really need to think about the planning in ways that they haven't previously. And so now we're going to see more interesting financing. We're going to see new technologies brought online. We're going to see new types of companies that haven't existed before that are going to try and piece together all those problems to be able to bring the energy online.

Michael Johnson:

I think we both know natural gas is going to be one of the biggest sources in the near term. And then they'll layer in solar and wind to decarbonize that and to add electrons. And then longer term, I think starting in 2030, really ramping up 2035, we'll have nuclear really kicking into the grid.

Dr. Sarah Kapnick:

Storage has been incredibly important in the recent years to also bring that online in Texas. That is where storage has been being put onto the grid to be able to take all that excess also from when the wind blows for then when the energy is needed, and same with solar. And that will be really important with these data centers as they're trying to bring it on with renewable energy sources on site as well. And also for the backup power when there's grid intermittency problems, because those data centers need power all the time. And so those will be put in place also to ensure that they have that steady power that they are needed.

Michael Johnson:

The storage, I agree with you, and it's being added like crazy every day, but they still can't get storage to be much longer than four hours. Is that right?

Dr. Sarah Kapnick:

There are a couple early-stage companies, and that's part of the reason SRI is so important, is that there are early companies that are out there that are starting to be built and they're building their first factories for storage that goes out to a hundred hours. And so those need to be built up and they're CapEx intensive. And I think we're going to see more of these companies available and making that later stage with the investments and they need to be deployed because the demand is there for more than four hours. A diversified energy mix is really important for ensuring that you actually can get all the electrons on the grid, but also as you are trying to balance the loads from the different energy sources, it allows for being able to ensure that you can have all that energy continuously and meeting the demand and the demand through many different times when you have extreme weather of heat, when you have cold, you have to actually have that full mix to be able to make sure that you're bringing enough onto the grid and being able to balance all of that as that's coming online.

Michael Johnson:

It is a balancing act. It's amazing to me that grids keep producing with all the demands and all the changes and all the weather, but I'm curious, the point you made about all the sources, how do you feel about dispatchable twenty-four seven energy versus intermittent energy and how they play into the mix?

Dr. Sarah Kapnick:

Well, I see it as a scientist. It's a big science question, an optimization problem of being able to get all those different sources on. And historically with the grid, as you were saying, dispatchable and twenty-four seven, there were certain types of energy that it was really fossil fuel based where you had to have it where you could fire it up, fire it down. But now when we have all these different sources, but also new grid technologies, you can have the baseload power with nuclear, you can have wind, you can have solar, you end up now having storage coming online in larger quantities because they're trying to be able to match it for when you have supply versus when you have demand. And as more technology of smart technology for grid management becomes available, you integrate all of those in to be able to actually use the sources of the energy that you have on the grid.

Michael Johnson:

The most exciting things in dispatchable energy, you know I believe this, geothermal, right? I really think it's time has come and it's been promised for a long time, but the new methodology, the new technology really are going to break through I think finally. So that's one of the most exciting developments. The other one, of course, is nuclear, which has been long the promised land. And I'm curious if you agree with this. When my kids ask me, how are we really going to reduce carbon emissions? I say one of the best solutions is broad use of nuclear.

Dr. Sarah Kapnick:

Oh, I agree. And it's starting to come back with people are very excited about nuclear and the future of that technology. I'll also add on geothermal. Part of this unlocking is where technology is and being able to drill further down and being able to drill horizontal wells. That is being able to place geothermal in places where we haven't had geothermal before. And so instead of just being in those tectonically active places where geothermal has traditionally been, you're going to be able to unlock the capability across many more land spaces around the United States, but also globally. With matters of national security, you want to make sure that you have resilience against multiple different scenarios. And so a diversified energy mix is really important for making sure that you have that diversity in all of your supply chains, but also all the energy that's coming onto the grid. And that protects against trade issues. It protects against supply chain issues. For renewables, sometimes it also protects against certain types of weather. And so you have that layering of these different types of energy that allow for it to be continuously available so you don't have any of those weak links that could lead to blackouts and brownouts.

Michael Johnson:

I totally agree. Think of if you've only had gas when Uri hit in Texas, you just would've had no power, which they had for a short amount of time. So sometimes wind and solar pick up the slack, sometimes gas picks up, gas fired power picks up the slack. And I also think that a diversified source actually helps internationally because think about the generation growth that we've had in this country from solar. That actually allows us to export more gas, which helps the allies.

Dr. Sarah Kapnick:

Well, and I'm also seeing it outside the United States. There's an interest in self-sufficiency of energy. And so there's this push towards development of renewables, development of storage so that they're no longer beholden to volatility for certain types of energy, but then also to be able to produce their own and not have to rely on imports continuously. But that's once they have the infrastructure in place. And the trading partner diversity matters then for what's actually being built as well.

Michael Johnson:

Remember when energy independence was a pipe dream and a joke in this country? We just really never thought it could happen, and then it happened. Clients tell me, if you give the engineers enough time and enough money, they will figure it out. And we've seen that happen.

Dr. Sarah Kapnick:

Oh, as a scientist, I completely agree with that statement.

Michael Johnson:

In deal making, what we're seeing is consolidation with different kinds of energy. So think of companies that are big nuclear producers buying natural gas so that now they can- Why is that? So that they can just provide more forms of energy. If you're good at natural gas, you can stand up new generation quickly, and if you're good at nuclear, you can stand up low carbon generation for the long run. So the same companies are combining to be able to do both of those.

Dr. Sarah Kapnick:

And is that because of the complexity of the grid that they're trying to generate energy of different types and have control across that? Why is it that they would do that?

Michael Johnson:

It's partly because, to be honest, their economies of scale, big companies can usually become more efficient.

Dr. Sarah Kapnick:

So it's really a big infrastructure play of being able to build all this out at once.

Michael Johnson:

The other thing that we've done, especially as we staff up SRI, is we're starting to tackle the supply chains behind the supply chains, behind the supply chains. And we're going to companies that we're saying, "What are you worried about? " You need to build automobiles, right? What are you worried about? What supplies? What things are you worried? Everybody knows about rare earth magnets. Can't make a car without rare earth magnets, but what else is in the supply chain? And many of the things, tool dyes and things like that are made by small companies, and that's where SRI comes in. We're going to reach all the way down to those and help those.

Dr. Sarah Kapnick:

Yeah. I see this in the way that you're describing it. We're widening the aperture to understand where everything is coming from to make sure that everything fits together so we can be able to do this and build the cars, build whatever it needs to be built.

Michael Johnson:

One of the things we've done that we are very proud of is to help bring to the US shores this giant zinc smelter that's going to create and produce 11 of the 13 critical minerals that we're short of.

Dr. Sarah Kapnick:

Critical minerals are really important for energy resiliency because they are the building blocks for being able to build most energy types. It's important for the wires and the transmission. It's important for solar cell development. It's important for wind. It's important for nuclear. We actually don't have access to many of the minerals that we need to be able to build out the energy of the future unless we start having access to those supplies.

Michael Johnson:

I agree. As we've started to dig into this, now I'm learning, I really need a periodic table on my wall because I'm learning about all these things that I never knew were so important. You can't make an airplane without Scandium. You need bismuth and antimony and germanium and gallium and all these elements that are critical for things we use every day.

Kristina Nilsson:

Think about AI almost like an enabling liquid for human beings to function in the future. And that enabling liquid has a lot of physical infrastructure behind it, but ultimately all information, all data by individuals, corporations, and governments are going to flow through this liquid.

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Justin Krauss:

The Security and Resiliency Initiative, having spent years covering venture-backed companies working in frontier tech and really changing the way we live. Almost bringing science fiction to real life. The Security and Resiliency Initiative, what it really does is gives us a chance to focus even more than we have before on finding those ones that fit these incredibly critical pillars of energy independence and defense and aerospace and supply chain. It is one of the most rewarding things you can possibly do is to spend time with a founder who's building a business that is changing the world, and you can help him or her through those steps. And in this case, it's even better because it fits in something that we all believe fundamentally is important for our country and our allies.

Kristina Nilsson:

You know, as we think about the AI value chain, the broader ecosystem associated with that, it truly does encompass pretty much every economy in the world. And so, having a framework that evaluates policy, evaluates financing, evaluates really targeted focus on advancing these technologies, which is everything from manufacturing to construction, to the electronic supply chain, to data centers broadly, to the entire AI application model-development ecosystem... Having a partner that really cares about that, thinks about it on a domestic and global basis and thinks about how do we as a firm, how do we as a team really say, "Okay, how can we best leverage our assets, which is everything from connectivity to capital markets and that interface and interplay with government and policy, to really ensure that all of this is successful?" Think about AI almost like an enabling liquid for human beings to function in the future. And that enabling liquid has a lot of physical infrastructure behind it, but ultimately all information, all data by individuals, corporations, and governments are going to flow through this liquid. And so, the debate is very active right now by every country in the world. Who has access to that liquid and what influence do they have on it? And so, if you think about AI build-out both here domestically and internationally, you want to ensure that you have a solid technical foundation that is trustworthy, that is not going to use or abuse that information on a country basis, on a governmental basis, a corporation basis, and on an individual basis. And so, really, it's this network of trust that is getting deployed everywhere such that we all can benefit from AI on the back end.

Justin Krauss:

So to all these amazing things, all these amazing technologies, now we have to power them. Obviously, the data center question in terms of thinking about not just the capital to build, but where do you build them? What the permitting process is to build them? What is the implications for the local communities when you build them? What's interesting about the data center demand piece is the broad supply chain there. And this actually gets to the heart of our Security and Resiliency Initiative, that it's not just about, can you put up a data center? Can you finance it? Can you attach it to the grid? That's complicated enough. But the question is, all those pieces down the line, do you have the workers to actually build the data center? Can you get the chips, which is a big question. Can you get the turbines you might need to produce the power that comes onto the grid that comes through? I think those are sort of downstream supply chain issues that I know we're thinking a lot about.

Kristina Nilsson:

I think this is a generational opportunity for all of us. And someone said recently, "Think about the magic that's happening here. You're taking sand and transforming it into thought at the end of the day." And so, I mean, the componentry pieces that you talked about– power, all of the components that are necessary for enabling that power, the turbines themselves, the sourcing, the different types of power and translating that into the data center and all of the electronic systems that go into the data center, and then applying the model and the application on top of that–that orchestration is extraordinary. And I think that is our generation's highway infrastructure, shipping infrastructure, railroad infrastructure. It is something that is transformational and necessary. Because you think about productivity... Productivity flatlined, unfortunately, for a very long time. This is something that the globe can get behind, invest, create jobs, create high-paying value-added jobs that's going to enable humanity to work and live better. And maybe to pull on that, in defense tech specifically, what's the overall thesis for SRI?

Justin Krauss:

Clearly, when we think about SRI, a big part of it is defense and aerospace, and particularly, how do we help think about the historic way that–or at least the way we have for the last few decades–outfitted our national security apparatus? How are we changing that now? There's new technologies that enable us to protect our country and assets in a safer way. So when you see, obviously autonomous drones have gotten a lot of attention, but even autonomous vehicles, as the technology continues to improve and you think about logistics technology, moving from point A to point B, in boats, over the ground, or through the air, it takes people out of harm's way, candidly. And not just in a threatened environment, but just an accident happens. And so, when you think about the opportunities that this incredible autonomy that we're seeing that it's going to play out in defense, we're really, really excited about that and supporting companies that are bringing that vision of protecting war-fighters, helping with logistics, and just enhancing our national security.

END