Side Letter: The CARES Act debate highlights a lingering PE problem

Private equity's image problem is getting in the way of an important debate: whether its portfolio companies should access government stimulation money. Here’s today's brief, for our valued subscribers only.

Just happened

Jon Gray on PE’s image problem

Private equity firms were taking some heat in the “normal” times before the coronavirus outbreak became a pandemic. The industry was increasingly viewed by the public and political classes as an extractor, rather than a creator, of value. In the words of Blackstone president Jon Gray (pictured): “There’s this monolithic perception that we’re not good actors.”

In the past this negative perception had been easily dismissed as either simply wrong, or driven by envy, or both. At any rate, it didn’t matter. To generalise: as institutional capital kept pouring into the asset class, the need to make other stakeholders in society feel good about PE had not been a priority.

Our exclusive interview with Gray – conducted before the escalation of the coronavirus crisis – shows industry leaders were already starting to take this seriously. “We need to engage on the facts. And, as the biggest player in the space, obviously, we’re the ones to focus on the issue,” Gray told our senior editor for real estate, Jonathan Brasse.

The current debate around the CARES Act is bringing this challenge to the fore. As it stands, PE-owned companies look unlikely to benefit from the life-giving Paycheck Protection Program. GPs and LPs argue there is no just reason to discriminate against private equity-owned businesses when it comes government support, but there are those who will baulk at anything that smells remotely like a bail-out in the vicinity of a private equity firm (example here). A more carefully nurtured reputation would have made the case easier to make.

Headphones on…

PEI’s latest coronavirus podcast is hot from the mixing desk. In this edition, editors from across our portfolio delve into LP liquidity, CLO fund issues and a potential domino effect in the real estate market:


  • Chris Witkowsky, editor of Buyouts, on whether LPs believe their GPs should be able to access US government funds to support small business: “They don’t want to see mass lay-offs across the portfolio and so any form of help from the government, or wherever it comes from, they think private equity should have access to it.”
  • Toby Mitchenall, senior editor, private equity, in London, on how GPs are responding to potential LP liquidity concerns: “We’ve heard from numerous sources that some of them are calling capital a little bit early or bringing forward capital calls that they were going to do this summer just so they’ve got cash on hand.”
  • Isobel Markham, senior editor, private equity, Americas, in New York: “GPs have got a lot of work to do right now. If it’s a highly levered business as well they’ve got to think about if there’s a way out for the equity. If this ends up going on for a long time, not every business is going to be able to be saved … so difficult decisions are going to have to be made.”
  • Andy Thomson, senior editor, private debt, on the threat of overcollateralisation in CLO funds due to deterioration of debt quality: “When [overcollateralisation] happens, cash gets shunted away from the junior tranches to prop up the senior tranche holders, so I think that anybody who is invested in those junior, riskier parts of CLO structures … they’re going to lose a lot of value, potentially they may lose everything.” Read more on CLOs on Private Debt Investor.
  • Evelyn Lee, editor of PERE, on the potential ramifications of tenants not being able to pay rent: “While landlords are talking to their tenants about rent relief, they’re also talking to their lenders about mortgage relief – so abatements or deferrals in their loan payments – and essentially you’re seeing this potential domino effect of defaults.” Read more about this on PERE.
  • Bruno Alves, senior editor, infrastructure, on digital infrastructure emerging as a bright spot in the midst of coronavirus chaos: “You’re now looking at the potential for investment opportunities in these areas which used to be the network’s edge but now have a high capacity workload put on them.” Read more about digital infra in the age of covid-19 on Infrastructure Investor.

He said it

“The investor’s goal should be to make a large number of good buys, not just a few perfect ones.”

Prolific memo writer and serial “He said it” candidate, Oaktree Capital Management’s Howard Marks makes the case in his latest note for “previously cautious” investors to “reduce their overemphasis on defense and begin to move toward a neutral position or even toward offense”, and why waiting for the “bottom” of the market is irrational.


Covid-19 fightback continues. ICG is donating £250,000 ($309,000; €284,000) to covid-19 relief efforts, split evenly between the COVID-19 Solidarity Response Fund for the WHO and City Harvest, a London-based charity that redistributes surplus food to vulnerable people.

Meanwhile, Ares spinout LightBay Capital’s LightBay Foundation – which is funded by a fixed portion of LightBay’s fees and carried interest – has donated $100,000 to DonorsChoose. The crowdfunding platform has created a programme called “Keep Kids Learning” to help teachers in high-poverty schools send their students personalised education care packages while they cannot attend class.

Eurazeo has set up a €10 million solidarity fund to help those affected by the virus. We’ve posted the press release, which includes details of how Eurazeo portfolio companies have fought back against the virus.

Dig deeper

Institution: Connecticut Retirement Plans and Trust Funds
Headquarters: Hartford, United States
AUM: $37.63bn
Allocation to alternatives: 21.50%
Bitesize: $50m-$100m

Connecticut Retirement Plans and Trust Funds is intending to maintain the pace of its private markets fund commitments in light of covid-19, a contact at the pension informed Private Equity International. The Office of the Connecticut State Treasurer, which oversees the combined Retirement Plans and Trust Funds, has a strategic plan for committing private capital and will continue with that plan for the foreseeable future. The $37.63 billion US public pension has a 10.0 percent target allocation to private equity that currently stands at 7.20 percent. Connecticut is also an active real estate investor, as well as investing in other asset classes, such as infrastructure, energy and timber out of its alternative investment portfolio.

For more information on CRPTF, as well as more than 5,900 other institutions, check out the PEI database.

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Today’s letter was prepared by Toby MitchenallIsobel Markham and Alex Lynn.

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