Story of the Year: The double-edged sword of state aid

The onset of the coronavirus presented a vital question to private equity managers – should they accept state support or not?

The first Private Equity International story to mention the word ‘coronavirus’ was on 30 January. The next month saw a stream of concerned stories, though most treated covid-19 as a specifically Asia-based phenomenon. On 2 March, Blackstone declared that the coronavirus “presents material uncertainty and risk” with respect to fund performance, mirroring the reality that was dawning across the industry.

Firms immediately began delving into their portfolios, trying to figure out which assets would be most affected and how to get liquidity to them as quickly as possible. The following question also arose: should any of that cash come from the state?

Some politicians in the US considered any relief going to PE-owned companies as “lining the pockets of private equity”. In the UK, the Financial Times’ editorial board concluded: “PE funds are experts at financial engineering. Now is the time to put that expertise to good use, and not rely on a helping hand from the government.”

Many general and limited partners were acutely aware of the risks associated with accepting state support. One PE investment head at an insurer raised the spectre of governments citing firms’ reliance on state aid as an excuse to close the carried interest tax loophole – a chief aim of US senator and vocal private equity critic Elizabeth Warren.

At the same time, fiduciary duty requires that GPs do whatever it takes.

“If one of the funds’ businesses needs help… We will first evaluate what help is required, what we can do with our tools, what credit suppliers can do and, if necessary, what governments may be able to help with,” EQT chief executive Christian Sinding told PEI.

Legal impediments

Although businesses in countries such as Germany and Switzerland were able to secure quick government funding, the situation in the US and the UK was more complicated. In the US, many PE-backed businesses had their applications for support rejected because they did not count as ‘small businesses’ under the definition laid out by the government. Despite lobbying by the Institutional Limited Partners Association, that definition has not yet changed.

In September, the UK government relaxed its eligibility criteria for receiving bailout funds, thereby opening the door for PE-owned businesses. The government had deemed that giving money to companies with already-high debt burdens would risk breaching EU state aid rules. It is not clear how many PE-backed businesses have accessed support since the rule change.

The invention of several apparently successful covid vaccines has raised the prospect of economic recovery in 2021. However, a slower-than-hoped-for recovery could still create liquidity concerns for PE-backed businesses, causing them to turn to government.

LPs appear largely in favour of their GPs accepting any aid they can to shore up portfolio companies’ balance sheets. As one LP gatekeeper put it to us in May, looking at a company’s ownership makes little sense because “the money’s going to the portfolio companies, not the Schwarzmans of the world”.