Should private equity-backed portfolio companies be eligible for relief under government assistance programmes meant to alleviate pressure on those hardest hit by measures taken to curb the spread of coronavirus?
Of course, the answer from the industry is a resounding ‘yes’: as Institutional Limited Partners Association chief executive Steve Nelson wrote in a letter earlier this month to the US government: “We see no reason why being owned in a fund structure should result in these businesses having less access to the capital needed to keep their employees on the payroll.”
At issue in the US is portfolio companies’ access (or lack thereof) to the Paycheck Protection Program, what was initially a pot of up to $349 billion in forgivable loans to small businesses to pay their employees during the crisis through the $2 trillion CARES Act. The loan is forgivable as long as it is used to cover payroll costs and certain mortgage interest, rent, and utility costs within eight weeks of it being extended, and employee numbers and compensation levels remain the same.
PE-backed companies so far face exclusion if they have more than 500 employees – a threshold that is easily breached, seeing as all employees in a PE firm’s portfolio are counted as affiliated under the rules.
On Thursday night Congress passed an expansion to the PPP pot – which had run dry – opening up a further $310 billion.
(We should note there are other funding options private equity-backed companies may be eligible to take advantage of under the CARES Act, such as the Main Street Lending Program.)
Private equity has been on the receiving end of some harsh criticism, particularly in the last two years. It’s natural that anything that has a whiff of a “bailout” about it will be treated with intense scepticism if not outright hostility. Big corporations that are seen as “unworthy” receiving significant payouts under the CARES Act has already come in for some serious criticism.
But excluding private equity-backed businesses from any relief will have an outsized impact on those who right now are most vulnerable, namely public pension funds and portfolio company employees. A survey of almost 1,200 professionals working in small to midsize businesses in the US by the Association for Corporate Growth found 77 percent indicated the survival of their business is impacted by being excluded from the PPP; 85 percent anticipate laying off employees in the next month; and 92 percent expect the exclusion to result in layoffs. More than half – 53 percent – of 117 GP respondents to PEI’s covid-19 survey, conducted in late March, said they expect to make layoffs in their portfolio companies, with a further 40 percent indicating no decision had yet been made on this.
The private equity industry is not perfect; there are arguments to be made for sensible, thoughtful changes to the way it operates.
But now is not the time. Those who wish to see the private equity industry reformed should concentrate on the “front end”: imposing any restrictions or regulations before investors have made commitments, before companies have been purchased. Punishing the industry for its perceived faults as managers scramble to shore up jobs and preserve investments only harms those very pensions and employees society is striving to protect.
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