The private equity industry continues to lobby the U.S. government to either amend the Coronavirus Aid Relief and Economic Security Act, or to be included in another stimulus bill, after it emerged that many of its portfolio companies will be unable to access the act's small business Paycheck Protection Program.
The $350 billion PPP, authorized under the CARES Act and overseen by the Small Business Administration, is open to businesses with fewer than 500 employees. The SBA, a U.S. government agency that supports entrepreneurs and small businesses, has longstanding rules that see applicants considered together with affiliate companies. An interim final rule issued by the SBA on April 3 confirmed this rule will apply to businesses applying for the PPP that have backers that own or have the power to control over half of a portfolio company's voting equity.
There are exemptions for businesses operating in certain industries, including hotel and food services, SBA franchises and companies that receive financial assistance from Small Business Investment Companies — investment funds licensed and regulated by the SBA.
"Right now, there's a very, very large lobbying effort," John Koskiewicz, Managing Director at mid-market corporate finance and business advisory firm Larx Advisors Inc. said following the SBA's interim final rule on April 3, adding that it was receiving multiple emails requesting that recipients lobby congressional representatives about either changing the affiliation rule or providing some other stimulus funding that private-equity-backed businesses can access.
Private equity managers and private-equity-backed businesses Larx has advised and spoke with are "cautiously optimistic that the lobbying efforts are going to be fruitful for them, but they're resigned to the fact it's not going to happen until Congress comes back into session at the end of the month," Koskiewicz added.
One senior adviser to the asset class said before April 3's interim final rule that private equity firms did not want to give up the option for access to the PPP. Many companies backed by the asset class employ under 500 employees and private equity-backed businesses account for a sizeable portion of the U.S. economy, the adviser said. "Why shouldn't [a private equity-backed company] be able to get help just because other companies that the private equity fund owns have more employees?"
While some remain hopeful for inclusion down the line, Martin Ruhaak, private equity partner at law firm Ropes & Gray LLP, was doubtful that both private equity and venture capital can expect anything that will dramatically change the landscape for managers, as the loan program is now underway.
Larger counterparts could be in the running
Under the CARES Act, the Treasury is getting $454 billion in funds to provide credit protection for the Federal Reserve's emergency lending operations, a backstop expected to lead to about $4.5 trillion in Fed lending. Private equity firms and advisers are awaiting guidance from the Treasury and the Fed with regards to the program.
The statute has expressed an intention that a portion of the funds is used to support midsized businesses of between 500 and 10,000 employees, although guidance on how these programs will be structured, who will be eligible and how they will work is yet to emerge.
Under existing rules, Fed programs have historically been limited to investment-grade credits and there are generally collateral requirements that will need to be satisfied to obtain loans through the Fed, Ropes & Gray private equity partner Scott Abramowitz said.
"One of the open questions that we're waiting for guidance on is whether Treasury and the Federal Reserve will structure a program that's accessible, buying up high-yield credits, and that will allow companies, including private equity portfolio companies with senior secured debt facilities, to participate without the requirements of giving a lien on their assets," he said.
"The issue there, of course, is that many private equity portfolio companies already have existing senior secured debt, and so to the extent that the new loan program would require them to deliver collateral or security to new lenders through the Fed program, that would, in many instances, create issues in terms of compliance with covenants and their existing credit facilities," Abramowitz added.
One tool in the toolkit
While the asset class continues to lobby for stimulus under the SBA lending program and awaits guidance on the Fed's emergency lending operations, private equity firms and their businesses continue to monitor other options to manage operations and liquidity, with many drawing down on revolvers.
"The evaluation of the liquidity under the CARES Act is sort of one tool in the tool kit I think that most of our private equity clients are evaluating," Ropes & Gray's Ruhaak said.
Portfolio company management teams of Larx Advisors' clients, which are typically in the mid-market, are starting to take pay cuts of anywhere between 25% to 50%, Koskiewicz said, and some companies are speaking with customers about speeding up payments, and suppliers about financing where they have significant access to capital. Likewise, some non-bank lenders are loosening up availability of funds for opportunities where they see they can generate goodwill and gain access to deals they otherwise may not get, Larx Advisors COO and Managing Partner Todd Perry said.
But there are some instances where private equity managers must make tough decisions about whether a portfolio company is worth recapitalizing or not, Perry added. The Association for Corporate Growth, a trade body for middle-market companies, investors, lenders and other market participants, said in a news release on April 4 that it had already received notice "from many of its members of massive layoffs anticipated" because of the affiliation decision with regards to the PPP.
Those in the asset class are concerned by the uncertainty, and some businesses that are in particularly hard-hit industries are feeling the pinch, but the asset class with its long-term-hold approach is not panicking, market participants said.
Polo Rocha contributed to this story.