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U.K. and Europe-based PE and VC backed companies see stimulus options open

Clarification around the eligibility of U.K. and Europe-based private equity backed companies for stimulus packages in certain countries has emerged, but lobbying efforts for a level playing field continue.

The U.K. treasury announced April 16 that private equity-backed businesses will be able to access its guaranteed coronavirus interruption loan schemes, but details on how initial restrictions will be eased are yet to be confirmed, Michael Moore, the director general of U.K. private equity and venture capital trade association British Pvt. Equity and Venture Capital Association Ltd, or BVCA, said in an interview April 20.

The Coronavirus Business Interruption Loan Scheme, or CBILS, provides funding for businesses with a turnover of no more than £45 million. The Coronavirus Large Business Interruption Loan Scheme, or CLBILS, which was expanded ahead of its launch on April 20, will make available a guarantee-backed facility of up to £25 million for those businesses with a turnover of more than £45 million to £250 million, and up to £50 million for those with a turnover of over £250 million.

The problem for private equity firms was that CBILS initially included a grouping clause, which essentially sees the turnover of a fund's private equity portfolio companies aggregated and would have left many unable to access the loans. The BVCA has greater confidence that this issue has now been resolved for both schemes, Moore said, although details are still being worked out.

"The signaling [of the inclusion of private equity businesses] is important. … You don't want the private equity businesses turning their back on these schemes because they think they're never going to get into them, there is still a need for speed to get the details clarified, and that's where our policy team is focusing its efforts at the present time," he said.

The U.K. government also announced a £1.25 billion relief package targeting startups April 20. It includes a £500 million Future Fund, which will provide loans to investment-dependent companies that can secure match funding from private investors. The fund, which will be launched in May, is available to U.K.-based businesses that have raised at least £250,000 in equity investments from third-party investors in the past five years.

Moore said the Future Fund, which was finalized the weekend before April 20, is a "huge breakthrough." The BVCA will establish which companies can take advantage of the program and ensure no businesses are excluded from the program that "in the cold light of day look like they should get the support," he said.

European State Aid Rules may impact these arrangements, the BVCA said, although this is not a unique issue to the U.K. and would also apply on the continent. "There's a bit of work going on around that to make sure there isn't an unexpected problem there but the sooner we can get the detail of these things revised then we will absolutely be clear about our eligibility," Moore said.

Elsewhere in Europe

A total of 58 "wide in scope" state aid schemes have been approved by the European Commission under its Temporary Framework, Eric de Montgolfier, CEO of European private equity and venture capital trade body Invest Europe, said in an interview. Many intend to support small and medium-sized businesses, or SMEs, in particular. "Although all undertakings may be eligible, the size of the businesses really matters," de Montgolfier said.

In some instances, schemes targeting SMEs have used the EU recommendation on the definition of an SME, which captures private equity and venture capital-backed companies in grouping rules. Invest Europe has "made sure" the European Commission is aware of the issue, he said.

France's quick decision to include all companies, including those backed by private equity and venture capital, is "the way I think most, if not all governments will go progressively," de Montgolfier said

Germany and the U.K. have also been quick to secure businesses under wider stimulus schemes that have been put in place, he said.

More broadly, European Union Finance Ministers agreed on April 9 on a €540 billion package of measures based on three key pillars. These include a €25 billion pan-European guarantee fund under the remit of the European Investment Bank, which could support €200 billion of financing for companies with a focus on SMEs; a joint employment insurance fund worth €100 billion; and credit lines of approximately €240 billion from the European Stability Mechanism, according to an Invest Europe release.

The details are yet to be published, but de Montgolfier said a key point of interest is which parts of the package would be devoted to liquidity help through loan guarantees and supporting what he termed "inequity of the European SMEs." He expects the European Investment Fund, the European Union agency for the provision of finance to SMEs, would like to see capital support the various investment funds and SMEs it is invested in.

Why private capital-backed businesses?

Private equity firms are sitting on record amounts of dry powder, but there are restrictions on firms' ability to draw down capital from their limited partners, the BVCA's Moore said. "These are commitments that are made to invest in funds that are just getting underway, and they don't get drawn down until there's actually a real business to which to invest. So once you strip out that type of dry powder you very quickly seriously restrict what is left," he said.

General partners are also constrained "and quite rightly so" on where they can put capital raised from their limited partners. "If you are an institutional investor, you're allocating funds to a particular manager and particular investments that they brought to you. You quite rightly want to be clear how additional capital call drawdowns are going to be used," Moore said.

Moore said he was "really pleased the Treasury has recognized that the dry powder argument is one to consider, but the reality for individual businesses is quite far removed from some of the headline figures."

There should be "no prejudice" against companies backed by private equity and venture capital companies when it comes to access to state aid plans, de Montgolfier said. It is not the intention of any government to exclude private equity or venture capital-backed businesses from funding. "I'm actually sure of the contrary," he added. But the urgency of the situation means the easiest solution is to use a recommended definition for packages, like the EU's recommendation on the definition of an SME, he said, adding that it takes time to solve issues.

If businesses are unable to access state aid programs, there could be a significant domino effect, de Montgolfier said. "In each vertical, you've got suppliers, clients, and if some suppliers actually are no longer there or if some clients are not there, we will have domino effects on businesses that were, I would say, in good shape," he said.