Private Equity Frets That It’s a Loser in $2 Trillion Virus Bill

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  • Firms concerned portfolio companies not eligible for loans
  • Industry is seeking clarification from SBA and lawmakers

By Robert Schmidt and Heather Perlberg | March 31, 2020 01:57PM ET | Bloomberg Government

Private equity firms are working the phones in Washington to fix what they consider a major flaw in the coronavirus rescue bill: they fear that companies they own are largely ineligible for the billions of dollars in small business loans the U.S. is doling out to save the economy.

In a flurry of calls this week to congressional offices and the Small Business Administration, private equity firms said the $2 trillion law seems to exclude most of their portfolio companies due to a technical definition of how a “small business” is defined. They’ve asked the SBA, which is writing regulations for the lending program, to specify whether their holdings can participate.

While the biggest firms in the industry and its trade association are downplaying the problem, other executives say privately that it could deal a serious blow to the businesses they own. The legislation, signed last week by President Donald Trump, does make an exemption for private equity-controlled hospitality and travel companies to obtain loans. Those industries have been among the hardest hit from the virus-fueled slowdown.

At issue is how to count the employees that make up a small business. In the rules laid out by the law and the SBA, firms that have more than 500 employees aren’t eligible for the loans. That number counts affiliates –- a definition that could include the workers at all the portfolio companies that a private-equity firm invests in.

It’s unclear whether private equity was purposefully targeted in the law. A sign that it might not have been intentional: the same problem is impacting companies funded by venture capital firms.

If private equity doesn’t get the issue addressed by the SBA, it may have to seek a legislative fix on Capitol Hill. That may not be easy because Democrats have made the industry a target for attacks in an election year that has focused on issues like economic fairness and income inequality. Progressives have homed in on the sector in part because some of its leaders, like Blackstone Group Inc.’s Stephen Schwarzman, are part of Trump’s inner circle and his administration has given private equity regulatory relief and tax cuts.

Industry executives who asked not to be identified said the SBA may issue guidelines for its loan program as early as today. That would give the private equity firms more clarity on whether their companies can get aid. If not, the people said, the industry is likely to ask Congress to add a measure to the next rescue legislation that ensures they can take advantage of the lending.

Tapping Funds
Drew Maloney, the president of the American Investment Council, which lobbies in Washington for private equity firms, said the companies should be able to tap SBA funds regardless of their ownership structure.

“Businesses across America are looking for support immediately in order to survive,” Maloney said. “It shouldn’t matter if these companies are backed by investments from corporations, pension funds, or others.”

An SBA spokesman didn’t immediately respond to a request for comment.

It’s still uncertain how the issue might be worked out. Last week, at least one senator was reassuring private equity groups that excluding their companies from the stimulus funds was an oversight and new language adopted in an SBA regulation governing the program would eliminate their concerns, according to people familiar with the discussions. But SBA officials were less reassuring and told buyout shops that they should use their own cash piles to bail out struggling portfolio companies, the people said.

Eligible Businesses
Law firms that cater to financial companies were quick to point out the potential problem in notes to their clients.

“Most portfolio companies controlled by private equity sponsors – even though each such company may be an eligible small business when considered on its own – are likely to be aggregated with the other controlled portfolio companies,” Davis Polk & Wardwell lawyers wrote in a March 29 memo. That would “exceed the size limitations for participation.”

Still, the Davis Polk attorneys said that ambiguity in the law could prompt the SBA to issue guidance that could resolve the issue in the firms’ favor.

Investor Plea
In a Tuesday letter to the SBA and Treasury Secretary Steven Mnuchin, a trade group representing investors in private equity firms urged quick relief.

“All small businesses are likely to suffer some impairment, whether they are individual businesses, or those that happen to be owned as a portfolio company,” the Institutional Limited Partners Association wrote. “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.”

To contact the reporters on this story:
Robert Schmidt in Washington at [email protected];
Heather Perlberg in Washington at [email protected]
To contact the editors responsible for this story:
Jesse Westbrook at [email protected]

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