In the second iteration of "Ask PitchBook," an invitation for readers to submit questions, we tackle an inquiry about the private equity and venture capital industries lobbying for federal loans.

More than two months into the 19 pandemic, uncertainty over who should receive taxpayer-backed funds has been especially prevalent among privately backed companies.

Trade groups have pushed lawmakers to ensure portfolio companies aren't left out of the US Treasury's Paycheck Protection Program and the Federal Reserve's Main Street Lending Program. And lobbyists representing VC and PE interests have been willing to spend big.

The National Venture Capital Association has done the bulk of the heavy lifting on the venture side, spending more than $569,000 in the first quarter, according to its federal disclosures. For private equity, the American Investment Council, a lobbying group backed by investor heavyweights including Blackstone and KKR, has spent more than $640,000 in the period.

Lobbyists identified several hurdles to loan access for privately-backed businesses, including so-called affiliation rules that use a company's size to determine whether it can receive loans from the Small Business Administration.    

Because of the rules' interpretation, most private equity-owned companies were ineligible for the $660 billion Paycheck Protection Program, run through the SBA.

Venture-backed startups, however, were more likely to qualify under the rules. But even if a company qualified, banks would have to look into affiliation issues—wasting valuable time in the process.

"Our concern was that all companies that had equity backers were going to get stuck at the end of the line, which is what was happening," said Jeff Farrah, general counsel at NVCA.

Ultimately, industry groups weren't able to get the affiliation rules waived. But the SBA did shift the responsibility of certifying eligibility from banks to the companies, thus avoiding delays and allowing companies with equity backing to access cash faster.

The NVCA also asked lawmakers to relax two other requirements: the "personal guarantee" and the "necessity test."

A personal guarantee, a requirement for some SBA loans, essentially gives a lender the right to seize a business owner's personal assets in order to repay the loan in the event a company's assets don't cover it. The NVCA and others argued that few founders could make such a guarantee, given the high costs and risks inherent to startups.

Luckily for startups and their founders, the SBA waived this requirement.

The PPP also required that in order for companies to receive taxpayer-funded loans, the money must be "necessary to support [the] ongoing operations" of a business—the necessity test. Under this test, the SBA said that companies should first consider other sources of liquidity before taking out a loan.

The NVCA was worried that if a startup had raised funding recently, it may appear to have access to liquidity and thus be eliminated from the program. After all, many companies that easily found funding a year ago may struggle to do so during the current downturn. 

While liquidity remains part of the necessity test, the SBA has since said that loans of $2 million or less will be taken in good faith—a relief for many startups.

After being largely left out of the PPP program, some private equity-backed companies will be eligible for loans under the new $600 billion Main Street Lending Program, assuming the loan, when added to existing and undrawn available debt, doesn't exceed 4 times the borrower's 2019 EBITDA.

And that's in large part due to the efforts of the American Investment Council, which has been lobbying to get more of these businesses eligible for months.

But for those that meet the criteria of the Main Street program, which is reportedly expected to start by the end of the month, there's a general feeling of uncertainty tied to how they'll be able to spend the money and how the PPP program was rolled out.

"I'm not terribly optimistic that the traditional private equity-backed businesses are going to get federal programs to make that big of a difference," said Jerry Graunke, a principal at Chicago-based advisory firm Erie Street

Ask PitchBook: Send us your questions, and the news team will do the digging to find answers, based on our data and reporting. Contact us here: ask@pitchbook.com

Featured image via Doug Armand/Getty Images

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