PE loses out, VC still unclear on $350B US stimulus package

April 4, 2020 View comment (1)
House Minority Leader Kevin McCarthy and House Speaker Nancy Pelosi both lobbied to get VC-backed companies covered by the stimulus package. (Zach Gibson/Getty Images News)

Despite lobbying efforts by House Minority Leader Kevin McCarthy and House Speaker Nancy Pelosi, it appears that most venture capital-backed companies still don't have clear access to the $350 billion in loans available as part of the $2 trillion US stimulus package. And middle-market companies with private equity owners are out of luck, too—at least for now.

Part of that contradicts what McCarthy told Axios on Thursday, when he said he was assured that VC-backed companies would soon be allowed access to the loan program after a conversation with US Treasury Secretary Steve Mnuchin. Late Friday night, the Small Business Administration, a department of the US Treasury tasked with setting up the program, updated its rules on which companies were eligible, added non-profits and faith-based organizations to the list. It said nothing specific about how VC-backed companies were exempt from the plan's original affiliation rules.

Further guidance on eligibility could still be made available in the coming days.

The issue comes by way of the Paycheck Protection Program included in the US stimulus package to help small businesses devastated by the financial impact of the coronavirus. Under the program, companies with less than 500 employees qualify for forgivable loans of up to $10 million if they keep their employees on the payroll. The terms include an affiliation rule that counts all employees within a PE or VC firm's respective portfolio toward that 500 figure, making most of the portfolio companies ineligible.

But then came McCarthy's promise, adding a dose of optimism to VC-backed companies with multiple investors and doubt for most private equity-backed businesses, as many have one sponsor and thus would not qualify. But the new guidelines issued Friday by the SBA indicated that investors who held less than 50% ownership stake in a startup could still be considered a controlling investor, for instance when adding a member to the company's board of directors as part of an investment. Having a representative on the board, and the powers that come with that, could affiliate the company with the rest of the firm's investments.

If the new guidelines are the final word, it would mark a major blow for the National Venture Capital Association, a lobbying group that wrote a letter pushing for inclusion in the PPP. It would also be a setback for Pelosi, who pressed the SBA and Mnuchin for the inclusion of VC-backed companies. Pelosi's home district is San Francisco, where a number of startups have been forced to lay-off staff as they deal with the financial fallout from the coronavirus pandemic. A recent analysis by CNBC noted nearly 4,000 startup jobs across the country were eliminated in March.

The SBA launched the loan program to poor results Friday, as banks were overwhelmed with requests. Some VCs have still urged their portfolio companies to apply for the loan program, according to TechCrunch, with hopes that the PPP could eventually include startups.

"Startups are the engine of America's innovation economy and our districts in California's Bay Area and Silicon Valley are home to thousands of these companies," Pelosi wrote in a letter co-signed by US Rep. Ro Khanna (D-Calif.). "Other high-tech hubs around the country with a strong startup ecosystem will also be in need of PPP financing to preserve jobs and survive."

Private equity trade groups including the American Investment Council have intensively lobbied lawmakers to cover PE-backed companies, noting that many firms would have to cut payroll at portfolio companies because of the pandemic if they didn't see some relief. The coronavirus outbreak has already ravaged PE-backed restaurants. CraftWorks, a Nashville-based restaurant chain backed by Centerbridge Partners, laid off most of its staff of 18,000 after it filed for bankruptcy.

"Businesses across America are looking for support immediately in order to survive and continue to employ people," AIC president Drew Maloney said. "It shouldn't matter if these companies are backed by investments from corporations, pension funds or others. We'll continue to work with the administration and Congress to request that federal programs support all businesses, regardless of ownership structure, and their workers."

Some of the congressional reluctance to bail out private equity-backed companies could be related to the industry's recent history. Over the past couple of years, Democrats in Congress have become increasingly critical of some of private equity's predatory tendencies. And the high-profile bankruptcy and liquidation of Toys R Us and Shopko didn't help that perception. But it's unclear if the PPP restriction was purposely targeting private equity-backed companies. Assuming the coronavirus pandemic continues to drag down the global economy, PE firms could potentially see some sort of relief, McCarthy noted, though nothing's guaranteed.

President Trump already has a relationship with some of the industry's biggest players. He recently held a conference call with a handful of business leaders, including Blackstone co-founder Stephen Schwarzman and Vista Equity founder Robert Smith, according to CNBC. But the call was reportedly focused on the state of the economy and not specific strategies to bail out companies. Schwarzman served on Trump's since-disbanded economic council early in his presidency.

Note: This article was updated on April 4 to include details on the new guidance from the SBA late Friday, which didn't specifically include an exemption for venture-backed companies regarding the affiliation rules, as was expected following McCarthy's interview with Axios.

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