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Your LPs want you to take the state aid lifeline

(Investment Bites from around the world MAY 15 2020)

Investors are expecting their GPs to do everything they can to save portfolio companies and keep employees on the payroll – and that includes accepting eligible government support.Whether private equity firms can or should be seeking or accepting state aid as they seek to shore up portfolio companies affected by the ongoing coronavirus epidemic has been a subject of much debate worldwide.

Central to the discussion is the US government’s Paycheck Protection Program, part of the CARES Act, from which private equity-backed companies have thus far been shut out.

Some politicians are vehement in their opposition. Members of the Congressional Hispanic Caucus and Representative Darren Soto sent a letter to Treasury secretary Steve Mnuchin and Jovita Carranza, administrator of the Small Business Administration, urging that affiliation rules not be changed to allow large private equity firms to gain access to CARES Act Funding. 

“Diverting any federal assistance from small businesses, especially those in more vulnerable and socio-economic disadvantaged communities, to line the pockets of private equity is unacceptable,” they wrote.

But what do those whose opinion matters most to private equity managers – their limited partners – think about it?

Those GPs wondering where their LPs stand should be reassured that their partners – as far as our initial conversations go – want them to do everything they can to protect their portfolio, including accessing public money.

Given some of the backlash that’s been seen in the US around big corporations seen as “unworthy” receiving significant payouts under the CARES Act, it’s perhaps unsurprising that one source said there seems to be “a badge of honour” in the US in not accepting state aid. That has not been the case in Europe, where there’s “no stigma to the issue”.

There are nuances to the conversation because the financial assistance varies from country to country and we are taking a deliberately global approach in our discussions.

One big insurer we spoke to pointed out that PE funds have an obligation to their investors to “keep companies viable in spite of the current tough and unexpected circumstances”.

“They are doing their fiduciary duty by seeking to keep the impacted companies financially sound and securing the long-term employment of their staff,” the person said.

As one LP gatekeeper put it, looking at ownership makes no sense because “the money’s going to the portfolio companies, not the Schwarzmans of the world”; however, any state aid should come with restrictions ensuring the capital can’t be used for refinancings.

The head of private equity at a global private bank called ruling a company out of state aid on the basis of ownership “quite dangerous”.

“Governments have shut down entire economies, so this isn’t reflective of private equity’s ability to cope with a crisis.”

Private equity firms should be using every tool in the toolbox to keep their portfolio companies running and to maintain employment levels – and that includes taking advantage of government-backed aid.

Look out for the full story on LP views on state aid from on Private Equity International next week.

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