Concerted and aggressive lobbying efforts by those supporting the buyout industry have been met with opposition as private equity firms look for ways to prop up their portfolio companies during the COVID-19 pandemic. 

While the Coronavirus Aid Relief and Economic Stimulus (CARES) Act passed by Congress last month allocates more than $1 trillion in funding for small businesses, local and state governments and some large businesses, a provision within it is preventing some private equity firms from accessing the Paycheck Protection Program (PPP) for small businesses that they have turned to in search of support. 

The PPP fund, administered by the Small Business Administration (SBA) and with $350 billion in its coffers, is available to businesses with under 500 employees. But private equity portfolio companies are being grouped together as the sum of the portfolio's parts. While many have less than 500 employees, when lumped together they typically reach past that mark and are unable to petition for funds. 

The industry has been lobbying to fix that, and had hoped that additional funding, being negotiated now by Republican and Democratic senators, would include its members. While the additional $250 billion likely to be added to the existing $350 billion PPP fund could be a savior for many small businesses, those owned by private equity firms are likely to be left out again, as neither the GOP nor Democratic legislation suggests any changes that would loop in the portfolio companies.

As of April 10, private equity firms are hoping that the newly enacted Main Street Lending program, which is designed to help midsize businesses under 10,000 employees, will provide some support. 

Brian Richards, the Chicago-based partner and chairman of the global private equity practice at Paul Hastings, said he understands why portfolio companies didn't get funding this time around, but that doesn't change the fact that some of these businesses, without assistance, will go under because of coronavirus-related economic factors. 

"It may just be a capacity issue," Richards said. "They need another $250 billion for those that do qualify already. If they expand the eligibility pool at all, there would be a further crush of demand that would exceed supply." 

There have been some examples, however, of private equity-backed companies receiving some aid.  

For example, the hospitality and travel industry, which has been decimated by COVID-19-related events, was granted an exception in the existing legislation that allows for larger entities to petition for funds normally reserved for small businesses. Travel and hospitality companies owned by private equity firms are allowed to request funding under that specific provision. 

But many leading the lobbying effort for more inclusion believe that access will not be coming, in part because of the way they feel the private equity industry has been portrayed recently by Democrats.

According to Private Equity Insights, a networking platform founded in 2011, Democrats have ramped up rhetoric against the industry, citing examples of businesses run into the ground, as well as some industry leaders' support of President Donald Trump, whose administration has helped the industry via deregulation and tax cuts. Democrats have argued that this assistance widens income inequality and gives handouts to many of Trump's businesses, making them unlikely to support legislation that would extend a hand to the industry.  

Richards said the GOP tends to favor traditional leveraged buyout firms, while venture or early stage companies enjoy support from both sides of the aisle. Either way, he said, there isn't a whole lot of logic in leaving out portfolio companies when it comes to assistance. 

"It is a fundamental misunderstanding of how portfolio companies work," Richards said. "They have their own payroll, their own capital and management. I'm not sure that is understood in Washington, or that they care. It isn't politically popular to support them."

He said an example would be a small, family-run business of 400 employees that was purchased by a private equity firm in February. That same company would have been eligible for funds if this crisis would have occurred in January, but not now.

"The government has made a choice to allow those people to be furloughed," Richards said. "They could have protected those jobs just like they did for the nonprivate equity businesses. They think they are thinning out private equity, but they are just causing more unemployment."

The Washington Post reported that while lobbyists for the buyout industry have been requesting funds, officials at the SBA have told them they should use their own stockpiles to rescue their investments. The lobbying groups have hit back at the SBA, with several penning a letter to SBA Administrator Jovita Carranza saying the current path puts a "direct regulatory barrier to job retention and creation at some of the most innovative and exciting companies in our economy." They accused the SBA of punishing investors for "political purposes." 

The industry is hoping to take another stab at securing PPP and CARES funds after April 20, when Congress will reevaluate the current bailout funding, the Post reported.

Slowed, Not Stopped

Unlike M&A results for Q1 of 2020, private equity work was up slightly in comparison to 2019. PE saw 1,384 deals closed in Q1 for a combined $186.4 billion, an increase of 7.3% in deal count and 6% in value year-over-year, according to PitchBook. 

But virtually all of that was before the COVID-19 outbreak. Numbers for March were down significantly and PitchBook predicts that deal activity in the coming fiscal quarters will likely reach levels not seen since the Great Recession. 

Even if funds are not secured from the bailout packages, there is still room for private equity work during COVID-19. For the first time in several years, company valuations have dipped significantly and those entities are looking for a cash influx. Both circumstances play well with PE firms' desire to find business opportunities below market rate. 

Private equity firms Silver Lake Fund and Sixth Street Partners, for example, agreed to finance a $1 billion loan to Airbnb last Monday, although the funds demanded a 10% interest rate on the funding, to which Airbnb agreed. The company also agreed to significant changes in its leadership structure and fixed cost expenses, according to The Wall Street Journal. 

While straight buyouts may be down due to the difficulty in securing loans, opportunities still exist for firms looking to invest in strong companies that have been hit harder than most by COVID-19 measures. 

"There are some companies that won't make it," Richards said. "For others, this will affect the returns and the calculus as to whether private equity firms are willing to support their companies with more equity that would give them a chance to fight another day."

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