The Federal Reserve last month broadened the pool of private equity-backed companies with access to loans through the Main Street Lending Program, but challenges remain for mid-sized companies.
The Main Street Lending Program, like the better-known Paycheck Protection Program (PPP), excludes most private equity-backed companies because of an affiliation rule under the Small Business Administration (SBA) that combines the number of employees from a private equity firm’s different portfolio companies.
There is an exemption to the rule for individual PE-backed companies with fewer than 500 employees that don’t have to combine its employees with other portfolio companies, ultimately making it easier for those small to mid-sized businesses to apply to the program, an SBA affiliation overview document shows.
PE firms can own multiple businesses each having thousands of employees. Combining all employees rather than counting them individually for each portfolio company presents a challenge for companies seeking to be a part of the programs.
The Fed also created a loan option, the Main Street Priority Loan Facility, which lowered the minimum size of particular loans that PE-backed companies can get to $500,000 from $1 million.
CohnReznick managing principal Jeremy Swan told Buyouts that the Fed’s new rule makes it easier for smaller PE-backed companies to be eligible for assistance. “As it relates to private equity, when the first draft came out there were some limitations on the amount of leverage on an existing facility,” Swan said.
According to Swan, he’s spoken to private equity executives who said they were happy that another option was in the market, but that they were exploring different alternatives.
Ian Walker, an analyst at Covenant Review, told Buyouts that while the new affiliation rule would prevent larger sponsors from accessing the program, mid-sized companies are not necessarily in the clear.
“The median Ebitda for a middle-market company is around $35 million, according to our data,” he said. “What we’re seeing is that most deals are bunched between 5x and 5.5x. [They] won’t be able to access it because [they’ll] hit the 6x threshold after only using one turn of Ebitda.”
The Main Street Lending Program does not have an official launch date, but in a Senate Banking, Housing & Urban Affairs Committee hearing on Tuesday, Fed Chair Jerome Powell said that he hopes for the program to be up and running by the end of the month.
The Fed did not return Buyouts’ request for comment.
The Main Street Lending Program has been seen as an alternative option for private equity-backed companies after they were excluded from the Paycheck Protection Program because of the SBA’s affiliation rule. PPP is a $349 billion loan program under the Coronavirus Aid, Relief, and Economic Security Act, designed to help small businesses adversely affected by Covid-19.
The Main Street program was created to provide loans to small to mid-sized companies that were financially stable prior to the coronavirus crisis.
Eligibility requirements for the program allow businesses with up to 15,000 employees or $5 billion in revenue from 2019 to be eligible, up from the 10,000 employees and $2.5 billion in revenue that was initially announced.
It also expanded the types of businesses eligible for the loans and allowed lenders to keep a 15 percent share of loans that don’t surpass 6x the borrower’s Ebitda.
Update: This story was updated to explain which private equity firms are exempt from the affiliation rules.
Action Item: Check out the term sheet for the Main Street Priority Loan Facility here.