Lower to middle-market companies are worried that millions of employees at their portfolio companies are at risk of losing their jobs if they are excluded from a loan program created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, according to a recent survey from Association for Corporate Growth (ACG).
Last month, President Trump signed the $2.2 trillion CARES Act into law, aimed at tackling the economic fallout from the coronavirus pandemic, which has halted the global economy and led to record unemployment in the US.
Businesses with fewer than 500 employees or those that meet the Small Business Administrations (SBA) industry size standard of more than 500 employees may be eligible for the Paycheck Protection Program (PPP), a $349 billion loan program under the CARES Act created to help small businesses get back on their feet.
“A lot of private equity has multiple companies with many thousands of employees,” Tom Bohn, the CEO of ACG told Buyouts. “It’s not looking at each company individually. If you’re part of a private equity group, family office or an investment banking group, you’re excluded simply because they take the combined number of all your employees together as opposed to each individual company.”
Conversations are underway in Congress between Democratic and Republican leaders about including an additional $250 billion in the program, which private equity firms are hoping to be a part of.
Independent sponsor AGI Partner, which focuses on TMT, business marketing services and niche manufacturing, took part in ACG’s survey. The company was looking forward to getting assistance from the CARES ACT for its businesses but did not qualify for the program under the SBA’s guidelines, according to Partner David Acharya.
“We are all calling the same politicians and we’re trying to educate them on the rule,” Acharya said. “I don’t think people realize that these affiliation rules are a big issue for smaller companies to get this aid. We’re certainly working the phones in DC.”
Survey results show that 77 percent of respondents said the survival of their business is impacted by being excluded from the PPP; 85 percent said they anticipate laying off employees in the next month; and 92 percent of those surveyed said they expect the exclusion to result in layoffs.
ACG surveyed almost 1,200 professionals who work in small to midsize businesses in the US.
According to the Department of Labor, 6.6 million people filed for unemployment the week ending April 4, bringing the three-week total to 17 million claims.
“We’re obviously looking at hiring freeze, furloughing employees, but if we don’t get some type of help from the government, these employees will ultimately suffer through loss of jobs,” Acharya said.
Between 1998 and 2017, private equity-backed businesses increased jobs by 60 percent, according to the research database Growth Economy, which is in affiliation with ACG, PitchBook Data, Inc., and the University of Wisconsin System Institute for Business and Entrepreneurship Business Dynamics Research Consortium.
Lower to middle-market companies were “flabbergasted” that a large section of what drives the economy was left out of the Paycheck Protection Program because they created high wages and well-performing jobs, Bohn said.
“They’re under the same economic duress that everyone is under right now. Whether you’re a public company, the airlines, some of the hotel chains or you’re a private equity-backed middle market group, the financial economics are still the same,” Bohn said. “The money is not coming in, the people are not coming in and as a result, they have started laying off and furloughing people.”
In a letter to Secretary of the Treasury Steven Mnuchin, and the administrator of the US Small Business Administration, Jovita Carranza, Institutional Limited Partners Association (ILPA) called for private equity and venture-backed businesses to be able to access capital under the program.
“The rules could effectively aggregate the 500-employee threshold across the entirety of the fund’s portfolio, even though these businesses are distinctly separate entities,” ILPA CEO Steve Nelson wrote.
Action Item: Check out survey results here.