Some in PE space express concern for smaller GPs excluded from government loans

With the passage of a new tranche of funds for the Paycheck Protection Program as part of the latest congressional package passed last week, the private equity industry has seen its road forward get a bit narrower.

In new rules released Friday, according to Politico, the Small Business Administration explicitly forbade private equity firms from applying for loans through the PPP program. This means that even smaller PE firms that might meet the criteria and which may be experiencing financial problems will not be eligible.

The administration also continued the “affiliation rule,” which means that a private equity-backed portfolio company would be considered aggregated with all the other companies owned by the firm, making the 500-employee limit difficult to fulfill.

Sources told Buyouts most private equity firms were never trying to access PPP funds in the first place and had even told their portfolio companies not to do so.

“If a private equity firm does have available equity or does have available liquidity, to be honest I think private equity should step up rather than the government,” one LP told Buyouts.

Some LPs previously expressed openness to smaller investment managers being able to access the funds both for themselves and for portfolio companies, though.

Last week, Bloomberg reported on a letter written by Pennsylvania Public School Employees’ Retirement System CIO James Grossman to the $60 billion pension’s managers. In it, Grossman warned firms against “unnecessarily taking advantage” of the program or other programs like it. But he added this did “not generally apply to portfolio companies.”

PA Schools had no further comment.

Some suggested that smaller firms might have trouble accessing capital for various reasons, and if that can be proven, firms should be able to access financial help.

One LP told Buyouts that considerations like this should be “case-by-case,” but for the most part it seemed that larger PE firms were telling portfolio companies not to take advantage of PPP due to concerns over public or political blowback.

“They’d rather not have the headline risk,” he said.

“Our member firms never planned to apply for this program,” said a spokesperson for the American Investment Council, an industry advocacy group. Those members include most of the major names in the industry, including Blackstone, Carlyle, Apollo Global Management and KKR.

Kelly DePonte, a managing director with placement agent Probitas Partners, did not feel that either rule would be that deleterious to private equity firms. “Their operations are run by management fees they receive from LPs and that is not being impacted,” he said. 

Some sources did suggest there may be a need for smaller private equity firms to be able to access loans, though.

Sasha Grutman, co-founder of merchant bank Middlemarch Partners, said the question should be whether or not management fees can cover expenses for firms, and if they cannot, they should be eligible for the funds.

“There are small private equity firms and small hedge funds and small investment banks that really do live on current income,” he said.

Action Item: read the new rule released Friday here.