The topmost private equity firms in the US at the moment are facing a big liquidity crunch as a consequence of the coronavirus pandemic. Renowned private-equity owned firms located on Wall Street are putting pressure on the Trump administration to sanction small business rescue loans to them. Noteworthy is that billions of dollars are preserved each year by the US government as small business rescue loans to save SMEs in the country from finishing off due to liquidity crunch.
Rescue Loan Plea Sent to the White House
Industry lobbyists have recently contacted the White House regarding the burning issue of liquidity crunch at their respective firms. US Congress, last week directed the Small Business Administration to dispense rescue loans worth $350 billion among companies with less than 500 employees.
Affected badly with the pandemic, Wall Street’s private companies backed by the influential US private equity firms are targeting the affiliation rule of US federal government. As per the said rule, a small business backed by a US private equity firm whose portfolio organizations collectively employ a workforce of more than 500 individuals can be barred from leveraging the rescue loans.
In a letter penned by Steve Nelson (chief executive – Institutional Limited Partners Association) to the White House, he wrote – “There is no logic behind not allowing private-equity owned small businesses to access the federal rescue funds, or keeping the access limited”. The mentioned association constitutes members of public pension funds that have put large chunks of money as equity investments managed by the biggest of Wall Street firms such as Blackstone, and Apollo.
One adviser to a large PE firm stated – “If the federal government has decided to restrict funding for the firms we own to punish us, then we will be forced to take some drastic actions.”
What Are Small Business Rescue Loans?
A $349 billion worth of small business rescue funds is being eyed by the PE-backed private businesses of US in the last month amid the liquidity crunch faced as a result of coronavirus epidemic. The US treasury has now released the guidelines following which the funds will be distributed.
Pay check Protection Act is a critical part of the US federal government to save small businesses from shutting down amid the virus outbreak. The program holds a monetary budget of $2.2 trillion to be dispensed among the country’s small businesses having fewer than 500 employees.
The aim is to support organizations to continue paying their workers amid the crisis situation. The loans, however, will strictly be sanctioned basis the amount needed by the companies to pay workers ‘salaries, but a small percentage of overhead cost is also covered under the rescue initiative.
Maximum Amount That Can Be Borrowed
The rescue initiative is allowing organizations to borrow 2.5 times of what they pay in their monthly payroll(average), while capped at $10 million. However, it’s still unclear among both the lenders as well as the firms how the calculations will be made.
What All Expenses the Loans Will Cover
Borrowers of the loans are advised to spend 75% on the payroll, equivalent to eight weeks of compensation for the company’s workforce. The motto behind the whole sanction of rescue loans to small businesses has been to save jobs of the American workforce. The other intended uses of the loan could be expenses on company utilities and payment of interest on the loans taken by the company otherwise. Rent and health insurance are the other two expenses covered under the rescue loans.
Terms of the Small Business Rescue Loan
Two years is the loan term. 1% will be the rate of interest to be levied on the sanctioned amount.
Indirect Warning Issued to the Federal Government
US private equity industry has come strong on the government’s denial to access the rescue funds. As per the people close to the ongoing conversations between the White House and the private equity executives, an indirect warning has been issued by the PE executives that is directed towards lay-off of millions of employees working across their portfolio.
The demand from the private equity association is that the government must hand out rescue loans worth $2 trillion for which an agreement was made a week ago.
Views of American Investment Council
The council sees hope in the government and has expressed its desire to work out ways of coming out of the situation while taking the government alongside. It has shown its interest in working with the administration i.e. Congress and the Federal Reserve, to find a potential resolution. However, the intention remains the same – to persuade the federal authorities in supporting private equity-backed businesses and their employees.
Democrats Strongly Opposing the Idea of Lending Loans to PE-Backed Firms
Private equity investment professionals and executives are finding it extremely hard to convince democrats to accept the idea of extending loans to PE-backed businesses amid the virus outbreak.
The ideology of democrats in this matter says that the funds kept for supporting mom-and-pop organizations must not be handed out to the businesses backed by the high-profile PE firms that hold more than a whopping $2tn in dry powder.
Nancy Pelosi Stood Up for the PE-Backed Small Businesses
Pelosi, the Democrat from California, has spoken against the views of his political party citing concerns for PE-backed small businesses in her district. She said – “A large number of start-up companies in our district with less than 500 employees that are backed by equity investors will get severely hurt because of the overly strict implementation of Small Business Administrations affiliation rule”. She further expressed her worries over the job cuts in bulk that can emerge out of the existing situation amid the pandemic.