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The Deal Professor: Money and morals |
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Steven Davidoff Solomon, a.k.a. “The Deal Professor,” is the faculty director at the Berkeley Center for Law, Business and the Economy |
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In the competition for a federal bailout, venture capital won the first round. Now, private equity is fighting back — and winning. |
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The first round was the $350 billion Paycheck Protection Program, which provides forgivable loans of up to 2.5 times companies’ monthly payroll. The program is limited to businesses with no more than 500 employees, and it specifically excludes financial firms. |
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Businesses are flocking to the program, but the Small Business Administration initially barred most companies that are funded by venture and P.E. firms. The administration’s affiliate rule lumps together businesses with common controlling shareholders, so all of a firm’s majority-owned businesses count toward the employee limit. Private equity has lobbied vociferously for a waiver, but the government has not granted one. |
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For most venture-backed companies, the problem is not majority ownership, but that the affiliate rule covers companies where an investor has “negative control” rights, like the ability to veto board decisions. Faced with forgoing a potential government grant or losing control rights, venture firms have rushed to eliminate these rights. Their extensive banking relationships also make them more attractive to lenders than unfamiliar mom and pop businesses. |
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This only remaining issue for venture firms is a moral one: Do they really need these loans? After all, V.C. and P.E. funds have nearly $1.5 trillion in uncalled capital, otherwise known as dry powder. The number of venture-backed companies that refused to participate in the program is unknown, but anecdotally there are some. |
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The second round of bailout wrangling is where private equity is coming out on top. |
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Apollo successfully lobbied for another Fed program — the $100 billion Term Asset-Backed Securities Loan Facility — to purchase a wider range of investment-grade securities, particularly the mortgage-backed and commercial real estate debt popular among many P.E. firms. The need for this is obvious: If landlords don’t get paid (however politically popular that is) there are mass disruptions to the economy. P.E. firms can also get in on the Fed’s $600 billion Main Street Business Lending Program for midsize companies. |
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There’s widespread criticism of bailing out P.E. funds. But whatever you think about this, public pensions are dependent on private equity investments for returns, and their portfolio companies employ millions. Frankly, the industry is too politically savvy to let these critical arguments stand in the way. |
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I would expect the next round of stimulus to be even more friendly to private equity. Unlike venture funds, P.E. financiers do not have the same moral misgivings about lobbying aggressively for federal assistance. |
