Private equity- and venture capital-backed small businesses have had a tough time accessing a massive new aid program enacted last month to help them through the COVID-19 pandemic, given regulators’ concerns that the firms’ overall portfolio of companies might be anything but small.

But the two investor groups are taking slightly different tacks, as private equity appears to be counting on Congress to deliver changes in the next economic rescue bill, while venture capitalists say the Small Business Administration can make the rules more workable.

At issue is a business’s ability to tap into the $349 billion Paycheck Protection Program run through the SBA, a cornerstone of the $2.3 trillion coronavirus package. 

Small businesses can get short-term loans through private lenders to stay afloat while contagion countermeasures shutter most of the economy. If borrowers use the money to cover payroll and other fixed costs, they won’t have to pay it back.

The problem for small businesses whose owners include private equity or venture capital funds is that they may be deemed part of a larger company, an affiliation which can put them above the 500-employee threshold that defines a small business. 

Venture capital funds typically invest in start-up companies with promising growth prospects, especially technology. Private equity funds, by contrast, typically take controlling positions in more established companies, often to reduce costs.

The PPP program has seen huge demand. White House National Economic Council Director Larry Kudlow said lenders have approved some $250 billion as of Tuesday. Congressional leaders are now debating how to refill the program’s coffers before it runs dry by this weekend, as is now expected.

Republicans want to inject another $251 billion into the program without making any changes, but Democrats have countered with a $500 billion-plus proposal that would set aside $60 billion for lenders serving underbanked small businesses, plus another $150 billion for state and local governments and $100 billion for hospitals.

Sen. Marco Rubio, R-Fla., one of the PPP program’s architects, told CQ Roll Call that fund managers shouldn’t be included in an additional aid package.

“This program is for the restaurant down the street,” Rubio said. “The dry cleaner. The small, family-owned manufacturer. Sometimes those Main Street businesses receive funding from an investor.”

Rubio said the Trump administration is working through its rules to make sure small businesses aren’t inadvertently left out. “But we absolutely must preserve this program for those real small businesses because we have a limited pot of money, and more than half of small businesses have less than two weeks of cash flow on hand,” he said. “Most have burned through their reserves. This program is for them, not fund managers.”

The Democrats’ proposal for the next aid bill didn’t include changes sought by private equity and venture capital firms. They want to loosen SBA affiliation rules that lump companies controlled by shared ownership together when deciding whether a business qualifies as “small.” 

Despite being left out of the Democratic proposal, the private equity sector hopes it will see affiliation rules changed in an interim spending measure.

“We keep hearing the same thing from Pelosi or [White House adviser Jared] Kushner or [House Minority Leader Kevin] McCarthy — all are in agreement, but somehow can’t seem to get it past the finish line,” said Tom Bohn, CEO of the Association for Corporate Growth, a trade group for mid-sized private equity firms.

Investor groups have powerful backing. Speaker Nancy Pelosi, D-Calif., sent the SBA a letter with progressive Rep. Ro Khanna, D-Calif., urging it to be flexible in its application of the affiliation rule. Both Khanna and Pelosi represent districts in the Bay Area, which receives an overwhelming share of venture capital investment in the U.S.

Justin Field, senior vice president of government affairs at the National Venture Capital Association, said his organization sees a potential solution in an SBA rule change. 

“There’s a path forward for venture-backed startups and other small business equity investors to make it through the process,” said Field. “We don’t know if it will work. We hope it will.”

Field said the SBA appears to be tweaking the rules to allow for “lender deference.” Lending banks had worried that if they erred in granting a loan, they could lose a federal guarantee. Under an interim final rule from the SBA, lenders could rely on a certification from the applicant, Field said. 

Resistance to ‘vulture funds’

Progressives like Rep. Alexandria Ocasio-Cortez of New York say they oppose giving private equity more help.

“We’re generally against asking the public to bail out PE-backed companies whose business practices can be irresponsible, risky, saddled with debt, and ultimately lead to bankruptcy,” said Ocasio-Cortez spokeswoman Lauren Hitt. She said workers laid off by private equity-backed firms should get help, but that “we shouldn’t be subsidizing vulture funds.”

If congressional leaders and the White House can strike a deal this week, they will likely try to pass it via unanimous consent to avoid forcing members to violate social distancing rules for a vote, although Kentucky Republican Rep. Thomas Massie has threatened to block such a maneuver by forcing a quorum call.  

Both chambers this week extended their recesses until May 4. 

While the affiliation rules may preclude private equity- and venture capital-owned companies from applying for the PPP forgivable loans, their corporate parents should be able to turn to new lending facilities being set up by the Federal Reserve and the Treasury Department.

The Fed’s Main Street Lending Program, announced last week, will offer four-year loans to mid-sized companies starting at $1 million at interest rates around 2.5 to 4 percent.

Bohn said that fund, which the Fed says will support up to $600 billion in lending backed by $75 billion from the Treasury, won’t be enough. Bohn also bemoaned the lack of clarity around how the facility will operate once it’s up and running — the Fed is taking public comments on it until April 16.

As a sector, private equity came into the coronavirus pandemic relatively well-prepared.

According to the Financial Times, private equity ended 2019 with roughly $2.5 trillion of cash and other liquid assets on hand and ready to be deployed snapping up distressed assets and struggling entities once the U.S. economy’s record-long stretch of growth — then 126 months — ended. An analysis from Prequin, which collects asset management data, estimated U.S. private equity firms had $1.5 trillion on hand.

When asked why private equity firms couldn’t use that cash to keep their investments afloat during the crisis, Bohn said they were, “but you can’t do that in perpetuity.”

“Jobs are jobs, and these are jobs are no different than any other,” Bohn said. “If shops are closed and customers aren’t coming into stores, they won’t be able to keep people regardless of how they’re financed.”

Partisanship in the wings

Despite support from Pelosi and Khanna, the debate may follow mostly familiar partisan lines.

A collection of 16 left-leaning public interest groups and unions including the American Federation of Teachers and Americans for Financial Reform released a letter urging Congress to keep private equity out of the economic response programs.

“Congress must stand up to private equity’s efforts to hold their own workers and customers hostage in order to get a public bailout, and it must focus small business assistance on actual small businesses,” they wrote last week. “If Congress decides to not simply prevent access to all public dollars for PE firms, it must impose strict conditions that ensure these funds are used for the public good, not to pad the profits of the private equity executives.”

Meanwhile, a group of 10 conservative groups, including the Club for Growth and Americans for Tax Reform, urged the SBA and Treasury to loosen the affiliation rules on April 7.

“The fact is, businesses have been impacted by COVID-19 irrespective of their ownership structure,” they said. “Failing to protect a subset of small businesses for political reasons could threaten tens of thousands of jobs.”

If congressional leaders decide to let private equity and venture capital firms access the PPP in an interim package deal, it’ll be difficult for opponents to stop them.

The last coronavirus response package was negotiated primarily among leadership, excluding a majority of members. Opponents will likely again be faced with a take-it-or-leave it vote — if they get to vote at all. The House passed the $2.3 trillion measure on a voice vote over the protests of Massie, who argued the chamber lacked the necessary quorum.

Jennifer Shutt and Paul M. Krawzak contributed to this report.

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