Private equity mostly out of luck
Economic fallout putting businesses in serious jeopardy
Since March, when the federal government began extending trillions of dollars in aid to companies and investors battered by the pandemic, some of the country’s biggest private equity firms have lobbied hard to shape the stimulus in their favor.
The Carlyle Group argued that some of its companies in aviation, a particularly hard-hit sector, should be eligible for emergency assistance. A co-founder of Apollo Global Management pushed hard for a broader use of a lending program that could benefit its holdings. And the American Investment Council, the industry’s main lobbying group, argued that companies backed by the private equity industry are very much part of Main Street America, and should therefore be eligible for the same government grant and loan programs that other companies are.
As the economic fallout continues, the bankruptcy filing of J. Crew, the highprofile retailer backed by two private equity firms — as well as signs of distress in other industries where private equity firms are big players — could add ballast to the industry’s push for financial help.
So far, though, its efforts have fallen short.
Last week, the Federal Reserve updated its terms for an emergency program that could lend as much as $600 billion to medium-sized companies, including those with relatively high levels of debt. Despite the AIC’s lobbying for a loosening of restrictions, most private equity firms — which buy companies using large amounts of debt that they then load onto those companies’ balance sheets — will still be shut out because of a rule included in the program.
The affiliation rule, which the industry has lobbied against, essentially considers companies owned by a single private equity firm to be part of a conglomerate rather than individual businesses, disqualifying them from the program by size and revenues. That means big buyout firms, which own scores of companies, are out.
“The new affiliation rule is clearly targeted at the bigger sponsors with a substantial portfolio,” Ian Walker, head of U.S. middle market research at Covenant Review, said, using an industry term for private equity firms. “It probably won’t affect the smaller players in the middle market.”
Whether the industry should get government aid is a politically thorny question. The private equity business is one of Wall Street’s most profitable, and the industry is sitting on hundreds of billions of dollars of spare cash that it has raised from pension funds and other investors.
Private equity firms own thousands of companies, many of them small to medium-sized, that employ 8.8 million workers in the United States, according to figures compiled by the professionalservices firm EY and the AIC. In 2019 alone, such firms invested more than $300 billion in 4,788 companies, according to the AIC.
As part of their pitch, private equity executives are also highlighting the financial hit their investors — including university endowments, state and municipal pension funds — are taking as the economy craters. Those clients pay annual fees of between 1-2% of the money they have promised to invest in a private equity fund, no matter what the economic conditions may be.
Critics of private equity say this is the moment when the industry should be coming up with more ways to help the companies they own.