COVID-19: Considerations for Alternative Investment Funds: CARES Act from a PE Perspective
April 04, 2020
By Elana Margulies-Snyderman
The largest stimulus bill in U.S. history, known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), was signed into law on March 27, 2020. This $2 billion stimulus package is intended to help stabilize the U.S. economy by providing businesses and individuals with cash, save jobs and bail out companies both large and small. The aid in this stimulus package was calculated to help small businesses cover eight weeks of payroll and other operating expenses, with a view that the related funding should be sufficient if the economy re-opens by late May. This aid package is really about stabilization and just a start. If additional stabilization for the economy is needed, lawmakers could possibly approve additional aid packages later this year with the purpose of further stimulating the economy.
A few of EisnerAmper’s professionals shared their insights on how the stimulus package may impact private equity, venture capital and family offices who invest in direct deals.
What parts of the aid package will have the biggest impact for midsize businesses and private equity firms?
JOHN ELLIOTT, DIRECTOR, BUSINESS DEVELOPMENT, PRIVATE EQUITY:
Approximately $350 billion of the CARES Act is geared toward small businesses; defined as having less than 500 employees. The two facets that will be most applicable to such businesses are the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) Program. Both of these programs are designed for companies that have been negatively impacted by COVID-19 in an effort to help them stay afloat and minimize their financial losses attributable to the pandemic. The PPP and IEDLP are very unique in that they require no personal or collateral guarantees, no evidence of ability to repay, and no disclosure whatsoever that the borrower was unable to obtain credit elsewhere. A borrower cannot receive a PPP loan in addition to an EIDLP loan through the SBA for the same purposes. However, a borrower who has an EIDLP loan unrelated to COVID-19 may apply for a PPP loan (with an option to refinance the EIDLP loan into the PPL).
There are specific criteria that must be met in order to be eligible for companies to apply for the PPP and EIDL Programs. Regarding the PPP, any business concern, non-profit organization, veterans organization, or tribal business shall be eligible to receive a covered loan if that entity employs not more than 500 employees. Under the EIDL Program, the size of the applicant alone (without affiliates) must not exceed the size standard designated for the industry in which the applicant is primarily engaged; and size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone, or the primary industry of the applicant and its affiliates, whichever is higher.
The cap on the amount of the loan of the PPP is $10 million whereas the EIDL is $2 million. From a timing perspective, SBA lenders are currently accepting applications for the EIDL, and the PPP loan application was finalized on April 2, 2020. Lenders will be accepting applications on April 3. 2020. The final deadline to apply for the PPP is June 30, 2020, while the EIDL will run until the end of the year.
SIMCHA DAVID, TAX PARTNER, FINANCIAL SERVICES:
There are also a number of beneficial tax provisions in this stimulus package that can be beneficial to private equity portfolio companies that should be looked at closely, such as the enhanced NOL provisions that now allow for a five-year carry back, changes to the business interest expense limitation under IRC Sec. 163(j), delays in timing for filings and estimated tax payments and corporate AMT relief, to mention a few.
ETHAN BOOTHE, NATIONAL PRIVATE EQUITY INDUSTRY LEADER:
Private equity firms with exposure to hospitals and health care would certainly be impacted as more than $140 billion has been allocated to the space. The deals will provide $100 billion in grants allocated directly to hospitals to help fight the COVID-19 outbreak and the rest is will be dedicated to providing health care professionals with protective equipment, testing supplies, increased workforce and training and accelerated Medicare payments, as well as supporting the Center for Disease Control (CDC).
Elective surgeries and all non-vital procedures, which tend to be money makers for hospitals, will be postponed for the indefinite future as we fight this pandemic across the United States.
Is there anything not mentioned in the CARES Act that firms were hoping for? Are there any open questions about any of the provisions, for example, is there clarity around who qualifies?
One item that begs for more clarity is the SBA affiliation rules under the PPP. Private equity firms are currently trying to figure out whether the SBA is likely to relax its historical view of ‘affiliates’ in a way that would make their portfolio companies eligible for 7a loans under the PPP. The 500-employee cap issue certainly needs clarification and private equity firms and many venture capital firms hope the portfolio companies they control or have invested in with under 500 employees will qualify for these loans. Guidance is expected soon on whether private equity-backed companies can qualify for $350 billion of relief loans as part of the government stimulus package. Companies with under 500 employees would be eligible for up to $10 million of loans as part of the program.
It should be noted that the loans come with significant handcuffs including no layoffs, no dividends, and no stock buybacks, but the portion of the loan used to pay payroll, mortgage interest, rent and utilities for the eight week covered period may be forgiven. The amount of the PPP loan to be forgiven will be reduced by employee layoffs and wage reductions greater than 25%.
Some of the larger loan programs in the $2 trillion stimulus package available to distressed industries, specifically those being made available to the airlines industry and other “eligible businesses,” may require demonstrating a lack of access to alternative debt financing, which could be a challenge for PE-controlled companies seeking relief through the CARES Act.
With regard to the loans administered by the SBA, final guidance from the SBA was released on April 2, 2020 and that included the application for the PPP loans.