Asset Managers and the CARES Act

Much has been written about how private equity and venture capital firms can benefit from the CARES Act, especially as it relates to their portfolio holdings, but what about other asset managers, such as fixed income, real estate, commodities, other alternative investments (wine funds, car funds, art funds, etc.), and mutual fund managers? 

As many asset managers are considered small businesses or are sole proprietorships, there are various programs under the CARES Act that they may qualify for, most notably the following:

Payroll Protection Program (PPP)*:  The Act provides for nearly $350 billion in loans under the Small Business Administration (SBA) of up to $10 million per borrower.  Proceeds of such a loan must be used for salaries, commissions, health care benefits, retirement plan benefits, etc.  Loans covered under the SBA may qualify for 100% forgiveness.  PPP loans are not for everyone, including those whose sole stock and trade is in “money,” and borrowers should consult with proper advisors to ascertain their ability to qualify for a PPP loan and possible loan forgiveness.   

Economic Injury Disaster Loans (EIDL)*:  Under the SBA, small businesses and sole proprietorships may also qualify for a loan for the lesser of $2,000,000 or the amount of economic injury determined by the SBA, less business insurance recoveries, if they have been in business for at least one year.  Those applying for such a loan under the EIDL may also request up to $10,000 for an emergency grant that must be distributed within three days of receipt.  Grants should be used to maintain payroll or to repay obligations that can’t otherwise be met due to lost revenue from the COVID-19 crisis. 

Payroll Tax Deferral:  Two forms of payroll tax relief have been provided under the CARES Act. 

From March 12, 2020 through the end of the calendar year, employers can defer payment of Social Security Taxes.  50% of deferred taxes need to be paid by December 31, 2021 and the remaining 50% by December 31, 2022. Employer payroll tax deferrals are not applicable if you receive forgiveness for your Paycheck Protection Program loan under the CARES Act.

Employee retention payroll tax credits are also available to employers that have had to partially or fully suspend operations due to a government order and/or experienced a “significant” decline in gross receipts due to the COVID-19 crisis.  There has been limited guidance received on the definition of “significant” in this case; however, a 50% decline from the same quarter in 2019 seems to be a good measure.  Credits apply against an employer’s Social Security tax obligations with a maximum annual credit of $5,000 on the qualified wages paid to each employee.

It is important to note the employers receiving an SBA loan under the PPP are not eligible for employee retention payroll tax credits.

When taking advantage of any of the provisions of the CARES Act, asset managers should be aware of the Affiliation Rules.  Under the Affiliation Rules, when one entity controls another they become affiliates and any limitations on the above programs may be impacted.  When determining the size and revenue of a business, affiliates may be counted as one entity, thus disqualifying them for some of the programs afforded under the CARES Act.  There are certain waivers of the Affiliation Rules that can be considered and managers should work with their advisors to see if any apply.

*Please note, as of this writing, the PPP and EIDL programs have been fully subscribed; however, it is anticipated that they will be replenished under the next stimulus package.

This article does not serve as an endorsement of or suggestion that asset managers should apply for funding under the CARES Act.