Apr 2, 2020 - Economy & Business

Bipartisan push could save private equity-owned small businesses

Illustration: Aïda Amer/Axios

Private equity and venture capital investors now have high-powered bipartisan support in their efforts to expand the types of small businesses eligible for $350 billion in federal loans via the CARES Act.

The intrigue: House Speaker Nancy Pelosi and House Minority Leader Kevin McCarthy, who rarely agree on anything except for the grandeur of California, both want the so-called "affiliation rules" waived.

What's the affiliation rule? As Axios Pro Rata discussed last week, it excludes most small businesses from qualifying as small businesses if they are owned by a private equity firm — by "affiliating" all of the company's employees with those of the private equity firm's other portfolio companies.

  • So if a private equity firm has 10 portfolio companies with 51 employees each, then none of those companies would qualify for loans that are explicitly structured to keep people employed.

Affiliation rules also expand to many VC-backed companies, even if there is no outside investor control, such as if two or more VC firms combined "are large compared to other stock holdings."

  • This is particularly pernicious because the vagueness could cause banks participating in the loan program to avoid VC-backed companies, given that they cannot be sure of the federal guarantees until weeks or months from now (when the SBA would rule on a case-by-case basis).
  • As Justin Field of the National Venture Capital Association suggests, it's reminiscent of the Seinfeld bit when Kramer pretends to be Moviefone. "Why don't you just tell me if you're a small business..."

Some argue that these companies should tap their existing financial sponsors for support, but that misses the point of a federal program designed to stem job losses immediately.

  • Some firms could (and are) plugging in new cash or debt, but many are holding out in case they need to rescue the entire entity (at which point there would be no prospect for rehiring).

All of which brings us back to Pelosi and McCarthy.

  • Yes, they helped write the bill that they now want Treasury or the SBA to fix via "guidance."
  • No, we can't say that the bill just relied on existing SBA language, given that it exempted relevant companies in select industries (restaurants, hospitality, etc.) and those that have received prior SBA funding via SBICs.
  • But, but, but: Their vocal efforts are better late than never for hundreds, maybe thousands, of companies that are staring down awful payroll decisions.

The bottom line: Waiving the affiliate rule remains a long shot, particularly given that it wasn't addressed yesterday in new loan application information released by the Treasury and SBA. Still, it remains a long shot that's worth taking.

  • Bonus: Later today I'll be interviewing McCarthy about the affiliate rule on Pro Rata podcast.

Update: McCarthy says VC-backed startups will be covered

Go deeper

World coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Axios Visuals

New Zealand has only eight active novel coronavirus cases no COVID-19 patients in hospital after reporting another day of zero cases. However, the death toll rose to 22.

Zoom in: A top health official told a briefing a 96-year-old woman "was regarded to having recovered from COVID-19 at the time of her death, and COVID-19 is not recorded as the primary cause of her death on her death certificate." But health officials decided to include her death in the overall tally of deaths related to the virus.

Coronavirus dashboard

Illustration: Sarah Grillo/Axios

  1. Global: Total confirmed cases as of 10 p.m. ET: 5,690,951 — Total deaths: 355,575 — Total recoveries — 2,350,071Map.
  2. U.S.: Total confirmed cases as of 10 p.m. ET: 1,699,073 — Total deaths: 100,396 — Total recoveries: 391,508 — Total tested: 15,192,481Map.
  3. Public health: CDC issues guidelines for reopening officesFauci says data is "really quite evident" against hydroxychloroquine.
  4. States: California hospitals strained by patients in MexicoTexas Supreme Court blocks mail-in expansion to state voters.
  5. Business: MGM plans to reopen major Las Vegas resorts in June — African American business owners have seen less relief from PPP, Goldman Sachs says.
  6. Tech: AI will help in the pandemic — but it might not be in time for this one.
  7. World: EU proposes a massive pandemic rescue package.
  8. 1 🎶 thing: Local music venues get rocked by coronavirus.
  9. 🎧 Podcast: Trump vs. Twitter ... vs. Trump.
  10. What should I do? When you can be around others after contracting the coronavirus — Traveling, asthma, dishes, disinfectants and being contagiousMasks, lending books and self-isolatingExercise, laundry, what counts as soap — Pets, moving and personal healthAnswers about the virus from Axios expertsWhat to know about social distancingHow to minimize your risk.
  11. Other resources: CDC on how to avoid the virus, what to do if you get it, the right mask to wear.

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Updated 19 mins ago - Politics & Policy

U.S. coronavirus updates

Data: The Center for Systems Science and Engineering at Johns Hopkins; Map: Andrew Witherspoon/Axios. This graphic includes "probable deaths" that New York City began reporting on April 14.

More than 100,000 Americans have died of the coronavirus, according to data from Johns Hopkins — a milestone that puts the death toll far beyond some of the most tragic events in U.S. history.

By the numbers: Over 1.6 million have tested positive in the U.S. Nearly 354,000 Americans have recovered and over 15.1 million tests have been conducted. California became the fourth state with at least 100,000 reported cases of the coronavirus on Wednesday, along with Illinois, New Jersey and New York.