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.