Private equity-backed companies should qualify for government relief, GPs to reassess supply chain exposure as pandemic reveals vulnerabilities, CalSTRS has the cash to pounce on opportunities in market dislocation

KPS Capital's sale of Chassis Brakes International wins Turnaround Deal of the Year and why the CARES Act should provide relief to private equity.

Morning!

Nice to be heading into the weekend … I guess!
KPS Capital won our Turnaround Deal of the Year for its sale of Chassis Brakes International, realizing a 6.2x euro cash-on-cash return. Check out how they did it here.

I have some thoughts on the CARES Act and the likely possibility that private equity-backed small businesses will be excluded from relief loans (as per Dan Primack’s interview with Rep. Kevin McCarthy yesterday):

Private equity should absolutely get access to emergency government loans through the CARES Act to help ease the crush of layoffs that are likely to come without federal intervention. This is about saving jobs and preserving the investment returns of millions of pensioners, whose retirement savings are under pressure by the devastation of the public markets.

Guidance is expected soon on whether private equity-backed companies can qualify for $350 billion of relief loans as part of the government’s $2 trillion economic stimulus package President Trump signed into law on March 27. Companies with under 500 employees would be eligible for up to $10 million of loans as part of the program, called the “Paycheck Protection Program.”

Borrowers would be charged 1 percent interest and loans would be forgiven as long as businesses keep employees on the payroll for two months, according to the Wall Street Journal. UPDATE: According to today’s news, the banks are not ready yet to accept the applications.

It’s widely expected that most PE-backed companies would fall under the “affiliates” rule, meaning a portfolio company that has, say, 50 employees, would be treated as “affiliated” with all its sponsor’s other portfolio companies. This could push the single company above the 500-employee threshold for qualifying for relief, barring many PE-backed companies from receiving government loans through the CARES Act.

Critics believe private equity firms should tend their own gardens, kicking in financial assistance from their own sizable coffers of uncalled capital and borrowing power to prop up ailing companies.

The reality is firms are already doing this, or planning for this, for those companies that are suffering in the pandemic-fueled market downturn. Companies operating in the hospitality, retail and energy spaces were the first impacted by the market shock as governments worldwide have increasingly restricted peoples’ movement and forced on-premise businesses to shut down. Firms that own such companies have already been dealing with the damage to these types of companies.

Access to emergency government relief will help those companies worst hit by this disaster, which would mean fewer layoffs for those companies that can sustain through the worst of this dislocation. And layoffs are coming. According to a survey by Private Equity International conducted from March 25 to 27, 53 percent of 117 GP respondents expected to make layoffs in portfolio companies, 7 percent did not expect layoffs and 40 percent had not yet made a decision.

Additionally, government assistance would come with restrictions on a business’s ability to lay off workers – an added layer of job protection for the most vulnerable workers. Perhaps government assistance could come with requirements for sponsor firms to also kick in some level of equity to portfolio companies seeking aid.
Helping to sustain businesses through this emergency would also have the effect of preserving a private equity firm’s overall portfolio. This in turn could prop up the private equity investments of large public pensions, which account for somewhere around 80 percent of all capital flowing into private equity funds. Public pensions are getting hammered by public market volatility and will lean increasingly on distributions from their long-term private equity portfolios to keep capital flowing to retirees.

It’s looking increasingly unlikely that private equity will qualify for federal government help and that’s unfortunate as the economy contracts further in this catastrophe.

What are you thoughts on this? Reach me at cwitkowsky@buyoutsinsider.com.

Top Scoops
Vulnerabilities in the global supply chain that emerge in the coronavirus pandemic will force industrial and manufacturing-focused GPs to look locally for supplies, writes Karishma Vanjani on PE Hub. This also will change the way GPs assess potential investments, she writes.

“I don’t think PE investors think too much about the supply chain,” said Hugh MacArthur, who leads Bain & Co’s Global Private Equity Practice. “They want a very high service level and a low cost,” he said.

But that’s changing, according to MacArthur. “Now we are realizing that PE investors also need to play defense,” MacArthur said. Sponsors in the aftermath of coronavirus will examine how efficiently a company handles risks and the vulnerabilities in the supply chain before executing acquisitions. Read more.

California State Teachers’ Retirement System expects to stick with its private equity plan, despite the pandemic-spurred market dislocation, the system’s Chief Investment Officer Chris Ailman told Justin Mitchell on Buyouts. In fact, the dislocation could present opportunities the system will be able to seize because of its cash on hand, he said.

“In the past, we have found that after a crisis the opportunities are generally more attractive,” Ailman wrote. “We have held cash to be able to take advantage of these types of opportunities.” Read the story here.

Have a great weekend! Hit me up as always with tips n’ gossip, feedback or just to chat at cwitkowsky@buyoutsinsider.com, on Twitter or find me on LinkedIn.