The government’s response so far to the Covid-19 pandemic provides for a mixed report card.
Disasters have been averted in the NHS, but death numbers are among the highest in Europe and coronavirus is having a devastating impact on care homes. Questions about the timing of lockdown and the government’s testing infrastructure also remain. The government’s business support measures have been more successful. The furloughing scheme has undoubtedly saved hundreds of thousands, if not millions, of people from unemployment and credit is finally making its way to businesses who need it via the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme (CBILS).
Private equity firms and their portfolio companies have not been at the front of the queue to receive government financial support, nor have they been at the forefront of the government’s mind throughout the policy development process. The furloughing scheme has allowed portfolio companies to keep staff on the payroll, while the government subsidises their wages, and the news the scheme will continue until October provides certainty to both workers and management teams for the next few months at least.
CBILS, when it was announced in March, gave the impression that it could provide a vital line of credit to support the liquidity of many private equity-backed portfolio companies. CBILS allowed firms with a turnover of less than £45 million to borrow up to £5 million, with 80% of the loan backed by the government.
However, many portfolio companies were ineligible for the loans as turnover was originally calculated on a group basis, taking into account the portfolio as a whole. This rule was later relaxed to allow portfolio companies to apply as separate entities for the government-backed loans, alongside the introduction of the Coronavirus Large Business Interruption Scheme (CLBILS) that provided credit to firms with turnover over £45 million. CLBILS was created after it was pointed out to government that many firms were too large for CBILS but were not of investment-grade so could not access the Bank of England’s Covid Corporate Financing Facility (CCFF).
Just when private equity firms thought it was possible to dip their toes into this new pool of credit, another issue raised its head that has proved to be a significant barrier to portfolio assets accessing the government-backed loan schemes.
Under EU state aid rules, firms that had accumulated losses greater than half their subscribed share capital as at 31 December 2019 are not eligible for government support as they are deemed to be a ‘business in difficulty.’ Due to the leveraged structure of the vast majority of private equity portfolio companies, this rule has made them unable to access CBILS and CLBILS.
Both the British Private Equity and Venture Capital Assication (BVCA) and the Confederation of British Industry (CBI) are currently lobbying the EU Commission to change the rules, but so far the Commission has held fast.
The saga of how the government’s various support measures have arguably fallen short in supporting PE-backed companies illustrates two important facts about government.
The first is that the old adage about not wanting to see how the sausage is made still holds true. The government has had to conduct policy development that would normally take years in a matter of months, with every mistake or problem that would have been caught along the way being made in full view. Fortunately, industry groups like the BVCA, and expert advisers supporting individual investors have been on hand to support the government and ensure the measures have been refined enough to help the majority of businesses.
The second is that while government has been willing to make some concessions to private equity, the sector is clearly nowhere near the top of the government’s agenda. This partly comes down to a lack of understanding of how the private equity model works, for which the industry itself must take some responsibility. If policymakers buy in to many of the enduring myths about the sector – that UK private equity firms are sitting on huge amounts of cash that could be deployed to support their portfolio companies – for example, there is little incentive to go to any special lengths to provide them state-backed financial support
The post-coronavirus recovery will offer private equity firms the ideal opportunity to rectify this problem and ensure a more prominent position in the government’s thinking. By demonstrating how private equity firms bring expertise, innovation and growth to businesses in all sectors across the UK, private equity can make its case that it is a force for good.
Government will be looking for every opportunity to promote growth and investment, and private equity firms will be in a strong position to contribute to this.