Broadly Disqualified

To be clear, Congress and the SBA intentionally stopped short of outright banning relief to companies backed by private equity investors. Authorities carved out exceptions for food-service and accommodation companies hit especially hard by the pandemic. Franchisees and affiliates of firms already licensed as Small Business Investment Companies also were allowed in.

But most companies backed by buyout firms appeared to be disqualified by rules against lending to borrowers with more than 500 employees, unless they met SBA standards for larger firms. Regulators tally such figures by adding all the headcount at businesses controlled by a private equity firm. If two businesses each employ 300 people, they could both be disqualified.

Defining whether a private equity firm controls a company isn’t always simple. Funds are known to take minority stakes with outsize influence over strategy. If a buyout firm wields enough clout on a board of directors to prevent a quorum or to block decisions, then that “negative control” can make the company ineligible for SBA support.

That’s prompted a variety of workarounds, according to people familiar with the strategies. For example, buyout firms ceded some board seats or gave up other rights to loosen their grip.

Ample Cash

Evidence of the strategies emerged in April when the SBA, in consultation with the Treasury, published guidance on a list of frequently asked questions. It noted shareholders who forfeit “rights to prevent a quorum or otherwise block action by the board of directors or shareholders” must do so “irrevocably” to satisfy the rules.

In other cases, buyout firms have gotten around the ban with more arcane steps, such as pledging not to add any more debt or giving up the power to make hiring and firing decisions, according to the people familiar with the arrangements.

The private equity industry lobbied to access the SBA program as it was being set up, but to little avail. “It shouldn’t matter if the companies are backed by investment from corporations, pension funds or others,” Drew Maloney, the president of the American Investment Council, private equity’s trade group, said at the time.

The program isn’t meant to help companies that have access to other sources of cash, Treasury Secretary Steven Mnuchin has said. SBA officials have urged the private equity industry -- which currently has about $1.5 trillion in available cash -- to help their portfolio companies. There’s also the moral hazard: Some companies were particularly vulnerable to the pandemic because private equity owners had loaded them up with debt to maximize profits.