United States

Many midsize PE-backed companies shut out of new paycheck program

Large swath of U.S. businesses excluded from PPP relief plan


Many small and middle market businesses owned by private equity and venture capital funds have been unable to access emergency loans established by the CARES Act. These portfolio companies are being shut out of the $349 billion earmarked for the Paycheck Protection Program because of how the law’s “affiliation rule” limits eligibility for companies who would otherwise meet the program’s 500 employee cap and other requirements.  

At issue are provisions that prevent portfolio-owned companies from counting only their own workers toward the 500-employee limit. The law instead includes workers from all other companies in which their private equity or VC fund is invested. Without access to emergency loans, some distressed small and middle market portfolio companies are struggling to find relief. 

“This is probably the first time in the history of private equity where it hurts to be a private equity-owned company,” said Anthony DeCandido, RSM partner and senior analyst, financial services. “If any of these companies stood on their own and were privately held, they would immediately be eligible. But some of these companies right now—forget about suffering financial losses—some of them are closing their doors.”

Certain private equity-controlled companies are exempt from the affiliation rules that increase their employee count, but those exceptions are limited to a few industries, such as hospitality and food services. Also, certain family offices that have private equity holdings have run into similar roadblocks to PPP relief. Even if they’re able to tap into other loans or capital streams, this leaves many startups, small businesses and middle market companies without access to a critical element of PPP – loans that will eventually be fully forgiven if employment and other conditions are met. 

Many raise concerns

RSM is actively engaged with several organizations, such as the U.S. Chamber of Commerce, the American Institute of Certified Public Accountants (AICPA) and others who argue that the CARES Act would more effectively stabilize the economy if affiliation rules were interpreted more inclusively. The organizations have voiced these concerns to Congress, the Small Business Administration, the Treasury Department, the Federal Reserve and others, noting the act is intended to help small businesses keep their employees and cover other expenses during the COVID-19 pandemic. The groups see no reason to exclude companies based on ownership structure, especially when shutting them out could have broad negative economic effects.

Similarly, the exclusion of financial lenders from PPP loans has strained some specialty lenders that would otherwise qualify as small businesses and might be able to help administer emergency loans amid the extreme demand. 

Recent letters from a host of policymakers and other organizations to the SBA and Treasury Department highlighted this issue, citing concerns that excluding such lenders will have a devastating impact on small businesses that have remained open and operating and that continue to provide critical financial services during the COVID-19 emergency.

They also questioned whether SBA guidance regarding PPP loans is inconsistent with the CARES Act, citing statutory text of the act stating that “in addition to small business concerns, any business concern” shall be eligible to receive a PPP loan.

“The small and middle market companies affected here are a huge segment of the economy and exactly the type of organizations the CARES Act is supposed to cover, ” said Don Lipari, RSM’s national industry and private equity leader. “Everyone is aware of the devastating impact COVID-19 is having on so many great companies. It’s absolutely crucial that they receive the assistance they need to make it through this unprecedented time.”

How these concerns might be reconciled remains unclear. Even with an additional $250 billion potentially on the horizon to fortify the PPP, there are no assurances criteria for loans will change in favor of these distressed small and middle market companies. RSM is engaged and continues to closely monitor this and all other COVID-19 relief programs. 

Related insights


Coronavirus Aid, Relief, and Economic Security Act (CARES)

The CARES Act, including a proposed main street lending program, offers help to middle market businesses facing challenges from COVID-19.


A business guide to the new Main Street Lending Program

RSM put out a guide to answer questions businesses may have about this new program, based on information from the Federal Reserve.


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