In the last few weeks, family offices in the United States have gone through a number of transformative changes due to the disruptive nature of COVID-19. These offices are working through issues regarding human capital, liquidity, data, cybersecurity, technology, and other enterprise risks. Depending on the mission and structure of the family office, the top-of-mind issue for executives is liquidity management.
Family offices are unique in many respects. Multi-family offices provide investment management services to a wide range of families. Single family offices often have several generations to support.
As steady flows of management fees and profits interest start to attenuate, liquidity becomes more important to the family office’s operations from slipping. The trickle-down effect of this could lead to downsizing of the family office, which in turn could lead to a reduction of key employees who handle the office’s most complex tasks.
As the economy slows and uncertainties linger, these types of family offices need to move beyond the Paycheck Protection Program (PPP) and focus on the new Main Street Lending Program (MSLP).
Public perception and reputational risk
Family offices that were approved for funding under the PPP will have the opportunity to apply for one of the facilities under the MSLP. The key difference between the two programs is the component of forgiveness. Loans made under the MSLP are ineligible for forgiveness, while the government will forgive PPP loans if the borrower meets certain conditions regarding employee head count and wages.
There is a public perception that family offices are ineligible for loan programs created by the CARES Act based on their business purpose. That statement should be true for offices basically managing the wealth for members of that family. But family offices in the trade or business of providing investment management services should not be disqualified from coronavirus relief loans. We look to the precedent established under Lender Management LLC v. Commissioner to distinguish between the two types of family office formats.
Family offices that are eligible for a relief loan, however, must consider pitfalls of borrowing one. The Small Business Administration (SBA) could publish information about borrowers of relief programs. Treasury Secretary Steven Mnuchin has said the SBA will perform a “full review” of PPP loans of at least $2 million. At the very least, family offices looking to apply for a relief loan should be aware their private data might be published. Because the government does not forgive loans in the MSLP, the reputational risk for participating in it is significantly less than borrowing under the PPP.
Overall, the rollout and execution of the PPP has not been smooth, as some funding went to borrowers who really did not need it. In addition, there are many small and midsize businesses still waiting either for their application to be reviewed, or to receive approved funding. In recent guidance, the SBA established May 18, 2020, as the last day for borrowers to review their funding request and return their loan if they want to back out of the program for any reason.
Main Street undergoes construction…
The MSLP is a joint effort between the Federal Reserve and Department of Treasury that promises needed liquidity for businesses struggling through this sudden economic downturn.
The criteria for the program broadened after the Fed released additional guidance on April 30, 2020. There are now three separate loan programs under the Main Street umbrella.
These programs are for businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues. The business must have been established prior to March 13, 2020; created or organized in the United States, and have significant operations in and the majority of its employees in the United States.
In addition, the MSLP depends on a number of rules and regulations that fall under the SBA. These include a list of ineligible businesses, as well as the affiliation rules that disqualify a large number of portfolio companies associated to private equity. A careful analysis of the affiliate rules and alternative-size standard will need to be completed by legal counsel and your lender to determine eligibility.
Here are the details of the three loan facilities: