In the competition for a federal bailout, venture capital won the first round. Now, private equity is fighting back — and winning.Did you catch that last part? He's right, public pensions are dependent on private equity investments for returns, and their portfolio companies employ millions.
The first round was the $350 billion Paycheck Protection Program, which provides forgivable loans of up to 2.5 times companies’ monthly payroll. The program is limited to businesses with no more than 500 employees, and it specifically excludes financial firms.
Businesses are flocking to the program, but the Small Business Administration initially barred most companies that are funded by venture and P.E. firms. The administration’s affiliate rule lumps together businesses with common controlling shareholders, so all of a firm’s majority-owned businesses count toward the employee limit. Private equity has lobbied vociferously for a waiver, but the government has not granted one.
For most venture-backed companies, the problem is not majority ownership, but that the affiliate rule covers companies where an investor has “negative control” rights, like the ability to veto board decisions. Faced with forgoing a potential government grant or losing control rights, venture firms have rushed to eliminate these rights. Their extensive banking relationships also make them more attractive to lenders than unfamiliar mom and pop businesses.
This only remaining issue for venture firms is a moral one: Do they really need these loans? After all, V.C. and P.E. funds have nearly $1.5 trillion in uncalled capital, otherwise known as dry powder. The number of venture-backed companies that refused to participate in the program is unknown, but anecdotally there are some.
The second round of bailout wrangling is where private equity is coming out on top.
Apollo successfully lobbied for another Fed program — the $100 billion Term Asset-Backed Securities Loan Facility — to purchase a wider range of investment-grade securities, particularly the mortgage-backed and commercial real estate debt popular among many P.E. firms. The need for this is obvious: If landlords don’t get paid (however politically popular that is) there are mass disruptions to the economy. P.E. firms can also get in on the Fed’s $600 billion Main Street Business Lending Program for midsize companies.
There’s widespread criticism of bailing out P.E. funds. But whatever you think about this, public pensions are dependent on private equity investments for returns, and their portfolio companies employ millions. Frankly, the industry is too politically savvy to let these critical arguments stand in the way.
I would expect the next round of stimulus to be even more friendly to private equity. Unlike venture funds, P.E. financiers do not have the same moral misgivings about lobbying aggressively for federal assistance.
Nobody wants to give private equity titans billions in public bailouts but the truth is PE funds invest in commercial real estate and they employ millions of people in their portfolio companies which are typically mid-size firms with less than 500 employees (some are much large).
And who invests in PE funds? Large public pensions and sovereign wealth funds.
If you ask me, I have less of a problem bailing out large private equity funds than bailing out hedge funds which speculate on markets:
Wait, what? Hedge funds may be able to claim bailout money intended to help cash-strapped small businesses.https://t.co/hh8OYwV05D— MarketWatch (@MarketWatch) April 15, 2020
At least PE funds invest directly in mid-size to large companies and try to reshape them over a long period.
Earlier today, I saw this comment on LinkedIn on whether PE deserves a bailout:
Yes it does. It is just as vital, and probably more, to the economy as first-line borrowers (banks).I responded:
The problem is another, once you get used to the notion that someone will save you in difficult times, your mindset gets spoiled.
I would like to quote Mr. Henry Kravis: "A real entrepreneur is somebody who has no safety net underneath them".
Great quote, Kravis is right, a real entrepreneur is somebody who has no safety net underneath them. But as we see now, a pandemic can destroy even the best entrepreneurs. The best will rebuild but they need assistance. My problem with PE funds and hedge funds looking for a public bailout is it exposes how utterly unprepared they were for a major downturn. For years, they borrowed cheaply thanks to the Fed and were incentivized to take risks they normally wouldn’t take and now the chicken has come home to roost.A lot of companies were unprepared for a major downturn and now they're lining up for a bailout.
Lastly, as I've said repeatedly, bailouts are going to become the norm going forward, and if things get really bad in US Pension Land, Congress will bail out public pensions not because they care about pensioners (they don't), but because they want to fund private equity and hedge funds in perpetuity.
Moody’s estimated that public pension investment losses were nearing $1 trillion in March. https://t.co/g2ayPiTXx0— Lisa Abramowicz (@lisaabramowicz1) April 15, 2020
Of course, they will window dress it and make it look like they're bailing out public pensions but that's not the real reason behind it.
And therein lies the problem, the entire capitalist system is holding on by a thread, one bailout after another, and the financial elite are making off like bandits, exacerbating inequality.
In fact, David Rosenberg tweeted something yesterday that caught my attention:
The chart below illustrates why it is that the government must ensure that bear markets never happen. There is too much at stake to end the "casino economy" when people’s net worth is so crazily hitched to the stock market. Question is – at what cost?? pic.twitter.com/abaXPwFvBD— David Rosenberg (@EconguyRosie) April 14, 2020
The financialization of our economy has reached epic proportions, everyone's fortune is tied to the stock market, and the same goes for public pensions relying on hedge funds and private equity funds. There's just too much at stake to let them fail.
Below, CNBC's "Halftime Report" team is joined by Social Capital CEO Chamath Palihapitiya to discuss his view of the markets amid the coronavirus pandemic. Listen carefully to what he says.
And short-seller Jim Chanos, Kynikos Associates founder, discusses the state of private markets amid the coronavirus pandemic, why he is still bearish on Tesla Inc. and the sectors he is shorting with Bloomberg's Scarlet Fu and Joe Weisenthal on "Bloomberg Markets: What'd You Miss?"
Lastly, Francine Lacqua speaks with The Blackstone Group Chairman and CEO about his drive for success, his attitude toward investments and the importance of education. Great discussion, well worth watching this interview and reading his book on what it takes to pursue excellence.
Update: After reading this comment, Bruce Schoenfeld of 3P Associates shared this on LinkedIn:
Is there any other answer besides no? Most PE firms lever up their acquisitions to unsustainable levels and pay themselves massive dividends and management fees. And the taxpayer is now being asked for help? That, my friend, is the definition of chutzpah!I completely understand why he feels this way but like I said, PE funds are employing millions in mid-size to large companies and as such, they have an argument as to why they deserve bailouts.
Also, Timothy Hosking, economist, shared this on LinkedIn:
Bail out is for the economy to kickstart and prevent a meltdown. If the equity is of pension origins then a yes, otherwise go to the back of the queue. Same goes for rent seeking organisations.It's tough to disassociate if the equity was of pension origin but it's safe to assume all pensions have big stakes in the success of private equity and are hoping that these bailouts can limit the damage to their portfolio companies.