Private Equity and Portfolio Companies may be left out in the cold under CAREs Act

The unprecedented $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CAREs) is the largest stimulus package in U.S. history.

The primary intent of CAREs is to help small businesses across the country ride out the storm during the difficult financial times resulting from the global COVID-19 pandemic.

CAREs stimulus aid includes (a) $349 billion for the Paycheck Protection Program (PPP) designed to give payroll relief to small businesses by way of federally guaranteed loans that can be forgivable; (b) $10 billion for Economic Injury Disaster Loans to fund ordinary course expenditures and working capital; and (c) $17 billion in relief for borrowers with currently outstanding SBA loans.

As noted above, hundreds of billions of dollars will be accessible to small and midsize business through the PPP to be administered by the Small Business Administration (SBA) to assist with covering payroll and operational expenses during the current outbreak and consequent economic fallout.

The safety net created by CAREs, however, appears to have a hole that may unfortunately result in one segment of the business community missing the opportunity of accessing the sizable funds to be distributed. Companies seeking loans through the PPP generally must have 500 employees or fewer.

The PPP rules also treat “affiliated” companies as one entity for employee-count purposes. Accordingly, many private equity firms and their portfolio companies will be unable to receive much-needed relief funding. In other words, if the number of employees at a private equity firm combined with the employees of its portfolio companies surpasses 500, they will be unable to access loans through the PPP.

As such, companies owned by many middle or lower market private equity firms may be unable to receive SBA help they desperately will need in the coming weeks and months.

Despite this potential impediment to private equity firms and their portfolio companies receiving funding under the PPP, there are potential affiliation waivers available under the program.

The affiliation rules may be waived if a business:

  • is currently receiving financial assistance through the SBA’s Small Business Investment Company program. This does not mean, however, that if a single portfolio company qualifies under this waiver all portfolio companies fall under the waiver;
  • is an SBA-approved franchise; or
  • that is assigned NAICS industry codes beginning with 72 (accommodation and food services) that have fewer than 500 employees.

Private equity portfolio companies that fall into the above exceptions may be eligible to receive small business aid under the PPP.

While participation in the PPP may be limited for private equity firms and their portfolio companies, CAREs will provide relief to many firms and portfolio companies in other circumstances.

To further discuss potential eligibility for these critical programs and other business-related questions arising out of the pandemic, please contact Steven J. Enwright, Esq. at Lippitt O’Keefe, PLLC.


Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI. Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Alex Monahan is an associate at Lippitt O’Keefe, PLLC. He focuses his practice on business and corporate law, real estate law and commercial litigation.

Contact Steve at [email protected] or Alex at [email protected]