Private equity, hedge funds excluded from PPP

Private equity or hedge funds that took out loans designed to help small businesses survive the coronavirus meltdown now have until May 7 to return them, the Trump administration has determined.

Private equity and hedge funds are excluded because they’re “primarily engaged in investment or speculation,” the Treasury Department and Small Business Administration said in an April 24 FAQ.

Congress initially set aside $349 billion under what it called the Paycheck Protection Program, designed to help small businesses make payroll. As the US collapsed into the worst recession since the 1930s, the public seethed as seemingly large companies helped themselves to the subsidies.

Among those that applied for payroll loans was SkyBridge Capital, a hedge fund founded by former Trump administration spokesman Anthony Scaramucci. He tells RCW that his firm was eligible for the funding, but ultimately decided that “it was not the appropriate thing to do.”

The SBA burned through the cash by April 16 – just 13 days after the program commenced. Congress injected another $310 billion into the program on April 24 – the same day as the guidance banning private equity and hedge funds from receiving the money.

Venture capital

Venture capital firms are not mentioned explicitly in the new guidance, but regulators caution would-be applicants that they’re likely to face scrutiny under the SBA’s affiliation rules.

Under federal rules, companies with fewer than 500 employees are eligible for relief. But officials also count employees in “affiliated” companies toward the magic 500 number. Funding a third-party firm could well constitute an affiliation.

In any case, the SBA says that the loan applications require firms to certify that they’re only seeking the relief because “economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

‘Hedge funds are supposed to hedge’

The new guidance was welcomed by Mitch Ackles, president of the Hedge Fund Association, a nonprofit trade and lobbying membership group comprised of individual managers, vendors and others in the industry.

“The majority of hedge funds aren’t on the verge of shutting down. I’ve not come across one that has had an issue meeting payroll,” Ackles told RCW. “Remember, hedge funds are supposed to hedge.”

Hedge funds are hurting like everyone, Ackles added, but he’s cautiously optimistic that the industry seems to have learned its lessons from the Great Recession.

“You haven’t seen the blow-ups that we saw in ’08,” he said. “There have certainly been some rough months, but they’re not collapsing. It’s a good sign. That doesn’t mean investors are happy with the performances, but it means they’ll live to fight another day.”

ESG now

Ackles says his association was out ahead of the Trump administration, urging fund managers to say no to the federal subsidies. It’s not just that it violates the spirit of a hedge fund, it’s also that hedge funds have a lot of work to do to show the public they’re good corporate citizens, Ackles said.

ESG investing is something of a fad among private funds, but Ackles said it’s only a matter of time before it hardens into rules and laws.

“I think it’s really important that hedge funds look outside themselves,” he said. “You also need to look at things through an ethical and representational lens.”