EU rules that prevent private equity investors from taking advantage of the government’s Coronavirus Large Business Interruption Loan Scheme have been branded “unfair” by legal experts.

Tom Whelan, partner at law firm McDermott Will & Emery told HealthInvestor UK that while the rules prevent companies with accumulated losses greater than half their subscribed share capital from accessing loans, it is unlikely that many PE-backed firms in reality would exceed such losses.

“The share capital in private equity backed companies is relatively low typically, as most sponsor equity used to acquire portfolio companies is typically (but not always) provided by way of a shareholder loan (typically 90% plus of the equity invested by a private equity fund is in the form of such a loan) with the ordinary share capital typically being less than 10% of the total equity provided by the sponsor as part of the acquisition,” said Whelan.

“If there is an overall accumulated loss due to the impact of the coronavirus on trading plus for example the impact of interest charges on all loans (including bank and shareholder loans), tax, depreciation and amortization, then it is likely to be easier to attain the threshold of half of the subscribed share capital in a typical private equity backed business.  As a result, if there are such losses, many viable operating businesses (absent the coronavirus crisis) backed by private equity sponsors, will find that they are unable to access such funding due to such EU rules.”

He argues that portfolio companies owned by private equity investors employ thousands of people in the UK and those jobs should not be put at risk unnecessarily.

“Just because an employee works for a private equity backed company, why should the company they work for be disadvantaged by its inability to access such government schemes, leading to a greater likelihood of redundancy as compared to other UK companies?”

Whelan added that pensions could also be at risk were private equity firms to go to the wall.

“This barring could be detrimental to the underlying pension schemes and their pensioners and workers if such lack of access were to force such companies into administration or insolvency,” he said.

Date published: May 20, 2020

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