Whatever it takes
There has been no shortage of financial and legal commentary on Rishi Sunak and the government’s “whatever it takes” rescue package for British businesses affected by the covid-19 pandemic. On the face of it, the package has undoubtedly provided unprecedented state support for businesses – the Covid Corporate Financing Facility and Coronavirus Large Business Interruption Loan Scheme (CLBILS) for businesses with significant turnovers; the Bounce Back Loan scheme and Coronavirus Business Interruption Loan Scheme (CBILS) for SMEs and smaller companies. The Future Fund – details of which can be found here: https://www.charlesrussellspeechlys.com/en/news-and-insights/insights/corporate/2020/the-future-fund--good-news-for-growth-companies/ – is a means of potential support to early stage/ growth companies.
However, companies within private equity portfolios (PE Companies) have had significant issues accessing these schemes – with particular reference to CLBILS and CBILS (together the Schemes).
A question of aggregate
CBILS, launched on 23 March 2020, included a maximum turnover threshold of £45m. The initial stance of lenders, in relation to PE Companies, was that turnover of all companies under common ownership and control (i.e. within a portfolio) be aggregated. Unsurprisingly, the vast majority of PE Companies were therefore excluded from CBILS.
This issue was rectified to an extent by the introduction of CLBILS, which permitted companies with a turnover of over £45m to participate. As with CBILS, CLBILS provides lenders with a government-backed 80% net guarantee on the outstanding balance of any loan. However, unlike its younger cousin, borrowers are not eligible for the government’s interruption payment – that covers interest and lender charges for the first 12 months of the CBILS facility (effectively a year-long fee holiday). This is a significant financial benefit therefore not available to the majority of PE Companies.
Not in difficulty … but in difficulty?
A further hurdle for PE Companies in accessing both CBILS and CLBILS is the “business/undertaking in difficulty” test. EU state-aid rules state that an “undertaking [is] in difficulty … when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital”. For the purposes of the Schemes, the government introduced a requirement that an entity will be “an undertaking in difficulty” if – at 31 December 2019 – it had “accumulated losses of more than half of its subscribed share capital”. SMEs that have been in existence for less than three years are exempt from this rule.
The typical PE structure generally includes a high debt to equity ratio – particularly where shareholder loan notes have been used in the acquisition of portfolio companies. The unfortunate upshot is that even if a PE Company had been performing strongly pre-pandemic (businesses often take on significant debt to fund investment to facilitate/ catalyse growth – a mark of company strength), it may well fail the business in difficulty test (as a result of its highly leveraged structure) and thus not have access to either Scheme.
For the reasons stated above, few PE Companies will be in a position to consider the practical logistics of accessing either Scheme.
Accredited lenders (providing loans through the Schemes) will want security over the borrower’s collateral that ranks at least pari passu with other senior obligations. This throws up a number of difficulties. In the first instance, debt structures for PE portfolios are complexed and include (i) multiple lenders; and (ii) multiple tiers of debt. Secondly, existing lenders’ consent will be required to take on this additional debt.
In short – finding a place for the CBILS/CLBILS funding within a PE Company’s capital structure is not a straightforward process.
The Future Fund too is not overly inclusive – especially for early stage companies. The government has confirmed that funding under this scheme will be provided via convertible loan notes (CLNs) and that it will only match funding that private investors have agreed to invest into the company via a CLN on the same or better terms. Due to the use of CLNs, EIS and SEIS tax relief will be unavailable on investments under this scheme and this will likely deter individual/angel investors due to the substantial downside protection that EIS/ SEIS provides. Conversely, PE Companies do have the advantage that CLNs are familiar financing tools within the industry and companies backed by a PE house are therefore more likely to be able to secure follow-on funding via CLNs from the original PE house, where EIS relief is perhaps not as much of a concern.
However, PE houses may be unwilling to give up a share of their portfolio companies to a government-controlled entity or third party investor, nor may they want (or be able) to invest more into their portfolio companies to satisfy the matched-funding requirement. In summary, compared to the (relatively) no-strings attached CBILS, CLBILS and other funding schemes introduced by the government, the conditions attached to a Future Fund loan may make the Future Fund inaccessible to PE Companies (and certainly to early stage entities).
At present, the accessibility of the government schemes for PE Companies is limited. If Private Equity Limited were an umbrella organisation, it would be the second largest employer in the UK. Therefore PE Companies’ exclusion from these schemes is not insignificant.
However, these support schemes are continually evolving (often in line with the pandemic itself) and, combined with the work of important lobbyists including the British Venture Capital Association and Invest Europe, it may well be that PE Companies’ access to these Schemes improves.
In response to the global outbreak of COVID-19, the Chancellor has introduced a number of initiatives to help businesses access financial support to cover business interruption due to Coronavirus