DealBook: Does Private Equity Deserve a Public Bailout?

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Steven Davidoff Solomon, a.k.a. “The Deal Professor,” is the faculty director at the Berkeley Center for Law, Business and the Economy

In the competition for a federal bailout, venture capital won the first round. Now, private equity is fighting back — and winning.

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 Treasury Department’s demands “may set the tone” for other bailout negotiations, CNBC adds. Policymakers are mindful of the criticism that followed the bailouts of automakers and banks during the 2008 financial crisis.

In other airline news: Delta is temporarily changing how passengers board, with travelers in the back going first to minimize contact with others.

SoftBank was always expected to take a big hit from its $100 billion Vision Fund, as the coronavirus whacks its investments. Now, Masa Son’s tech conglomerate has put a number to the pain — and it’s big.

The Vision Fund is expected to have lost nearly $17 billion in the group’s the most recent fiscal year, which ended in March, “due to the deteriorating market environment.” What happened? Just take a look at the fund’s portfolio, which is heavily concentrated in money-losing ride-hailing and hospitality companies that were hit hard by the pandemic. That’s on top of other bad bets made outside the fund, like WeWork and the now-bankrupt satellite company OneWeb.

SoftBank itself is likely to lose ¥750 billion, or around $7 billion, for the year, its first annual loss in 15 years.

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