New PPP Guidance: Hedge Funds and “PE Firms” Ineligible; Portfolio Companies … Maybe

President Trump has signed the PPP 2.0 bill into law. There are reports that the SBA portal will reopen on Monday. In the meantime, there are recent headlines on PE funds and on a slew of congressional demands for investigations of bank PPP lenders.

SBA and Treasury this morning issued a new Interim Final Rule on Requirements for Promissory Notes, Authorizations, Affiliation, and Eligibility (IFR 4) (but there is still no further guidance on forgiveness):

  • The SBA for the first time expressly states that “hedge funds” and “private equity firms” are NOT ELIGIBLE (at the fund level) for PPP loans: “Hedge funds and private equityfirms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan.”
    • It’s not clear what a private equity “firm” is. It may be possible to argue that while this means that the fund entities themselves are not eligible, it does not say that the sponsor management companies are ineligible. While this interpretation does have some regulatory support (as noted below), by referring to PE “firms”, IFR 4 seems to be reaching for something more than the private equity fund itself … *if* the word “firms” was used intentionally with respect to private equity while “funds” was intentionally used re hedge funds.
    • So, although one could potentially argue that a hedge fund manager might be eligible, my personal opinion is that this seems a VERY aggressive approach to argue that this new guidance was intended only for fund entities, especially for private equity funds. In light of all of the other background on this, it seems much more likely (to me personally) to conclude that Treasury and SBA meant this in more of a layman’s definition to mean that hedge funds, PE funds and their management companies are ineligible. I would think a similar logic applies to managers of other private investment funds such as venture capital, private credit and real estate. That said, the language in the IFR 4 isn’t crystal clear.
    • For those wanting a deeper dive on this regulatory nuance: The original IFR 1incorporated the existing SBA 7(a) list of ineligible businesses. The SBA “Standard Operating Procedure” (SOP) manual has traditionally extended that ineligibility to “investment companies” in a more layman’s sense of the word, vs a ’40 Act sense. However, that SOP also provides that financial advisors advising on a fee basis are eligible, which directly or by analogy would arguably pick up many fund management companies (see the bottom of p. 104). It is not clear whether SBA considered this in the drafting of IFR 4.
  • The next question asks whether PE portfolio companies are eligible. IFR 4 responds with what I would call an annoyingly passive-aggressive answer.
    • IFR 4 DOES NOT SAY “YES”. It also does not use the words “is eligible” or “is not ineligble” (which IFR 4 does say in answers to other questions).
    • But, IFR also does not say “NO” or that they are ineligible.
    • But, IFR also does not say “NO” or that they are ineligible.
    • What it does say is that “private equity-owned businesses” must apply the same affiliation rules as everyone else and that “all borrowers should carefully review the required certification” that the loan is necessary, as discussed in detail in last night’s note. While this is broadly phrased to refer to “all borrowers”, it is specifically included in response to a question about the eligibility of PE portfolio companies, which seems to further indicate that such portfolio companies will be subject to a higher level of scrutiny than an independently-owned PPP borrower.

Thus, IFR 4 implicitly (and perhaps begrudgingly) acknowledges that PE portfolio companies could be eligible, subject to applicable affiliation and certification requirements. This arguably creates a three-tiered level of scrutiny on the “necessary” certification:

  • Public companies, especially those with “substantial market value and access to capital markets,” are almost presumptively ineligible because they are “unlikelyto be able to make the required certification in good faith.” Such a company could potentially rebut that presumption (my words, not Treasury’s) and “should beprepared to demonstrate to SBA, upon request, the basis for its certification.”
  • Private equity portfolio companieswho “should carefully review” the required certification. (I would define “private equity” fairly broadly for purposes of this loose categorizing, and include most private investment funds, and probably even some family offices and other investors.)
  • All other businesses, who of course should also carefully review the certification and all submissions to their lenders and SBA, but who have not (yet) found themselves in the PPP crosshairs.

All PPP borrowers should carefully document the process and substance of their analysis of both their affiliation and size status and their need for the PPP loan. Portfolio companies and their investors should ensure that both the company and the investors retain copies of this documentation. These records will be important in answering questions that may be asked in an investigation that may not happen for several months or years down the road, when both the current management team and current investors may no longer be with the company.