How private equity can avoid the reputational pitfalls of benefiting from Government-backed loan schemes
By Agnès Riousse, Director at Citigate Dewe Rogerson
Private equity firms are going to be faced with some tough communications issues in the coming months as the furlough scheme ends and the true impact of the Covid-19 crisis on jobs becomes apparent. Latest figures from the BVCA, the industry body, show that the 4,000 venture capital (VC) and private equity (PE) backed companies in the UK employ over 800,000 people – many in some of the hardest hit sectors like retail, leisure, hospitality, care and travel.
Over 60.000 struggling British companies have already benefited from emergency 100% state-backed aid schemes, the Coronavirus Business Interruption Loan Scheme (CBILS) or Coronavirus Large Business Interruption Loan Scheme (CLBILS), representing £17.1bn as of mid-August.
However, many PE-backed companies have not been allowed to access such schemes. EU rules concerning state aid have so far excluded highly leveraged PE and VC backed companies from receiving government-backed loans, as businesses with high levels of debt and accumulated losses are not deemed eligible for the schemes – to avoid the risk of good money chasing bad.
According to recent media reports though, Chancellor Rishi Sunak, a former hedge fund executive, is considering extending state-backed loans to PE-backed companies.
If that happens, it will be a real dilemma for the PE firms thinking about making use of the scheme. Do they take it up and become accountable to Government and taxpayer scrutiny, an unwelcome consequence, or soldier on, ignore the scheme and risk potentially avoidable job losses.
With the increased focus on the S in ESG triggered by the pandemic, media, commentators and investors are already alert to perceptions surrounding the PE industry’s potential use of the loans, especially considering the industry’s estimated $2.5 trillion of dry powder and its reputation for over-leveraging portfolio companies, taking advantage of controversial tax loopholes and charging excessive fees. Even the slightest hint that PE bosses are in any way profiting from taxpayer bailouts will be called out immediately, bringing reputational risk to firms and their executives.
If a PE firm’s portfolio company were to benefit from a state-backed loan, what should the PE firm take into consideration, from a communications point of view, to ensure their intentions are not misconstrued?
- Accept accountability. Anyone benefiting from government support must behave appropriately or risk reputational damage. It is either no loan or no job losses – now and into the coming year.
- Take responsibility. How much of the firm’s own money has been invested in the portfolio company prior to or in conjunction with requesting the loan. The media and the general public will be entitled to hold the view that if a business isn’t worth being saved by injecting the PE firm’s investors’ own cash, it isn’t worth being subsidised by the taxpayer either.
- Be ready for increased scrutiny. The media will consider it its responsibility to find out how taxpayers’ money has been spent. The Government is already under pressure to disclose the names of the businesses which have benefited from state-backed loans. PE firms will need to be prepared to explain, in a tangible manner, how the loan has been spent and how it impacts jobs.
- Be transparent. Elaborate on what operational measures have been implemented to support trading, protect jobs and ultimately save the portfolio company in question. It is the moment to demonstrate how the PE business model and the acumen of its partners can better manage companies and support them in times of crisis.
- Be clear on the repayment terms of the loans. The industry’s reputation cannot afford to allow many firms to default.
- Above all, make sure these Covid-loans benefit solely the portfolio companies, and in no way any individuals at PE firms themselves.
This crisis and how companies have responded to its unique set of challenges will undoubtedly be remembered for a long time. If private equity firms were to profit from taxpayers’ money, the industry would pay a considerably higher price in the future. This is not the moment for private equity to be its own worst enemy. The PE industry can and should demonstrate the key role it has to play in a more responsible form of capitalism.