Additional Funding of CARES Act Continues to Penalize Millions of American Working Families

By Atta Tarki

 

11 million Americans employed by private equity and venture capital backed companies were dealt a devasting blow this past Friday. They were namely left out in the cold — for a second time — as Congress replenished funds for the small business relief stimulus package.

PE and VC Backed Companies Large Employers

Nearly 9 million Americans are employed by private equity backed companies and additional 2 million by venture capital backed companies. In fact, if you are reading this piece, you should not be surprised if your business, a number of your critical vendors or customers are PE or VC backed. You may be even more surprised that your firm, some of your critical customers or vendors will not receive any support in the stimulus package.

The Importance of VC and PE for SMEs

While it’s clear to many that VC invests in early stage companies, a common misconception is that large enterprises are the main beneficiaries of PE investments. Let’s examine this claim.

There are now about 8,000 PE backed companies in the US. That’s, nearly double the number of publicly listed companies. Pitchbook data shows that 45% of all companies acquired by PE since 2010 are under $25M in revenues. Additionally, 99.6% are under $2.5Bn, qualifying them as SMEs using U.S. Treasury Secretary Steven Mnuchin’s classification.

PE therefore is an important source of capital for small businesses. Since 2010, PE has invested over $4T in SMEs, compared to $0.8T invested by VC during the same period. Depriving SMEs of this important source of capital forces these businesses to compete with large enterprises on an already slanted playing field where large companies have easier access to capital.

Mistakes in the CARES Act

A number of poison pills in the CARES Act excluded VC and PE backed companies from stimulus funding. It would be understandable if it was the PE and VC holding companies that were excluded from the stimulus package. Instead, the CARES Act, signed into law on March 27th, excluded the Mainstreet companies PE and VC are invested in as well.

Politicians concerned about their own popularity excluded employees of VC and PE backed companies from the $350B Paycheck Protection Program (PPP) under the mantra of “keeping Wallstreet out of Mainstreet.” They also excluded high growth but low profit VC and PE backed companies the $600B Main Street Lending Program. High growth companies that have sacrificed profit margins over the past few years to invest in creating more jobs are namely penalized by the profit requirements of the Mainstreet Loans. Congress also missed the opportunity to correct earlier mistakes in the CARES Act when they provided $484B in additional funding for the bill on Friday.

43% of publicly listed US companies founded since 1979 have had VC backing. Depriving these high growth PE and VC firms of funding intended to protect American workers will damage, perhaps irreparably, companies that would have been job creators on the other side of this recession.

A Better Solution

Things are moving fast and many, including the politicians who designed the bill, may not be aware of the unintended consequences of these bailouts. Meanwhile, there are millions of American families who rely on their livelihoods and healthcare coverage from PE and VC backed companies. The Association for Corporate Growth surveyed 1,131 professionals at PE backed companies. The survey showed that 5 million Americans are at risk to lose their livelihood and healthcare coverage due to the exclusion of PE backed companies from the PPP. These workers deserve better than being penalized by Congress in the midst of a global pandemic, for no fault of their own.

United States is losing jobs at a faster rate than under the Great Depression and despite all our efforts we have not yet reached bottom. The aim from the stimulus package needs to be to inject demand and prevent chain reaction of declining demand. It would therefore be foolish to deprive a large number of firms — and random sectors of the economy — of funding needed to stabilize demand.

COVID-19 will have a lasting impact on the American economy. Maybe even more, it will have a lasting impact on the trust that citizens put in our country’s leaders to do the right thing. Using the largest global pandemic of our lifetimes to penalize American workers because their boss’s boss took investments from PE or VC is not right. At a time like this, Congressional leaders should focus on optimizing stimulus funds to stabilize demand and save as many jobs as possible.

This article was originally published on Medium.

 

 

Atta Tarki is the founder and CEO of ECA and the author of Evidence-Based Recruiting (McGraw Hill, February 2020).

 

 

Atta Tarki
CEO & Founder

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