Private equity backed businesses face challenges on access to government packages

16 Apr 2020

Access to Coronavirus Business Interruption Loan Scheme (CBILS)

Whilst the government has introduced a number of schemes to help businesses through this challenging time, some businesses are having trouble accessing the schemes. For the Coronavirus Business Interruption Loan Scheme (CBILS), which is targeted at SMEs, one of the eligibility criteria is that annual turnover should not exceed £45m. Details on the CBILS can be found here.

In response to some of the initial criticism of the scheme, Rishi Sunak, the chancellor, removed the requirement for banks to first consider whether SMEs are eligible for other lending products before considering them for CBILS. However, this hasn’t closed all the gaps as one issue seems more prevalent than others for a lot of businesses.

More than 3,000 UK businesses are private equity (PE) owned so contribute significantly to the UK economy. According to the British Private Equity & Venture Capital Association (BVCA), PE and venture capital-owned companies collectively employ more than 800,000 people in the UK. Whilst those businesses are, on the face of it, eligible to apply for the scheme, it seems that lenders in some cases, are interpreting “business” to equate to a consolidated group for accounting purposes. This means that there are some questions surrounding PE houses ability to procure access to the scheme for individual portfolio companies.
The challenge that seems to be presenting itself is that some accredited lenders are working on the assumption for the CBILS, that revenue of any PE portfolio company is to be aggregated with all other portfolio companies owned or controlled by the same PE investor, when assessing whether the business applying for the CBILS has an annual turnover under the limit of £45m. The outcome of this means that many portfolio companies are finding themselves to be ineligible for assistance through the CBILS.

By calculating on this aggregate basis, this is positioning all portfolio companies owned (or controlled) by one sponsor, as a single group in the same way that a consolidated corporate business with no sponsor would be assessed. Guidance issued by the British Business Bank confirms that “if your business is part of a group, controlled on either a legal or de facto basis, the maximum turnover applies to the group undertaking. More than one company within the group can be considered for a CBILS facility but only if the consolidated group turnover does not exceed the £45 million annual turnover threshold”. 

Impact of EU State Aid Rules and Minority Interests

The BVCA thinks that the EU state aid rules may be having than effect on the UK’s interpretation of the scheme as the EU’s criteria for “Undertakings in Difficulty” covers a number of otherwise viable and established businesses. It seems that this has not been an issue in other EU countries where companies have been able to access funding. Further, it remains to be seen whether these issues are only affecting businesses where the PE house is a majority shareholder so that businesses with minority PE interests remain unaffected.

Coronavirus Large Business Interruption Loan Scheme

The government is expected to announce the Coronavirus Large Business Interruption Loan Scheme (CLBILS) before the end of the month and it remains unknown at this stage whether the same assessment will be part of the guidance. The CLBILS will target large businesses affected by COVID-19l those with an annual turnover of between £45m (the current CBILS limit)  and £500m, access loans of up to £25m, in what seems to be an attempt to fill the space between the CBILS and the Covid Corporate Financing Facility. If the guidance remains the same, it may be possible for more than one portfolio company to apply for CLBILS support if the whole “group” were considered to be eligible although what remains unclear is whether the total amount of funding to that group would be capped at the scheme’s loan limit of £25m.

Where does this leave PE backed businesses?

The very nature of PE backing means that firms borrow large sums to buy companies, with the debt sitting in the target company. If the target company cannot gain access to the government schemes, they may be unable to service their existing debt and could indeed face bigger problems down the line.

Other challenges PE houses seem to be facing with CBILS are that lenders are grouping them in as directors in requesting personal asset statements. The guidance for CBILS also suggests that for facilities above £250,000, personal guarantees may be required, which may deter some businesses from wanting to utilise the scheme. It is unclear at this point whether the CLBILS will follow the same pattern.

It is unknown at this stage, what conditions lenders are likely to attach to any funding for PE backed businesses under these schemes though it is possible that there would be conditions attached to dividends/distributions and management remuneration though this is likely to be assessed on a case by case basis.

It comes as no surprise that PE firms are therefore lobbying the government for access to these schemes in an attempt to save businesses across the UK. Over recent years, the PE sector has invested heavily in retail, leisure, restaurants and hotels – all industries that are seeing significant distress through the pandemic. One of the concerns amongst the market is that PE firms could receive criticism if they are seen to have profited from the government schemes, rather than using them as they are intended, as a method of survival..
The reality for a lot of PE backed businesses is that money goes in as loan notes rather than as share capital so they do not meet the eligibility criteria from an accounting perspective. This means that a lot of people-focused SMEs such as tech businesses will not be able to meet the retained earnings criteria to allow them access to funding when looking at their Profit & Loss statement. Keep an eye on the latest updates for CLBILS on the government website here.
If you have any concerns or queries as a result of any of the above, please contact Gwen Godfrey, or Katie Layton by phone or by email, or get in touch with your usual contact at DMH Stallard LLP.

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