Insights from the Operating Partners (Virtual) Forum - March 2020

Across the last two weeks, on March 31st and April 7th, Accordion hosted two virtual forums enabling operating sponsors to collaborate across funds on key issues related to COVID-19. Representing almost two dozen firms and individuals, here are a few of their key insights and learnings:

On the Stimulus Package

The most common questions asked are how can PE-backed companies qualify, what’s in the package and what can the package be used for? A legal resource provided the following framework:

1) HR Planning

• Payroll credits
• Additional unemployment benefits
• Paid time off provisions
• Rules that relate to layoff and furloughs

2) Tax Benefits

• Better access to NOLs (consult tax advisors for federal and state guidance)
• Less restrictions on interest expense

3) Loan Programs

• This is where the most confusion sets in. Particularly, the Paycheck Protection Program (PPP). Additional clarity may have just been published concerning eligibility and payback.

One of the largest hurdles to qualify for the stimulus package for PEs are the SBAs affiliate rules. These rules aggregate the number of employees backed by a firm who controls or has the power to control the company (i.e., board seats); essentially disqualifying a firm even if the employee count is less than 500.

NOTE: The affiliate rules do NOT apply to restaurants and franchises. If the affiliate rules do not apply to a PE firm and the company already has a loan with a Small Business Investment Company (SBIC) lender, the company will be able to qualify for a PPP loan. To qualify for a PPP, a PE firm needs to have an SBIC lender. An SBIC lender will help the borrower track what the loan proceeds are used for to ensure compliance with the program. Potential borrowers should also research whether they will be able to utilize payroll tax credits if they participate in this program.

Where there is a minority investment by PE, a PE firm needs to figure out what can be amended so that consent rights comply with the rules but also keep the firm out of the affiliation rules; and to add additional complexity, the amendments made are not permitted to be rescinded in the future. In a situation where there is control, it can be extremely tricky. Leveraging internal and/or external counsel to understand the possible courses of action is highly recommended.

On the Workforce

Operating Partners (OPs) have stood up HR calls on a weekly basis to discuss how to plan moving forward. This includes developing interim succession plans for executives and plans that address employee safety such as taking temperatures as employees enter company facilities. “What is the new normal?” “What is the legal standard of care needed for the future?”

Given the disruption to the workforce, OPs are seeing that companies which need the most help are reducing expenses and, therefore, find it difficult to bring in consultants to fill the void. A concern raised was: “Executives are operating in a vacuum and peerless environment and getting burned out without support.”

OPs are being cautious when it comes to reductions in force; particularly, when financial modelers make recommendations, but those recommendations may not work operationally. “We have a lot of great team members and we don’t want to be on the other side of this and not be able to have our team back.”

Additionally, OPs were curious to understand how others are addressing facilities if an employee tests positive. The responses varied based on the situation. One company shut down for 2 weeks with a full fumigation while another shut down for 3-4 days.

On Scenario Planning

The breadth and depth of the number of scenarios is staggering given the current environment is affecting industries differently. Some OPs are utilizing a phased approach while others use “RAG” status (i.e., red, amber, green) and a combination of both. One of the common themes regardless of the approach used is lender communication. Accessing credit facilities runs the full range; industries hit hardest have drawn fully on revolvers while others may have accessed the facility while others have not needed access. In any situation, OPs are advising portfolio companies to maintain lines of communication with lenders. “Given the initial rush to access the revolver, some lenders asked portfolio companies not to. In return the lender viewed it as a partner move and will take it into consideration if there are more difficult conversations down the road.”

A theme closely tied to lenders in scenario planning is cash management. OPs are looking into cost cutting such as executive compensation reduction and forfeiting 401k matches. One OP went so far as to provide portfolio companies with 6 expenses that must be paid to avoid legal exposure; lease and interest payments were not a part of the 6 expenses. OPs are tracking KPIs weekly and in some instances daily. “What do our daily run rates need to be and are we veering off? What are our daily cash receipts?” “What do we know today that we can try to forecast?”

A common question accompanying scenario analyses is: how will a decision affect the relationship with the counter party whether it be a customer, vendor, landlord, etc.? “What are some things we can do proactively to engage and keep customers? It’s easy to say push off Accounts Payable, but the damage that can be done when you go to turn the spigot back on could be lasting.”

There are OPs who are pushing portfolio companies to have more severe scenarios in their analyses because the OPs are finding that Management is anchoring to plans and budgets established prior to the current environment. “Let’s plan for the worst but hope for the best.”

On Productivity

OPs, generally, have accepted that productivity is down given the current environment. Some have noted that it is company by company. It is also relative to note that certain companies were not prepared to have employees working from home. Businesses have not moved data storage to the cloud which poses a challenge. An OP noted, “Portfolio companies are going through financial audits currently and certain data isn’t accessible from home.” Auditors are working with the portfolio companies in situations such as this by pushing deadlines.

However, amongst all the challenges portfolio companies are facing, there are positive outcomes to highlight. Employees have reported that they are getting to know their teams better because of the connectivity outside of work facilitated by technology and teams are adapting quickly to learning new things.