Private equity will get a liquidity cushion with payroll tax holiday, as some investments face a cash crunch

The rule has exceptions, but could effectively shut out a number of private equity portfolio companies.

The lobbying group for the industry, the American Investment Council, has pushed for clarity around those rules that would ensure private equity firms can tap the funds. Democrats, like House Speaker Nancy Pelosi, wrote to Treasury Secretary Steven Mnuchin and Jovita Carranza, administrator of the Small Business Administration, on Tuesday warning of the impact the rule could have on start-ups that have taken on outside investment.

Still, even as lobbying for small business loans continues, private equity investors have taken note that they do qualify for another tool for relief: the payroll tax holiday.

According to the bill, employers can defer their share of Social Security payroll taxes in 2020. Companies have until the end of 2021 to pay the first half of the deferred levies. The remaining tax liability will be due by Dec. 31, 2022.

The tool is essentially another form of debt, that may simply kick a can farther down the road. But it could prove useful as a number of private equity-backed companies, like Neiman Marcus, are grappling with heavy debt loads and in industries like retail in which revenue has taken a massive hit.

“It’s a valuable lever,” said one person in private equity, who requested anonymity due to the sensitivities around the discussions. “Not game-changing, but some of these companies are liquidity squeezed and every dollar helps.”

Still, the American Investment Council wants all forms of government relief available to private equity firms.   

“It shouldn’t matter if these companies are backed by investments from corporations, pension funds, or others. We’ll continue to work with the Administration and Congress to request that federal programs support all businesses, regardless of ownership structure, and their workers,” the group’s CEO, Drew Maloney, said in a statement.

A spokesperson for the Treasury did not immediately respond to a request for comment.

Article source: https://www.cnbc.com/2020/04/01/coronavirus-private-equity-will-get-a-liquidity-cushion-for-payroll-tax-holiday.html