Help from the federal government during the growing economic crisis is not expected to do much for the portfolio companies of private equity and venture capital firms, which are already starting to decide which ones might survive.
Institutional investors are worried, too. An April survey by placement agency Eaton Partners found that 59% of alternative investment investors are concerned that many private equity-backed companies may not be eligible for federally backed COVID-19 assistance, and 69% are only "somewhat confident" of the government's ability to navigate the economic impact.
Global institutional investors are committing a lot of capital to private equity. In the first quarter alone, private equity funds raised a combined $133 billion in 267 funds, up from $118.6 billion in 366 funds in the year-earlier quarter, according to London-based alternative investment research firm Preqin.
Fundraising added to private equity dry powder that totaled $1.4 trillion as of Dec. 31, according to McKinsey & Co.'s 2020 global private markets review.
Over the 10 years ended Dec. 31, alternative investment firm assets under management grew by 170% to $6.5 trillion, the McKinsey & Co. report shows. In just one year, private equity AUM grew 12.2% to $3.9 trillion.
"Venture capital firms are working hard to figure out what they can do, the impact of the crisis on their portfolio companies and how to survive a likely period of less capital in the startup ecosystem," said Justin Field, Washington-based senior vice president of government affairs for the National Venture Capital Association. "There's a chance it could be a rough time, especially if it is a longer recession."
Amid that uncertainty, some businesses could find a bit of breathing room from a new $349 billion Small Business Administration loan program included in the latest $2.2 economic stimulus package, the CARES Act. The Paycheck Protection Program offers loans with 1% interest rates that are forgivable if a borrower directly affected by the crisis retains a certain number of employees. PPP loans are limited to payroll and fixed costs like rent and utilities.