In a recent Real Deals podcast, political risk expert Lizzie Wills, director of investor services at W.A communications and White and Case partner Daniel Turgel discussed the longer-term ramifications for businesses that have received state aid. Here are some of the highlights:

PUBLIC GAZE

Lizzie Wills: “Given the unprecedented nature of the pandemic, policy-making was being made in public and some of the schemes that were announced in normal circumstances would have taken months of detailed deliberation behind the scenes. This inevitably led to some confusion and lack of clarity about how the schemes would work in practice, especially as any changes made to the policies were made in real-time. Navigating the application process too, proved a whole new challenge, given that the credited lenders were individually responsible for interpreting that eligibility criteria. This led to a series of chinese whispers over which banks were taking a more aggressive stance in relation to the eligibility of PE-backed businesses.”

TEETHING PROBLEMS

Daniel Turgel: “Early on in the pandemic, there were clear signs that fast growth, loss making early-stage to growth-stage businesses were missing out on some of the funding that was made available to other SME businesses. There was clearly a need for more support for that sector of the economy, particularly if the UK wanted to keep growing its technology capital and support the companies that were thriving prior to the virus. As a result, the Future Fund was announced in early May and, although there were some concerns about who would be excluded from eligibility, generally speaking, market participants have been happy with the way the Future Fund has worked in practice. While there were some teething problems, applications are now moving fairly swiftly and most businesses that apply for the Future Fund can expect to be funded within a month of applying.”

"If you compare the UK equity-backed schemes to what is being introduced across Europe, Britain has really led the way, especially if you look at the size of funding available. France, Spain and Germany have similar schemes, but the way it has been implemented in the UK and the take up in the market, it has been quite radical and extremely well-received by most of the market participants."

THE CORPORATE RECKONING

Lizzie Wills: The long-term implications for private equity will be interesting. The government has pumped in unprecedented amounts of money into the economy to help businesses through the pandemic. However, these business-owners may have become overly reliant on public sector support so the bigger challenge now will be how the government unpicks this so we don’t see an uptick in unemployment and more businesses becoming insolvent. The government has been generous, but whether they have made a rod for their own back in terms of what happens next is the big question that now needs to be addressed."

Daniel Turgel: A lot of our private equity clients have looked at the state bailout loans differently. Even, if they have been able to access the schemes, they are questioning whether they should.

Generally speaking, many of our clients have decided that it’s not in their best interest. This comes as businesses are now being judged on what they have spent business support loans on and how they have behaved during the crisis."

Lizzie Wills: “In the very early stages of the pandemic, a lot of money was being handed out hand over fist almost like a government freebie to say ‘we want to help, do with it what you will to try and get your business out the other side of this pandemic’. But, now businesses will be judged on what they spent the loan on and how they treated staff during the crisis. Those deemed to have not behaved well, will face a reckoning in the future.”

QUID PRO QUO

Lizzie Wills: “As the support schemes have become more sophisticated, there is an inherent quid pro quo embedded in the terms of some of the loans that reveals how the government plans to behave toward companies that have drawn down on some of the business support.

Companies that have drawn large sums are going to be subject to restrictions on dividend payments and senior payments among others.”