The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Act provided at least $350 billion in small business assistance to provide relief to businesses impacted by COVID-19, with the option to add another $250 billion upon Congressional approval. The initial $350 billion had run out as of Thursday, April 16, according to the Small Business Administration (“SBA”). 
An important component of the CARES Act, the Paycheck Protection Program (“PPP”) included affiliation rules that all but prohibited private equity (“PE”) owned businesses from participating in the PPP program, which provides forgivable loans to small businesses that maintain payroll expenses for a period of time.  Instead, PE owned businesses can access $75 billion in loans through the Main Street Business Lending Program (“MSBLP”), which provides loans to businesses that have fewer than 10,000 employees or less than $2.5 billion in annual revenue. However, unlike PPP loans, MSBLP loans are not forgivable. 
To qualify as a small business for the PPP, a company must have fewer than 500 employees, which many PE-backed entities do. However, affiliation rules state that if a PE firm owns a controlling interest in the company, or has voting control without, that PE firm would be considered an affiliate of the company, and all employees of the PE firm and its portfolio companies would be counted against the 500 employee limit.
These affiliation rules effectively prohibit PE-backed organizations from being considered small businesses under the SBA and exclude them from obtaining relief under the CARES Act. The Association for Corporate Growth, a professional association that represents middle-market companies, has lobbied strongly for a narrower set of rules that would permit PE-backed companies to receive CARES Act funds, but it’s likely too little, too late. 
Treasury Secretary Steven Mnuchin and Senate leaders are nearing a deal that would add $310 billion to the PPP, with $60 billion set aside for rural and minority-owned businesses.  PE-owned organizations will likely miss out on these funds as well unless Mnuchin also acts quickly to enact narrower affiliation rules permitting PE-owned company participation.
This exclusion could significantly impact PE-backed healthcare companies, even though PE firms typically arrange for debt and additional lines of credit that, together with equity capital raised, puts them in a better financial position to deal with downturns in business. But should the fact that PE firms typically have robust access to capital preclude their portfolio companies, which often operate independently and have strong levels of physician and employee ownership, preclude these companies from getting PPP?
“Small businesses with less than 500 employees are the backbone of our American economy,” said VMG Health CEO Greg Koonsman. “Many of these small businesses partner with private equity investors in structures that would prohibit their participation in the Paycheck Protection Program. Most of these companies operate independently with significant employee and founder ownership. It seems reasonable that many of these companies should be considered for the PPP support in order to limit furloughs and layoffs, which would help stem the tide of unemployment.”
The risk of excluding PE-owned companies is especially pronounced for healthcare companies, which are significantly impacted by the current downturn. According to research published in the Journal of the American Medical Association (“JAMA”) in February, Anesthesiology made up 19% of all PE deals from 2013 to 2016, followed by multispecialty groups (19%), emergency medicine (12%), family medicine (11%) and dermatology (10%).
With bans on elective procedures and patients delaying appointments until after COVID subsides, most PE backed practices are likely to experience losses due to lower volumes. In conversations with clients in recent weeks, difficult decisions are being made with regards to staff furloughs, reductions in pay, and other significant reductions in compensation or benefits to account for lost revenue.
The significant pressures and resulting economic decisions could significantly change the landscape of many physician organizations both independent and health system owned. Independent practices, private equity backed practices and health system owned practices could experience significant turnover in their organizations. This disruption is likely to have an impact on the number of independent physicians that can survive during this economic and health crisis. There is likely to be an opportunity for both health systems and private equity backed practices to act as a safety net, but only if they have the financial strength to continue adding physicians to their respective organizations.
Having access to Paycheck Protection Program loans would help these practices create stability in their organization so they would be in a much better position to care for patients and improve one of the most important segments of the American economy. Physician services has always been a critical component of the healthcare system and also one that has created significant employment levels in every geography of our country.
 Loan Money Runs Out While Small-Business Owners Wait in Line https://www.nytimes.com/2020/04/16/business/coronavirus-sba-loans-out-of-money.html
 SBA Affiliation Rules, April 3, 2020: https://home.treasury.gov/system/files/136/Affiliation%20rules%20overview%20(for%20public).pdf
 Fed Reinforces Stimulus with Its Main Street Business Lending Program https://middlemarketgrowth.org/main-street-business-lending-program/
 ACG letter to Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi https://www.acg.org/sites/files/ACG_CARESLettertoCongress.pdf
 Senate nears $370 billion deal for coronavirus small business loan programs https://www.cnbc.com/2020/04/19/mnuchin-pelosi-say-very-close-to-a-deal-on-second-round-of-small-business-loans.html
 Private Equity Acquisitions of Physician Medical Groups Across Specialties, 2013-2016, from JAMA: https://jamanetwork.com/journals/jama/article-abstract/2761076