(This was originally published May 19 but was updated June 15 when the Federal Reserve announced the immediate launch of the Main Street Lending Program and on June 8 when the Fed announced expanded program terms.)
In the last few weeks, family offices in the United States have gone through a number of transformative changes due to the disruptive nature of COVID-19. These offices are working through issues regarding human capital, liquidity, data, cybersecurity, technology, and other enterprise risks. Depending on the mission and structure of the family office, the top-of-mind issue for executives is liquidity management.
Family offices are unique in many respects. Multi-family offices provide investment management services to a wide range of families. Single family offices often have several generations to support.
As steady flows of management fees and profits interest start to attenuate, liquidity becomes more important to prevent the family office’s operations from slipping. The trickle-down effect of this could lead to downsizing of the family office, which in turn could lead to a reduction of key employees who handle the office’s most complex tasks.
As the economy slows and uncertainties linger, these types of family offices need to move beyond the Paycheck Protection Program (PPP) and focus on the new Main Street Lending Program (MSLP).
Public perception and reputational risk
Family offices that were approved for funding under the PPP will have the opportunity to apply for one of the facilities under the MSLP. The key difference between the two programs is the component of forgiveness. Loans made under the MSLP are ineligible for forgiveness, while the government will forgive PPP loans if the borrower meets certain conditions regarding employee head count and wages.
There is a public perception that family offices are ineligible for loan programs created by the CARES Act based on their business purpose. That statement should be true for offices basically managing the wealth for members of that family. But family offices in the trade or business of providing investment management services should not be disqualified from coronavirus relief loans. We look to the precedent established under Lender Management LLC v. Commissioner to distinguish between the two types of family office formats.
Family offices that are eligible for a relief loan, however, must consider pitfalls of borrowing one. The Small Business Administration (SBA) could publish information about borrowers of relief programs. Treasury Secretary Steven Mnuchin has said the SBA will perform a “full review” of PPP loans of at least $2 million. At the very least, family offices looking to apply for a relief loan should be aware their private data might be published. Because the government does not forgive loans in the MSLP, the reputational risk for participating in it is significantly less than borrowing under the PPP.
Overall, the rollout and execution of the PPP has not been smooth, as some funding went to borrowers who really did not need it. In addition, there are many small and midsize businesses still waiting either for their application to be reviewed, or to receive approved funding. In recent guidance, the SBA established May 18, 2020, as the last day for borrowers to review their funding request and return their loan if they want to back out of the program for any reason.
Main Street undergoes construction
The MSLP is a joint effort between the Federal Reserve and Department of Treasury that promises needed liquidity for businesses struggling through this sudden economic downturn.
The criteria for the program broadened after the Fed released additional guidance on April 30, 2020. There are now three separate loan programs under the Main Street umbrella.
- Main Street New Loan Facility
- Main Street Priority Loan Facility
- Main Street Expanded Loan Facility
These programs are for businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues. The business must have been established prior to March 13, 2020; created or organized in the United States, and have significant operations in and the majority of its employees in the United States.
In addition, the MSLP depends on a number of rules and regulations that fall under the SBA. These include a list of ineligible businesses, as well as the affiliation rules that disqualify a large number of portfolio companies associated to private equity. A careful analysis of the affiliate rules and alternative-size standard will need to be completed by legal counsel and your lender to determine eligibility.
Here are the details of the three loan facilities:
| New Loan Facility | Priority Loan Facility | Expanded Loan Facility | |
| Term | 5 years | 5 years | 5 years |
| Minimum loan size | $250,000 | $250,000 | $10,000,000 |
| Maximum loan size | Lesser of $35M or 4x 2019 adjusted EBITDA | Lesser of $50M or 6x 2019 adjusted EBITDA | Lesser of $300M or 6x 2019 adjusted EBITDA |
| Risk retention | 5% | 5% | 5% |
| Payment (principal deferred two years and interest deferred one year) | Years 3-5: 15%, 15%, 70% | Years 3-5: 15%, 15%, 70% | Years 3-5: 15%, 15%, 70% |
| Rate | LIBOR + 3% | LIBOR + 3% | LIBOR + 3% |
According to the Fed’s guidance for all three loan facilities, the lender must use a methodology it previously used for adjusting EBITDA when extending credit to the eligible borrower or to similarly situated borrowers on or before April 24, 2020.
Under the Expanded Loan facility, the definition of outstanding and undrawn available debt was clarified on page 13 of the FAQ provided by the Fed.
Next steps for interested family offices
Family offices and their business interests that in good faith believe they qualify for the MSLP should review each loan facility to determine what works best for them.
Here are some important certifications that will be required by the borrower:
- The borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Main Street loan is repaid in full, unless the debt or interest payment is mandatory and due.
- Borrowers in the Priority Loan facility can, at the time the Main Street loan originates, refinance existing debt owed to a lender that is not the Main Street lender.
- The borrower must attest that it will not seek to cancel or reduce any of its committed lines of credit with the Main Street lender or any other lender.
- The borrower must certify that it has a reasonable basis to believe that, as of the date of the Main Street loan, it has the ability to meet its financial obligations for the next 90 days and does not expect to file for bankruptcy during that period.
- The borrower must attest that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act.
- Except that an S corporation or other tax pass-through entity may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
- The CARES Act conditions apply through the duration of the loan and for 12 months after the date on which the loan is no longer outstanding.
- The borrower will be required to certify that it is eligible to participate in the facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
- Borrowers must also make commercially reasonable efforts to maintain their payroll and employees during the time the Main Street loan is outstanding. Specifically, a borrower should undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the economic environment, its available resources, and the business need for labor.
Legal consultation will be required during each step of the application process. The program launched June 15 and will run until September 30, 2020 unless extended by the sponsors of the facilities.
Looking toward the future
In a recent Microsoft earnings call, one of the executives said: “We’ve seen two years’ worth of digital transformation in two months.”
In the last two months, family offices had to retool and restructure the way they conduct business outside of their physical offices. Decisions are being made via Zoom or WebEx instead of in the boardroom. Executives practicing social distancing are meeting with managers of their operating businesses or other family office clients though these two communication platforms. Due diligence on prospective investments is being conducted virtually through augmented reality with the use of HoloLens.
Liquidity management is key at this time, but this also could be a time to think about the future. To make some much needed upgrades within the family office, especially with technology.
Based on the low cost and one-year deferral on payments, the MSLP could be a catalyst for infrastructure growth for these offices that deferred such investments for a long time.
As we are about to embark on the largest transfer of generational wealth, investments like this now will help prepare future generations to manage the office in a technologically transparent way.
Liquidity management is key at this time, but this also could be a time to think about the future. To make some much needed upgrades within the family office, especially with technology.
The takeaway
As family offices look to navigate these uncertain economic times, liquidity will be critical component for survival. Relief lending programs provide an opportunity for families to reassess their respective offices and businesses to determine if they qualify for such help.
Based on the latest jobs report from the U.S. Bureau of Labor Statistics, we are looking at a near real-time unemployment rate of 14.7%. RSM chief economist Joe Brusuelas looked deeper at the bureau’s report and addressed that the U-6 rate is closer to 22.8% if you include total unemployed, discouraged workers, and those employed part-time for economic reasons.
Family offices, whose reach spreads throughout our economy, have the opportunity to help slow down that trend by continuing to keep business interests moving forward. They could contribute to a new main street that we so desperately need to survive the exogenous effects of COVID-19.
For more information on how the coronavirus is affecting family offices, please visit RSM’s Coronavirus Family Office Resource Center.
