Contrary to previous reports, some businesses with backing from private equity or venture capital firms are eligible for loans under the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP).
Included in PPP guidelines for companies seeking loans are affiliation rule waivers that make the loans possible for some private equity-backed breweries in certain circumstances, Arnall Golden Gregory partner Tenley A. Carp and associate Joel N. Gossner wrote in a whitepaper.
The PPP is a key pillar of the Coronavirus Aid, Relief and Economic Support Act (CARES Act) that President Donald Trump signed into law on March 27. Its goal is to funnel $349 billion to small businesses in the form of forgivable loans through SBA-participating banks.
“The congressional intent is that it’s a real waste of time, money and effort and resources for a company to have to look for new workers, rehire, retrain — they just want to maintain the status quo,” Tenley said. “And that is why they approved this huge amount of money and the president signed into law and they’re starting to approve these loans.”
Normally, companies that have investment from private equity and venture capital firms are excluded from some SBA programs. However, with historic levels of unemployment, Congress relaxed some of the affiliation rules that normally come with SBA loans.
“The way they [SBA] look at it is a company with private investment would be able to turn to that private investor for money and would have access to resources that a true small business wouldn’t have,” Carp said.
Companies with investment backing are eligible for PPP loans if they meet one of the following criteria:
- The business has fewer than 500 employees;
- The business has fewer employees than the SBA’s size standard by industry; for brewers, the SBA standard is 1,250 employees;
- The business has more employees than the first two bullet points allow, but they are spread across multiple locations and no single location has more than 500 employees and the business has a North American Industry Classification System (NAICS) code that starts with 72.
NAICS codes belong to a classification system adopted by the U.S. Office of Management and Budget in 1997 and developed by groups of economists in the U.S., Canada and Mexico “to allow for a high level of comparability in business statistics among the North American countries,” according to the U.S. Census Bureau.
The class of companies with codes beginning with 72 includes restaurants, bars and hotels. Breweries have their own classification under manufacturing; however, with roughly 6,000 breweries operating primarily as taprooms, there’s room to interpret them as belonging in the same class as bars and restaurants.
“Do any of these breweries in good faith consider themselves really to be a restaurant, which would be able to take advantage of this exception to affiliation?” Carp asked. “The congressional intent is to keep these places open and to put money in the hands of the workers.”
In recent years, several craft breweries have struck deals with private equity firms to secure capital for growth.
The CANarchy Craft Brewery Collective, the multi-brand craft rollup backed by Fireman Capital Partners, is the largest investment-backed craft brewer, coming in at eighth on the Brewers Association’s 2019 rankings of craft breweries by volume.
Fireman Capital Partners’ involvement in craft brewers dates back to 2012, when the Boston-based office acquired a majority stake in the Utah Brewers Cooperative, the parent company of Squatters and Wasatch. Fireman Capital and Longmont, Colorado-based Oskar Blues, which had already acquired Comstock Park, Michigan-based Perrin Brewing Company, joined forces and rebranded as CANarchy in 2017. CANarchy also owns Cigar City (Tampa, Florida), Deep Ellum (Dallas, Texas), and Three Weavers (Los Angeles, California).
Escondido, California-based Stone Brewing, which ranked at the ninth largest craft brewery in 2019, took on nearly $90 million in investment from VMG Partners in 2016. Last week, Stone laid off 306 workers, about 30% of its workforce. Stone is not eligible for a PPP loan, a spokeswoman for the company told Brewbound.
The list of PE firms with investments in craft breweries includes:
- San Francisco-based TSG Consumer Partners,which hold minority stakes in Scottish craft brewery BrewDog, Atlanta-based SweetWater and Pabst Brewing Company;
- Valterra Partners, a boutique firm in New York and Massachusetts, which took a minority stake in Woburn, Massachusetts-based Lord Hobo Brewing in 2017;
- Boston-area private equity firm Castanea Partners, which invested in southern California craft brewery The Bruery in May 2017;
- New York City-based Orkila Capital, which invested in Mikkeller three years ago;
Those are just a few. The Riverside Company, a private equity firm with offices in New York City and Cleveland, exited its investment in Salt Lake City-headquartered Uinta Brewing last year.
Would-be borrowers need to ensure that they’re eligible before applying, Carp and Gossner said.
“SBA has made it clear that the applicants for these loans are the ones who are primarily responsible for determining their eligibility for banks,” he said. “Though it is important that brewers, particularly if they have private equity or venture capital backing, are going through an analysis to make sure that they are not affiliated with the other portfolio companies in a fund’s portfolio because this is the borrower’s responsibility.”
Although eligibility comes with some considerations, the program’s aim is to get the allocated money into businesses’ hands as quickly as possible.
“Is the PPP first come, first served? And the answer is just one word: yes,” Gossner said.
Both Gossner and Carp cautioned that the PPP’s first allocation is likely to run out and businesses considering the program should not delay in submitting applications.
As of Monday, April 13, the SBA has received 725,000 loan applications and allocated $182 billion since the PPP was first rolled out 10 days ago, Stonehearth Capital Management senior financial advisor Andrew Nadeau told Brewbound.
The SBA has doled out around $1.57 billion over 3,184 loans to breweries over the last decade, according to the Seattle Business Journal.