Asset managers, REITs snatch PPP funds from small businesses

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Asset managers, REITs PPP funds small businesses
FotografieLink / Pixabay

PPP funds were designed to help small businesses stay afloat during the coronavirus pandemic, but hedge funds, real estate investment trusts and other asset managers have been taking funds from the program. The Paycheck Protection Program was also aimed at keeping employees of small businesses on the payroll, but some companies without any employees have even been able to get funds.

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The $249 billion program is administered by the Small Business Administration and offers loans to pay for payroll, utilities and rent for up to eight weeks. The loans can be converted to grants if companies retain or rehire employees.

Asset managers tapping PPP funds

Most think of small businesses as private companies with few employees, but the Paycheck Protection Program makes companies with fewer than 500 employees eligible for aid. As a result, many public companies with access to lines of credit and other funding sources that aren't available to smaller businesses have applied for and received funds.

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One such company is Manning and Napier, an asset manager that applied for PPP funds despite having $10 million in net income. The company has since said it will return the funds as part of a broader move by public companies to return the PPP funds after they were called out for taking them.

Bloomberg reported last month that asset managers like hedge funds are claiming PPP funds as small businesses because they have fewer than 500 employees. The media network reports that some hedge funds applied for the Paycheck Protection Program, certifying that the loan is necessary to support ongoing because of "current economic uncertainty."

ValueWalk also noticed some real estate investment trusts on the list of public companies taking PPP funds. Lodging Fund REIT III and Global Healthcare REIT. Lodging lists itself as having zero employees, while Global Healthcare REIT has only two employees. According to Accountable Action, the firm received one set of loans on April 10 and a second set of loans on April 17 through various subsidiaries.

Additionally, Global Healthcare REIT has bought back nearly $133,000 of its shares, which means it had extra funds to return to shareholders recently. Even though the firm had extra money, it still felt the need for a bailout to support its two employees.

Should asset managers be taking PPP funds?

However, hedge funds are designed in such as way that they employ as few people as possible, leaving them with millions or billions of dollars in assets but few employees. Technically, since they have so few employees, such asset managers are eligible for PPP funds. Hedge funds are also named as such because they are supposed to be able to keep making gains even when the broader market falls.

This all raises the question of whether these firms have a moral obligation to leave the funds for small businesses that are truly teetering on the edge of bankruptcy. Aksia, an institutional investor advisory firm, warned that hedge funds and other asset managers should not abuse the PPP program. It said it would see any fund taking advantage of the program as a negative when it counsels pension funds and other institutional investors with approximately $160 billion to invest.

Aksia said in a memo that asset managers with healthy businesses that take advantage of a program that isn't "precisely defined" are "not only showing poor moral judgment and potentially hurting the reputation of the alternatives industry" but "also probably crowding out struggling workers and businesses severely impacted by Covid-19."

The Managed Funds Association, a hedge fund industry group, said in a statement that it doesn't believe PPP funds were intended for asset managers.

Other public companies also taking PPP funds

Asset managers aren't the only firms being blasted for accepting PPP funds. Many public companies with access to other sources of funding have also tapped the program for funds.

For example, The New York Times reports that the biggest beneficiary of the Paycheck Protection Program is Ashford Inc. and the REITs it oversees, which have snatched $53 million from the program. Public filings reveal that multiple hotels like Ritz Carltons which all funnel money back to the same company all received millions of dollars in forgivable loans.

Hotels associated with Ashford Hospitality received $29 million of the $31.1 million they asked for by the middle of last month, according to a financial filing. The largest amount of money went to the Ritz Carlton Atlanta and a Sheraton hotel in Anchorage, Ala.

Many other large public companies also received forgivable loans, like J. Alexanders. The firm's restaurants received $15 million. Ruth's Hospitality Group, which owns Ruth's Chris Steakhouse, and Shake Shack also receive PPP funds, although Shake Shack returned the money.

Treasury Secretary Steven Mnuchin said the Paycheck Protection Program was not aimed at helping big companies with access to capital. He called on public firms that received the funds to return the money if they do not meet the eligibility requirements. He added that if those companies repay the money quickly, they won't face any liability to the Treasury and the SBA. If they don't, the loan won't be forgiven, and they could even be subject to investigation.

Then there are companies like Drive Shack, a public company that supposedly has 4,650 employees, according to Accountable Action, but still received funds from a program that's only supposed to support companies with fewer than 500 employees.