A prolonged US government shutdown could be problematic for private funds, causing large deals to be upended, pushing firms to raise capital on their own for buyouts and edging the SEC to restart examinations already in progress.
The shutdown that started 22 December became the longest in US history this weekend, surpassing the government’s 21-day closure in late 1995 and early 1996. There are no signs President Trump and Congress are closing in on an agreement over the budget to resume work.
Under Federal Trade Commission rules, any deal valued at more than $84.4 million must go through the FTC and the Department of Justice for review to prevent anti-competitive mergers or acquisitions. During the preliminary review, firms must wait 30 days before closing the deal.
AJ Weidhaas, a partner at law firm Goodwin and co-chair of its private equity group, told sister title pfm the FTC could prolong the 30-day waiting period under the Hart–Scott–Rodino Antitrust Improvements Act by imposing a second request for information, which could delay closings for months. It comes at a time when the stock and bond markets have experienced volatility under the spectre of rising interest rates.
“That is a significant developing dynamic, and it overlaps the time when the credit markets were already starting to get a little choppy — largely as a result of the equity capital markets,” he said. “You know the downturn we saw there. The confidence that private equity buyers had six months to a year ago, that they would easily be able to finance the deals that they were looking at, has been shaken. We aren’t yet seeing debt being pulled from deals, but it’s getting choppy and people are worrying about it. When they worry about it, that impacts how aggressive they will be in bidding for a company.”
A waiting game
Private funds aren’t yet at a point at which the shutdown is disrupting transactions. But the longer it goes on, the more likely a scenario that becomes.
“Over the next couple of weeks, if we see the FTC and DOJ start issuing a bunch of second requests just to hit the pause button on deals they have not yet had a chance to review, that could totally change the dynamic both in terms of the deals that have already been signed up and what people are willing to do to commit to deals both on the lending side and on the equity side at an actual signing,” Weidhaas said.
”I think you could see private equity sponsors who went into a deal some number of months ago saying that they will fully backstop that deal with equity reconsider their position and require financing outs.”
For now, government departments and agencies, including the FTC and the Justice Department, inform on their websites the limitations of their services. The Securities and Exchange Commission’s contingency plan calls for “only an extremely limited number of staff members” to be on duty.
“We aren’t yet seeing debt being pulled from deals, but it’s getting choppy and people are worrying about it.” – Weidhaas
Similarly, the Internal Revenue Service said it recalled “a significant portion” of its workforce. The shutdown has also meant a halt for private investors in agriculture seeking to gather data and information from the Department of Agriculture. The department’s website “will not be updated during a lapse in federal funding,” according to a notice, and reports on some pages are inaccessible.
Snail mail to the IRS
Steven Bortnick, a tax partner at law firm Pepper Hamilton, expressed concern about mailing a tax form on behalf of a client to the IRS. Form 8832, which partnerships or limited liability companies use to inform the IRS of a change in business entity, must be filed within 75 days of the tax election status, and he is uncertain as to whether IRS employees will be available to certify the mail, he said.
“My concern is, if I do that, and the government shutdown goes down for a while, will the post office just send it back to me, so that I have not filed?” Bortnick said. “While I’ll probably still have time to file – because I can’t believe the shutdown will go on for two more months – it’s just an annoyance, and it means it’s not off my desk. So I now have an associate checking in on what are other ways to file that I don’t need their signature to establish timely mailing.”
The SEC itself has been stretched thin, with some employees facing an increased work burden under a hiring freeze that’s been in effect since January 2017.
A chief financial officer at a mid-market firm said he hasn’t seen any impacts from the government closure, but it could be problematic if a shutdown becomes lengthy. If, for example, a firm is in the process of being examined by the SEC, the regulator may decide to restart the exam process once the furlough is over. This could mean additional work for the firm in helping the agency’s examiners reacquaint themselves with certain aspects of the exam, he said.
“I can see that if the shutdown [continues] for a long period of time, like six months, GPs could be affected,” the CFO said.
Of the 4,436 employees the SEC designated to be affected by the closure, it is retaining a small amount of staff, including about 110 for law enforcement activities and about 175 for what it terms “protect life or property.” A voicemail to the Office of Compliance Inspections and Examinations went unanswered.