Big Investors Warn Hedge Funds on Tapping Small-Business Aid

(Bloomberg) -- Institutional investors in Pennsylvania and Alaska are taking a dim view of hedge funds and other asset managers seeking to tap emergency U.S. government money designed for struggling small businesses.

Pennsylvania’s Public School Employees’ Retirement System is monitoring its managers -- as well as potential new ones -- to see if they took advantage of the rescue program. The Alaska Permanent Fund Corp. said it would view any manager taking assistance “quite negatively.” Some funds have already applied, Bloomberg earlier reported.

“It is ethically questionable and likely not in the best interest of the industry as a whole, long term,” said Marcus Frampton, chief investment officer at Alaska’s $60 billion sovereign wealth fund. “Alternatives managers, from a fiduciary standpoint, should be exploring federal assistance for portfolio companies where it is needed to preserve value and help employees.”

Thousands of mom-and-pop firms are struggling to survive as the sudden halt to economic life because of coronavirus-spurred lockdowns takes an unprecedented toll. More than 20 million Americans have filed for unemployment in the past month, and fears are growing of a deep and long-lasting downturn.

The government said on April 16 the $349 billion lending program was exhausted, within two weeks of its launch. Shake Shack Inc., one of more than a dozen publicly traded companies to tap the program, promised to return a $10 million loan amid criticism that smaller businesses were being frozen out. The Senate passed $484 billion in new pandemic relief funds Tuesday to bolster the small business aid program, pay for coronavirus testing and help hospitals deluged by sick patients.

Jim Grossman, chief investment officer at the Pennsylvania school pension system, said in an April 14 letter to its managers that it agreed with consulting firm Aksia LLC, which had said managers applying for the program showed “poor moral judgment” and were “probably crowding out struggling workers and businesses severely impacted by Covid-19.”

The Pennsylvania fund, which had about $60.5 billion in assets at the end of last year, will look at managers who take the Paycheck Protection Program money on a case-by-case basis, said spokesman Steve Esack.

“Most managers that we deal with are large and have substantial revenue streams that will go on without missing a beat through this crisis,” he said. “We’ll have much less tolerance for any explanation of accepting PPP money from them.”

The sweeping lockdowns enacted last month didn’t prevent investment firms from operating as markets remained open for trading. Unlike thousands of small businesses whose revenues have plummeted, hedge funds continued to earn management fees, even if they lost money during the market turmoil.

Some pensions and endowments may use the Freedom of Information Act to see if hedge funds applied for small-business loans, according to a person who works closely with hedge fund investors and asked not to be identified because the conversations are private.

It’s not clear yet whether any managers have been successful in securing the loans.

In Ohio, the CIO and hedge fund team at the $13.5 billion School Employees Retirement System is “unaware that any of its managers have applied to the program,” according to spokesman Tim Barbour.

Ron Biscardi, former chief executive officer of Context Summits, said several industry professionals have told him they’re not tapping the government program, in part because they know it would keep money from businesses that desperately need cash. Reputation issues may also be a factor.

“Institutional investors have made it known that they would be very disappointed with any fund company found using the program that didn’t really need it,” said Biscardi, whose former firm plans events for the alternative asset management industry.

©2020 Bloomberg L.P.

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