They’re ‘Free Markets’ Guys — and They Want the Government to Intervene

Illustrations by Sally Deng

Illustrations by Sally Deng

Inside private equity’s battle to benefit from market interference.

When making his case for the government to rescue the oil industry, Wil VanLoh wanted Texas regulators to know that at heart he was a free-markets kind of guy. “I am a free-market person through and through,” the founder of private-equity firm Quantum Energy Partners told the Railroad Commission of Texas — the regulatory body that oversees the state’s oil and gas industry — at a mid-April meeting.

Yet VanLoh was pleading with the commissioners to temporarily limit oil production, warning their inaction would lead to widespread failure of small and midsize oil companies. The reduced supply, he hoped, would raise the value of the oil taken from the ground if done in coordination with other U.S. states.

“We don’t live in a world of free markets,” he lamented, pointing to the massive government intervention during the 2008 financial crisis. “The system of capitalism the world now works under is one where the markets are generally left alone, except during extraordinary times of volatility,” VanLoh said during the April 14 meeting, held online due to the coronavirus pandemic. “And that, commissioners, is exactly what we’re experiencing right now in the oil and gas industry — and why you must intervene.”

The pandemic was destroying energy demand as businesses closed and people stopped traveling, sending oil prices down. Soon Texas, the largest producer of oil in the U.S., would be pummeled with record bankruptcies and job losses, he said.

“If we let this fictitious free market run its course, I’m going to tell you what’s going to happen,” VanLoh warned the commissioners. “Most of the big companies will survive, but many of the small and medium-sized independents will go under — not just in Texas, but throughout our country.” (Quantum, based in Houston, did not return phone calls seeking comment on its performance and push for government intervention.)

VanLoh, of course, claimed that the intervention wouldn’t be on his behalf. Instead, he said, the Railroad Commission needed to act quickly to stabilize the oil industry before a “huge chunk” of the U.S. market was “taken out.”


“When that happens, what’s left, the pieces will be picked up by companies like mine,” VanLoh said. “We’ll make a lot of money doing that.”

Private-equity firms like Quantum, through the companies they control, employ millions of Americans. But should these titans of capitalism profit at the expense of Americans at the pump, or turn to taxpayer dollars to support their private-equity investments in times of trouble?


According to some governments, yes.

The U.S. government is allowing private-equity-backed companies to benefit from its emergency aid designed for small and midsize businesses in the crisis.

While the Federal Reserve’s expanded Main Street Lending Program, announced at the end of April, does not explicitly welcome companies controlled by buyout firms, the rules do not exclude them, according to Jeremy Swan, national director of CohnReznick’s financial sponsors and financial services industry practice. Swan says many of his private-equity clients, small and large, have expressed interest in Main Street loans as a possible financing option for companies they own.

The Fed expected the program to be ready by the end of May, or possibly around the start of June, according to remarks made by Chairman Jerome Powell during his testimony before members of Congress on May 19.

“The vast majority of the private-equity-backed businesses in the U.S.” would fit within the parameters the Fed set around revenue and employee count for its Main Street Lending Program, Swan said by phone. Highly levered companies with as much as $5 billion of revenue or as many as 15,000 employees are eligible, but with some restrictions — including around the very thing private-equity firms use to accelerate returns: high levels of debt.

“The challenge becomes the upper end in terms of how much debt they can take on,” Swan said. The expanded Main Street Lending Program’s term sheet shows companies may not borrow more than six times their adjusted earnings before interest, taxes, depreciation, and amortization in 2019. That would make them too risky in the government’s eyes.

Although government aid is one option for companies controlled by buyout firms, it’s not their only source of financing. The private-equity industry could also use some portion of the record $1.46 trillion of dry powder — the unspent capital investors committed to their funds globally by last June, according to Preqin data — to support their existing deals.

“Some of them, they have dollars that are eligible for portfolio companies,” Swan said. But “private-equity firms have a fiduciary duty to their limited partners, and not in every case is that investment going to be the right decision.” He added, “They have to do what’s right by those clients and maximize their return for each.”

Limited partners, or investors in private-equity funds, have increasingly turned to the industry in hopes of big returns in a low-return environment. When under criticism for their aggressive strategies, private-equity firms often point to these investors — including the pension funds that support teachers, police officers, and firefighters— as benefiting from their deals.

But directing companies they own to apply for the relatively cheap Main Street loans could come back to haunt them. Jobs may not be spared, and private-equity firms may fear political blowback should a deal go wrong at taxpayers’ expense.

Leon Black, co-founder of Apollo Global Management, said during the firm’s earnings call last month that none of the companies it controls will be using the federal government’s Paycheck Protection Program. “Similarly, although we are still reviewing the guidance recently announced by the Federal Reserve, we do not anticipate that the Main Street Lending Program will provide any relief or financial assistance to companies controlled by us or our funds,” he said at the time.

An Apollo spokesperson said there’s been no change in the firm’s thinking on the matter since the May 1 earnings call. “None of the companies controlled by Apollo or the funds we manage will be utilizing the PPP program and, given our current understanding of the program guidance, we do not anticipate companies controlled by us or our funds will utilize the Main Street Lending Program either,” the spokesperson said in an email late last month.

Blackstone Group, the world’s largest private-equity firm, co-founded by chief executive officer Stephen Schwarzman, indicated during its earnings call on April 23 that it probably wouldn’t direct companies it owns to seek money from the U.S. government. “At this point, none of the companies that we control have applied for funds under either of these programs,” Blackstone president Jonathan Gray said on the call. “It’s unlikely that I think we’ll do that.”

A spokesperson for Blackstone would not comment on whether the firm has applied for government assistance since then, pointing instead to Gray’s April remarks. Spokespeople for private-equity giants KKR & Co. and Carlyle Group declined to comment on whether companies they own have applied for government programs.

The onus is on banks to do their due diligence on companies applying for loans under the $600 billion Main Street program, according to Swan. Borrowers should fall within certain risk criteria, he said, helping to ensure the government loans are paid back.

For example, companies eligible for Main Street loans must have been healthy before the pandemic.

“If you’re a private-equity firm and you had some portfolio companies that were very healthy going through mid-March, and then, whether it was geography, whether it was consumer demand — whatever it may be — if business fell off and you now have a capital need, this could work,” said Swan. He has advised clients that if they feel they are suitable and have everything in place to participate in the lending program, they should let the banks know before the application process begins.

But while some private-equity firms have viewed the Main Street loans as advantageous to their portfolio companies in the crisis, Swan has found they’re wary of taking taxpayer money. His clients generally have added government loans to their list of potential financing sources that could help “fix a short-term cash-burn problem” in the crisis — but “not at the very top of the list.”

“They are treating it almost as a last resort,” he said.

Wary or not, the Main Street Lending Program expanded to include private-equity portfolio companies. Why?

“The industry pushed back” against its broad exclusion from previous government programs like the Paycheck Protection Program, said Swan.

The type of owner a company has should not dictate its eligibility for emergency lending programs set up by the government, says Christopher Zook, founder of multifamily office CAZ Investments in Houston.

“If you want to punish the owner, punish the owner; don’t punish the employees of that business,” Zook said by phone. “The main focus of the government right now” should be — and has been — keeping people employed when they’ve been told to stay home to save lives during the Covid-19 crisis. “I don’t think the government should pick winners or losers based on who the owner of the business is,” he said.

Buyout firms have vast reach across the economy, with an Ernst & Young report in October estimating that private-equity-backed companies employ almost 9 million people in the U.S. “Private equity, as a group, is one of the largest employers in the country,” said Zook, whose firm invests in the industry.

Like Swan, he sees buyout firms worrying about accepting government help.

“Private-equity folks are very cautious about whether or not they take taxpayer funds,” Zook said, partly because “once they have accepted the camel’s nose under the tent, they’re going to be subject to constraints similar to what the banks basically accepted after 2008.”

Zook himself isn’t big on government bailouts.

Unlike the founder of Quantum Energy, Zook opposed the Texas Railroad Commission forming a group similar to the Organization of the Petroleum Exporting Countries to limit oil production.

“I’m very much of a free-markets person,” Zook said, explaining his opposition to government-mandated cuts aimed at lifting low oil prices. “People that are way over-levered, that didn’t make good business decisions, should not be rescued by taxpayer money or any other form of bailout — except for a more capitalistic view of it.”

As it turned out, Texas regulators weren’t willing to intervene in oil markets.

The Railroad Commission in May voted against the idea of limiting crude production, dismissing the joint motion filed by Parsley Energy — a publicly traded oil and gas producer that this year appointed Quantum founder VanLoh to its board — and Pioneer Natural Resources Co.

VanLoh reckoned during his mid-April testimony to the Railroad Commission that U.S. oil producers generally needed oil prices to return to at least $50 a barrel for the industry to stabilize. “Anything below $50, to be very blunt, a good portion of North American oil drilling does not work,” he said at the time.

His push for government intervention was intended to benefit producers, but that same manipulation of markets would come at the expense of consumers paying more per gallon at the gas pump. And it did not square with Railroad Commission chairman Wayne Christian’s belief in free markets.

“Texas companies, rather than the government, can decide for themselves what level of production cuts make sense for them to make while they weather the storm of market instability,” he said in a May 5 statement on his vote.

Certainly, some will struggle to make it through the turmoil. At least one private-equity-owned oil and gas producer already has succumbed: Blackstone-backed Gavilan Resources, based in Houston, filed for bankruptcy protection in mid-May, according to Texas court documents.

As private-equity-backed companies navigate the economic shutdowns that have slowly begun reversing across the U.S., the buyout industry faces more distress. And Zook, whose multifamily office has $1.5 billion in assets under management, is prepared to profit from that.

It’s the type of bailout he can get on board with.

Private-equity firms can use their “massive amounts of dry powder” to buy assets at “very, very good prices,” deals that will produce “outsized returns over the next three to seven years,” Zook said. “That gives us the ability to benefit from that, while at the same time still benefit from what they fix in their existing portfolio.”