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Small Business Investment Companies (SBIC) Please choose a question and select or press the enter key to reveal/hide the answer. To view both question and answers in this area follow this link. 1. What is the SBIC Program? The Small Business Investment Company (SBIC) program, part of the U.S. Small Business Administration (SBA), was created in 1958 to fill the gap between the availability of venture capital and the needs of small businesses in start-up and growth situations. 2. What is the current size of the program? It’s a little-known fact, but the federal government is the largest single investor in U.S. private equity funds. At the end of FY 2003, SBA had close to $5.5 billion invested in 435 funds, plus another $3.7 billion in available commitments. Together with private capital topping $12 billion, the program totals over $21 billion in private equity capital dedicated to America’s entrepreneurs. 3. What has the SBIC program done to expand the availability of capital in the private equity market? SBIC investing, as a subset of the overall venture capital industry, is responsible for the creation of millions of jobs, billions of dollars in corporate revenues, billions of dollars in federal and state taxes paid, and countless improvements to our health, safety and way of life. Venture capitalists are very “hands-on” investors, adding corporate value in many ways beyond financing growth. 4. How does the SBA participate in an SBIC? The government itself does not make direct investments or target specific industries. Essentially, the SBIC program is a “fund of funds” – meaning that portfolio management and investment decisions are left to qualified private fund managers. As a result, SBA has very minimal direct involvement in an SBIC’s portfolio management operations. 5. What are the requirements for obtaining an SBIC license? SBICs must be privately managed, for-profit investment companies formed to provide equity and/or debt capital to U.S. small businesses. SBICs are licensed by the SBA, which invests alongside private investors. An experienced team of private equity managers must secure minimum commitments from private investors of either $5 million (for a debenture fund) or $10 million (for an equity fund). For every $10 million in private equity, SBIC licensees are eligible to receive up to a $20 million SBA commitment (2:1 public-private leverage), substantially enhancing prospective portfolio returns. The total size of an SBIC typically ranges from $30 million to $170 million. SBICs may only invest in “small businesses” defined as: net worth less than $18 million and prior two years’ average after-tax income less than $6 million. 6. What are the benefits to fund managers of forming an SBIC? SBICs supplement their own private capital through guarantees of debentures or participating securities up to three times private capital, depending on which security the SBIC chooses. This capital is provided at a significantly lower cost than traditional limited partner equity investments. The effect of the leverage can have a very powerful impact on return enhancement to fund managers. Additional benefits to fund managers include: Concentration of a large portion of funding in one LP reduces fundraising burden and administrative / reporting requirements Community Reinvestment Act credits available to financial institutions that invest in SBICs open up a source of private funds to SBICs that they might not have otherwise Enhanced deal sourcing through network of over 400 SBICs SBIC MAQ application process helps to crystallize strategy and can be presented to private investors as part of a larger marketing package SBA’s financial reporting criteria help SBICs develop standardized and comprehensive investor relations processes SBA’s licensing process is well defined, with early milestones which help potential licensees assess their likelihood of funding early on. 7. What investment styles and fund types fit best with the SBIC Program? No particular style or type is preferred. Among the existing SBICs, SBA holds a diversified portfolio across multiple investment styles and fund types. It is important to note that both the Participating Securities and Debentures are a 10 year obligation. Therefore, strategies with investment time horizons in excess of 10 years, such as early stage (pre-FDA approval) bio-tech, are often not a good fit for the Program. Our SBIC Program Basics (under the About Us section of the website) summarizes your fund’s structure choices. 8. How do I know if I have what it takes to receive an SBIC license? The first step is to evaluate your team and strategy relative to the SBIC Program’s general management qualification guidelines, including: Private equity investing experience and strong “deal flow” of the same type that the proposed fund would perform. At least two general partners who have five or more years of “decision-making” experience as a principal in a private equity fund (rather than as an agent such as consultant, investment banker, broker, etc.) Realized track record of superior returns, placing a fund in the upper half of performance for venture funds of the same vintage year and style. Managerial, operational or technical experience that can add value at the portfolio company level. Cohesive management team, with complementary skills and history of working together. The full SBIC licensing process is outlined in detail at http://www.sba.gov/INV/rightforyou.pdf 9. What are Low/Moderate Income (“LMI” ) Debenture Securities? Licensed debenture SBICs are eligible to use LMI Debentures, which are deferred interest debentures that are issued at a discount and require no interest payments or SBA annual charge for the first five years. LMI Debentures are available in 5 and 10 year maturities. The use of LMI Debentures is restricted to LMI qualified investments. Qualified investments are small businesses in which 50% or more of the employees or tangible assets are in a LMI Zone (as defined by applicable government agencies) or 35% of the full time employees of the small business have primary residences in a LMI Zone. 10. What portion of state economic development or state government agency capital can be counted toward regulatory capital? A maximum of 33% of regulatory capital can come from state or local government entities. 11. Can an SBIC have a single private LP? No. An SBIC must have diversity in its private LP funding base. Investment by a single large LP is restricted to 70% of private capital. 12. Are claw backs permitted for private LPs? No, “claw back” provisions to protect private limited partners are not permitted. For more information on acceptable provisions refer to the Model Participating Partnership Agreement at http://www.sba.gov/INV/modelparticipating.doc 13. How does the SBA’s liquidity preference affect private limited and general partners? In exchange for a substantially lower portion of the SBIC’s profits, the SBA requires a liquidity preference ahead of the other private partners of the fund. This liquidity preference mandates that the SBA receive its principal plus Prioritized Payments prior to any distributions being made to private Limited or General Partners. 14. How do SBIC profit distributions differ from non-SBIC funds? Profit distributions are applicable to Participating Securities SBICs only. As a Preferred Limited Partner, the SBA is entitled to receive a preferred return (referred to as the “Prioritized Payment”) prior to any distributions being made to Private General and Limited Partners. The rate for the Prioritized Payment is a function of the 10 Year Treasury Bond Rate plus a spread (current rates posted at http://www.sba.gov/INV/trustrates.html) plus an annual charge by SBA (current rates posted at http://www.sba.gov/INV/annual.html). SBA also receives a Profit Participation when profit distributions are made to the Private General and Limited Partners. The amount of SBA’s Profit Participation is determined using two factors: the 10 Year Treasury Bond Rate and the ratio of Participating Securities to Private Capital. For example, if Rates are 4.00% and an SBIC has utilized two full tiers of leverage, the Profit Participation rate charged by SBA would be 6.00%. This structure differs from a traditional fund structure in that the SBA has an interest in a substantially lower portion of the investment company profits than a traditional LP. 15. How does SBA calculate the “Prioritized Payment” amount? The “Prioritized Payment” is calculated using the 10 Year US Treasury Bond rate plus a spread and an applicable SBA fee. Current rates are posted at http://www.sba.gov/INV/trustrates.html 16. How does the SBA calculate the “Profit Participation Rate”? The amount of SBA’s Profit Participation is calculated using two factors: the 10 Year Treasury Bond Rate and the ratio of Participating Securities to Private Capital. For example, if Rates are 4.00% and an SBIC has utilized two full tiers of leverage, the Profit Participation rate charged by SBA would be 6.00%. 17. How is the Debenture rate of interest calculated? The rate of interest is based on the 10-year Treasury rate plus a market-driven spread, currently about 70-80 basis points. 18. What are the historical returns of SBICs as an asset class? The SBIC program is involved in a medium term project to develop historical returns of SBICs as an asset class, particularly since the inception of the Participating Security (equity) funds in 1994. 19. What are the rules governing control situations by an SBIC? An SBIC is permitted to control, either directly or indirectly, a small business for a maximum period of 7 years. With SBA’s prior written approval, an SBIC may retain control for such additional period as may be reasonably necessary to complete divestiture of control or to ensure the financial stability of the portfolio company. 20. How does SBA protect against fraud and other wrongdoing in the SBIC program? Prior to receiving an SBIC license, the applicant must undergo a rigorous licensing process. Upon receiving a license, the SBIC is subject to an annual regulatory audit by the Office of SBIC Examinations. These audits are designed to ensure that SBICs operate in conformance with the regulations or to uncover those instances when they have failed to do so. Potential fraud is most usually uncovered after an SBIC has been transferred to the Office of SBIC Liquidation. These cases may be referred to the Office of the Inspector General for investigation and possible referral to the Assistant US Attorney for prosecution. SBA Home Page | FAQ Home | Contact Us | Privacy
Please choose a question and select or press the enter key to reveal/hide the answer. To view both question and answers in this area follow this link.
An experienced team of private equity managers must secure minimum commitments from private investors of either $5 million (for a debenture fund) or $10 million (for an equity fund). For every $10 million in private equity, SBIC licensees are eligible to receive up to a $20 million SBA commitment (2:1 public-private leverage), substantially enhancing prospective portfolio returns.
The total size of an SBIC typically ranges from $30 million to $170 million. SBICs may only invest in “small businesses” defined as: net worth less than $18 million and prior two years’ average after-tax income less than $6 million.
Additional benefits to fund managers include:
Our SBIC Program Basics (under the About Us section of the website) summarizes your fund’s structure choices.
The full SBIC licensing process is outlined in detail at http://www.sba.gov/INV/rightforyou.pdf
SBA also receives a Profit Participation when profit distributions are made to the Private General and Limited Partners. The amount of SBA’s Profit Participation is determined using two factors: the 10 Year Treasury Bond Rate and the ratio of Participating Securities to Private Capital. For example, if Rates are 4.00% and an SBIC has utilized two full tiers of leverage, the Profit Participation rate charged by SBA would be 6.00%.
This structure differs from a traditional fund structure in that the SBA has an interest in a substantially lower portion of the investment company profits than a traditional LP.
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