Small Business Administration
Office of Investment and Innovation
The Small Business
Investment Company Program
Meeting the Capital Needs of American Small Business
Program Overview The SBIC The SBA’s SBIC Program
Life Cycle Portfolio Performance
January 2011
Table of Contents
Program Overview:
- The SBIC Program in Brief
- Success Stories
- Our Results in FY 2010
The SBIC Life Cycle
The SBA’s SBIC Portfolio
Program Performance
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Program Overview
The SBIC Program in Brief
The SBIC Program is a multi-billion dollar, government-
sponsored investment fund created in 1958 to bridge the
gap between entrepreneurs’ need for capital and
traditional sources of financing:
• The program invests long-term capital in privately-
owned and managed investment firms licensed as
Small Business Investment Companies (SBICs)
• For every $1 an SBIC raises from a private investor,
the SBA will provide $2 of debt capital, subject to a
cap of $150 million
• Once capitalized, SBICs make debt and equity
investments in some of America’s most promising
small businesses, helping them grow
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Program Overview
SBIC Success Stories
Since its inception, the SBIC program has helped finance thousands of small businesses.
The following is a small sample of SBIC success stories.
Costco Callaway Cutter & Buck
Amgen Adaptec Intel
Staples AOL FedEx
Apple HP Jenny Craig
Quiznos Outback Steakhouse Build-a-Bear
Workshop
Sun
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Program Overview
Our Results in Fiscal Year 2010
The SBA issued $1.17 billion in new commitments to SBICs
$2.05 billion in financing dollars were invested in small businesses
1,331 small businesses were financed, 29% of which were in low-to-
moderate income areas or in minority or women-owned businesses
An estimated 46,130 jobs were created
…all at ZERO cost to taxpayers…
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Table of Contents
Program Overview
The SBIC Life Cycle
- SBIC Leverage Products and Investment Criteria
- Phase I: The Application Process
- Phase II: The Licensing Process
- Phase III: Portfolio Monitoring
The SBA’s SBIC Portfolio
Program Performance
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The SBA Life Cycle
SBIC Leverage Products
Regular
Debenture Amount: Typically 2x (but up to a maximum of 3x) the capital
raised from private investors
Term: 10 years with principal payment due at maturity
NO prepayment penalty
Interest: Semi-annual payment based on a spread above the 10-
year Treasury bond
Discounted
Fees: 1% commitment fee; 2% drawdown fee
Debenture Annual fee due semi-annually
Uses: Investments in “small businesses” as defined by the
SBA Office of Size Standards and federal regulations,
generally in later stage and “buyout” transactions. Real
estate and project finance generally prohibited.
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The SBA Life Cycle
SBIC Leverage Products
Regular
Debenture Amount: Typically 2x (but up to a maximum of 3x) the capital
raised from private investors
Term: 5 or 10 years with principal payment due at maturity
NO prepayment penalty
Interest: Semi-annual payment on 10 year bond only; based on
spread above 10 year Treasury bond
Discounted
Fees: 1% commitment fee; 2% drawdown fee
Debenture Annual fee due semi-annually for 10 year bond only
Uses: The discounted debenture is appropriate for debt and
equity funds with an investment focus on “small
businesses” in low-to-moderate income areas or those
providing energy-saving products or services.
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The SBA Life Cycle
Some Major SBIC Investment Requirements
Instruments Geography Size
SBICs may invest using: SBICs may invest: SBICs must invest in Small
- Loans - In businesses located Businesses, defined as:
- Debt with Equity features anywhere in the U.S. or its - Businesses with a tangible
- Equity territories net worth < $18 million AND
average after-tax income for
SBICs may not invest: SBICs may not invest: prior two years of < $6
- More than 10% of the - In businesses with over 49% million
proposed total fund size in a of their employees located - OR Businesses with 500
single company without SBA outside the U.S. employees or less
approval
Use of Proceeds Control SBICs must make 25% of their
financings in “Smaller
SBICs may not invest in: SBICs may: Businesses”, defined as:
- Project Finance - Control small businesses for - Businesses with a tangible
- Real Estate up to seven years, a limit that net worth < $6 million AND
- Financial Intermediaries may be extended with SBA average after-tax income for
approval prior two years < $2 million
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The SBA Life Cycle
Phase I: The Application Process
Phase I – Office of Program Development:
- Applicants submit a “Management Assessment Questionnaire”, which includes:
- Description of proposed fund strategy
- Detailed investment track records of fund management
- List of references to guide due diligence
- Due diligence documents, term sheets and other fund documentation
- Analysts review track record and conduct extensive due diligence
- Investment Committee approval required to move forward
- Target Time Frame: 8 weeks
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The SBA Life Cycle
Phase I: The Application Process
Phase I – Key Evaluation Criteria:
Manager Assessment Performance Analysis Strategy Evaluation Fund Structure & Economics
• Proven investment • High quality track record • Clearly articulated focus and • Structure of LP preferred
experience • Evidence past returns could investment thesis return
• Balanced track record have supported SBIC cost of • Evaluation of targeted • GP carry, management fees
among principals leverage and met or transaction size, investment and vesting schedules in line
exceeded targets themes and type with industry norms
• Evidence indicating a
cohesive and effective team • Analysis of fund instruments to be used • Alignment of carry
performance measured • Clear indications proposed distribution with time
• Principals with strong,
positive reputations against peer funds investments will fund dedication and level of
eligible “small businesses” responsibility
• Robust investment and due
diligence process • Adequate fund infrastructure
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The SBA Life Cycle
Phase II: The Licensing Process
Phase II – Office of Licensing:
- Prior to the submission of the Licensing Application, applicants must have
raised a minimum of $5 million of private capital
- Analysts review the application, business plan, financial projections, ownership
diversity and coordinate a legal review with SBA’s Office of General Counsel
- Licensing is contingent on the approval of the SBA’s Divisional Committee,
Agency Committee and the Deputy Administrator
- Target Time Frame: 6 months
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The SBA Life Cycle
Success Rates for 1st Time Applicants
The substantial increase in MAQs submitted to the SBA over the past three fiscal years indicates
growing interest in the SBIC program. Yet, the success rates for the green light and licensing
phases of the application process have held steady, preserving the selective nature of the program.
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The SBA Life Cycle
Phase III: Portfolio Monitoring
Phase III – Office of Operations:
- After an investment fund obtains an SBIC license it moves into the Investment
Division’s Office of Operations, where the SBA monitors its performance
- Analysts in the Office of Operations perform a variety of tasks:
- Assist SBICs with the draw down of SBA-guaranteed leverage
- Review and seek authorization for potential conflicts-of-interest
- Process requests for the transfer of LP interests
- Monitor financial health of SBICs
- Target Time Frame: Life of the Fund (~10 years)
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Table of Contents
The Application & Investment Processes
The SBIC Life Cycle
The SBA’s SBIC Portfolio
- Debenture Portfolio by Instrument
- Debenture Portfolio by Sector
- Debenture Portfolio by Geography
Program Performance
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The SBA’s SBIC Portfolio
SBIC Program Debenture Portfolio: FY ‘06-’10
Given the structure of the SBA’s lending,
debt dominates most debenture SBICs
portfolios, but managers will often structure
deals to include equity positions or will
attach equity “kickers” to enhance returns.
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The SBA’s SBIC Portfolio
SBIC Program Debenture Portfolio: FY ‘06-’10
The need for capital among small
businesses is not limited to one, or even a
few sectors of the economy. In fact, small
businesses across the spectrum of American
industry are connecting with debenture
SBICs to access the capital they need to
expand and grow.
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The SBA’s SBIC Portfolio
SBIC Program Debenture Portfolio: FY ‘06-’10
The diversity of industries
represented in SBIC portfolios is
mirrored in the geographic profile of
the program. While some managers
source investments in their home
regions, others seek opportunities
regardless of location. Combined,
their efforts distribute capital to
small businesses across the country.
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Table of Contents
The Application & Investment Processes
The SBIC Life Cycle
The SBA’s SBIC Portfolio
Program Performance
- Historical Returns
- Leverage and the Cost of Capital
- Administrative Performance
- The Advantages of an SBIC
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Program Performance
Strong Historical Returns
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Program Performance
Historical Impact of SBA Leverage
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Program Performance
Low Cost Capital
The SBA’s leverage commitments to licensed SBICs are funded through the sale of
government-backed securities called “trust certificates.” Every March and September,
these commitments are pooled and sold on the open market at a premium over 10-year
Treasury Notes.
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Program Performance
Record Growth
Financings to small businesses,
Program Level Obligations and Initial
Capital to New Funds have all
reached record levels in FY 2010.
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Program Performance
Administrative Improvements
In the past year, the SBIC program has improved its evaluation and review
processes to make the program better, smarter and faster.
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Program Performance
The Advantages of an SBIC
Strong, stable returns
Very low cost of capital provides SBICs pricing flexibility across cycles and 10 year debenture term avoids
problem of duration mismatch.
Flexible Fund Structure
The SBA licenses a variety of fund structures, including SBICs established as “drop-down” or “side-car” funds
attached to an existing investment fund.
Regulatory Benefits
SBICs are exempt from SEC registration requirements. Yet, LPs benefit from the careful monitoring done by the
SBA, greatly reducing the risk for fraud and abuse.
Rapid Deployment of Funds
The SBA provides leverage up to 3x the private capital commitments an SBIC has raised. Fund managers are
thus able to minimize the time they spend fundraising and focus their efforts on investing.
Community Redevelopment Act
Investments in Small Business Investment Companies are eligible as Community Reinvestment Act credits.
The Opportunity of “Small Business”
Despite being the bedrock of the American economy, the small business community is underserved and
represents a value opportunity for investors.
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Contact Us
U.S. Small Business Administration
Investment Division
409 3rd St., SW
Suite 6300
Washington, DC 20416
Kristi Craig
Senior Investment Officer
SBIC Program
[email protected]
p: 202-205-7546
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