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— Judgment Call —
One alternative is the Small Business Administration's Small Business Investment Company program, which is experiencing a dramatic increase in applications. In fact, the SBA has already granted 50% more licenses in fiscal year 2009 than it did in all of fiscal year 2008. The SBA now has a significant pool of untapped funds available; while Congress authorizes $3 billion annually for the SBIC program, last year SBICs drew down less than a third of that amount. The SBIC program has become even more attractive under the Obama administration, which sees it as playing a key role in the nation's economic recovery. Its most significant change so far, an expedited application process, went into effect immediately upon President Obama's inauguration. The previous 12- to 18-month licensing period has been reduced to five months for an initial license and four months for a second license. This makes an SBIC license a much more feasible option for funds with time-sensitive financing requirements.
The cap on funding available to each SBIC has also been increased to $150 million, and portfolio diversification requirements have been reduced. Pursuing an SBIC license is now a viable option for many funds that had not previously even considered it. The SBIC program matches what a fund raises in the private sector, providing up to 3 times leverage on the fund's private capital, although most funds should plan on 2 times leverage as part of their business plan. The money is provided through a 10-year, unsecured note with a market-driven interest rate, which has recently hovered around 6% to 7% all in. Interest-only payments are due semiannually, with all principal due at maturity. There are some limitations on how and where an SBIC may invest. SBICs may invest only in businesses that have a net worth of less than $18 million and an average taxable net income of less than $6 million over the previous two years or have fewer than a certain number of employees based on their industry class (parent companies and subsidiaries are all considered in this size assessment). There are also conflict-of-interest and usury regulations. Additionally, SBICs may not invest in other SBICs, finance and investment companies (including finance-type leasing companies), unimproved real estate, majority foreign-owned companies or businesses deemed contrary to the public interest. The application process is rigorous, with the SBA paying particular attention to a fund's management structure, business plan and overall financial health. Funds should have two or more principals, each with more or less equal responsibility and ability. At least one of these principals should have five years or more of decision-making, private equity experience. The principals should have done at least 15 deals, handled more than five exits and have an internal rate of return in excess of 15%. Given the above, there are funds that may not be suited for the SBIC program. Participation requires government oversight, and adding this layer of oversight to its operations is not something every fund will find useful or palatable. Some funds also work extensively with foreign-owned companies, and not being able to use SBIC capital for these investments may prove to be problematic. Regulations affecting when distributions can be made to investors may also place unwanted restrictions on a fund's operations. Despite these issues, however, the fact remains that, in today's economy, the government stands as one of the few entities with liquidity available to provide financing. The SBIC program, bolstered by recent positive changes, should be on the list of any fund manager examining alternative sources of financing. Many will find that the benefits of access to SBA leverage outweigh the added oversight and responsibility. Alan B. Roth heads the SBIC practice at Wildman, Harrold, Allen & Dixon LLP. The firm has one of the most active SBIC practices in the country. Comments |
As the credit crisis continues, many of the traditional funding sources for private equity funds remain strained. As a result, there is increasing interest in securing alternative financing sources.
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For Sale? - Rather than start from scratch, who knows of any ongoing SPIC's for sale? FWH