The Small Business Investment Company ("SBIC") program, administered by the U.S. Small Business Administration (“SBA”), is a multi-billion investment program created in 1958 to bridge the gap between entrepreneurs’ need for capital and traditional sources of financing.  The program is a proven public-private partnership that leverages the full faith and credit of the U.S. government to increase the pool of investment capital available to small businesses. 

Through the SBIC program, SBA provides guaranteed financing to privately owned and professionally managed private investment funds.  A SBIC fund can leverage capital raised from private investors, such as banks, pension funds, or high net-worth individuals, with government-guaranteed debt obtained through the program.  For every $1 the SBIC fund raises from private investors, SBA will commit up to $2 of financing, subject to a cap of $150 million per SBIC fund.  These licensed SBIC funds in turn make loans and investments into qualifying small businesses seeking growth capital, especially in markets where such capital is not adequately available. 

As of 9/30/2017, there were 315 active funds in the SBIC program with $29 billion of total capital, split roughly evenly between private capital and SBA financing.  Today, most SBIC funds operate under the Debenture program, which is comprised of 227 active funds and $26 billion of capital. 

Some of the key terms of SBA financing include the following:

  • Debt is provided at the fund level and has recourse to all of the fund’s assets;

  • Debt has a 10 year term from the time of each draw with no required amortization or prepayment penalty;

  • Debt is priced at a market-driven spread above the 10-year Treasury note; and

  • SBA charges a one-time leverage and underwriting fee and an annual program fee to cover the cost of operations.

Historical borrowing rates for SBIC funds have been extremely attractive relative to other third-party financing options (mezzanine lenders, Business Development Companies (“BDCs”), etc.) within the lower middle-market private equity space.  In addition to SBA financing representing a low cost alternative to other third-party lenders, it also provides significant flexibility to private equity managers in closing deals and managing portfolio companies throughout the holding period.  Serve believes the low cost and flexibility of SBA financing provides SBIC managers with a meaningful advantage in the market relative to non-SBIC managers.

Serve believes the SBIC fund opportunity set is attractive and expects to make multiple investments in the space over time.  Serve has worked diligently to identify key managers within the SBIC program and has built deep relationships with many of these managers.  Serve also has a goal to introduce non-SBIC managers to the program to help expand the investable universe over time.