The Small Business Investment Company program and the Rural Business Investment Company program were created as public-private partnerships to encourage investment in small businesses.
Bryan Bylica, a member of Bass, Berry & Sims, says these investment programs are valid considerations for investors and small businesses alike. He spoke with the Job on both programs.
What is the SBIC program?
The SBIC program allows private equity fund managers to access government leverage at generally lower rates than traditional lending sources to allow SBIC funds to invest in “small businesses”, term defined by the Small Business Administration to include businesses with a tangible net worth. with a value less than or equal to $19.5 million and average after-tax profits for the two preceding years less than or equal to $6.5 million. If a business fails this size test, there is another standard size test based on the NAICS codes of the primary industry in which the business operates. The goal of the SBIC program is to grow small businesses by facilitating access to growth capital for these lower-middle-market businesses in a way that promotes growth and job stability for these businesses. Since the inception of the SBIC program, SBIC funds have provided billions of dollars in investment and financing.
Who are the right candidates to apply for the SBIC program?
The SBA thoroughly reviews an applicant for an SBIC license, including its management team. Generally speaking, SBA seeks two or more full-time directors with at least five years of relevant experience in making investment decisions at the investment committee level (or a similar level of responsibility outside of non-committee organizations). formal investment). Each principal’s track record should reflect at least 10-15 investments relevant to the fund’s investment strategy, with a sufficient number of such investments being made to provide SBA with an accurate picture of each principal’s track record. SBA also seeks directors who have a history of successful collaboration.
What is the typical SBIC licensing process?
New applicants for an SBIC license must follow the SBA’s two-step process. The first stage requires the fund to submit a “management assessment questionnaire” and pay a non-refundable fee to the SBA. The MAQ outlines the fund’s investment strategy and process and requires each fund manager to provide detailed background information. Once the MAQ is filed, the SBA will review the submitted information.
If the SBA’s investment committee issues a “green light letter,” the fund can raise additional private capital before filing its formal application for an SBIC license. The license application includes formal background checks on each of the applicant’s principals, a review of the proposed investment strategy and processes, and their investment history. Currently, go-ahead letters are issued 3-4 months after the MAQ is submitted. After the formal license application is submitted, the SBA may take an additional 6-12 months to finalize its review and make a decision on whether to grant or deny the SBIC license. However, the duration of this review often depends on the rate at which the SBIC fund is able to raise private capital during this period in sufficient quantity to execute its investment strategy.
What are the benefits for fund sponsors who form an SBIC fund?
One of the most compelling benefits of the SBIC program is that licensed SBIC funds have access to long-term funding through securities sold in the public market and guaranteed by the US government. The SBIC Act permits SBIC funds to obtain long-term leveraged funds at favorable interest rates to finance loans and investments in qualifying small businesses.
Leveraged funds obtained through the SBIC program typically come with lower rates than would otherwise be available from traditional lending sources.
A second advantage is that SBIC funds are an attractive investment for banks and bank holding companies. Bank investments in SBIC funds are exempt from the Volcker Rule, are exempt from parts of the Gramm-Leach-Bliley Act, may generate Community Reinvestment Act credit for investing banks and have traditionally generated strong returns and increased deal flow for the bank. . As a result, many banks are active investors in SBIC funds.
What are the differences between the SBIC program and the RBIC program?
The RBIC program is run by the United States Department of Agriculture and is, in many ways, very similar to the SBIC program. The objective of the RBIC program is to facilitate the availability of investment capital for small businesses and small businesses located in rural communities. The RBIC program uses the same definition for small business and small business as the SBIC program.
What are the operating requirements for an RBCIC fund?
Like SBIC funds, the USDA will focus on whether potential management teams have a proven track record of superior returns for their investors and experience in managing private equity funds. The licensing process for RBIC funds is again very similar to that for SBIC funds. Once authorized, at least 75% of RBIC fund investments (measured by both dollars invested and number of investments) must be in rural areas, which are generally defined as areas outside of a standard metropolitan statistical area or within a community with a population of less than 50,000.
Are RBCIC funds eligible for leverage?
Currently, RBIC funds are not eligible for leverage. However, like SBIC funds, RBIC funds are often an attractive investment option for agricultural credit institutions (as well as commercial and community banks). The investment strategies of RBIC funds often align well with the target markets of agricultural credit institutions. Consequently, the Farm Credit System has played an active and integral role in the revival of the RBIC program over the past few years.