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Editor’s Letter: U.S. government should keep SBIC program fresh and healthy

SBIC is one of those programs that it’s hard not to like.

The program, run by the Small Business Administration, matches a manager’s private capital with government debt $2 for every $1 of private investor capital.

So if a manager raised $87.5 million from limited partners, the program kicks in $175 million. That’s a powerful tool, especially for a new manager trying to break into the game.

Numerous managers have raised SBIC funds over the years, including those who have grown into major industry players like Riverside Co, Avante Mezzanine Partners, Deerpath Capital and Levine Leichtman Capital Partners.

The issue now is that some GPs and LPs are concerned about long delays in the licensing process to register an SBIC fund. This is a slowdown that has been happening since Donald Trump was elected and was made worse by the government shutdown.

Our cover story in this issue of Buyouts touches on the challenges some managers see with raising SBICs. Mark Kromkowski, head of McGuire Woods’s SBIC fund formation and transactional group, told reporter Dietrich Knauth that approvals that used to take six months now take a year or more.

One GP said it had decided to pursue alternatives to a planned SBIC fund after its license sat for two years. And an insurance company LP said his institution has had to look outside the SBIC universe to deploy capital to small private equity funds. (See the article on page 30.)

I understand the complaints about the government subsidizing private business. I’ve gotten into this sort of debate over a government program called Overseas Private Investment Corp.

In that case, the government backs emerging-markets managers that are investing in some of the riskiest frontiers in the world.

SBIC is a lot more quotidian, which makes it potentially even more impactful. SBIC managers invest directly into U.S. small companies in a side of the market that is not a target of big banks or even the wider direct lending community. Financing is not readily available to the types of small businesses that get the attention of SBIC funds.

SBIC managers have the advantage (or they should) of having a line in to local small business communities and are therefore an important part of the private market ecosystem.

One hopes the slowdown is just a kink in the system, the natural result of the leadership transition, and will get back on track. It’s a system the government should support, especially with an administration ostensibly so business-friendly. That amiability should filter down to the smallest levels of the market, to the small-business person who historically has been the cornerstone of the American economy.