SBIC Venture Program Proposed

A congressman proposed legislation last week that would revive the Small Business Administration’s Small Business Investment Corporation (SBIC) venture capital program.

The proposed act – proposed by Rep. Don Manzullo, an Illinois Republican – would create a new program to replace the SBIC Participating Securities program. Under the old program’s structure, the SBA invested double what a venture fund raised from private LPs. In exchange, the SBA received its money back with a small amount of interest and 10% of the fund’s returns. The SBA would begin collecting those returns after the private LPs received their distributions.

Under the proposed participating debenture program, the SBA would collect interest regardless of an SBIC’s profitability. Qualified firms would make additional distributions to the SBA and other private investors after the SBA-guaranteed interest is current with SBIC distribution. The SBA’s share of profits would reach a base share up to 27% in a fund with a gross IRR greater than 17 percent.

The legislation will be taken up again in the fall by the committee and faces several hurdles. It must pass muster with the SBA, which will have to rule that it is in compliance with the Credit Reform Act.

“It is still a long shot for passage this year, but we are hopeful,” says Lee Mercer, president of the National Association of Small Business Investment Companies (NASBIC), and a long-time champion of SBA support of venture capital. “Anyone who works in government must, by definition, be persistent and an optimist – and I put myself in that category.” Mercer testified at last week’s House Small Business Committee hearing.

Faced with heavy losses to the tune of almost $2 billion, the participating securities program needed restructuring to survive. Lack of an agreement between competing sides, coupled with a legislative agenda that was subject to the strains of an election year, produced no action last year. As a result, the SBA stopped licensing new SBICs last year.

The suspension of the program left a key source of funding out of the reach of many venture firms that rely on the government funding to supplement their funds. Typically, they are firms with relatively small funds and they serve geographic regions that are not traditionally served by venture capital.

About one-fifth of the venture firms in the United States are backed by the SBIC, based on data gathered by Thomson Venture Economics (publisher of PE Week), the National Venture Capital Association and the NASBIC.

NASBIC reports that there are about 206 SBICs nationwide with about $15.4 billion under management.