Leverage may be what got the country into its latest financial crisis, but in the area of small business investment, it may also help on the road to recovery.
That seems to be the thinking behind the federal government’s move earlier this year to increase leverage limits for funds that participate in its Small Business Investment Company (SBIC) program. SBIC funds can now receive matching leverage from the government of up to 3x the amount of private capital raised, with a limit of $150 million. Previously, the maximum cap for matching funds was $137 million.
And they can also get their matching money faster, too. In October, the Small Business Administration (SBA) implemented a “fast-track” process for successful repeat applicants, which enables them to secure funding in about four months (several months faster than the historic timeframe), and also frees up resources for first-time applicants.
The move to add funding and speed up approvals comes as the financing programs are seeing a marked uptick in application activity, according to panelists participating in a Thomson Reuters (publisher of Buyouts) discussion on SBIC fund-raising last month.
“In today’s economy, what we are seeing is that fundraising is very difficult,” says Alan Roth, a partner at Wildman, Harrold, Allen & Dixon LLP who specializes in SBIC licensing. “It’s a good way to supplement private capital raised with capital from the government.”
But although the maximum leverage has been increased, not everyone will qualify for maximum leverage. Only funds with experience and a track record of successful investments will be able to qualify for 300 percent leverage, Roth said, adding that he advises first-time applicants to request no more than twice their committed private capital.
As of November, Roth estimates, the SBA had more than $6.8 billion invested in 315 funds nationwide, plus another $1.4 billion in outstanding commitments. Applicants use the money for debt and equity investments in businesses with a net worth of less than $18 million. Funds that participate in the SBIC program first raise private financing, then apply for the low-interest government loans.
In addition to raising leverage and reducing applications times, SBICs may also see themselves exempt from some regulatory burdens that apply to other private equity funds, said Brett Palmer, president of the National Association of Small Business Investment Companies. The U.S. House of Representatives recently approved legislation that would exempt SBICs from having to comply with new private equity fund registration requirements enacted by the U.S. Securities and Exchange Commission, Palmer said.
Palmer added that SBIC members could also benefit from President Obama’s jobs stimulus plan, which includes a proposal to reduce the capital gains tax to zero for qualified investments in small businesses made in 2010.