SBA Memo regarding management team recommendations:

We thought it might prove helpful to you if we provided a discussion of the nature of the private investment experience a management team should possess in order to qualify for an SBIC license. You may wish to share this guidance with your clients.

SBA requires that the management team of any prospective licensee have relevant private investment experience. Specifically, the team should possess at least two full-time managers with at least five years each of senior-level (decision-maker) investment experience analogous to that contemplated by the applicant (e.g., early stage equity, later stage mezzanine, etc.). This investment experience should have been obtained as a principal rather than as an agent (such as an investment banker, consultant or broker) and should be accompanied by a track record that has a significant number of realized (exited) investments. The overall investment performance should preferably be in the upper 50th percentile relative to similar types of funds. It is also preferable that such experience be financial (as with a formal investment fund) rather than strategic (corporate M&A or similar) in nature. In evaluating the track record we will consider the time frame over which the performance was achieved, the number of investments the track record is based upon, the economic conditions existing at the time, the value added by the management team and ultimate stability of the portfolio concern assisted.

The principals should be able to demonstrate active involvement in past investments, in the form of board directorships or other strategic assistance. If the proposed fund is specialized in certain industries, the management should have expertise in those industries. Such expertise can be demonstrated through successful related investment experience, relevant entrepreneurial experience, operations management experience or technical expertise in the targeted industries.

The above are the investment experience qualifications that SBA seeks in management teams and we recognize that a large number of management teams may not fully meet these criteria. Deficiencies in one area, however, may sometimes be overcome by significant compensating skills in another area so long as the management team collectively can demonstrate the range of capabilities to successfully manage a venture firm. SBA is evaluating the management team as a whole and will look for a cohesive unit of two or more experienced principals with complementary backgrounds and a demonstration of the ability to work well together in a fund environment. However, in all instances it will be very difficult to compensate for the lack of a realized track record.

The licensing process is not a checklist type of evaluation. As with a jigsaw puzzle, merely possessing the pieces is not a demonstration that the picture is complete. How it all fits together is critical.

Finally, this memo should not be viewed as specifying the exclusive criteria evaluated during the licensing process, but as informal guidance on the subject of private investment experience.

I hope this proves useful. Please feel free to contact me if you have additional questions.