Debenture SBICs, because their interest payment obligations start immediately, generally make loans to companies with reliable and predictable cash flow. SBICs can obtain SBA leverage of up to the lesser of $150 million or 3X the SBIC’s private capital raised. The maximum SBA leverage for a family of affiliated SBICs is $350 million. The SBA debentures are unsecured notes issued by the SBA that have ten-year maturities and bear interest payable twice a year. The general partner of the SBIC is not personally liable for their repayment.
Unleveraged SBICs do not borrow money from the SBA. A primary benefit which motivates private equity funds to obtain an unleveraged SBIC license is the ability for the fund to raise LP capital from banks, which is generally prohibited for non-SBICs.
BDC Subsidiary SBICs
A number of publicly traded Business Development Companies (BDCs) have formed subsidiary funds which are licensed as SBICs. A BDC-owned SBIC is similar to a typical debenture SBIC, with some differences stemming from the publicly traded nature of the parent entity. Depending on the funded net worth of the BDC, the subsidiary SBIC is generally able to utilize up to $150 million of SBA debentures on a 2:1 basis to the amount of capital funded by the BDC to its subsidiary SBIC.
Participating Securities SBICs
Unlike debenture SBICs which require repayment of principal and interest, in a participating securities fund, the SBA is entitled to a preferred return for the participating securities, plus a profit participation. Participating Securities SBICs are most suited for venture capital equity investments and acquisitions. The SBA no longer issues new licenses for SBICs using participating securities leverage nor any additional participating securities leverage to existing SBICs.
Early Stage SBICs
The SBA has authorized a type of SBIC known as an Early Stage SBIC to promote entrepreneurship and support high growth companies. An Early Stage SBIC must invest at least 50% of its capital in companies that have never been cash flow positive. Early Stage SBICs are eligible to apply for leverage from the SBA for up to $50 million and not to exceed 1X the SBIC’s private capital.
Under the Impact Investment Fund Program, the SBA created Impact SBICs. Impact SBICs must invest 50% of their capital in companies located in underserved communities (including economically distressed areas) and rural communities, companies in designated sectors, such as clean energy, education and certain advanced manufacturing, and BIR/STTR grant recipients or in certain fund-identified impact investing strategies. Applicants for an Impact SBIC license are eligible for an expedited licensing process.