(Corrects wording in first sentence of paragraph 6 to say
"debenture SBIC funds provided $2.59 billion in financing" and
removes word "loan" in second sentence to say "average volume")
* SBIC funds provided $2.6 bln in financing
* Program aimed at small businesses
* License processing time way down
By David M. Toll
NEW YORK, Dec 7 (Reuters-BUYOUTS) - The Obama administration
has been ratcheting up its participation in the private equity
market - even as Republican presidential candidate Mitt Romney
comes under criticism for his private equity record at Bain
It's doing so as part of the more than 50-year-old Small
Business Investment Company program, administered by the Small
Business Administration. In increasing numbers, firms have been
taking advantage of low-interest leverage provided by the
debenture SBIC program to raise senior loan funds, mezzanine
funds and even buyout funds.
In an interview late last month, Sean Greene, a former
entrepreneur and venture capitalist who supervises the SBIC
program, said that one of the hallmarks of the
post-financial-crisis economy has been the struggle that small
businesses, often seen as the key to job creation in the United
States, have had securing debt financing.
The SBIC's debenture program is designed to get small
businesses the capital they need, be it senior debt, mezzanine
debt or equity, as part of growth financings and buyouts, often
with a sponsor at the helm. Greene is particularly interested in
helping what he calls "gazelles" - fast-growing companies that
account for a disproportionate amount of job growth.
"Long-term, more patient capital is critically important to
those kinds of companies," Greene said.
In the fiscal year ended September 30, debenture SBIC funds
provided $2.59 billion in financing to small businesses,
according to the SBA. That was up 63 percent from the prior
fiscal year and nearly double the average volume for the
previous five years. All told, the SBA committed a record $1.8
billion to 22 debenture SBIC and unleveraged licenses in fiscal
2011, and Greene said more than 50 applications are in the
pipeline. (The legislative cap is $3 billion in any one year.)
The number of SBIC funds stands at nearly 300, with more than
$17 billion under management.
Greene and his team at the SBA get credit for a good part of
this expansion. One of their biggest achievements has been to
reduce license processing time from more than 14 months in
fiscal year 2009 to five and a half months in fiscal year 2011.
Zia Uddin, managing director at Chicago-based Monroe Capital
LLC, said it took two years from beginning the application
process in early 2009 to reach a first close of about $200
million on its first SBIC fund early this year.
Under Greene's leadership, the SBIC licensing committee also
appears to be approving a wider variety of investment strategies
than in the past. That's proving tempting to buyout firms that
might previously have seen debenture SBICs as mainly suitable
for subordinated debt investments.
The Riverside Company, a lower-mid-market shop with offices
in New York, Cleveland and elsewhere, structured its latest
micro-cap buyout fund as an SBIC - its first time participating
in the program. It raised $137 million this year in private
capital, and secured access to $150 million through the
debenture program, for a total fund of $287 million.
The debenture SBIC program has also benefited from some
significant tailwinds. A tight fund-raising market, for example,
has more sponsors thinking creatively about ways to raise money.
The SBIC program not only lets them leverage the amount of
money they can raise from private investors, it also makes them
more attractive to banks, which can use their commitments to
meet requirements of the Community Reinvestment Act of 1977.
Among the Riverside SBIC fund backers are BMO Harris Bank N.A.
and Key Community Development Corp.
The economics for both sponsors and private investors in SBIC
funds are compelling. For single SBICs, the amount of leverage
available from the debenture SBIC program is the lesser of $150
million per fund or three times private capital, although two
times is the normal cap, according to the Small Business
Investor Alliance, formerly known as the National Association of
Small Business Investment Companies.
Consider Monroe Capital, which through the last pooling of
debentures is paying the holders of the 10-year bonds about a
2.9 percent coupon and (counting fees) an effective rate in the
4 percent to 6 percent range. The firm has then gone out with a
uni-tranche product and made loans with rates somewhere between
the Libor plus 350-550bps offered by asset-based lenders and the
14 percent to 15 percent rates offered by mezzanine firms, in
some cases also taking warrants, according to Uddin. Greene
estimates that SBIC funds get a 300-600bps pop in returns,
compared with unleveraged funds.
In recent weeks, both The New York Times and The Los Angeles
Times have run articles pointing out instances where employees
lost their jobs while working for companies owned by private
equity firm Bain Capital, which Romney founded in 1984.
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