November 26, 2010 / 6:38 PM / 8 years ago

BUYOUTS-Buyout firms plan SBIC vehicles

Nov. 26 - With government-guaranteed debt available at low rates, buyout shops are looking at the prospect of raising investment funds organized as small business investment companies, or SBICs.

Steve Bills of Buyouts magazine reports:

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* Perseus LLC, others, seek SBIC licenses

* Financing alternatives remain scarce

* SBA debenture rate hits historic low

NEW YORK - More buyout firms, large and small, are showing interest in small business investment companies, or SBICs, a flexible source of financing that can provide equity or debt to companies that meet federal small business guidelines.

Perseus LLC, the New York growth equity fund manager, is seeking an SBIC license for its first such fund, as are The Riverside Company of Cleveland, which specializes in small-cap investments around the world, and LongueVue Capital, a New Orleans-area buyout boutique.

The U.S. Small Business Administration reported in October that it had issued 21 SBIC licenses in fiscal 2010, ended Sept. 30, more than double the 10 licenses a year that the agency had averaged over the preceding four years. Total SBA financings through the SBIC debenture program grew to $1.59 billion, a record, up 23 percent from the average of the prior four years.

Perseus is in the process of seeking a license from the SBA to launch an SBIC fund, Sheryl Schwartz, a senior managing director at the firm, said this month at the Buyouts Texas conference held in Dallas and sponsored by Thomson Reuters.

Perseus, which has raised more than $2 billion across eight funds since 1996, plans to use its SBIC fund to provide mezzanine financing for its deals, Schwartz said. This would be Perseus’s first SBIC fund.

“In the small end of the market, which is where SBICs operate, there’s a real shortage of capital,” Schwartz said in a keynote interview at the conference. “The banks aren’t coming back anytime soon, and the economy needs the capital to create jobs.”

The Riverside Company, meantime, is raising a fund for which it is seeking an SBIC license, sources told Buyouts magazine, published by Thomson Reuters. For the Cleveland firm, which has more than $3 billion in capital under management in North America, Europe and Asia, this “microcap” fund would be its first SBIC since its founding in 1988. The fund would be earmarked for equity investments in small buyouts.

OTHERS IN SBIC HUNT

Also in the SBIC hunt is LongueVue Capital of Metairie, La., a buyout shop that targets small-cap companies. LongueVue is completing paperwork now that could enable the firm to license its current fund-raising effort as an SBIC, said a person with direct knowledge of its plans. LongueVue, which according to its Website raised an $82 million equity fund in 2001 from a group of wealthy investors, is targeting at least $50 million for its planned SBIC fund, but could raise as much as $75 million.

While LongueVue plans to use the SBIC fund primarily to provide debt financing for its equity deals, it also could use it for direct equity investments in target companies, the source said.

Nicholas Marshi, the chief investment officer of Southland Capital Management, a hedge fund in Santa Monica, Calif., said interest in SBICs is also strong among business development companies, a category of publicly traded closed-end funds that provide debt or equity to small businesses.

“At least half the 24 companies we track have arranged or applied or are considering applying for an SBIC license,” Marshi wrote in October on his blog, BDC Reporter.

Why the sudden interest? In a market where leverage can be hard to find, especially for smaller deals, SBICs represent a versatile, inexpensive funding mechanism. A sponsor raises funds for an SBIC like any other fund, but the government does impose limitations. The initial fund can be no larger than $75 million, and no single limited partner can provide more than 70 percent of the commitments.

As the fund makes its investments, it can borrow up to $150 million from the SBIC Funding Corp, an arm of the U.S. Small Business Administration, at a rate tied to 10-year Treasury bonds. The agency also limits its lenders to “two tiers” of leverage, so an SBIC fund tops out at $225 million, with some exceptions. The SBIC Funding Corp priced nearly $563 million of 10-year debentures in September at 3.215 percent, the lowest rate at the semi-annual pricing since the SBA established its debenture program in 1958.

For all their growing appeal, SBICs are no panacea. Sponsors must comply with federal regulations and face audits by the SBA. The money must be invested domestically, and it must go to small businesses. By the employee head-count standard used by most SBICs, target investments may have as many as 500 to 1,000 workers, depending on the industry.

Mid-market sponsors have often shied away from raising SBIC funds because of the perceived complexity. But, said Mark A. Kromkowski, a partner in the Chicago office of the law firm McGuireWoods LLP: “When they look at deals they could have done, 85 to 90 percent fit.”

Buyouts magazine is a Thomson Reuters publication. Editor: david.toll@thomsonreuters.com. wwwbuyoutsnews.com

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