In this challenging fundraising environment, private equity ("PE") managers have shown increased interest in obtaining capital through the Small Business Investment Company ("SBIC") program, which provides attractive loans to PE firms licensed by the Small Business Administration (the "SBA") for the purpose of financing small businesses.
The SBIC program offers a PE fund access to SBA
leverage, enabling the PE fund to:
- Borrow at rates generally lower than traditional lending sources (September 2009 SBA leverage was priced at just over 4%);[1]
- Increase the size of its fund (to the sum of limited partner ("LP") capital plus SBA leverage);
- Reduce the number of capital calls from LPs (by drawing SBA leverage for interim capital needs); and
- Thereby enhance LP returns.
The February 2009 American Recovery and Investment Act, commonly referred to as the Stimulus Bill, increased the maximum amount of SBA leverage available to an SBIC from approximately $137 million to $150 million (or $225 million for a group of affiliated SBICs). Because an SBIC may generally borrow two (and possibly three) times its committed capital, a $50 million fund may become a $150 million (and possibly $200 million) fund through SBA leverage.
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Author: Margaret A. Gibson and Waldemar Colón of Kirkland & Ellis LLP
