Small Business Administration Office of Investment and Innovation
Investing with the SBA The Small Business Investment Company Program
October 2011
Small Business Administration 2
140
107
60
Number of Licensees at FYE 2010
Debenture
Participating Security
Other - SSBIC & Bank-Owned
Total Program Data
Small Business Administration 3
Total Program Data
Small Business Administration
SBIC Program Debenture Portfolio: FY ‘06-’10
4
Overview
13%
44%
43% Equity
Debt with Equity
Debt
Small Business Administration
SBIC Program Debenture Portfolio: FY ‘06-’10
5
Overview
$-
$250
$500
$750
$1,000
$1,250
$1,500
Mil
lio
ns
Small Business Administration
SBIC Program Debenture Portfolio: FY ‘06-’10
6
Overview
Mountain
7%
26%
8% Pacific
13% W. North Central
6%
W. South Central
9%
E. North Central
11%
E. South Central
3%
South Atlantic
17%
Middle Atlantic
New England
Small Business Administration
The closing phase of the process requires SBIC applicants to raise private capital before filing a final licensing application. Fundraising remains the greatest impediment to success in this phase as most funds that file receive a license. From FY 2005 through FY 2009, the average percentage of initial applicants ultimately awarded an SBIC license was 23%.
Following a rigorous evaluation, the SBIC program’s investment committee will award a “green light” letter to those funds it believes meet SBA’s minimum criteria for the program. From FY 2005 through FY 2009, the award rate has deviated little from an average of 57%, despite growth in the program.
To begin the formal application process, each fund must submit a Management Assessment Questionnaire (MAQ) with information on the fund strategy, team history and a detailed investment track record. The number of MAQs submitted has grown steadily from 19 in 2008 to 29 in 2009 and 51 in 2010.
The Office of Program Development offers informal feedback to prospective SBIC licensees before they begin the application process. For each fund that ultimately submits their application, as many as two have been screened.
7
Licensing
Screening
Application (MAQ)
100%
Green Light
57%
License
23%
Application Process for 1st Time Applicants
Small Business Administration
Strong Historical Returns
8
Program Performance
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35% Returns by Vintage Year 1997 – 2008
SBIC Debenture Funds Pooled IRR (1)
Thomson Buyout, Mezz & Later Stage Pooled IRR (3)
Preqin US Small Buyout Pooled IRR (2)
Preqin US Mezzanine Pooled IRR (2)
* 2006 – 2008 data is presented as an arithmetic mean of IRRs for those years
(1) SBIC Vintage Year determined by date of license. Data as of 8/10
(2) Source: Preqin Ltd. www.preqin.com. Data as of 9/13/11; Data may include some funds licensed as SBICs
(3) Source: Thomson Reuters. www.thomsonone.com. Data as of 9/13/11. Data includes US funds from $5M to $500M categorized as
Small Buyout, Medium Buyout, Later Stage, Turnaround and Mezzanine.
Small Business Administration
Historical Impact of SBA Leverage
9
Program Performance
Small Business Administration
0%
1%
2%
3%
4%
5%
6%
7%
8%
10
Program Performance
SBIC Regular Debenture Coupon Rates: 3/00 – 9/11
Yield on 10-Year Treasury
SBA Trust Certificate Rate
Sept. ‘11 2.9%
Treasury Rates Data Source: http://www.ustreas.gov/offices/domest-finance/debt-management/interest-rate/yield_historical_main.stml
SBA Leverage Rates Source: http://www.sba.gov/idc/groups/public/documents/sba_program_office/inv_pooled.pdf
Financial Data
Small Business Administration 11
0.88% 0.87% 0.89% 0.86% 0.87% 0.94% 0.91% 0.72%
0.41% 0.29% 0.52%
8.332%
7.209%
5.730% 5.909%
6.465% 6.131%
4.393%
4.599%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Inte
re
st
Ra
te
Debenture Program Cost of Leverage (Trust Certificate Rate + Annual Charge)
Trust Certificate Coupon Rate
Yield on 10-Year Treasury Notes
Annual Charge
All-in Cost of Leverage
Financial Data
Small Business Administration
2010 SBIC Debenture Program Results
12
Program Performance
$0.75
$1.20
$0.00
$0.50
$1.00
$1.50
Avg. FY06 - FY09 FY 2010
Bil
lio
ns
SBA Commitments to Funds
+50% +23%
Small Business Administration
2011 SBIC Debenture Program Results
13
Program Performance
$1.3$1.6
$2.6
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Avg. FY06 -FY09
FY 2010 FY 2011B
illi
on
s
Financings to Small Businesses
$.75
$1.2
$1.8
$0.00
$0.50
$1.00
$1.50
$2.00
Avg. FY06 -FY09
FY 2010 FY 2011
Bil
lio
ns
SBA Commitments to Funds
2.4X 2X
Small Business Administration
2011 Initial Capital to Licensees
14
Program Performance
$0.3B$0.6B
$0.8B$0.5B
$1.2B
$1.4B
FY 2009 FY 2010 FY 2011
Initial Capital to Licensees
Private SBA
Small Business Administration 15
MAQ Processing
29
44
58
0
10
20
30
40
50
60
70
MAQs Processed
2.7
3.5 3.5
0
0.5
1
1.5
2
2.5
3
3.5
4
Average Processing Times (months)
2009 2010 2011 2009 2010 2011
Program Performance
Small Business Administration 16
65%
35%
Licensing Processing Time – FY 2010
< 6 months
> 6 months
Breakdown of Licensing Times
Program Performance
Small Business Administration
% Beat Target
40%
100%
% Beat Target
87%
77% 65
55
2011
2010
Commitments % Beat Target
55%
60% 54
35
2011
2010
Conflicts
Operations Turnaround Times
65
55
2011
2010
Subsequent Funds
Program Performance
Small Business Administration 18
Traction, Trajectory and the Future
Where We are Going
Small Business Administration
Changes to model LPA
Single Point of Contact for LPs
More data
More proactive outreach
19
LP Focus
Small Business Administration
Impact Investment Fund
Early Stage Innovation Fund
$200 million commitment per year
Focus on financial return + “social return”
Place-based focus (LMI, Economically Distressed areas)
Emerging sectors (Clean Energy, Education)
Growth capital – operates fundamentally like debenture program
$200 million per year
Permit early stage equity investing
Simple changes from debenture platform to mitigate risk of leveraged instrument
20
New Initiatives
Small Business Administration 21
11%
26%
0%
5%
10%
15%
20%
25%
30%
2007 2011
% of applicants that are women and minority run funds
Increase in Minority- & Women-run funds
Small Business Administration
Impact Fund
Debenture Performance and LMI Investing – As of FY 2011
Percentage of Leverage Lost % of Capital Deployed in LMI 0.0053
R² from Regression of Leverage Lost on LMI Capital Deployed
R² = 0.0053
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%
Per
cen
tage
Lo
ss
Percentage of Financings Dollars in LMI
Relationship Between Percentage of LMI and Leverage Losses*
* Note this data is based on 113 SBIC s issuing Debentures only and performing at least $1 million in multiple financings between 1998 and 2010 and have no outstanding leverage in Operations.
Small Business Administration
Leverage Statistics in Millions – SBICs 1998 - 2010
% of Capital Invested in
LMI
Leverage Drawn ($MM)
Leverage Lost ($MM)
Leverage Lost/Drawn
Number of SBICs
Over 40% 345 1 0.3% 14
20% - 40% 2,637 60 2.3% 91
Under 20% 3,061 63 2.1% 99
Total 6,043 124 2.1% 204
SBICs that placed 40% of investment dollars in LMI did no worse than SBICs with less LMI investing.
23
Impact Fund
Debenture Performance and LMI Investing – As of FY 2011
Small Business Administration 24
New Initiatives
Source: Kauffman Foundation
5 Year (2006-2010)
Average Statistics
Angels
Seed
Venture Seed
(Funding Gap)
Venture
Early Stage
Venture
Later Stages
Annual Financings
($ billions)
$ 20-25 $1.6
6% of Venture
$5.1 $18
Number of Businesses
Invested Each Year
54,245 377
Less than 1% of Angels
904 1,700
Annual Financings Not
in CA, MA, NY
Unknown $0.5
Less than 1/3 of All Seed
$1.7 $6.2
Number of Businesses
Not in CA, MA, NY
Unknown 171
Less than half of all Seed
369 723
Problem: Equity Gaps
Small Business Administration
Objective –
Facilitate market-driven process for wind down of PS program
Change:
Old: Floor = Leverage + Prioritized + SBA profit participation
New: Floor = Leverage repayment; Make us best offer
Structure: sale of entire assets of fund to a third party
Process
Valuations required
“Single Shot” offer
Evaluate in 9 months and refine
25
PS Buyout Policy
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