The Investment Division of the United States Small Business Administration
(SBA) issued yesterday new SBIC Licensing Guidelines for investment companies
that are regulated as a business development company (BDC) under the Investment
Company Act of 1940.
In addition to the minimum requirements required of all investment fund
managers seeking an SBIC License, the SBA will consider the following five
special factors for BDC applicants:
- SBA will generally count a Parent BDC’s unfunded
capital commitment as Regulatory Capital if (1) the Parent BDC’s funded net
worth is at least ten times its total capital commitment to the SBIC Fund,
and (2) SBA is comfortable that sufficient liquidity exists to fund
the commitment, taking into account such factors as cash on hand, access to
additional equity capital and non-SBA credit facilities, operating income
and expenses, historical and expected portfolio cash projections, and
current and long term liabilities.
- If a Parent BDC has (1) funded net worth of at least six times its total
capital commitment to the SBIC Fund, and (2) SBA is comfortable that
sufficient liquidity exists to fund the commitment, SBA will consider the
SBIC Fund eligible to obtain a leverage commitment of up to two times its
Regulatory Capital, but the SBIC Fund’s leverage draw downs will initially
be limited to a single tier and a 1:1 leverage ratio until Regulatory
Capital is fully paid-in.
- If a Parent BDC has funded net worth of less than six times its total
capital commitment to the SBIC Fund and/or if the Investment Division
determines that liquidity is insufficient, its commitment will only be
counted as Regulatory Capital to the extent that it is paid-in.
- Although the term funded net worth is not defined in the SBA Tech
Note, the SBA has communicated that funded net worth will equal total
assets less total liabilities of the Parent BDC. This is also referred to as
“Total Stockholder Equity” on certain balance sheets.
- SBA generally prefers SBIC Funds that have a planned 10-15 year
lifespan, rather than an evergreen or indefinite life structure.
- As a general rule, SBA will only license funds that satisfactorily link,
either directly or indirectly, incentive compensation of the fund managers
responsible for the SBIC portfolio to the performance of the SBIC Fund.
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advised of new legislative and business developments as they occur. If you have
any questions regarding these issues, please feel free to contact your primary
attorney at McGuireWoods LLP or the authors.