On Jan. 3, 2011, the U.S. Small Business Administration (SBA) revised its
policy regarding buyouts of Small Business Investment Companies (SBIC Funds)
with outstanding participating securities (PS) leverage to now consider requests
for SBA approval for buyouts of the portfolio of active SBIC Funds with
outstanding PS leverage with a purchase price at or above an amount sufficient
to repay SBA leverage and any other obligations due SBA. Previously, SBA only
considered requests that would fully repay SBA’s leverage, earned and unearned
accrued prioritized payments, and any SBA profit participation calculated on the
basis of a current valuation of the portfolio.
A buyout is characterized as a transaction in which the SBIC Fund sells all
or substantially all of its assets to another entity and uses the proceeds to
repay SBA leverage, earned prioritized payments, charges, adjustments, and any
allocable SBA profit participation.
SBIC Funds seeking SBA approval of a buyout must submit a written request to
SBA that includes all of the following:
- Copy of the buyer’s offer, including all terms and conditions.
- Purchase price offered and associated distribution of proceeds to SBA,
limited partners and any other parties.
- Name and ownership of buyer and evidence of buyer’s ability to close the
transaction satisfactory to the SBIC Fund and SBA.
- Discussion of the general partner’s authority to sell the SBIC Fund’s
assets, including provisions of the SBIC Fund’s limited partnership
agreement requiring approval of the limited partners.
- Updated Form 468.
- SBIC Fund’s wind-up plan, and any forecasts and other materials provided
to the offeror regarding the valuation, timing and expected cash flows with
respect to the SBIC Fund’s portfolio.
- Any other offers received by the SBIC Fund for the sale of its portfolio
assets and/or SBA’s positions.
- Discussion and evidence of any marketing efforts undertaken for the sale
of the SBIC Fund’s portfolio assets.
- Statement either identifying any unresolved issues or violations, or
certifying that no such issues or violations exist.
The proposed offer must clearly indicate the purchase price and all terms and
conditions and be for all or substantially all of the SBIC Fund’s portfolio
assets. The offer cannot provide a better general compensation package to the
general partner or any fund managers than is currently in place; cannot require
any representations, warranties, covenants, acknowledgements or other agreements
of SBA, nor will SBA be party to the transaction; must include a provision that
no further leverage will be drawn to support any additional follow-on financings
or expenses prior to closing; must allow at least 21 days for SBA review; and
must provide for closing and payment in cash within 45 days of SBA approval.
The SBIC Fund must also retain and pay for an independent valuation to value
all portfolio companies identified by SBA at a portfolio meeting between the
SBIC Fund’s management team and the SBA that is held within two weeks of the
SBIC Fund’s submission.
SBA will examine the buyout offer and whether it would be in SBA’s best
interest to hold its position in the SBIC Fund based on valuations, expected
wind-down time, anticipated future cash flows, and impact on the small
businesses comprising the SBIC Fund’s portfolio. SBA will not provide a
counteroffer and will not negotiate the terms of the offer. It will only accept
or reject the proposal. Any request for approval granted by SBA is conditioned
upon SBA’s receipt of an acceptable opinion of counsel. SBA may also require the
SBIC Fund to resolve regulatory issues prior to the buyout. Upon SBA’s receipt
of all proceeds due SBA, the SBIC Fund will tender surrender of its license for
For a complete copy of SBA’s policy memorandum, click here.
Equity Practice Group is dedicated to keeping clients advised of new
legislative and business developments as they occur. If you have any questions
regarding these issues, please feel free to contact Mark A. Kromkowski
(312.849.8170), Bryan P. Bylica (312.750.3617), your primary attorney at
McGuireWoods LLP, or any of the authors.