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 SBA approval.
For a complete copy of SBA’s policy memorandum, click here.
McGuireWoods’ Private 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.