SBIC is the Small Business Investment Company, created by congress to promote small businesses through loans. SBIC Funds are privately run funds that have obtained a license from the SIBC to invest in SIBC-approved companies using a combination of its own capital and SBIC funds.
Q. So, we know SBIC is the Small Business Investment Company, set up by the US to make loans to small companies. But what’s a SIBC fund?
A. It’s a pretty nifty thing for investors to know about. A SIBC fund is a private equity fund that has actually obtained a license from the SIBC to make investments with SIBC-provided leverage. Because of the amount of leverage available, and the low cost of it, that can really produce some nice returns.
Q. So presumably the fund can only invest in companies that would themselves qualify for SIBC loans?
A. Yes, right. In a way, you could say the SIBC is essentially deputizing these funds to project the available SIBC leverage into the real economy. So in general, the fund can only invest in companies with less than $50mm of revenue, for example, and has to be investing in active US business (and not banks, real estate, or certain other fields).
Q. And how does it work, exactly? The fund is investing its own capital alongside the SIBC money?
A. Right. Say a fund has raised $50mm of its own capital. It can get two or even three times that from the SIBC, so now its a $150 or $200mm fund. In each deal, it invests its own capital along with the SIBC leverage.
Q. And does the fund make debt or equity investments?
A. Either or both. One thing we’ve seen lately is funds that just make debt investments, and, instead of retaining the interest as its paid, actually pays that out to investors like a coupon. Because of the leverage, placement fees the fund can charge, and other features, some of these are paying out double digit returns to investors on an ongoing basis… not bad in a zero interest rate environment!
Q. So… can any PE firm get in this game?
A. No… the fund has to apply to the SIBC to qualify, and the process takes 12-18 months. But for funds that want to specialize in small and midcap deals, its worth taking a look at.