SBIC Program Annual Report 2012

The Investment Division of the U.S. Small Business Administration is pleased to present the SBIC Program Annual Report for Fiscal Year 2012.  Working in partnership with top-tier investment fund managers and their private investors, the SBIC Program helps channel much-needed, long-term capital to small businesses located across the United States.  The FY 2012 Annual Report report offers SBIC Program stakeholders, members of Congress and the general public important information about the performance, economic impact and future direction of this 54-year old public-private partnership.


Select the link below to download the SBIC Program FY 2012 Annual Report:

The SBIC Program FY 2012 Annual Report (PDF Version)


The Small Business Investment Company (SBIC) Program Annual Report FY 2012

Table of Contents

  1. Message from the Administrator
  2. Message from the Associate Administrator
  3. Executive Summary
  4. Debenture and Other SBICs
    1. Program Review
    2. Economic Impact
    3. New Initiatives
    4. Financial Risk and Performance
      1. SBA Financial Performance and Risk Management
      2. Returns to Private Investors
  5. Participating Securities SBICs

Message from the Administrator

The following report provides the most comprehensive analysis in the history of the Small Business Administration’s (SBA) Small Business Investment Company (SBIC) Program and is part of ongoing efforts to deliver transparency, accountability and robust data collection in all of SBA’s programs.

The report also highlights the success and progress the SBA has made over the last four years to streamline, simplify and strengthen its core programs. Today, the SBIC program serves as a model of a successful public-private partnership.

The program oversees more than 300 SBA-licensed funds, with over $18 billion in capital, combining $8.8 billion of SBA leverage commitments and $9.4 billion of commitments from private investors.

In Fiscal Year 2012, the SBIC program had its third consecutive record-breaking year. Investment funds licensed as SBICs provided more than $3 billion in growth capital to over 1,000 small businesses, a 17 percent increase from FY 2011 and an 83 percent increase from FY 2010.  In FY 2012, the SBA also licensed 30 new funds, including a record 27 Debenture SBICs.  And it’s important to note that based on recent historical performance the program continues to operate at zero subsidy and no cost to the American taxpayer.

A key factor driving the success of the program has been ongoing efforts to streamline its operations. In 2009, it took 14.6 months to get an SBIC fund licensed.  Today, it takes only 5.4 months, a 60 percent improvement in licensing times.

In addition, enhancements to the program have attracted a more diverse array of top-tier investment managers to our funds. And we’ve expanded the program with new funds targeting promising companies in economically distressed regions and gaps in early stage investment.

These new initiatives are attracting more institutional investors, pension funds, and multinational corporations. This allows us to expand investment and financing to more innovative small businesses outside of traditional start-up and investment hubs.

Going forward, we will continue to build on the success of this public-private partnership to reach more entrepreneurs in more regions and more industries across the country.


Karen G. Mills


U.S. Small Business Administration 

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Message from the Associate Administrator

The Investment Division of the U.S. Small Business Administration is proud to present the results of the Small Business Investment Company Program for Fiscal Year 2012. We have achieved record success this year, providing  the capital small businesses need to fuel their growth and create jobs.

With the economy still in recovery, SBA’s mission of supporting small businesses and the Americans they employ has never been more critical. Small businesses are responsible for creating over 60% of the country’s net new private sector jobs each year. Yet despite their importance to the health of the overall economy, many small businesses struggle to access the capital they need to expand operations, build new facilities and hire new staff.

In FY 2012, the SBIC Program channeled more than $3 billion to over 1,000 small businesses. We achieved these results at zero cost to the taxpayers, thanks to the public-private partnership at the program’s core. Even in an era of tightening budgets, SBA is able to efficiently harness the talent of professional investment managers to expand the pool of capital available at the smaller-end of the market.

FY 2012 was the third consecutive record year for the program and this Annual Report reflects our commitment to the continued growth of the SBIC Program. We are investing heavily in improved data management systems, both to enhance our own underwriting processes, but also to provide current and future program participants additional data for more informed investment decisions.

In particular, this report explores in depth returns to private investors relative to broader private equity benchmarks, including analysis of SBIC funds by vintage year, fund size and fund strategy.

In line with the SBA’s agency-wide commitment to transparency in government, the pages that follow were also prepared with U.S. taxpayers in mind. We hope all of our stakeholders find this SBIC Program Annual Report useful in evaluating the program’s past, but also in helping to shape its future.


Sean Greene

Associate Administrator for Investment and Innovation

U.S. Small Business Administration

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Executive Summary


FY 2012 Program Highlights

  • Debenture and Other SBICs provided $3.1 billion in financing to over 1,000 small businesses, a 17% increase from FY 2011 and an 83% increase from FY2010
    • 29% of those small businesses were located in low-to-moderate income areas or were businesses owned by women, minorities or veterans
    • SBA estimates these financings created or sustained over 65,000 job
  • SBA approved $1.9 billion in SBA-guaranteed leverage commitments to SBICs, a 65% increase over commitments issued in FY 2010 and an 87% increase over commitments issued in FY 2008
  • Private and SBA capital under active management reached over $18 billion, distributed across 301 operating SBICs
  • SBA licensed 30 new SBICs that have raised approximately $1 billion in private capital
  • SBA launched its Early Stage Fund Program; six funds received “green light” letters
  • Since the launch of the Impact Investment Initiative in 2011, SBA has licensed six funds with an Impact Focus
  • The Trust Certificate rate for debentures reached 2.245%, the lowest cost of capital in over a decade
  • The SBIC debenture program has historically operated at zero cost to taxpayers
  • SBICs generally continue to generate attractive returns to private investors as a result of accessing SBA-guaranteed leverage

The Small Business Investment Company (SBIC) Program, administered by the Small Business Administration (SBA), is a multi-billion dollar investment program created in 1958 to bridge the gap between entrepreneurs’ need for capital and traditional sources of financing.  The program, which operates as a public-private partnership, does not invest directly in small businesses, but provides SBA-guaranteed leverage to privately owned and managed investment funds that in turn make loans and investments into qualifying small businesses.  These funds are licensed by the SBA as Small Business Investment Companies (SBICs) and are subject to the legal authority of the SBA to ensure they operate in compliance with program rules and regulations.

Over the last four years, SBA has focused on streamlining, simplifying and strengthening the SBIC program to better meet the needs of both investors and entrepreneurs. As part of these efforts, SBA is winding down the parts of the program that were less effective, while growing and expanding the areas of the program that better serve the marketplace.

Today, the SBIC program serves as a model of an effective public-private partnership. The program helps to ensure that high growth businesses—which create the majority of new jobs in our economy—have access to the type of patient investment capital they need to grow and scale their operations. Investment decisions are made by experienced private sector fund managers. The program operates at zero subsidy and has historically operated at no cost to the American taxpayer.

In Fiscal Year 2012 (FY 2012), the SBIC debenture program and its stakeholders had their third consecutive record-breaking year.  The program reached record levels in terms of number of SBICs licensed, the amount of commitments of both private capital and SBA-guaranteed leverage and, most importantly, the amount of financing provided to America’s small businesses. In total, investment funds licensed in the SBIC debenture program provided more than $3 billion in growth capital to over 1,000 businesses, a 17% increase from FY 2011 and an 83% increase from FY 2010.

Ongoing improvements to the SBIC program have also led to increased interest by experienced blue chip investment managers and have allowed the SBIC program to expand its reach, by implementing new initiatives that are attracting new funds focused on promising businesses in economically distressed regions and filling gaps in early stage investment. These new initiatives also are attracting more institutional investors, pension funds, and global corporations, and are helping to ensure that private capital reaches companies outside of traditional start-up and investment hubs.

To accommodate the surge of interest in the SBIC Program, the SBA’s Investment Division continues to streamline its processes, all while maintaining high credit standards and transparency. Division staff now process SBIC License Applications within an average of 5.4 months, down from an average of nearly 15 months in FY 2009.  This streamlining helped the SBIC program get out a record of more than $1.9 billion in SBA-guaranteed leverage commitments to its funds in FY 2012.  Current SBICs have seen a similar improvement in performance from the Office of Operations, which has reduced turnaround times on key decisions by over 50%.

The program licensed 30 new funds in FY 2012 (including a record 27 Debenture SBICs), welcoming another cohort of experienced fund managers pursuing a diverse array of investment strategies.  The mix includes traditional mezzanine investors, senior lenders, leasing firms, and buyout funds. The funds are split evenly between returning SBIC fund managers and teams launching their first SBIC.

Throughout this report, there are examples of high growth businesses that received investment backing from SBICs. These case studies highlight the impact that SBICs have in providing capital to a broad range of businesses throughout the country. One is JSI Store Fixtures Inc., based in Milo, Maine. JSI received funding from Champlain Capital Partners, an SBIC. The investment was critical to the company’s success. In recent years, JSI has been able to move into a larger facility, invest in new equipment, and hire more workers, many of whom had been displaced when one of the region’s major employers closed. Today, JSI is one of the area’s largest employers and is providing economic opportunity to the surrounding community.

The growth of the SBIC Program over the past several fiscal years masks the divergent paths of two of its constituent parts.  The core “Debenture” program, which now finances the bulk of SBICs, has been on a growth trajectory since FY 2008.  By contrast, the “Participating Securities” (PS) program has been gradually winding down.  Whereas the two programs were roughly equal in size as recently as FY 2009, SBICs licensed through the Debenture program now manage approximately 4 times the capital of PS funds.  The “Debenture Program & Other SBICs” section goes into further detail on the Debenture program, while the “Participating Securities” section discusses the current status of the PS program.

Exhibit 1 - SBIC Operating Portfolio Capital Under Managment (Private & SBA)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Debenture Program $6,869,300,000 $7,553,200,000 $9,068,100,000 $11,070,100,000 $13,344,900,000
Participating Securities $8,792,300,000 $7,388,200,000 $5,727,300,000 $4,521,900,000 $3,454,600,000
TOTAL $15,661,600,000 $14,941,400,000 $14,795,400,000 $15,592,000,000 $16,799,500,000


At fiscal year-end, the portfolio of operating SBICs were managing over $18 billion in capital, combining $8.8 billion of SBA-guaranteed leverage commitments and $9.4 billion of commitments from private investors. The impact of the SBIC program extends beyond those funds that receive SBA-guaranteed leverage.  Among the 301 licensees at FYE 2012 were 44 investment funds that do not receive SBA-guaranteed leverage.  These “non-leveraged” funds nonetheless play an important role in both attracting private capital and investing in small businesses in need of financing.  These non-leveraged funds have typically been attractive to bank investors, for whom investments in SBICs presumptively qualify towards Community Reinvestment Act Credit.  Bank interest in SBICs is likely to grow, with the implementation of the Volcker rule part of the Dodd-Frank legislation, which limits banks from investing in private equity vehicles, with a few targeted exceptions, which includes SBICs.

The “Financial Risk and Performance” section provides further detail on the current portfolio, and financial risk to SBA, including examples of efforts to improve risk management through better analytics and more data-driven decision making. The section also provides a more detailed analysis on the returns to private investors in the program.

The analysis shows that the economics are compelling for private investors.  Overall, SBIC financial returns to private investors compare favorably with the private equity industry as a whole.  Most SBICs pursue credit-oriented investment strategies, which suggests SBIC risk-adjusted returns may also keep pace with or even outperform the rest of industry.  Data maintained by SBA’s Investment Division shows that on a pooled basis, returns to private investors can be 300-600 basis points higher through the use of low-cost SBA-guaranteed leverage.  Among SBIC funds that raise at least $25 million of private capital, 26% generated net IRRs in excess of 18%.

The SBIC program has a long and successful track record of supporting investment in high-growth companies like Pandora, AOL, Costco and Intel when they were small businesses. Ongoing improvements to the program will ensure that the next generation of innovative American companies can attract the type of patient capital they need to be successful.

Ex. 2 - SBIC Operating Portfolio Snapshot September 30, 2012 ($ millions)
  Number of Funds Private Capital Leverageable Private Capital Unfunded Private Capital TOTAL SBA Leverage Outstanding SBA Leverage Unfunded SBA Leverage TOTAL Combined TOTAL
Debenture 158 $3,795 $2,319 $6,114 $4,871 $2,360 $7,231 $13,345
Participating Securities 86 $1,458 $424 $1,881 $1,548 $25 $1,573 $3,455
Other 57 $934 $447 $1,381 $16 $3 $19 $1,400
TOTAL 301 $6,187 $3,190 $9,377 $6,435 $2,388 $8,823 $18,199


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Debenture and Other SBICs 1

Program Review

In FY 2012, Debenture and Other SBICs provided over $3.1 billion of financing to small businesses, a record for the SBIC Program.

Ex. 3 - Financings to Small Businesses (in millions)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Debenture SBICs $1,436.0 $1,227.0 $1,587.0 $2,589.0 $2,950.0
Other SBICs $149.0 $166.0 $125.0 $80.0 $175.0
Total $1,585 $1,393 $1,711 $2,668 $3,126


SBA-guaranteed leverage commitments issued to SBICs has reached a 3-year high, topping out at nearly $2 billion for FY 2012.

Ex. 4 - Commitments Issued (in millions)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Debenture $1,029 $788 $1,165 $1,828 $1,924


In addition, the SBIC Program licensed 30 new funds in FY 2012, a five-fold increase over 2008 levels.

Ex. 5 - New Licenses Issued
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Debenture 5 8 21 18 27
Non-Leveraged 1 3 2 4 3
TOTAL 6 11 23 22 30


At the time of licensing, the 30 funds licensed in FY 2012 had together raised nearly $1 billion of private capital, another record for the program. This capital came from institutional investors, fund-of-funds, high net-worth individuals and other private investors.

Ex. 6 - Private Capital at Licensing (in millions)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Debenture $232.00 $257.00 $616.00 $714.00 $893.00
Non-Leveraged $8.00 $88.00 $39.00 $127.00 $81.00
TOTAL $240.00 $345.00 $655.00 $840.00 $974.00


The tremendous growth in the program is the result of greater interest in the program among funds and SBA’s efforts to streamline its investment process. 

The SBIC Program Investment process has 3 phases. In Phase I an initial fund review takes place and  funds are given a "Green Light" to move forward. In Phase II funds raise private capital. Finally, in Phase III funds recieving licensing approval are  licensed.

Over the last 3 years, the number of fund proposals received in Phase I has hit historical highs. In FY 2008, SBA received 27 fund proposals. Over the last three fiscal years, that number has jumped to an average of nearly 70.

Ex. 7 - Initial Fund Application Volume
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
1st Time Applicants 19 29 54 52 43
Subsequent Fund Applicants 8 19 19 22 18
TOTAL 27 48 73 74 61


Despite the surge in applications, a concerted effort to streamline Phase III of the investment process has kept processing times down. In FY 2009 it took an average of 14.6 months to process an applicant through Phase III.  By FY 2012 SBA reduced the timeline to just 5.4 months, well below the target processing time of 6 months.

Ex. 8 - Phase III: License Application Processing Time
  FY 2009 FY 2010 FY 2011 FY 2012
Months 14.6 5.8 5.5 5.4


Over the past ten years, the average amount of private capital committed at the time of licensing has doubled.  Within a year of licensing, these SBICs increased their private capital base by roughly 40% to 50%.  Factoring in 2 tiers of SBA-guaranteed leverage, the average size of a newly licensed fund has increased to $140-150 million of capital.

Ex. 9 - SBIC Private Capital Levels SBICs Licensed between 1998 and 2012 (in millions)
  Average at Licensing Average One Year After Licensing
1998 - 2002 $15 $22
2003 - 2007 $26 $34
2008 - 2012 $33 $47


Over the past two fiscal years, 83% of the funds licensed as SBICs had raised at least $20 million of capital at the time of licensing. Given historical fundraising patterns, SBA expects these SBICs to achieve a final close with substantially more private capital.

Ex. 10 - Distribution of Private Capital at Licensing SBICs Licensed in FY 2011 & FY 2012
Less than $20M 17%
$20 - $40M 54%
$40 - $60M 19%
More than or Equal to $60M 10%


This trend has important implications for SBA’s SBIC portfolio as a whole. An analysis of SBIC leverage loss rates among Debenture SBICs active between 1997 and 2009 shows that funds with private capital greater than $17.5 million have experienced significantly lower loss rates than their peers.2

Ex. 11 - SBIC Leverage Loss Rate by Size As of 12/31/2010 (n=64)
  Leverage Loss Rate
More than $17.5M 0.3%
$10M to $17.5M 6.2%
$5 - $10M 15.2%


Funds with higher levels of private capital have historically delivered higher returns to private investors as well.  The “Financial Risk and Performance” section of the report will discuss in more detail.

The increasingly attractive economics of the SBIC Program may help explain the success new SBIC licensees are having raising private capital. The rate on SBA-guaranteed “Trust Certificates,” which determines the interest rate SBICs pay on SBA-guaranteed leverage, has followed the yield on the U.S. 10-year Treasury Note to historic lows.  Poolings of SBA-guaranteed Trust Certificates are done semi-annually. The most recent pooling closed in September 2012 at just 2.25% (Trust Certificate Rates: SBIC Debenture Pools)

The SBIC Program has attracted a diverse array of investment strategies over the past two fiscal years.  Though the bulk of SBICs pursue credit-oriented strategies, many invest in more equity-oriented strategies such as buyout/hybrid and venture.

Ex. 13 - Breakdown of SBIC Fund Strategies SBICs Licensed in FY 2011 & FY 2012
  Number of Funds Percentage
Senior Debt & Other Credit 15 29%
Mezzanine 26 50%
Buyout/Hybrid 9 17%
Venture 2 4%


The Investment Division has made a concerted outreach effort to attract more diverse fund managers to the program. This has resulted in a rise in the percentage of first-time applicants that are woman- or minority-managed funds.3

Ex. 14 - Women or Minority-Managed SBIC Applicants % of First-Time Phase I Applications Received
  % of MAQ Apps
FY 2008 16%
FY 2009 17%
FY 2010 27%
FY 2011 30%
FY 2012 24%


The current portfolio of Debenture and Other SBICs has shown a strong preference for making straight “Loans” to small businesses or providing them with “Debt” financings that have equity features, such as warrants.

Ex. 15 - Portfolio Distribution; As of 9/30/2012
  Loans Debt Equity Total
Debenture $5,039.80 $3,542.30 $1,207.50 $9,790.00
Other $123.60 $111.40 $459.20 $694.00
Total $5,163.00 $3,654.00 $1,667.00 $10,484.00
Total % 49% 35% 16%  


SBA plays an active role in monitoring the financial performance of SBICs while also striving to minimize the regulatory burden. The streamlining of key regulatory approval processes has improved turnaround times by over 50% in the last 2 years.

Ex. 16 -Operations Turnaround Times (months)
  FY 2010 FY 2011 FY 2012
Conflicts of Interest 1.8 1.0 0.8
Commitment Letters 2.2 1.3 1.0


SBA has increased the frequency of its regulatory exams, ensuring that each SBIC with outstanding SBA-guaranteed leverage receives one exam per year. Meanwhile, there has been a sharp drop in the number of regulatory violations called “findings,” indicating that regulatory compliance has improved.

Ex. 17.1 - Examinations Metrics Exam Cycle (months)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
SBICs with Leverage 14.5 13.9 12.9 11.7 11.7
SBICs w/o Leverage 23.2 21.2 18.2 15.6 15.6


Ex. 17.2 - Examinations Metrics
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
SBICs with Leverage 22.3% 17.0% 8.7% 11.1% 6.6%
SBICs w/o Leverage 16.3% 20.0% 15.1% 21.3% 17.6%


If a fund fails to maintain adequate financial performance or otherwise violates the legal requirements governing SBICs, SBA has the right to transfer the SBIC to its Office of Liquidations (“Liquidations”) and repurchase the fund’s outstanding SBA-guaranteed leverage from bondholders.

The bulk of the transfers to liquidations over the last five years were funds licensed prior to 1985.

Ex. 18 - Transfers to Liquidations per Fiscal Year Debenture & Other Funds (Non-PS Funds Only)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Funds Licensed Prior to 1985 $0 $41 $64 $0 $107
Funds Licensed from 1985-2002 $26 $50 $30 $0 $26
Number of Funds 3 9 4 0 4


In fact, no Debenture or Other SBIC licensed since 2002 has been transferred to Liquidations, a year in which SBA made significant improvements to its licensing process. 

Ex. 19 - Status of Debenture Funds by Vintage Year Total Capital as of September 30, 2012 ($ millions)
  Balance in Operations Repaid Transferred to Liquidations Total % Trans to Liquidations
1993 - 1997 $0 $343 $223 $566 39%
1998 - 2002 $223 $1,071 $212 $1,506 14%
2003 - 2007 $1,899 $1,007 $0 $2,906 0%
2008 - 2012 $2,657 $3 $0 $2,659 0%



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Program Review - Footnotes:

1 The data reported in the “Debenture and Other SBICs” section of the report covers the SBIC programs that are active and apply only to SBICs that were issued a standard debenture license, a non-leveraged license or a specialized license.  Excluded from the data are any SBICs that were licensed under the Participating Securities program.  Data concerning the Participating Securities program are presented in a later section.(back)

2 Please refer to Appendix III for information on the data and methodology used to analyze SBIC loss rates.(back)

3 The identification of woman- or minority-owned funds is done on an observational basis, rather than through self-reporting. (back)

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Economic Impact

The growth in the number of Debenture and Other SBIC Licensees, the amount of private capital raised and the issuance of commitments for SBA-guaranteed leverage has translated into increased financing for small businesses. From FY 2009 through FY 2012, the amount of capital Debenture and Other SBICs have used to finance small businesses has more than doubled, reaching record financing levels.

Ex. 20 - Financings to Small Businesses (in millions)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Equity $295 $260 $260 $334 $518
Debt $679 $620 $684 $976 $695
Loans $612 $513 $767 $1,359 $1,912
TOTAL $1,585 $1,393 $1,711 $2,668 $3,126


Over the same period, the number of small businesses being financed has declined slightly, suggesting that the amount of capital provided per firm is increasing.


Ex. 21 - Number of Small Business Financed
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Competitive Opportunity Gap 518 346 326 372 270
All Others 796 690 659 747 667
TOTAL 1,314 1,036 985 1,119 937
% Competitive Opportunity Gap 39% 33% 33% 33% 29%


These financings are estimated to have helped create or retain over 65,000 jobs.4

Ex. 22 - Estimated Jobs Created or Retained
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
Jobs Created or Retained 35,595 31,751 38,566 57,947 66,743


Capital in the SBIC Program is invested all across the United States, unlike much of the rest of the venture capital and private equity industries, which have traditionally concentrated their financings in places such as Silicon Valley, New York or Massachusetts.

Ex. 23 - Geographic Distribution of SBIC Financings FY 2008 - FY2012 Percentage of Total Capital (Total Financings = $10.5 billion)
  % of Financings
New England 9%
Middle Atlantic 20%
East North Central 11%
West North Central 5%
South Atlantic 18%
East South Central 4%
West South Central 12%
Mountain 7%
Pacific 14%


Debenture and Other SBICs balance their financing across a variety of sectors, with the manufacturing and consumer sectors in the lead, each accounting for 18% of financings.

Ex. 24 - Financings by Sector SBICs Financed from FY 2008 to FY 2012; $ billions
  Percentage Amount Financed (in billions)
Manufacturing 18% $1.90
Consumer Related 18% $1.88
Business Services 15% $1.62
Transportation 10% $1.09
Communications 8% $0.84
Medical/Health 7% $0.71
Other 23% $2.44


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Economic Impact - Footnotes:

4 SBA estimates jobs created or sustained using the results of two studies on the impact of venture capital on employment.  These studies estimate that one job is created or sustained for every $36,000 invested (adjusted for inflation). Studies: 1) DRI-WEFA, “Measuring the Importance of Venture Capital and Its Benefits to the United States Economy,” June 19, 2002. 2) Cook & Nevins. The Zermatt Group. “The 1999 Arizona Venture Capital Impact Study,” March, 1999. (back)

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New Initiatives

As part of the SBA’s ongoing efforts to expand its reach and enhance access to capital, the Investment Division has introduced several new initiatives over the past two fiscal years. The SBIC Program website ( outlines these recently introduced initiatives, some of which  are profiled below:

Impact Investment Initiative

In 2011, as part of President Obama’s “Start-Up America Initiative,” SBA announced that it would commit $1 billion in SBA-guaranteed leverage to investment funds licensed as “Impact Investment SBICs.” These funds invest for financial return, but also seek to generate social return.

While conventional wisdom suggests that financial performance may be reduced with a double bottom line focus. SBA’s historical experience with SBIC loss rates suggests this may not be true.  Analysis of SBA’s existing portfolio shows there is no correlation between portfolio concentrations in low-to-moderate income (“LMI”) communities and SBIC fund loss rates.

Two Impact SBICs have already been licensed, along with four other standard Debenture SBICs that have an impact focus. Together these funds have over $200 million of private capital and close to $400 million of SBA-guaranteed leverage to make impact investments.

Program Highlights:

SBA defines “impact investments” as investments in small businesses that meet one of two criteria:

  • Place-based: Small businesses located in rural areas or employing residents of LMI or economically distressed areas
  • Sector-based: Small businesses in the national priority industry sectors.  Currently this includes the education and energy sectors

Impact SBIC applicants benefit from an expedited licensing process and  may have access to up to the lower of 3 times its Regulatory Capital or $150 million in SBA-guaranteed leverage.


Early Stage Innovation Fund

Also as part of President Obama’s “Start-Up America Initiative,” SBA announced the launch of the Early Stage SBIC Initiative and a new commitment of up to $1 billion in SBA-guaranteed leverage for venture capital SBICs targeting promising start-ups. Using the Debenture program’s existing authorization, the Early Stage Initiative will channel capital to funds investing in high-growth companies seeking financing in the range of $1 to $4 million and which are located in regions of the country underserved by the venture capital markets. Since 2008, less than 6% of all U.S. venture capital dollars went to seed funds investing at those levels and approximately 70% of those dollars went to just three states:  California, Massachusetts and New York. 

The first call for Early Stage SBIC proposals was announced in May 2012 and attracted 33 applications. After interviews with the applicants and a thorough review of the applications, six funds were issued “green light” letters.

Program Highlights:

  • Up to $1 billion in SBA-guaranteed leverage commitments issued over 5 years
  • Maximum 1 to 1 match with private capital with a $50 million cap
  • Minimum private capital raise of $20 million
  • Early Stage SBICs must deploy 50% of total capital in early stage companies
  • Annual call licensing process


Web-based Financial Reporting

The Investment Division is moving forward with the implementation of a new online data management system. The new system, “SBIC-Web,” will provide a single, web-based platform for the collection and management of SBIC financial reporting data. 

SBIC-Web brings with it a level of functionality and reporting capability not previously available. Enhanced workflow will improve efficiency and lead to more timely communication with program stakeholders. Improved data reconciliation and integration will minimize the risk of duplication and enhance the accuracy of reporting.

The implementation process began in October 2012, with the transition to the online submission of Forms 1031 (Portfolio Financing Report) and 468 (Quarterly Financial Statement). Further enhancements will follow as the remaining elements of the new system are deployed in the coming months and years.


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Financial Risk & Performance

As a public-private partnership, the SBIC Program’s success depends on its ability to manage the risks to taxpayer dollars while also ensuring the program remains attractive to private investors.  The following two sections describe the program’s success in balancing these dual objectives.

SBA Financial Performance & Risk Management

The SBIC Program operates on a zero subsidy basis and, historically, at no cost to taxpayers. The vast majority of SBICs fully repay their SBA-guaranteed leverage, but SBA charges upfront and annual fees on the leverage that SBICs draw to offset anticipated losses. SBA closely monitors SBICs to ensure they are performing well financially and in compliance with the legal requirements governing the SBIC Program.

As of September 30, 2012, SBA capital at risk with Debenture and Other SBICs was $7.6 billion, including $2.4 billion in outstanding commitments for SBA-guaranteed debenture leverage, $4.9 billion of outstanding SBA-guaranteed leverage, and $0.3 billion of debenture and other leverage held in Liquidations.

Outstanding debenture leverage issued by Debenture and Other SBICs has grown from $2.7 billion in FY 2008 to $5.2 billion in FY 2012. “Non-compliant capital,” which includes the leverage of operating SBICs that have exceeded maximum Capital Impairment Percentage (CIP)5 and the leverage of SBICs in Liquidations, increased from $156 million in FY 2008 to $298 million in FY 2012. As a percentage of debentures outstanding, the amount of non-compliant capital has fallen from 9% to 6% over the last five fiscal years.

Ex. 26 - Status of Outstanding Leverage (Non-PS Funds Only) ( in millions)
  FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 *
In Liquidations $156 $219 $290 $213 $298
Over Max CIP $92 $31 $23 $22 $33
Under Max CIP $2,510 $2,893 $3,411 $4,249 $4,854
Total Leverage $2,758 $3,143 $3,724 $4,484 $5,184
% Out of Compliance 9% 8% 8% 5% 6%


As the SBIC Program has grown, SBA has strengthened its analytical and risk management capabilities. In particular, the Investment Division has analyzed which specific variables correlate to SBICs successfully paying back their SBA-guaranteed leverage. The following charts demonstrate examples of the findings (for information on the data, fund population and methodology underlying these charts, please refer to Appendix III).

The analysis confirmed that CIP is a critical metric to monitor. An analysis of historical Debenture and Other SBIC financial performance indicates that SBA is far more likely to sustain losses when CIP is higher.  SBA suffered losses with 61% of SBICs whose CIP exceeded 75% after year 6.

Ex. 27 - SBIC Leverage Losses by CIP CIPs after Year 6; As of 12/31/2010 (n=57)
Loss Category SBICs Under 75% CIP
SBICs Over 75% CIP
No Losses 90% 39%
< 25% Losses 10% 39%
≥ 25% Losses 0% 22%


This analysis also provides useful data in evaluating track records of funds applying to the program. SBA found that funds that achieve total value to paid-in capital (TVPI) of at least 1.25x almost uniformly have no losses. Similarly, even for funds with significantly unrealized portfolios, their distributions to paid in capital (DPI) can be a leading indicator of whether or not they will repay their leverage. 

Relative performance mattered as well.  SBA experienced no losses from SBIC Debenture and Other SBICs that ranked in the top half of private equity performance based on multiples. SBA suffered losses from 50% of the SBICs that ranked in the bottom half of private equity funds.

Ex. 29 - Percentage of SBICs that Repaid Leverage by Private Equity Rank As of 12/31/2010; Preqin Benchmark (n=33)
  % Repaid
SBICs in Top-Half of Private Equity
SBICs in Bottom-Half of Private Equity


Separate analysis shows that “second-time” SBICs outperform “first-time” SBICs.  Yet, contrary to conventional wisdom, SBICs managed by “first time” teams performed as well as “experienced” teams, although the performance did not catch up until the end of the fund. For the SBICs in the sample that were between three and nine years old, the TVPI and DPI of "first time" teams remain consistently below that of "experienced teams." But for those that were ten years old, the difference was negligible.


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SBA Financial - Footnotes


5 “Capital Impairment Percentage” measures the losses incurred by a fund relative to the its Regulatory Capital, a defined term under 13 CFR 107.50.  SBIC regulations establish a maximum level of capital impairment based on each SBIC’s leverage ratio and portfolio equity percentage. If the SBIC exceeds its maximum allowable CIP, SBA has the right to transfer the SBIC to Liquidations. A 100% CIP would indicate that an SBIC’s losses equal the private capital.  Further losses would likely to result in losses to SBA (back)

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Returns to Private Investors

The success of the SBIC Program depends on the funds’ ability to attract private investors seeking strong financial returns. This section presents financial performance metrics from the perspective of private investors for SBICs in the Debenture program only.6

SBICs are considered a distinct alternative asset class within the broader landscape of private equity. The charts that follow benchmark the pooled performance of SBICs against the performance of the private equity industry as a whole by vintage year using data obtained from both Preqin and Thomson Private Equity.

Since 1998, SBIC performance compares favorably on a pooled basis to the rest of the industry in terms of multiples, IRRs, and distributions.

Ex. 31 - SBIC Private Investor Returns v. Benchmarks Total Value to Paid-In Captal (TVPI) - Pooled Basis as of 12/31/2011
  SBIC Private Investor TVPI Thomson One (All PE) TVPI Preqin (All PE) TVPI
1998 0.85 1.28 1.37
1999 2.51 1.32 1.32
2000 2.00 1.12 1.56
2001 1.66 1.35 1.76
2002 1.95 1.65 1.57
2003 1.76 1.64 1.65
2004 1.27 1.63 1.45
2005 1.79 1.51 1.31
2006 1.15 1.32 1.11


Ex. 32 - SBIC Private Investor Returns v. Benchmarks Net IRR to Private Investors - Pooled Basis as of 12/31/2011
  SBIC Private Investor Net IRR Thomson One (All PE) IRR Preqin (All PE) IRR
1998 -2.6% 5.5% 7.1%
1999 16.2% 2.1% 3.7%
2000 15.0% 6.1% 9.6%
2001 9.6% 13.5% 16.8%
2002 15.9% 15.6% 14.6%
2003 14.2% 15.0% 16.3%
2004 5.5% 11.6% 12.0%
2005 15.2% 7.6% 7.5%
2006 4.7% 2.8% 2.0%


Ex. 33 - SBIC Private Investor Returns v. Benchmarks Distributions to Paid-In Captal (DPI) - Pooled Basis as of 12/31/2011
  SBIC Private Investor DPI Thomson One (All PE) DPI Preqin (All PE) DPI
1998 0.62 1.10 1.31
1999 1.79 0.86 1.14
2000 1.48 0.96 1.28
2001 1.04 1.20 1.39
2002 1.09 1.16 1.11
2003 0.92 1.00 1.09
2004 0.40 0.75 0.79
2005 0.74 0.40 0.50
2006 0.14 0.27 0.30


The chart below breaks down the performance of SBICs into quartiles.  SBICs of earlier vintage years show substantially more variance in performance than those of more recent vintages.

Ex. 34 - SBIC Private Investor IRR Quartiles by Vintage Year As of 12/31/2011
  Net IRR Quartile 1 Net IRR Median Net IRR Quartile 3
1998 -2.0% -28.7% -97.5%
1999 19.7% 5.6% -1.2%
2000 12.2% 5.2% -23.2%
2001 13.5% 8.2% 4.4%
2002 14.0% 10.3% 7.3%
2003 20.2% 12.8% 9.5%
2004 3.9% 3.5% 2.9%
2005 11.7% 9.7% 6.8%
2006 6.2% 4.3% 2.1%


As with any leveraged vehicle, SBA-guaranteed leverage has the effect of amplifying the underlying performance of the SBIC. SBA-guaranteed leverage can enhance returns to investors in strong performing SBICs just as it can lower returns to private investors in poor performing ones.

An analysis of a sample of 71 SBICs with positive unleveraged IRRs and licensed from 1998 through 2006, shows that their "break-even" rate, where leverage had no impact on private investor returns, was an unleveraged IRR between 5% and 6%. Not surprisingly, this figure roughly matches the sum of the interest rate and annual fee charged for debentures issued in the years consistent with this data set. Given the decline of the interest rate on SBA-guaranteed Trust Certificates over the past decade, one would expect the break-even point to decline in coming years.

Relative to the private equity industry as a whole, SBICs that perform in the first and second quartile of private equity on an unleveraged basis benefit significantly from access to SBA-guaranteed leverage. For third quartile SBICs, the leverage has a slightly negative effect. SBICs that perform in the bottom quartile of private equity suffer a large negative impact from the use of leverage.

Ex. 36 - Average Impact of SBA Leverage on Private IRR SBICs Licensed from '98-'06; as of 12/31/2011 (n=84)
  Average IRR Impact Average Private Investor IRR
4th Quartile -29.7% -39.1%
3rd Quartile -0.8% 4.5%
2nd Quartile 2.3% 10.3%
1st Quartile 8.2% 24.1%


However, these aggregate results mask large differences in performance among various types of SBICs. On average, SBICs with $25 million or more in private capital have significantly higher returns than those with less than $25 million in private capital.7

Ex. 37 - Pooled Private Investor IRRs by SBIC Size VY's 1998 - 2006; as of 12/31/2011 (n=84)
  Pooled Private Investor IRR
Private Capital < $25 million 1.0%
Private Capital ≥ $25 million 13.7%


The performance of SBICs with $25 million or more in private capital is significantly better on a relative basis as well. The bulk of the SBICs that rank in the first and second quartiles of private equity are these larger SBICs. Close to two-thirds of SBICs with $25 million or more in private capital fall in the top half of private equity, while nearly one-third make it into the top quartile.

Ex. 38 - Distribution of SBICs by Private Equity Quartile Based on Private Investor IRR for VY’s 1998-2006; as of 12/31/2011
  All SBICs (n=84) SBICs with $25 million or more in Private Capital (n=50)
Quartile 1 19% 30%
Quartile 2 29% 34%
Quartile 3 25% 24%
Quartile 4 27% 12%


In terms of absolute returns, 26% of these larger SBICs generate net returns to private investors greater than 18%.

Ex. 39 - Distribution by Private Investor IRR and Fund Size Funds Licensed '98-'06 as of 12/31/2011
  Loss 0 to 6% IRR 6 to 12% IRR 12 to 18% IRR Over 18% IRR
Private Capital greater than or equal to $25 Million
10% 26% 24% 14% 26%
26% 24% 23% 11% 17%


The return profiles of Debenture SBICs also differ by strategy. Of the SBICs that exceed the $25 million private capital threshold and are pursuing buyout strategies, 50% are top quartile performers yielding median net IRRs of 22.5%. An additional 22% fall in the second quartile.

Ex. 40 - Distribution of SBICs by Preqin PE Quartile: Buyout Funds with $25M or more in Private Capital Funds Licensed '98-'06 as of 12/31/2011; Indexed to Inflation (n=18)
  Quartile 1 Quartile 2 Quartile 3 Quartile 4
Buyout Funds 50% 22% 22% 6%
Median Private Investor IRR 22.5% 6.5% 5.2% -2.3%


SBICs pursuing mezzanine or credit-oriented strategies have also experienced strong performance: 19% fall into the top quartile of private equity with a median IRR of 22.9% and 41% fall into the second quartile with a median net IRR of 10.9%. Given the lower loss rates for most mezzanine and credit-oriented SBICs, these returns may be even more attractive when considered on a risk-adjusted basis.

Ex. 41 - Distribution of SBICs by Preqin PE Quartile: Mezzanine Funds with $25M or more in Private Capital Funds Licensed '98-'06 as of 12/31/2011; Indexed to Inflation (n=32)
  Quartile 1 Quartile 2 Quartile 3 Quartile 4
Mezzanine Funds 19% 41% 25% 16%
Median Private Investor IRR 22.9% 10.9% 3.6% -4.6%



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Returns to Private Investors - Footnotes:

6 These metrics are only available for SBICs licensed since fiscal year 1998 as data for funds of prior vintage years are not available. Please refer to Appendix IV for information on the data, methodology and assumptions underlying the analyses in this section. (back)

7 SBA adjusted SBIC Private Capital for inflation using the Bureau of Labor and Statistics inflation calculator. Available at (back)


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Participating Securities Program

The Participating Securities (PS) Program ended at fiscal year end 2004 and no further SBA-guaranteed PS leverage was funded after fiscal year end 2008. Overall, SBICs issued $10.3 billion in SBA-guaranteed PS leverage for fiscal years 1994 through 2008.

Table 8 in the Federal Credit Supplement Spreadsheet to the Fiscal Year 2013 budget estimates approximately $2.4 billion in losses to the program.8 As of September 30, 2012, SBA had transferred 136 SBICs with almost $4 billion in SBA-guaranteed PS leverage to Liquidations. Appendix II provides detailed leverage statistics by FY for SBICs licensed since fiscal year 1994.

SBA conducted extensive analysis of the program to evaluate where it failed. Findings included:

  • As of December 31, 2011, Participating Securities pooled fund performance showed positive returns.
  • Timing played an important part. The majority of the capital was allocated between 1999 and 2004, some of the worst years in venture capital.
  • The primary problem was structure. As a result of a complex structure, government contributed 62% of the capital, but received only 34% of the profits.  It is estimated that a simple pro rata profit distribution structure would have covered all leverage drawn and kept the program close to break even.

The chart below shows the wind-down of the Participating Securities Program since the last issuance of SBA-guaranteed PS leverage in FY 2008.

Ex. 42 - Status of Outstanding Participating Securities Leverage (in millions)
  FY2008 FY2009 FY2010 FY2011 FY2012
In Liquidations $1,153 $1,432 $1,595 $1,417 $1,122
Over Max CIP $410 $581 $220 $82 $345
Under Max CIP $4,251 $3,294 $2,690 $2,080 $1,335


As shown, the overall outstanding leverage has steadily decreased since FY 2008, with the total amount remaining in Liquidation remaining fairly constant. The chart below shows Liquidation activities for Participating Securities SBICs during this timeframe.

Ex. 43 - Status of Outstanding Participating Securities Leverage (in millions)
  FY2008 FY2009 FY2010 FY2011 FY2012 
Transferred to Liquidations $474 $622 $709 $316 $231
Collections $294 $116 $254 $270 $206
Participating Charge-Offs $176 $238 $301 $227 $308


Transfers have started to decline as less SBA-guaranteed PS leverage remains outstanding in Operations. Collections have slightly outpaced leverage charge-offs. Almost all prioritized payments associated with Participating Securities SBICs transferred to Liquidations have been charged-off. To date, SBA has charged off over $1 billion in prioritized payments.

Although SBA estimates the Participating Securities Program will lose approximately $2.4 billion, the program has provided significant economic benefits, in that it has:

  • Funded $14.8 billion in financings,
  • Financed 4,062 small businesses, and
  • Created or sustained 387,929 jobs.9

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Participating Securities - Footnotes:

8Available at: (back)

 9 SBA estimates jobs created or sustained using the results of two studies on the impact of venture capital on employment.  These studies estimate that one job is created or sustained for every $36,000 invested (adjusted for inflation). Studies: 1) DRI-WEFA, “Measuring the Importance of Venture Capital and Its Benefits to the United States Economy,” June 19, 2002. 2) Cook & Nevins. The Zermatt Group. “The 1999 Arizona Venture Capital Impact Study,” March, 1999. (back)

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