Small Business Investment Companies (SBICs), which invest in qualifying small businesses in the United States, are eligible to receive Small Business Administration (SBA)-guaranteed debentures at favorable rates to finance their investment activities. Standard SBIC debentures typically have 10-year terms with interest payments due semi-annually, and a lump-sum payment of the principal at maturity.
Under the current SBIC regime, the amount of standard debentures outstanding from a single SBIC cannot exceed the lesser of: (a) US$175 million and (b) two times (2x) the SBIC's limited partners' commitments to the SBIC (the Debenture Cap). As a result, levered SBICs often seek to raise a minimum of US$87.5 million in limited partner capital commitments, which allows the SBIC to seek approval for up to US$175 million in debentures from the SBA.
In recent months, however, certain SBICs have begun targeting fundraises of US$125 million and including disclosures in their offering documents related to a potential increase to the Debenture Cap, signaling an expectation that such an increase may occur. This change would allow SBICs that raise US$125 million in private capital to seek approval for up to US$250 million in SBA debentures, for a total fund size of US$375 million. We expect that such update would be welcomed by SBIC sponsors and investors alike, as it would allow for increased capacity for SBICs and result in more capital flowing into US-based small businesses.
| Current Limit | Potential New Limit | |
|---|---|---|
| Debenture to Private Capital Ratio |
2:1 | 2:1 |
| Private Capital Target | US$87.5 million | US$125 million |
| Maximum Aggregate Standard Debentures per SBIC |
US$175 million | US$250 million |
| SBIC Size at 2:1 Ratio | US$262.5 million | US$375 million |
We are closely monitoring these developments and will publish any official updates as they are released.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
