The Investment Division of the United States Small Business Administration (SBA) issued yesterday new SBIC Licensing Guidelines for investment companies that are regulated as a business development company (BDC) under the Investment Company Act of 1940.
In addition to the minimum requirements required of all investment fund managers seeking an SBIC License, the SBA will consider the following five special factors for BDC applicants:
- SBA will generally count a Parent BDC’s unfunded capital commitment as Regulatory Capital if (1) the Parent BDC’s funded net worth is at least ten times its total capital commitment to the SBIC Fund, and (2) SBA is comfortable that sufficient liquidity exists to fund the commitment, taking into account such factors as cash on hand, access to additional equity capital and non-SBA credit facilities, operating income and expenses, historical and expected portfolio cash projections, and current and long term liabilities.
- If a Parent BDC has (1) funded net worth of at least six times its total capital commitment to the SBIC Fund, and (2) SBA is comfortable that sufficient liquidity exists to fund the commitment, SBA will consider the SBIC Fund eligible to obtain a leverage commitment of up to two times its Regulatory Capital, but the SBIC Fund’s leverage draw downs will initially be limited to a single tier and a 1:1 leverage ratio until Regulatory Capital is fully paid-in.
- If a Parent BDC has funded net worth of less than six times its total capital commitment to the SBIC Fund and/or if the Investment Division determines that liquidity is insufficient, its commitment will only be counted as Regulatory Capital to the extent that it is paid-in.
- Although the term funded net worth is not defined in the SBA Tech Note, the SBA has communicated that funded net worth will equal total assets less total liabilities of the Parent BDC. This is also referred to as “Total Stockholder Equity” on certain balance sheets.
- SBA generally prefers SBIC Funds that have a planned 10-15 year lifespan, rather than an evergreen or indefinite life structure.
- As a general rule, SBA will only license funds that satisfactorily link, either directly or indirectly, incentive compensation of the fund managers responsible for the SBIC portfolio to the performance of the SBIC Fund.
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