SBA's Small Business Investment Company Program

SBA’s Small Business Investment Company Program Created in 1958, the Small Business Investment There are two types of SBICs: leveraged, which Company (SBIC) program is designed to use SBA leverage in the form of SBA-backed stimulate growth in America’s small businesses borrowings; and unleveraged, which do not. The by supplementing the long-term debt and private majority of active SBICs are leveraged. equity capital available to them. The American Unleveraged SBICs, including bank-owned Recovery and Reinvestment Act of 2009 SBICs, make up about 15 percent of active enhanced the program by increasing the SBICs. maximum funding available to SBICs and, in turn, to small businesses. What Are the Benefits of Investing in SBICs for Banks? What Is a Small Business Investment

Company? National banks and federal savings associations (collectively, banks) may be interested in SBICs are privately owned and managed investing in SBICs for the following reasons: investment funds licensed and regulated by the U.S. Small Business Administration (SBA). The • Investment performance: The main SBIC license allows SBICs to employ private advantage of leveraged SBIC funds is their capital and funds borrowed at low cost using potential for producing competitive returns, SBA-guaranteed securities to make investments compared with similar classes of investment in qualifying small businesses and smaller funds. This is a direct result of employing enterprises as defined by SBA regulations. low-cost, SBA-guaranteed debentures to supplement the funds’ private capital. SBICs generally are formed as limited partnerships, with the fund managers acting as • Community Reinvestment Act (CRA) the general partner. The limited partners, who consideration: Investments in SBICs meet supply the majority of the private funding, are the definition of qualified investments under typically institutional investors, including banks, the CRA. and high-net-worth individual investors. SBICs invest in small businesses that fulfill the • Volcker rule exemption: SBICs are regulatory small-business size requirements, exempted from the Volcker rule, which including having less than $18 million in net generally prohibits “banking entities” from worth and posting net revenue of less than engaging in proprietary trading and $6 million annually. On average, SBICs invest investing in hedge funds or private equity between $1 million and $10 million for each funds. investment, although some SBICs go outside this range. January 2013 1 Office of the Comptroller of the Currency • Small-business development What Are the Key Risks of Investing opportunities: When investing in an SBIC, in SBICs? many banks build mutually beneficial financial relationships with companies Investments in SBICs have risks similar to those included in the SBIC’s investment portfolio. in other types of private investment firms. These risks can be mitigated by performing proper due What Are the Regulatory diligence on the SBIC funds being considered Considerations of Investing in SBICs? for investment. The following are key issues to consider in any risk management strategy Banks may make investments in SBICs using associated with investing in SBICs: one or more of the authorities discussed below: • Loss of principal: Loss of principal is a risk • Small Business Investment Act: Banks of investing in small businesses. Investments have authority under the Small Business in SBICs, therefore, are long-term in nature Investment...

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