Small Business Investment Companies

Comptroller of the Currency A dministrator of National Banks US Department of the Treasury Community Developments SEPTEMBER 2012 Community Affairs Department Insights Small Business Investment Companies: An Investment Option for Banks Abstract This Insights report describes the Small Business Investment Company (SBIC), its role in capital markets, and how banks can use SBICs to expand their small-business finance activities. The report also outlines risks and regulatory considerations of SBIC investments and explains how these investments may receive consideration under the Community Reinvestment Act (CRA). The information presented in this report was obtained from a variety of sources, including bankers, nonsupervised financial intermediaries, SBIC general partners, trade groups, the Office of Investment at the Small Business Administration (SBA), and other parties

involved with SBICs. Appendix E contains a resource directory of additional information on the SBIC program. I. What Are Small Business Investment Companies? SBICs are privately owned and managed investment funds licensed and regulated by the SBA. The SBIC license allows SBICs to employ private capital and funds borrowed at low cost using SBA-guaranteed securities, called debentures, to make investments 1 in qualifying small businesses and smaller enterprises as defined by SBA regulations. The SBIC program was created in 1958 to stimulate growth in America’s small-business sector by supplementing the long-term debt and private equity capital available to small businesses. The American Recovery and Reinvestment Act of 2009 enhanced the program 2 by increasing the maximum funding available to SBICs and, in turn, to small businesses. SBICs generally are formed as limited partnerships, with the fund managers acting as the general partner (GP). The limited partners (LP), who supply the majority of the private funding, are typically institutional investors, including banks, and high-net-worth individual investors. SBICs invest in small businesses that range in size from $1 million to $100 million in annual revenues but fulfill the regulatory small-business size requirements, including having less than $18 million in net worth and posting net 1 SBICs are required to dedicate 25 percent of their investment dollars to smaller enterprises. Definitions of a small business and a smaller enterprise can be found in 13 CFR 121.301(c) as well as parts 121.101, 121.103, and 107.710. See www.access.gpo.gov/nara/cfr/waisidx_09/13cfr107_09.html. 2 For more information on the impact of the American Recovery and Reinvestment Act, see “Economic Development Programs: Providing Lending Opportunities for Banks” in the OCC’s Community Developments Investments Spring 2010 newsletter, at www.occ.gov/static/community-affairs/community-developments-investments/spring10/cde10spring_index. htm. revenue of less than $6 million annually. On average, SBICs invest between $1 million and $10 million per investment, although some SBICs go outside this range. As of July 31, 2012, there were 299 licensed SBICs using private capital and SBA- 3 guaranteed securities of more than $18 billion. In fiscal year (FY) 2011, the SBA issued $1.82 billion in new SBIC commitments and SBICs invested $2.83 billion in 1,339 small 4 businesses that created an estimated 56,211 jobs. SBICs have invested in a variety of industries. From FY 2007 through FY 2011, nearly 20 percent of SBICs’ investments were in the manufacturing sector. Next in volume were investments in consumer-related businesses, transportation, and business services. Additionally, the SBIC portfolio is geographically...

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