Investing with the SBA with SBA - 2011.pdf · SBIC Program Debenture Portfolio: FY ‘06-’10 6...

Small Business Administration Office of Investment and Innovation

Investing with the SBA The Small Business Investment Company Program

October 2011

Small Business Administration 2

140

107

60

Number of Licensees at FYE 2010

Debenture

Participating Security

Other - SSBIC & Bank-Owned

Total Program Data


Total Program Data

Small Business Administration

SBIC Program Debenture Portfolio: FY ‘06-’10

4

Overview

13%

44%

43% Equity

Debt with Equity

Debt



5

Overview

$-

$250

$500

$750

$1,000

$1,250

$1,500

Mil

lio

ns



6

Overview

Mountain

7%

26%

8% Pacific

13% W. North Central

6%

W. South Central

9%

E. North Central

11%

E. South Central

3%

South Atlantic

17%

Middle Atlantic

New England


The closing phase of the process requires SBIC applicants to raise private capital before filing a final licensing application. Fundraising remains the greatest impediment to success in this phase as most funds that file receive a license. From FY 2005 through FY 2009, the average percentage of initial applicants ultimately awarded an SBIC license was 23%.

Following a rigorous evaluation, the SBIC program’s investment committee will award a “green light” letter to those funds it believes meet SBA’s minimum criteria for the program. From FY 2005 through FY 2009, the award rate has deviated little from an average of 57%, despite growth in the program.

To begin the formal application process, each fund must submit a Management Assessment Questionnaire (MAQ) with information on the fund strategy, team history and a detailed investment track record. The number of MAQs submitted has grown steadily from 19 in 2008 to 29 in 2009 and 51 in 2010.

The Office of Program Development offers informal feedback to prospective SBIC licensees before they begin the application process. For each fund that ultimately submits their application, as many as two have been screened.

7

Licensing

Screening

Application (MAQ)

100%

Green Light

57%

License

23%

Application Process for 1st Time Applicants


Strong Historical Returns

8

Program Performance

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35% Returns by Vintage Year 1997 – 2008

SBIC Debenture Funds Pooled IRR (1)

Thomson Buyout, Mezz & Later Stage Pooled IRR (3)

Preqin US Small Buyout Pooled IRR (2)

Preqin US Mezzanine Pooled IRR (2)

* 2006 – 2008 data is presented as an arithmetic mean of IRRs for those years

(1) SBIC Vintage Year determined by date of license. Data as of 8/10

(2) Source: Preqin Ltd. www.preqin.com. Data as of 9/13/11; Data may include some funds licensed as SBICs

(3) Source: Thomson Reuters. www.thomsonone.com. Data as of 9/13/11. Data includes US funds from $5M to $500M categorized as

Small Buyout, Medium Buyout, Later Stage, Turnaround and Mezzanine.

http://www.preqin.com/

http://www.thomsonone.com/


Historical Impact of SBA Leverage

9

Program Performance


0%

1%

2%

3%

4%

5%

6%

7%

8%

10

Program Performance

SBIC Regular Debenture Coupon Rates: 3/00 – 9/11

Yield on 10-Year Treasury

SBA Trust Certificate Rate

Sept. ‘11 2.9%

Treasury Rates Data Source: http://www.ustreas.gov/offices/domest-finance/debt-management/interest-rate/yield_historical_main.stml

SBA Leverage Rates Source: http://www.sba.gov/idc/groups/public/documents/sba_program_office/inv_pooled.pdf

Financial Data

http://www.ustreas.gov/offices/domest-finance/debt-management/interest-rate/yield_historical_main.stml







http://www.sba.gov/idc/groups/public/documents/sba_program_office/inv_pooled.pdf


0.88% 0.87% 0.89% 0.86% 0.87% 0.94% 0.91% 0.72%

0.41% 0.29% 0.52%

8.332%

7.209%

5.730% 5.909%

6.465% 6.131%

4.393%

4.599%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Inte

re

st

Ra

te

Debenture Program Cost of Leverage (Trust Certificate Rate + Annual Charge)

Trust Certificate Coupon Rate

Yield on 10-Year Treasury Notes

Annual Charge

All-in Cost of Leverage

Financial Data


2010 SBIC Debenture Program Results

12

Program Performance

$0.75

$1.20

$0.00

$0.50

$1.00

$1.50

Avg. FY06 - FY09 FY 2010

Bil

lio

ns

SBA Commitments to Funds

+50% +23%


2011 SBIC Debenture Program Results

13

Program Performance

$1.3$1.6

$2.6

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Avg. FY06 -FY09

FY 2010 FY 2011B

illi

on

s

Financings to Small Businesses

$.75

$1.2

$1.8

$0.00

$0.50

$1.00

$1.50

$2.00

Avg. FY06 -FY09

FY 2010 FY 2011

Bil

lio

ns

SBA Commitments to Funds

2.4X 2X


2011 Initial Capital to Licensees

14

Program Performance

$0.3B$0.6B

$0.8B$0.5B

$1.2B

$1.4B

FY 2009 FY 2010 FY 2011

Initial Capital to Licensees

Private SBA


MAQ Processing

29

44

58

0

10

20

30

40

50

60

70

MAQs Processed

2.7

3.5 3.5

0

0.5

1

1.5

2

2.5

3

3.5

4

Average Processing Times (months)

2009 2010 2011 2009 2010 2011

Program Performance


65%

35%

Licensing Processing Time – FY 2010

< 6 months

> 6 months

Breakdown of Licensing Times

Program Performance


% Beat Target

40%

100%

% Beat Target

87%

77% 65

55

2011

2010

Commitments % Beat Target

55%

60% 54

35

2011

2010

Conflicts

Operations Turnaround Times

65

55

2011

2010

Subsequent Funds

Program Performance


Traction, Trajectory and the Future

Where We are Going


Changes to model LPA

Single Point of Contact for LPs

More data

More proactive outreach

19

LP Focus


Impact Investment Fund

Early Stage Innovation Fund

$200 million commitment per year

Focus on financial return + “social return”

Place-based focus (LMI, Economically Distressed areas)

Emerging sectors (Clean Energy, Education)

Growth capital – operates fundamentally like debenture program

$200 million per year

Permit early stage equity investing

Simple changes from debenture platform to mitigate risk of leveraged instrument

20

New Initiatives


11%

26%

0%

5%

10%

15%

20%

25%

30%

2007 2011

% of applicants that are women and minority run funds

Increase in Minority- & Women-run funds


Impact Fund

Debenture Performance and LMI Investing – As of FY 2011

Percentage of Leverage Lost % of Capital Deployed in LMI 0.0053

R² from Regression of Leverage Lost on LMI Capital Deployed

R² = 0.0053

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%

Per

cen

tage

Lo

ss

Percentage of Financings Dollars in LMI

Relationship Between Percentage of LMI and Leverage Losses*

* Note this data is based on 113 SBIC s issuing Debentures only and performing at least $1 million in multiple financings between 1998 and 2010 and have no outstanding leverage in Operations.


Leverage Statistics in Millions – SBICs 1998 - 2010

% of Capital Invested in

LMI

Leverage Drawn ($MM)

Leverage Lost ($MM)

Leverage Lost/Drawn

Number of SBICs

Over 40% 345 1 0.3% 14

20% - 40% 2,637 60 2.3% 91

Under 20% 3,061 63 2.1% 99

Total 6,043 124 2.1% 204

SBICs that placed 40% of investment dollars in LMI did no worse than SBICs with less LMI investing.

23

Impact Fund

Debenture Performance and LMI Investing – As of FY 2011


New Initiatives

Source: Kauffman Foundation

5 Year (2006-2010)

Average Statistics

Angels

Seed

Venture Seed

(Funding Gap)

Venture

Early Stage

Venture

Later Stages

Annual Financings

($ billions)

$ 20-25 $1.6

6% of Venture

$5.1 $18

Number of Businesses

Invested Each Year

54,245 377

Less than 1% of Angels

904 1,700

Annual Financings Not

in CA, MA, NY

Unknown $0.5

Less than 1/3 of All Seed

$1.7 $6.2

Number of Businesses

Not in CA, MA, NY

Unknown 171

Less than half of all Seed

369 723

Problem: Equity Gaps


Objective –

Facilitate market-driven process for wind down of PS program

Change:

Old: Floor = Leverage + Prioritized + SBA profit participation

New: Floor = Leverage repayment; Make us best offer

Structure: sale of entire assets of fund to a third party

Process

Valuations required

“Single Shot” offer

Evaluate in 9 months and refine

25

PS Buyout Policy

Investing with the SBA with SBA - 2011.pdf · SBIC Program Debenture Portfolio: FY ‘06-’10 6...

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