SBIC Program Overview

1
SBIC Program Overview

• US Small Business Administration
• Investment Division

2
What is the SBIC Program?

• Created by Congress in 1958 to bridge the gap
  between entrepreneurs need for capital and
  traditional financing sources
• Multi billion dollar, government-sponsored fund
  of funds
• Invests long term capital in privately owned and
  managed investment firms (licensees)
• Public-private partnership
• Administered by the Investment Division, US Small
  Business Administration

3
What is the SBIC Program?

• An institutional LP, managing 8.1 billion in
  outstanding leverage and commitments
• An investor in 311 private equity partnerships
• Supported by roughly 8.7 billion in capital
  resources from private partners

Source SBIC Data Management Branch, Weekly
Report as of April 7, 2010.
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What is the SBIC Program?
An Engine for Growth in the US Economy

• In Fiscal Year 2009
• SBIC financings totaled 1.8 billion
• 1,477 companies benefited from SBIC financing
• 361, or 24 of SBIC financings went to companies
  less than 2 years old
• 11 of SBIC financings were made to Competitive
  Opportunity Gap Businesses

Source SBIC Data Management Branch, Weekly
Report as of September 30, 2009.
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What is the SBIC Program?

• A Source of Funding for Successful Companies

Domain Furniture, Inc. DoubleClick.com Douglas
Machine, Inc. Duracraft Corporation Etak,
Inc. Educational Development Encore Wire
Corp. Envoy Corporation Evergreen Solar,
inc. Federal Express FIserv Fusion Systems
Corp. Gendex General Sciences Corp. Genicom
Corp. Geotek Communications, Inc. Global Village
Communications Gymboree Corporation Hanger
Orthopedic Group, Inc. Harman International
Ind. HS Resources, Inc. Healthcare Compare
Corp. Healthcare Services HealthSouth
Rehabilitation Industrial Training
Corp. Information Analysis, Inc. Infotec
Commercial Systems Intel Corp. Jenny Craig, Inc.
Kent Electronics Kentucky Kingdom, Inc. Kronos,
Inc. Labor Ready, Inc. Lansinoh Laboratories,
Inc. LaMadeleine, Inc. Lifeline Systems,
Inc. Maxim Integrated Products Metrolina Outreach
Mammography Microcom Micromodule
Systems Microtouch Systems, Inc. Mothers Work,
Inc. Neoterik Health Tech, Inc. NetFrame Systems,
Inc. Newcomb Communications, Inc. New England
Critical Care NuCo2, Inc. Octel Communications
Corp. Optical Data Systems Orbital Sciences
Corp. Outback Steakhouse Peoplesoft,
Inc. Performance Polymers Petstuff, Inc. Potomac
Group, inc. (MediFAX) Protocol Systems RF Power
Products Radio One
AW Brands Holding Co Actel Corporation Adaptec Ai
rport Systems Intl, Inc. America OnLine Amgen,
Inc. Apple Computer Assembly Solutions,
Inc. BeutiControl Cosmetics, Inc. Build-a-Bear
Workshop, Inc. Bright Start, Inc. CTC
Distribution Services Callaway Golf
Company Cardio Logic Systems, Inc Cerner
Corporation Chesapeake Biological Labs Citation
Computer Systems, Inc. Cognex Corporation Compaq,
Inc. Comptek Research, Inc. Connecticut Culinary
Institute Cooper Natural Resources,
Inc. Costco Cray Research Cutter Buck Data
Stream Systems Devon Group, Inc. Digimark, Inc
Read-Rite Restoration Hardware, Inc. Rock Bottom
Restaurants Sage Software Seasafe, Inc Security
Dynamics Technology Staples Steelweld Equip.
Co. Sun Microsystems Symbol Technologies,
inc. Synoptics Communications, Inc. Techne
Corp. Telesis Corp. Teradata Corp. The Computer
Group (TCG) The Last Best Place Catalog The
Merchandising Group (TMG) The Systems
Center Tricord Systems, Inc. Vertex
Communications Vivid Technologies,
Inc. WebMethods Wellfleet Communications Wire
Networks, Inc. Extreme Networks, Inc. Zydacron,
Inc.
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How Does the Program Work?

• Debenture Securities Program
• Interest only, bullet with 10 year maturity
• Coupon Rate 4.11 (as of 3/24/10)
• Origination fee 3.0 (1.0 at commitment 2.0
  at draw)
• Annual fee on leverage drawn .406
• Other fees .425
• Unsecured, non-recourse to General Partners
• Leverage available up to 3x private capital
  paid-in, but generally limited to 2X
• Leverage ceiling is 150 million per SBIC and
  225 million for two or more licenses under
  common control
• No prepayment penalty

• The annual fee is fixed at time of leverage
  commitment. The current rate floats according to
  the SBIC Programs required subsidy rate.
• Administrative and underwriting fees are
  adjusted annually, payable at time of draw, and
  not applicable to LMI debentures.

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How Does the Program Work?

• SBICs invest in
• Loans, debt with equity features or equity
• 100 Small Business
• Net worth lt 18M and average after-tax income for
  prior two years lt6M
• Of which, 25 must be Smaller Enterprise (net
  worth lt 6M and average after-tax income for
  prior two years lt2M)
• Not more than 10 of the combined committed
  private capital and proposed leverage may be
  invested in a single company without prior SBA
  approval
• Project financing is prohibited (real estate,
  single purpose projects)
• SBICs may control small businesses for up to
  seven years which may be extended with SBA
  approval

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How Does the Program Work?
SBA requires management teams to have

• Senior-level decision making experience in a
  private equity / mezzanine fund relevant to
  proposed fund,
• Evidence of strong deal flow in investment area
  for proposed fund,
• Investment experience as a principal rather than
  an agent (i.e. investment banker, consultant,
  broker),
• A realized track record of superior returns
  benchmarked against funds of same vintage year
  and style,
• Hands-on experience adding value at the portfolio
  company level,
• A cohesive team, with complementary skills,
  history and strong chemistry,
• And, private capital comprised of diverse private
  LPs.

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How Does the Program Work?
The SBIC Application A Two Step Process

• Step 1 Office of Program Development
  Gatekeeper
• Management Assessment Questionnaire (MAQ)
• Track record evaluation and comprehensive due
  diligence
• Investment Committee
• 6 to 8 weeks
• Step 2 Office of Licensing
• Minimum of 5 million committed private capital
  to begin process
• Analyst review of application, business plan,
  financial projections, legal documentation and
  ownership diversity
• Divisional and Agency Licensing Committee
  approvals
• Final approval (Second close on private capital
  within 1 year of final approval)
• 5 to 6 months

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How Does the Program Work?
Portfolio Monitoring and Oversight

• Analyze annual audited financial statements,
  portfolio valuation reports, and other supporting
  documentation
• Analyze new commitment requests, review draw
  requests
• Process examination reports to determine if
  regulatory violations occurred
• Attend SBIC annual and other on-site meetings
• Review regulatory issues requiring prior approval

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How Does the Program Work?

• Customized structures fit managers LPs needs

• Standard structure
• At fund inception, 100 of private LPs
  participate in leveraged fund
• Drop-down structure
• A portion of all private LP capital is used from
  the parent fund to capitalize the leveraged SBIC
• Best suited for existing funds, looking to expand
  capital under management without a full
  fundraising cycle
• Side-by-side structure
• A portion of certain LPs capital is used from
  the parent fund to capitalize the leveraged SBIC
• Best suited for funds, looking to expand capital
  under management, when only a subset of LPs
  desire leverage
• Additional costs and time required depend on
  complexity of the structure and private LPs
  cooperation

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Why Partner with the SBA?

• Pros
• 10 yr Committed Capital
• Attractive Pricing
• 2/3 LP
• SBIC Network

• Cons
• Leverage Ceiling
• Administrative Costs
• Time to Market
• Political Risk

Regulated Environment
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• US Small Business Administration
• SBIC Program
• http//www.sba.gov/INV