BUYOUTS-Buyout firms plan SBIC vehicles

Nov. 26 – With government-guaranteed debt available at low
rates, buyout shops are looking at the prospect of raising
investment funds organized as small business investment
companies, or SBICs.

Steve Bills of Buyouts magazine reports:

**********************************************************

* Perseus LLC, others, seek SBIC licenses

* Financing alternatives remain scarce

* SBA debenture rate hits historic low

NEW YORK – More buyout firms, large and small, are showing
interest in small business investment companies, or SBICs, a
flexible source of financing that can provide equity or debt to
companies that meet federal small business guidelines.

Perseus LLC, the New York growth equity fund manager, is
seeking an SBIC license for its first such fund, as are The
Riverside Company of Cleveland, which specializes in small-cap
investments around the world, and LongueVue Capital, a New
Orleans-area buyout boutique.

The U.S. Small Business Administration reported in October
that it had issued 21 SBIC licenses in fiscal 2010, ended Sept.
30, more than double the 10 licenses a year that the agency had
averaged over the preceding four years. Total SBA financings
through the SBIC debenture program grew to $1.59 billion, a
record, up 23 percent from the average of the prior four
years.

Perseus is in the process of seeking a license from the SBA
to launch an SBIC fund, Sheryl Schwartz, a senior managing
director at the firm, said this month at the Buyouts Texas
conference held in Dallas and sponsored by Thomson Reuters.

Perseus, which has raised more than $2 billion across eight
funds since 1996, plans to use its SBIC fund to provide
mezzanine financing for its deals, Schwartz said. This would be
Perseus’s first SBIC fund.

“In the small end of the market, which is where SBICs
operate, there’s a real shortage of capital,” Schwartz said in
a keynote interview at the conference. “The banks aren’t coming
back anytime soon, and the economy needs the capital to create
jobs.”

The Riverside Company, meantime, is raising a fund for
which it is seeking an SBIC license, sources told Buyouts
magazine, published by Thomson Reuters. For the Cleveland firm,
which has more than $3 billion in capital under management in
North America, Europe and Asia, this “microcap” fund would be
its first SBIC since its founding in 1988. The fund would be
earmarked for equity investments in small buyouts.

OTHERS IN SBIC HUNT

Also in the SBIC hunt is LongueVue Capital of Metairie,
La., a buyout shop that targets small-cap companies. LongueVue
is completing paperwork now that could enable the firm to
license its current fund-raising effort as an SBIC, said a
person with direct knowledge of its plans. LongueVue, which
according to its Website raised an $82 million equity fund in
2001 from a group of wealthy investors, is targeting at least
$50 million for its planned SBIC fund, but could raise as much
as $75 million.

While LongueVue plans to use the SBIC fund primarily to
provide debt financing for its equity deals, it also could use
it for direct equity investments in target companies, the
source said.

Nicholas Marshi, the chief investment officer of Southland
Capital Management, a hedge fund in Santa Monica, Calif., said
interest in SBICs is also strong among business development
companies, a category of publicly traded closed-end funds that
provide debt or equity to small businesses.

“At least half the 24 companies we track have arranged or
applied or are considering applying for an SBIC license,”
Marshi wrote in October on his blog, BDC Reporter.

Why the sudden interest? In a market where leverage can be
hard to find, especially for smaller deals, SBICs represent a
versatile, inexpensive funding mechanism. A sponsor raises
funds for an SBIC like any other fund, but the government does
impose limitations. The initial fund can be no larger than $75
million, and no single limited partner can provide more than 70
percent of the commitments.

As the fund makes its investments, it can borrow up to $150
million from the SBIC Funding Corp, an arm of the U.S. Small
Business Administration, at a rate tied to 10-year Treasury
bonds. The agency also limits its lenders to “two tiers” of
leverage, so an SBIC fund tops out at $225 million, with some
exceptions. The SBIC Funding Corp priced nearly $563 million of
10-year debentures in September at 3.215 percent, the lowest
rate at the semi-annual pricing since the SBA established its
debenture program in 1958.

For all their growing appeal, SBICs are no panacea.
Sponsors must comply with federal regulations and face audits
by the SBA. The money must be invested domestically, and it
must go to small businesses. By the employee head-count
standard used by most SBICs, target investments may have as
many as 500 to 1,000 workers, depending on the industry.

Mid-market sponsors have often shied away from raising SBIC
funds because of the perceived complexity. But, said Mark A.
Kromkowski, a partner in the Chicago office of the law firm
McGuireWoods LLP: “When they look at deals they could have
done, 85 to 90 percent fit.”

(Buyouts magazine is a Thomson Reuters publication. Editor:
[email protected] wwwbuyoutsnews.com)

BUYOUTS-Buyout firms plan SBIC vehicles