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Abstract
This report analyzes investments made by debenture SBICs, and compares them with regard to their size, location of assisted firms, and industries in which assisted firms operate, to investments provided by private venture capital funds. The SBIC program provides venture capital and mezzanine finance to start-up and expanding small businesses through SBICs, and is intended to fill the gap in smaller debt/equity financings, and to expand the reach of venture capital into underserved urban and rural markets. We find that debenture SBIC investments varied substantially from comparable private venture capital. Total financings by SBICs are much less likely to be in high-tech industries than those made by venture capital firms, are more dispersed regionally, and appear more likely to be in low- and moderate-income areas.
Introduction
This report analyzes the investments made by debenture Small Business Investment Companies (SBICs) between 1997 and 2005, and compares these investments with regard to their size, the location of assisted firms, and the types of industries in which assisted firms operate, to investments provided by private venture capital funds. The SBIC program makes capital available to small business investment companies that are privately-owned, for-profit companies licensed by the SBA to provide venture capital and mezzanine finance to start-up and expanding small businesses. Rather than provide assistance directly to small businesses, under the SBIC program, the SBA allows privately-operated venture capital funds to leverage their capital through SBA-guaranteed debentures or participating securities. The debenture SBIC program has specified job creation goals for companies aided by investments of capital for start-up or expansion. Provision of capital for start-up and early stage concerns is intended to fill the gap in smaller debt and equity financings, and to expand the reach of venture capital into underserved urban and rural markets.
As of 2005, the SBIC program had committed capital totaling $20 billion, with $5.7 billion mobilized with SBA leverage since FY 1994, and some $800 million in FY 2002 alone in over 4,000 financings (OMB, 2005). Currently, debenture and participating securities SBICs combined provide more than 62 percent of all venture financings, although reflecting the small size of SBIC investments relative to the industry, only 8 percent of total dollars invested (OMB, 2005).
Unlike other SBA programs, firms assisted by debenture SBICs are not required to meet a credit elsewhere test, under which a lender that originates a loan with a SBA guaranty must substantiate that the assisted company would not have received the loan without the guaranty. Nonetheless, to be consistent with SBA’s Strategic Goal #2 (i.e. to increase small business success by bridging competitive opportunity gaps facing entrepreneurs), debenture SBICs should make investments in companies that may not be able to secure financing from private venture capital sources.
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