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BDCs Are Going For SBICs

BDCs (business development corporations) are now able to qualify for SBIC licenses, which are “back in vogue” with the benefits of access to low-cost capital, according to Mark Kromkowski, a private equity partner at law firm McGuireWoods LLP.

SBICs (small business investment companies) receive up to $150 million in cheap leverage from Uncle Sam. How cheap? “The cost of the SBA’s capital is roughly equal to the 10 Year T-Bills plus 200-225 basis points and is fixed at the time that the SBIC Fund draws down the leverage,” Kromkowski said.

Thanks to a new policy, BDCs can now qualify for SBIC licenses. Mid-market BDC Fifth Street Finance has already applied for one, after its investment committee met in May and received the go-ahead.

Boathouse Capital, a new mezzanine fund formed by former American Capital pros, also applied for an SBIC license. The firm is also in fund-raising mode with a target of somewhere between $75 million and $225 million, peHUB previously reported.

And despite turmoil in the BDC sector, traditional mid-market lenders are considering converting to the fund structure as it may be the most sustainable way to survive the credit crunch. Last month, a source close to Churchill Financial told peHUB that the firm may see the BDC business model as ideal in the aftermath of the credit crunch. “If the BDCs survive mark-to-market, delever and have a pool of assets that post a dividend, they could start to raise new capital,” the source said.

Started in 1958, the SBIC program “remains healthy,” Kromkowski said. It takes anywhere from six months to a year to obtain a license. Kromkowski said the ideal groups for the program have three to five managers who have three to six years of experience together and have exited with an IRR of 10% to 14% or higher. The licensees are able to leverage existing capital by around double and the leverage is available to be drawn down over a five-year period, with repayment within the life of the typically ten-year-long

You can download comments about the SBIC application process and its benefits in an interview with Kromkowski via VentureXpert, a sister product to peHUB, here:

Interview with Mark Kromkowski, a Private Equity Partner at McGuireWoods LLP.

Previously:

The Good News and Bad for SBICs, Per the New Stimulus Bill

What’s Next for Churchill and Peers?

Len Tannenbaum: “There’s Been Major Capitulation”