Equity Firm Looks To SBA Program For Capital Idea

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Levine Leichtman Capital Partners is about to close its latest private equity fund. But this one is a little different from most.

The Beverly Hills investment firm is taking advantage of a little-known program administered by the U.S. Small Business Administration that provides inexpensive capital for equity investments in promising young companies. The Small Business Investment Company program is proving to be an increasingly popular option for private equity firms in this particularly challenging period for the investment community.

Levine Leichtman, which started fundraising this month, has already secured $69.5 million of a hoped-for $75 million in its SBIC fund, according to a Securities and Exchange Commission filing. The firm, which did not return repeated calls requesting comment, is set to become just the fourth SBIC in Los Angeles County.

Under the SBIC program, privately owned investment firms – typically private equity or venture capital – can receive leverage of as much as three times the amount of private capital they raise to make debt or equity investments in small businesses. Though the approval process can be difficult, firms that are accepted into the program have access to as much as $150 million in leverage.

To receive the funds, SBICs will issue 10-year debentures, which require semiannual interest payments. The SBIC will then use that capital to make loans to or purchase equity securities from small businesses.

While the SBIC program has existed for more than 50 years, many investors are unaware of it, said Brett Palmer, president of the National Association of Small Business Investment Companies trade group. Since the financial crisis, however, investment firms have been forced to look at alternatives to traditional private equity, which has led to a sharp increase in SBIC applications, particularly in California’s robust investment community.

“There are a lot more funds out West that are looking to become SBICs because they’re just discovering it,” he said. “It’s definitely a growing trend among private equity firms.”

There are about 300 SBICs in the United States, but the numbers are rising. According to the SBA, there were 23 SBIC licenses issued last year, more than double the number from 2009. Avante Mezzanine Partners SBIC LP, headquartered in West L.A., raised an $18 million fund last March, according to an SEC filing.

Palmer said there are about 50 financial firms currently raising funds for SBIC investment vehicles, and another 30 are preparing paperwork to apply to the program.

“Fundraising is very difficult for all private equity funds,” he said. Also, he noted that firms typically spend less time fundraising through the SBIC program because of the easy availability of leverage.

Levine Leichtman, founded in 1984, manages a $5 billion portfolio. Its SBIC fund is significantly smaller than its previous vehicles. That’s presumably because there is a statutory cap on the amount of leverage, so there are diminishing returns for larger funds.

Dennis Byrne, a spokesman for the SBA, said the minimum required amount of capital is $5 million, while the average SBIC fund is about $30 million.

Levine Leichtman’s, he said, “is at the large end of the scale.”

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