1. The ABCs of SBICs
Why SBICs Can Make Great Investment Partners
January 17th 2013
17th,
2. Saratoga Investment Corp.
Saratoga Investment Corp. is a publicly traded (NYSE: SAR) business development
company (BDC). We provide customized financing solutions for middle market companies
located in the United States. Our investment professionals have a combined 80+ years of
States
experience investing over $4 billion in middle market businesses.
We typically make $3 million to $15 million investments in:
Leveraged & Management Buyouts | Recapitalizations | Growth Financings
Acquisition Financings | Transitional Financings
Joe Burkhart is a Managing Director and leads Saratoga’s new business efforts.
Previously, he was the Director of Business Development for American
Capital’s Private Equity Group. Prior to joining American Capital, Mr.
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Burkhart was Managing Director at EJF Capital a $3 billion hedge fund focused
on credit strategies. Mr. Burkhart began his career at Allied Capital
Corporation. Mr. Burkhart has a bachelor’s degree in accounting from the
University of Notre Dame and an MBA from the Darden Graduate School of
y
Business Administration at the University of Virginia.
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3. Overview of SBIC Program
Small Business Investment Company (SBIC) Program
• Multi-billion dollar investment program created in 1958 and
administered by the Small Business Administration (SBA)
• Mission is to bridge the gap between business owners’ need for
capital and the lack of traditional sources of financing
• SBICs operate as a public-private partnership
– Government does not directly invest in small businesses, but provides
SBA-guaranteed leverage to privately owned and managed investment
funds
– Funds make loans and investments into qualifying small businesses
– These funds are licensed by the SBA and are subject to their legal
authority to ensure they operate in compliance with SBIC Program rules
and regulations
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4. SBIC Overview
SBIC Basics
• The SBIC offers qualified funds
leverage of up to two times investors'
capital commitment at very competitive
interest rates
• SBIC program has provided over $60
billion of long-term debt and equity
capital to more than 107,000 small U.S.
companies
• “The SBA's program is rigorous and
so, for many investors, has an added
benefit of another layer of diligence
la er
analysis.” Mario Giannini, CEO
Hamilton Lane (Pension & Investments
November 26, 2012)
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5. SBIC Overview
The SBA relies on the sound judgment of SBIC fund managers to identify promising
small businesses. The SBA plays no role in the investment decision-making process of
its licensees. However, SBICs are subject to certain restrictions to ensure their financing
However
goes to the kinds of companies the program is designed to assist.
SBICs may . . . SBICs may not . . .
• Invest in small businesses using loans, debt • Invest in companies with more than $6mm
with equity features or straight equity in Net Income
• Invest in small businesses located in the U.S. • Invest in companies with less than $18mm
or its territories in Tangible Book Value
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• Invest in small businesses in a variety of • Invest an amount greater than 30% of their
sectors, such as manufacturing and Regulatory Capital in any one business
consumer goods • Invest in businesses with more than 49% of
their employees located abroad
• Invest in project finance, real estate,
financial intermediaries or sectors deemed
contrary to the public interest
• Control small businesses for more than
seven years without SBA approval
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6. SBIC Program Highlights
• In FY 2012, SBICs provided $3.1 billion in financing to over 1,000 small
businesses, a 17% increase from FY 2011 and an 83% increase from FY2010
• SBA estimates these financings created or sustained over 65,000 jobs
• SBA approved $1.9 billion in SBA-guaranteed leverage commitments to
SBICs, a 65% increase over commitments issued in FY 2010 and an 87%
increase over commitments issued in FY 2008
• Private and SBA capital under active management reached over $18 billion,
distributed across 301 operating SBICs
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• SBA licensed 30 new SBICs in 2012 that have raised approximately $1 billion
in private capital
• The Trust Certificate rate for debentures reached 2.245%, the lowest cost
of capital in over a decade
• The SBIC debenture program has historically operated at zero cost to
ta paye s
taxpayers
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17. What is Mezzanine Financing?
Mezzanine financing is the portion of a company’s capital that sits
between senior debt and common equity in the form of
subordinated debt, preferred equity, or some combination of these
two securities. While mezzanine financing can be structured in a
number
n mber of ways, common characteristics incl de
a s include:
• Subordinate to senior debt in terms of payment priority and
senior to common equity
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• Unlike bank loans, junior capital is typically unsecured and
commands a higher yield than senior debt
• Limited fixed principal amortization
• A portion of the return is fixed making this type of security less
dilutive than common equity.
equity
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19. Common Uses of SBIC Mezzanine Financing
Shareholder Liquidity
The owner agrees to sell a portion of the business to other existing shareholders. The company
borrows a combination of senior debt and mezzanine capital. The proceeds are used to buy out the
selling shareholder at a fair market value, providing other shareholders with controlling interest
value interest.
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20. Common Uses of SBIC Mezzanine Financing
• Acquisition Financing
• Growth Capital
• Dividend Recapitalizations
• Support P i
S Private Equity firms when making an acquisition
E i fi h ki iii
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21. Considerations when Seeking SBIC Mezzanine Financing
Certain business or transaction characteristics that make it difficult
to utilize mezzanine financing include:
• High customer concentration
• Capital expenditure intensive business
• Lack of management
• Commodity-like products or services
Commodity like
• Cyclicality resulting in volatile cash flow
• Total debt exceeding 60% – 65% of the market value of the
company
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22. Resources
Visit my LinkedIn profile for more information . . .
www.linkedin.com/in/josephsburkhart/
SBA Annual Report SRR Mezz Overview SAR Overview
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23. Contact Information
Joe Burkhart
Managing Director
Saratoga Investment Corp.
S t I t tC
535 Madison Avenue, Fourth Floor
New York, NY 10022
Tel: 212.906.7840
jburkhart@saratogainvestmentcorp.com
http://www.saratogainvestmentcorp.com
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http://www.linkedin.com/in/josephsburkhart
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