Small state aid

In March, the US Small Business Administration once again helped pave the way for limited partners to invest in the US priva, te equity and venture capital industry, by licensing New Orleans-based LongueVue Capital’s second fund and North Carolina-based SJF  Ventures’ third fund. 

For SJF Ventures, acquiring the Small Business Investment Company license will help the fund garner commitments from banks that otherwise will be prohibited from investing in equity funds as a result of the Volker Rule.

“Banks have always been important limited partners for us,” says SJF Ventures co-founder and managing director David Kirkpatrick. “Given that we had banks ready and eager to invest in our fund, they had to get regulatory approval. When you have the SBIC license, it’s kind of automatic.”

Citi Community Capital, the community development lending and investing group of Citi, is the lead investor in the fund, having committed $15 million. 

SJF Ventures III aims to invest in businesses that deliver “strong social and environmental impacts”, according to a statement. The firm’s areas of focus include efficiency and infrastructure, recycling, sustainable agriculture, food safety, and technology-enhanced services.

SJF is the first sector-focused fund to be licensed by the SBA as part of its Impact Investment Initiative to invest up to $1.5 billion in small businesses in the US. (Last year, the organisation licensed the $130 million geographically-focused small business fund InvestMichigan, which is managed by Credit Suisse’s Customized Fund Investment Group).
LongeVue Capital Partners II benefits from the partnership with the SBA in a different way, as a portion of the $175 million fund will be accessed through the SBIC programme, which last year entered into a similar arrangement with mid-market investor The Riverside Company.

In September, the SBA made up to $150 million of low-interest rate debt available to Riverside’s $137 million second micro-cap fund, taking the fund’s total firepower to $287 million. The firm’s first SBIC fund, Riverside Micro-Cap Fund II invests in control positions in companies with under $5 million in EBITDA.

The fund employs the same strategy as its predecessor (which collected $250 million in 2006) with one important difference, Riverside co-chief executive officer Stewart Kohl told Private Equity International in September: “Some of the $287 million is available not just for the equity component of the transaction but also for debt, whereas the $250 million in the first fund could also be used both ways but was overwhelmingly used for equity,” he said.

Not everyone is convinced – yet – that this kind of government tie-up is a good idea. “There is a cohort of investors who have a perception of SBA funds based on maybe other experiences – that they’ve not always had the best managers, and that the structure of an SBA fund does give the SBA a preferential position,” says Kohl.

Still, the SBIC programme has had a positive impact on the financing of small businesses in the US. In fiscal year 2011, the programme provided a record $2.59 billion to small businesses, a 63 percent increase compared to 2010, which itself represented a 50 percent jump from the previous year.

That growth could be accelerated by more partnerships with private equity firms in the future, according to Kohl. “I think the SBA is eager to increase the number and quality of private equity firms it works with and as folks have a good experience – assuming we do – naturally more will want to do it, because it is cheap and patient capital,” he says. “Our experience so far has been good.”