The U.S. Small Business Administration (SBA) is set to channel billions into venture capital funds, reshaping the Small Business Investment Company (SBIC) program.
What Happened: With a goal to amplify investment into U.S. startups, especially those in underserved areas and industries crucial to national security, the move marks a pivot towards modernizing the U.S. investment landscape, according to an Axios report.
Historically, the SBIC program favored debentures with semi-annual interest payments, largely appealing to mezzanine debt, private credit funds and certain Community Reinvestment Act credit-qualified investment vehicles, Axios said.
The participating securities program, a non-debt alternative, was shuttered in 2014 due to the potential risks of making the government vulnerable to General Partners (GPs) and Limited Partners (LPs).
The updated SBIC program offers debentures where interest accrues over a fund’s lifespan, which better aligns with the cash flow models of Market Over Invested Capital (MOIC) strategies. It also obliges funds to channel their investments exclusively into U.S. small businesses, using the SBA’s expansive metrics.
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Bailey DeVries, the SBA’s head of its Office of Investment and Innovation, underscored the crucial role of the SBIC program in diversifying venture capital investment beyond popular sectors like B2B Software as a Service (SaaS), according to the report. DeVries suggests the refreshed SBIC program could address market gaps, making it attractive to venture into perceived riskier territories.
With the updated program, investors may want to keep an eye on the ROBO Global Robotics & Automation Index ETF ROBO, which focuses on robotics and AI, and the VanEck Vectors Semiconductor ETF SMH, which may benefit given the emphasis on critical technology sectors.
Numbers To Watch: With an allocation of up to $6.9 billion for fiscal 2024, the SBA is gearing up for substantial funding support, the report said. It’s worth noting that while fiscal 2021 saw a full utilization of its $4 billion allotment, fiscal 2022 recorded a disbursement of $3.8 billion from its $5 billion authorization.
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