Provision
Typical Side Letter Requests
Additional Notes on These Provisions
Granting advisory board seats is often conditioned on meeting a certain size threshold and is more likely to be granted if the bank comes in at earlier closings than at a final closing.
Advisory board participation
An advisory board seat for larger capital commitments is common.
No guaranty, opinion or financial information owed to the SBIC fund’s subscription line lenders, no deemed consents, minimum notice periods for capital calls, notice of other limited partners’ defaults, and the option to opt out of certain alternative investment vehicles.
These are generally routine requests, but responses and specific language vary by SBIC fund manager.
Other investor protections
One practical point is that a bank’s side letter is not effective until approved by the SBA. However, the SBA permits provisions that relate solely to the bank’s ability to make the investment to become effective upon execution rather than upon SBA approval. This is a generally accepted approach among SBIC fund managers for encouraging bank investment before the SBIC fund receives its SBIC license. 5. The Principal Risks of Investing in SBIC Funds and How Banks Can Manage Them An SBIC fund interest is still a private fund investment, notwithstanding the SBA licensing requirement and oversight. The principal risks are familiar: illiquidity, manager selection, credit and equity market risk, valuation uncertainty, leverage, concentration, and limited investor control. The SBA framework mitigates some of these risks, but not all. The SBIC licensing process screens the SBIC fund manager and strategy. Ongoing reporting and examinations encourage compliance and adoption of best practices by SBIC funds. The SBA’s eligibility and diversification rules provide helpful guardrails as well. However, none of these protections change the basic reality that a poorly chosen SBIC fund manager or a weak vintage can lose money. The bank’s best protection remains disciplined SBIC fund manager selection, conservative sizing, diversification across managers and vintages, and a comprehensive due diligence and legal review process for each SBIC investment. 6. Takeaways for Bank Investors For sophisticated bank investors, SBIC funds can be a productive tool for accessing private fund returns while supporting CRA objectives and generating ancillary commercial benefits. A well-selected SBIC fund offers access to a diversified pool of small business private credit and equity investments, the potential to enhance returns through SBA leverage, a clear Volcker Rule exclusion, the possibility of CRA credit, and potential access to new senior lending and treasury management relationships. The IAA Act increased the leverage caps for individual funds and families of funds, which is expected to increase the size of funds in the SBIC program and, in turn, to draw larger institutional investors and SBIC fund managers into the program. 14 How Bass, Berry & Sims Advises Both Banks and SBIC Fund Sponsors The Bass, Berry & Sims Investment Funds team represents both SBIC fund sponsors and their institutional investors. We are one of the few practices nationwide representing both SBIC funds and Rural Business Investment Company (RBIC) funds. We guide sponsors through licensing, formation and capitalization, then through post-licensing compliance, SBA examinations and investment activity. At the end of an SBIC fund’s life, we handle the orderly wind-down process, the repayment of SBA leverage and the surrender of the license.
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