SBIA Legislative & Regulatory Priorities
SBIA Legislative & Regulatory Priorities
The Small Business Investor Alliance is the association of senior investment professionals focused on the lower middle market whose members represent the entire private capital ecosystem. For more than 60 years, the association has worked to promote domestic investment and the growth of small businesses that fuel the American economy and create U.S. jobs. SBIA recommends the following policies to unleash more capital for job creation and economic growth.
Preserve Carried Interest. Under the “carried interest” model, the General Partner is paid profits only if the fund’s portfolio companies are profitable and successful, which helps align the General Partner’s economic interests with those of the capital investors.
- This alignment of interests is particularly important and strong for smaller funds investing in smaller businesses because private equity is a long-term strategy that pays out, if at all, years after the initial investment is made.
- Scale matters in lower middle private equity investing. The smaller the fund, the more likely it is to invest in domestic small businesses. The smaller the fund, the smaller the management fees are to run the fund and the greater the importance of the carried interest.
Opportunity Zones. Make Opportunity Zones attractive for small business investing (and job creation), not just real estate investments.
Interest Deductibility. Extend current framework using EBITDA (instead of EBIT) for the 30% limitation on interest expensing.
Section 1202. Modify Section 1202 of tax code to include SBIC investments made into socially disadvantaged business and in LMI areas and Opportunity Zones.
Acquired Funds Fees and Expenses (AFFE) Rule. Funds that acquire BDCs are currently required to provide a disclosure that inaccurately portrays the true costs of investing in BDCs. This disclosure essentially results in “double counting” the actual cost to shareholders of investing in BDCs.
- Because of this, the stock market indexes decided to remove BDCs, which led to an outflow of investment by institutional investors. The result has been less capital available for middle market businesses throughout the country.
- While the SEC proposed a rule to address this issue in August 2020, the SEC proposal does not ensure BDCs are re-included in the indexes. SBIA seeks a full exemption from the AFFE requirement for BDCs either through regulatory or legislative action.
New “MicroSBIC” License Class. Expand the suite of SBIC licenses with this entry-level class to attract participation from a more inclusive pool of talented entrepreneurs. The objectives of this new license class are:
- To remove unintentional barriers faced by minorities and women;
- To increase investment in underserved communities; and
- To increase access to patient capital for smaller businesses, particularly in underserved rural and metropolitan communities.
Allow the Issuing of Preferred Stock by BDCs. Congress could improve the long-term outlook for BDC portfolio companies by allowing BDCs to issue preferred stock to institutional investors in compliance with requirements under the Investment Company Act. This would help BDCs provide additional capital to their portfolio companies.
Permanent Co-Investment Relief (Joint Transactions). Joint transactions where a BDC and affiliated funds co-invest have become common in the industry as BDCs are frequently externally managed on a platform with private funds following a similar strategy. These platforms provide significant benefits to the BDC and its investors, including access to greater deal flow and broader investment diversification.
- Joint transactions are currently governed by a patchwork of no-action letters and exemptive relief orders. This patchwork, which was developed in part to address the specific considerations relevant to various BDC issuers, has created not only an uneven playing field in terms of investment capabilities, but also is restricting the flow of capital to portfolio companies.
- In April 2020, the SEC recognized the value of co-investment transactions and granted temporary exemptions in the wake of the coronavirus pandemic and extended the exemption in January 2021. SBIA continues to support the SEC permanently exempting BDC co-investment transactions rather than the current framework.
SBIC Bonus Leverage. Encourage existing SBICs to seek smaller enterprises in underserved communities/geographies by offering up to $25-50 million in additional leverage for investments in LMI (low- or moderate-income) areas and Opportunity Zones (maintaining SBA approved ratio of private capital to SBIC debentures). Zero subsidy, no appropriation needed.
SBIC Patient Capital. Waive existing geographic limits in current SBIC regulations to benefit underserved areas in all geographies.“Renewing America” Fund. Establish a permanent revolving fund from a one-time federal appropriation to provide equity financing to support domestic job creation and the growth of domestic small businesses in targeted industries and underserved areas.
Invest in Main Street. Amend the Small Business Investment Act of 1958 to rectify its historical mismatch with banking regulations and allow a bank or federal savings association to invest up to 15% of its capital and surplus in SBICs, subject to a bank regulator if above 5%.
SBIC Investment Capital. Recognize investment from universities, pension funds, and other state-chartered entities as regulatory capital, not “qualified non-private funds” subject to 30% cap/SBIC investment because those funds include private capital, not solely public capital.
- Reclassification would permit wider options for investment from universities, pension funds, and other state-chartered entities necessary to maximize earnings that retired public employees rely on.