Impact Investment Initiative
Call for Action:
Download a PDF Version of this Call for Action
Download a PDF Version of the April 2011 Impact Investment Policy Memo
For over 50 years, the Small Business Investment Company (SBIC) program has partnered with investment fund managers and private investors to channel much-needed capital to small business concerns throughout the United States. In an effort to increase the program’s economic impact, the Small Business Administration (SBA) is launching an Impact Investment Initiative that seeks to:
- Proactively collaborate with institutional investors to identify and capitalize experience private equity fund managers to make “impact investments” into small business concerns.
- Provide expedited licensing and capital to fund managers who qualify to organize and operate an “Impact Investment SBIC.”
SBA will review this initiative on an annual (or more frequent) basis and, if needed, issue new guidance. If you would like to provide SBA with feedback regarding this initiative, please contact SBA at sbic@sba.gov. SBA will post representative comments and response online for public viewing, so please make sure that no private, proprietary or confidential information is included in any comment.
Quick Facts about the Impact Investment Program:
| SBA Committment: | $1 billion over 5 years, with $150 million committed in FY 2012 and $200 million committed each year thereafter |
| Maximum Leverage Per SBIC: | Up to $80 million dollars, with 1st tier of leverage available in the first year and the second available in subsequent years based on availability* |
| Investment Focus: | Place-based and sector-based investments |
| Licensing Process: | Expedited |
| Start Date: |
Licensing - April 2011 Leverage - Fiscal Year 2010 |
* See paragraph 2 of policy letter, dated April 7th, 2011, entitled, "Start-Up America Impact Investment SBIC Initiative".
Definition of an Impact Investment SBIC:
An Impact Investment SBIC must target deploying at least 50% of the total dollar amount of its investments into Impact Investments. Impact Investments are investments in Small Business Concerns (SBCs) which target areas of critical national priority including underserved markets and communities facing barriers to access to credit and capital. Impact Investment SBCs meet one or more of the following criteria:
- Place-based: SBCs located in or employing residents of, or with at least 35% of its full-time employees at the time of initial investment residing in, low or moderate income (“LMI”) areas as defined in CFR 107.50, or economically distressed areas (“EDAs”), as defined by Section 3011 of the Public Works and Economic Development Act of 1965, as amended, 42 U.S.C. 3161.
- Sector-based: SBCs in industry sectors that the Administration has identified as national priorities. Currently only clean energy2 and education have been identified as priority sectors. Additional sectors will be added over time in partnership with other mission-driven agencies.3
Notes:
1Section 301(a)(1) of PWEDA (42 U.S.C. 3161) provides that an area is economically distressed if it has a per capita income of 80 percent or less of the national average. Section 301(a)(2) (42 U.S.C. 3161) provides that an area is economically distressed if it has an unemployment rate that is, for the most recent 24-month period for which data are available, at least 1 percent greater than the national average unemployment rate. The Federal Highway Administration maintains a mapping tool that identifies economically distressed counties based on unemployment rate and per capita income located at http://hepgis.fhwa.dot.gov/hepgis_v2/GeneralInfo/Map.aspx.
2Included in this definition are any energy-saving qualified investments as defined in 13 CFR 107.50 the Energy Independence and Security Act of 2007 (Public Law 110-140) and implementing regulations have been designated as a qualifying sector for this initiative.
3SBA may add more sectors in the future as they are identified. SBA is working with both the Department of Energy and Department of Education to identify opportunities in these areas.
Implementing the Impact Investment Initiative:
SBA will proactively work with interested institutional investors to attract best-in-class fund managers to effectively create a three-way collaboration with SBA, private institutional investors (LPs) and qualified fund managers. Each of these three actors will play a critical role in ensuring the initiative’s success.
Role of the Small Business Administration:
Impact Investment SBIC LPs and fund managers can expect the SBA to:
- Educate interested institutional investors and potential fund managers on the SBIC program and how the SBA licenses and monitors its SBICs.
- Maintain a list of institutional investors that are interested in participating in this initiative to share information on the program and this initiative.
- Distribute names of existing SBICs and applicants that both qualify as an Impact Investment Fund and have consented to participate in this initiative. Only applicants that have successfully passed SBA’s initial licensing review (Phase I) will be included in this list. The list will include a brief description of each fund’s focus and contact information. Although SBA cannot recommend any fund, interested investors may contact SBICs and applicants should they be interested in learning more about that fund for a possible investment.
- Establish and implement an expedited licensing track to provide prompt consideration to Impact Investment Fund applicants, as described below.
- Provide up to three tiers of leverage against the Impact LP’s binding commitment plus any other qualified private capital raised by the SBIC(s), subject to such dollar limitations as SBA may determine (currently $80 million per Impact Investment SBIC).
- Perform regulatory oversight of the SBICs in accordance with SBA’s established rules, policies, and procedures.
- Require identification of Impact Investments by Impact Investment SBICs on SBA's SBIC Financing Form 1031.
- Regularly communicate with its partners on this initiative and consider changes for improvement as needed.
Role of Impact Investment LPs:
Private investors interested in achieving both financial and social-impact returns are critical to this initiative. Impact Investment LPs are institutional investors that seek both a financial and social-impact return and wish to participate in this program. Institutional investors:
- Keep SBA informed on ways to improve the SBIC program, especially in regard to this initiative.
- Recommend the SBIC program to qualified fund managers in which they have invested or are considering an investment and would qualify as an Impact Investment Fund.
- Consider investing in existing SBICs, funds currently in the SBA application process, and/or prospective applicants focused on impact investing.
- Perform their own due diligence and make their investment decisions in accordance with their own established investment evaluation criteria, time parameters and other factors they determine.
- Negotiate directly with the fund managers regarding the types of impact investments the fund will be expected to make.
- Establish their own guidelines/requirements with respect to such issues as LP reporting, which will be reflected in the limited partnership agreement.
Role of Impact Investment SBIC Fund Managers:
Experienced fund managers provide the foundation for this initiative by forming and managing the Impact Investment SBICs and ultimately making the critical investments in SBCs. Impact Investment SBIC applicants must submit the same documents, follow the same process, and meet the same high standards as any applicant to the SBIC program (See the SBIC Program application process for more information). However, impact investment fund applicants will benefit from an expedited licensing track (described below) and the opportunity to be part of the voluntary list provided to potential private institutional investors interested in Impact Investing.
To qualify as an Impact Investment SBIC applicant, the applicant must demonstrate the management team’s ability to deploy at least 50% of the total dollar amount of its investments into Impact Investments.
Applicants licensed as Impact Investment SBICs are expected to adhere to the business plan they proposed during the licensing process, particularly with respect to the Impact Investment focus. Impact Investment SBICs must identify their Impact Investments within the comments section of SBA’s Form 1031 and how they qualify. An Impact Investment SBIC that does not adhere to the business plan, as proposed during the licensing process, may not be eligible for subsequent debenture leverage commitments from SBA. Leverage draws under SBA's committment of leverage to an Impact Investment SBIC will be conditioned upon compliance with the Impact Investment Fund Requirements set forth in the section entitled: "Defintion of an Impact Investment."
How to Participate in the Impact Investment Initiative:
Limited Partners:
Interested institutional investors may contact SBA at impactLP@sba.gov to be part of this initiative. SBA has designated an Impact Investment LP point of contact that will receive the email and contact you.
Fund Managers:
Impact Investment SBIC applicants must submit the same documents, follow the same process, and meet the same high standards of the existing SBIC Application Process. However, impact investment fund applicants will benefit from the expedited Impact Investment Licensing Track described below:
SBA utilizes a three phased process to license its SBICs: Phase I – Initial Review; Phase II – Capital Raise; and Phase III – Licensing.
a. Phase I – Initial Review. During this phase, SBA reviews the business plan and the management qualifications. Applicants should identify that they wish to be considered for an Impact Investment Fund designation at the beginning of Phase I. If so, they should clearly identify how they meet the Impact Investment SBIC criteria in Section 2 of SBA Form 2181, Management Assessment Questionnaire (“MAQ”). If SBA confirms the qualification, SBA will place the applicant on the Impact Investment SBIC Expedited Track. This track involves the same qualification factors and analysis as for the regular SBIC program (see "Management Team Qualifications & Minimum Requirements"), with SBA’s commitment that Phase I review of applicants on this track will be completed within 60 days.
b. Phase II – Capital Raise. If SBA issues a green light letter to an applicant designated as an Impact Investment Fund, it will be asked whether it consents to being on the Impact Investment Applicant/SBIC list distributed to participating Impact Investment LPs. If the applicant consents, SBA will notify all participating Impact Investment LPs that the applicant has been given a green light, along with a brief description of the fund’s focus and their contact information. If an Impact Investment Fund Applicant fails to raise its targeted capital or determines for any reason during the licensing process that it prefers to be considered for licensing as a standard SBIC (not an Impact Investment SBIC), it will be returned to Phase I and will restart the process under regular processing.
c. Phase III – Licensing. An applicant who submits its application to become an Impact Investment SBIC will receive expedited consideration of its licensing application. In order to process the application as quickly as possible, SBA suggests that applicants adhere closely to SBA’s model limited partnership agreement and the additional guidance in Technote 15 and Attachment 2 in Technote 14. SBA’s goal is to complete its review of qualified Impact Investment SBIC license applications within 90 days.
Contact Us:
For more information about the SBIC Program and the application process, please visit the Office of Investment on SBA.Gov. We can also be reached via e-mail at sbic@sba.gov. For LPs interested in the program, please contact us at impactLP@sba.gov
| Attachment | Size |
|---|---|
| Impact_Investment_Call_for_Action.pdf | 482.52 KB |
| Impact_Investment_Policy_Memo_April_2011.pdf | 167.59 KB |
