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SBA’s Latest Approach Incentivizes Impact Investments in Underserved Areas
Written by Matt Camp, ICIC
Since 1958, the SBA’s Small Business Investment Company (SBIC) Program has worked to expand the pool of long-term capital available to America’s small businesses. Within the last five years alone, the SBIC has invested more than $13 billion in small businesses, with over 6,300 firms receiving funds. Yet, desp
ite the broad impact of the SBIC program, only 22% of businesses financed were located in low-to-moderate (LMI) areas.
That’s why, in 2011, the SBA announced the launch of the SBIC Program’s Impact Investment Initiative, which provides $1 billion (over 5 years) to investment funds seeking to generate both social and financial returns, particularly in the country’s most underserved regions.
Here’s how it works: in order to qualify for an Impact Investment license, fund managers must deploy at least 50% of the total dollar amount of investments into Impact Investments. Impact Investments are investments in areas of critical national importance, such as education and clean energy. Impact Investments can also be place-based, meaning that at least 35% of the small business’ full-time employees live in LMI or economically distressed areas. Once licensed, the SBIC uses privately raised capital and SBA guaranteed leverage (up to 2x private capital) to make investments in small businesses.
The program is structured as a three-way collaboration between the SBA, Impact Investment SBIC Managers and Impact Investment Limited Partners (LPs). The Managers form the fund with the impact investment focus, apply for the SBIC program and then manage and make investments through the fund. The SBA educates investors and fund managers on the program, implements the expedited licensing track and provides the leverage for the fund. Meanwhile, the LPs serve as the investors, negotiating with fund managers and investing capital into the impact funds.
In an information-gathering exercise earlier this month, the SBA convened a group of national stakeholders at the White House to highlight the importance of the SBIC program and glean insight as to the effectiveness and deployment of Impact Investment licenses thus far. ICIC joined as part of this round-table conversation. Topics included the gaps in impact investing, evidence of success, trends, and focus
areas such as industries and geographies.
What we learned is that there is indeed money reaching low-income communities, particularly around the education and energy sectors, but there is a greater need for more funds to reach small businesses in LMI communities.
Importantly, the SBIC’s Impact Investing program has created an incentive to encourage more institutional capital to be directed towards impact investments in LMI areas. Without these incentives, the private sector might not be as inclined to consider LMI areas for investments. Moreover, the SBA is allowing private investors who qualify for the license to leverage their money by a 2:1 ratio, meaning that
investors who may be new to the space but who are already targeting underserved communities can leverage additional capital.
It was important for ICIC to take part in this roundtable discussion because we’re focused on improving the economic conditions and growing small businesses in these underserved communities; as incentive programs like these take root, we hope to have made the urban core a more attractive and investment-ready target.