By Peter Stern, PEF Services LLC
On April 19, 2016, PEF Services was a contributing sponsor of a Capital Roundtable conference for the private equity community focusing on the question “Is the SBIC program right for you?” A question we typically hear – “Is dealing with the government worth it”? I believe that the answer to both of these questions is YES! The program works. The government wants the funds to make money and the GP to get carry. For these funds to be successful, they typically need to invest in approximately twelve to eighteen portfolio companies over a 4-5 year period. If managed correctly, as one fund winds down a new fund emerges to continue the legacy.
The conference focused on the moderators and panelists sharing war stories about their experiences in dealing with the SBA. The common thread was to tell the SBA everything, beginning with your initial license application and continue through the life of the fund.
The segment most interesting to me was titled “Efficient Tax Strategies for your SBIC”. There were discussions related to the impacts and pitfalls of phantom income, the Small Business Stock Gains Exclusion (Section 1202) and how the gain excluded from income is not subject to the 3.8 percent surtax on investment income on high-income taxpayers. My last point of interest is relating to management fee waivers and how the general partners will need to take an entrepreneurial risk in order for the management fee waiver not to be considered ordinary income (treated as payment for services).
In summary, the conference was a great place to meet and greet fund managers like Marilyn Adler of Medley, who have been successfully navigating the SBIC program for many years, and say good bye to Michael B. Staebler of Pepper Hamilton, a true pillar of the program who assisted in the formation and licensing of over 254 SBICs and who has announced his retirement at the end of the year.