By Delphine Jones, PEF Services LLC
On January 19, 2016, the SBIA hosted its Northeast Private Equity Conference. Brett Palmer (the President of SBIA) provided an industry update. Some of the highlights from the presentation are provided below.
The capital gains exclusion was increased from 50% to 100% and it was permanent for Qualified Small Business investments. The foreign investor withholding exemption for Regulated Investment Companies (RICs) was also made permanent. This ruling may encourage foreign investors to invest in Business Development Companies (BDCs). Available leverage to SBICs (the family of funds limit) was increased from $225 million to $350 million.
The elimination of the favorable tax treatment for carried interest has been a hot topic for several years. While no decision has been made, smart money says that carried interest days are numbered. Carried interest has become a symbol of everything that is unfair and corrupt on Wall Street, with no staunch supporters in Congress.
SBA’s New Model LPA for SBICs:
While the general feedback is that there have been a number of improvements in the document, there is concern regarding the strict liability wording in the standard of care and indemnifications provisions in the Model (Sections 3.09 and 3.10). The language in the Model does not allow flexibility to tailor the standard of care and indemnification provisions to measures agreed upon between the SBIC management and investors. The SBIA believes the proposed language is much more restrictive than market norms and could not find any other investment partnership agreement with provisions similar to those proposed in the Model.
The SBIA continues to champion legislative reform for BDCs. It firmly believes that current legislation is outdated, burdensome, and makes it difficult for BDCs to raise capital. The SBIA’s recommendations include changing the asset coverage ratio requirement from 1:1 to 2:1, adding financial companies as qualifying assets, and streamlining the registration and offering process.