sbic presentation

The ABCs of SBICs

Why SBICs Can Make Great Investment PartnersJanuary 17th 2013January 17th, 2013

Saratoga Investment Corp.

Saratoga Investment Corp. is a publicly traded (NYSE: SAR) business development company (BDC). We provide customized financing solutions for middle market companies located in the United States Our investment professionals have a combined 80+ years oflocated in the United States. Our investment professionals have a combined 80+ years of experience investing over $4 billion in middle market businesses.

We typically make $3 million to $15 million investments in:We typically make $3 million to $15 million investments in:

Leveraged & Management Buyouts | Recapitalizations | Growth FinancingsAcquisition Financings | Transitional Financings

Joe Burkhart is a Managing Director and leads Saratoga’s new business efforts. Previously, he was the Director of Business Development for American Capital’s Private Equity Group. Prior to joining American Capital, Mr. p q y p j g p ,Burkhart was Managing Director at EJF Capital a $3 billion hedge fund focused on credit strategies. Mr. Burkhart began his career at Allied Capital Corporation. Mr. Burkhart has a bachelor’s degree in accounting from the University of Notre Dame and an MBA from the Darden Graduate School of

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yBusiness Administration at the University of Virginia.

Overview of SBIC Program

Small Business Investment Company (SBIC) Program• Multi-billion dollar investment program created in 1958 and

administered by the Small Business Administration (SBA)• Mission is to bridge the gap between business owners’ need for

capital and the lack of traditional sources of financingcapital and the lack of traditional sources of financing• SBICs operate as a public-private partnership

– Government does not directly invest in small businesses, but provides SBA-guaranteed leverage to privately owned and managed investment funds

– Funds make loans and investments into qualifying small businesses – These funds are licensed by the SBA and are subject to their legal

authority to ensure they operate in compliance with SBIC Program rules and regulations

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SBIC Overview

SBIC Basics

• The SBIC offers qualified funds leverage of up to two times investors' capital commitment at very competitive interest ratesinterest rates

• SBIC program has provided over $60 billion of long-term debt and equity capital to more than 107,000 small U.S. companies

• “The SBA's program is rigorous and so, for many investors, has an added benefit of another la er of diligencebenefit of another layer of diligence analysis.” Mario Giannini, CEO Hamilton Lane (Pension & Investments November 26, 2012)

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SBIC Overview

The SBA relies on the sound judgment of SBIC fund managers to identify promising small businesses. The SBA plays no role in the investment decision-making process of

its licensees. However SBICs are subject to certain restrictions to ensure their financingits licensees. However, SBICs are subject to certain restrictions to ensure their financing goes to the kinds of companies the program is designed to assist.

SBICs may . . . SBICs may not . . . • Invest in small businesses using loans, debt

with equity features or straight equity• Invest in small businesses located in the U.S.

or its territories

• Invest in companies with more than $6mm in Net Income

• Invest in companies with less than $18mm in Tangible Book Value

• Invest in small businesses in a variety of sectors, such as manufacturing and consumer goods

g• Invest an amount greater than 30% of their

Regulatory Capital in any one business• Invest in businesses with more than 49% of

their employees located abroadtheir employees located abroad• Invest in project finance, real estate,

financial intermediaries or sectors deemed contrary to the public interest

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• Control small businesses for more than seven years without SBA approval

SBIC Program Highlights

• In FY 2012, SBICs provided $3.1 billion in financing to over 1,000 small businesses, a 17% increase from FY 2011 and an 83% increase from FY2010

• SBA estimates these financings created or sustained over 65,000 jobs

• SBA approved $1.9 billion in SBA-guaranteed leverage commitments to SBICs, a 65% increase over commitments issued in FY 2010 and an 87% increase over commitments issued in FY 2008

• Private and SBA capital under active management reached over $18 billion, distributed across 301 operating SBICs p g

• SBA licensed 30 new SBICs in 2012 that have raised approximately $1 billion in private capital

• The Trust Certificate rate for debentures reached 2.245%, the lowest costThe Trust Certificate rate for debentures reached 2.245%, the lowest cost of capital in over a decade

• The SBIC debenture program has historically operated at zero cost to taxpayers

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ta paye s


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Source: SBIC Program 2012 Annual Report


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What is Mezzanine Financing?

Mezzanine financing is the portion of a company’s capital that sits between senior debt and common equity in the form ofbetween senior debt and common equity in the form of subordinated debt, preferred equity, or some combination of these two securities. While mezzanine financing can be structured in a n mber of a s common characteristics incl denumber of ways, common characteristics include:• Subordinate to senior debt in terms of payment priority and

senior to common equityq y• Unlike bank loans, junior capital is typically unsecured and

commands a higher yield than senior debt• Limited fixed principal amortization• A portion of the return is fixed making this type of security less

dilutive than common equity

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dilutive than common equity.

SBIC Mezzanine Financing

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Common Uses of SBIC Mezzanine Financing

Shareholder LiquidityThe owner agrees to sell a portion of the business to other existing shareholders. The company borrows a combination of senior debt and mezzanine capital. The proceeds are used to buy out the selling shareholder at a fair market value providing other shareholders with controlling interestselling shareholder at a fair market value, providing other shareholders with controlling interest.

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Common Uses of SBIC Mezzanine Financing

• Acquisition Financing• Growth Capital• Dividend Recapitalizations

S P i E i fi h ki i i i• Support Private Equity firms when making an acquisition

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Considerations when Seeking SBIC Mezzanine Financing

Certain business or transaction characteristics that make it difficult to utilize mezzanine financing include:• High customer concentration• Capital expenditure intensive business• Capital expenditure intensive business• Lack of management• Commodity-like products or servicesCommodity like products or services• Cyclicality resulting in volatile cash flow• Total debt exceeding 60% – 65% of the market value of the

company

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Resources

Visit my LinkedIn profile for more information . . . www.linkedin.com/in/josephsburkhart/

SBA Annual Report SRR Mezz Overview SAR Overview

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Contact Information

Joe BurkhartManaging DirectorS t I t t CSaratoga Investment Corp.535 Madison Avenue, Fourth FloorNew York, NY 10022Tel: 212.906.7840 [email protected] http://www.saratogainvestmentcorp.comp // g phttp://www.linkedin.com/in/josephsburkhart

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sbic presentation

Economy & Finance

sbic program highlightssource

sbic debenture program

sbas program

sbic overviewthe sba

dollar investment program

sbic overviewsbic basics

sba capital

qualifying small businesses