Venture fund operators cry foul over the SBA's bid to get a greater share of their investment profits.
In an effort to stop losing money in its equity-investment program, the SBA is seeking a larger stake in the profits generated by the venture funds it licenses. The agency's goal isn't to make money but to break even. Under existing rules, it provides two-thirds of the capital for Small Business Investment Companies, or SBICs, but receives a much smaller percentage of their profits. The SBA has asked Congress to increase its share to 33.3 percent, up significantly from its current take of about 10 percent. The change would affect funds started after September 30, 2004.
Fund managers argue that such a drastic change in the program's economics will dissuade private investors from putting up capital to start an SBIC. Critics maintain that private investors, who already take a back seat to the SBA in recovering investment losses, are unlikely to accept other unattractive terms, particularly a sizable decrease in their own share of profits. "The [SBIC] industry believes that would represent far too risky an investment for private investors for the potential gain they would get from investing in those SBICs," says Lee Mercer, president of the National Association of Small Business Investment Companies (NASBIC).