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SBIC Lenders Grow in Small Bank Space

Saratoga Investment Corp., Fifth Street Finance Corp. and Victory Park Capital Advisors LLC are among the lenders looking to move into a space previously occupied by community banks

More lenders may be getting their Small Business Investment Company (SBIC) licenses, as bank consolidation continues and lower middle-market businesses seek financing. The Small Business Administration's (SBA) SBIC program provides an entryway for lenders looking to move into a space previously occupied by community banks, many of which have been acquired and no longer originate loans suited to small businesses.

Companies that have recently gotten SBIC licenses include Saratoga Investment Corp. (NYSE: SAR), which got program approval in March, Fifth Street Finance Corp. (Nasdaq: FSC), which got a second license in June and Victory Park Capital Advisors LLC, which joined the program in December.

In fiscal year 2012, the SBA approved 30 new SBIC lenders and had 57 applications in the pipeline for approval, according to data from the SBA's 2012 annual report. The group can make loans to companies with a net book value of less than $18 million.

Victory Park, headquartered in Chicago, got its SBIC license in December 2012 so it could lend to smaller and healthier companies. The firm focuses on private debt, lending, traditional private equity investing and distressed debt opportunities.

"I can't sit here and tell you that there's always going to be a market for lower middle-market distressed lending opportunities," says Brendan Carroll (pictured), a partner at Victory Park. Since the company got its SBIC license, it has closed one deal and hopes to close three or four in 2013.

Fifth Street, through Fifth Street Mezzanine Partners V LP, got its first SBIC license in 2010, and its second in June 2012.

"If you think back to 2009, no one was really lending then, "says Dean Choksi, head of investor relations fo Fifth Street. "Banks weren't extending credit, so it was a source of debt capital."

"I don't see access to capital for smaller borrowers increasing very soon," Choksi says.

When Fifth Street extends an SBIC loan, it is usually used for an acquisition or to refinance an acquisition that was previously made, according to Choksi.

Before a company can get its SBIC license, it has to go through a lengthy application process, which can take more than a year, including background checks and investigations into a company's underwriting practice. The SBA does an "intensive job kicking the tires," says Choksi

Once that process is complete, SBIC licensees still have certain guidelines to follow regarding the type and size of companies they can work with - but that doesn't deter applicants. The SBA received 61 applications in fiscal year 2012.

The loans provide lenders with a reduced cost of capital, allowing them to be more competitive.

"I'm seeing more institutions like us look to get their licenses," says Victory Park's Carroll.


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