2/12/20081NEW MARKETS VENTURE CAPITAL (NMVC) PROGRAMU.S. Small Business Administration (SBA)Investment DivisionOffice of New Markets Venture Capital2/12/20082What is the purpose of the NMVC program?To spur economic development in Low Income (“LI”) areas through equity investingProviding access to patient capitalRevitalizing inner-city and rural areasCreating wealth and job opportunities 2/12/20083How does the NMVC program achieve this policy objective?Public/private partnerships --Leveraging private sector capital and investment skills with Federal dollars for maximum investment potentialOperational assistance grants --Providing matching Federal funds for hands-on technical assistance2/12/20084NMVC CompaniesNew for-profit entities (Corp, LP, LLC)Made up of private investorsPrivately managed by experienced teamsFocused on economic developmentFormed to provide developmental venture capital and operational assistance to smaller enterprises in targeted LI areas2/12/20085Typical Venture Capital Company10-year limited partnership (“LP”)Funded with LP commitmentsYears 1-5: makes approximately 20 investmentsYears 6-10: creates value and liquidityManagement shares in profitsCapital requirements for an NMVC Company: Minimum $5 million of private capital from non-Federal sourcesMinimum $1.5 million of matching grant resources from non-SBA sources2/12/20086Unique Features of an NMVC Company“Double bottom line” of both financial return to investors and improvement of LI areas Provides intensive operational assistance to small business directly or through third parties, e.g. universitiesFund manager controls capital and grant money. If done well, this benefits both small business and fund investors 2/12/20087SBA’s Financial SupportGuarantee debentures issued by NMVC CompaniesMake grants to NMVC Companies for operational assistance to smaller enterprises2/12/20088Advantages to InvestorsLow Cost 1:1 Leverage on equityFund manager directs grant funds for 60% more resources to enhance investments Potential New Markets Tax Credit up to 39% over 7 yearsCRA credit for financial institutions2/12/20089Advantages to Portfolio CompaniesLong term risk capital Proactive investorNo cost operational assistance2/12/200810What is SBA’s role?Select NMVC Companies Ensure national and rural/urban distribution of program benefitsProvide oversight2/12/200811NMVC Program FundingFiscal Year 2001 funding by Congress:$150 million for debenture guarantees ($100 million discounted amount) $30 million for operational assistance grantsTotal public/private resources:$200 million for investing$60 million for operational assistance2/12/200812Terms of DebentureCost is approximately 100 basis points over comparable US Treasury securitiesNo SBA front end or annual feesFace amount discounted at issueNo interest in Years 1-5Semi-annual interest only in Years 6-10Balloon repayment of principal at end of Year 10Prepayable without penalty after Year 1Debenture placed directly with a financial affiliate of U. S. government2/12/200813Terms of Operational Assistance GrantsDollar-for-dollar match required (up to 50% in-kind contribution permitted)Disbursed over 4.75 yearsMust not to be used for general and administrative expenses, including overhead2/12/200814SBA OversightAnnual compliance examinationsGrant funding subject to auditAnnual financial reports and additional reports are requiredCross default between grant award and debenture guaranty2/12/200815NMVC InvestingAt least 80% of the businesses that the NMVC Company finances must:Be “smaller enterprises”Receive “equity capital investments”Have their “principal office” located in a LI area80% of dollars invested must also meet criteria2/12/200816Smaller EnterprisesBusinesses that, together with their affiliates:Have $6 million net worth and average after-tax income not exceeding $2 million for the preceding 2 years, orMeet SBA’s size standard based on revenue or employment criteria2/12/200817Equity Capital InvestmentsCommon or preferred stockLimited partnership interestsOptions, warrants, or similar equity instrumentsSubordinated debt with equity features as long as debt is not amortized and provides for interest payments contingent upon and limited to the extent of earningsMajority or 100% ownership permitted2/12/200818Low-Income (LI) Geographic AreasHistorically Underutilized Business (HUB) ZonesRural and Urban Enterprise Zones and Empowerment CommunitiesAny census tract or equivalent county division:That has a poverty rate of at least 20%, orThat qualifies for the Low Income Housing Tax Credit, orThat is a non-metropolitan area and has a median household income of no more than 80% of the statewide median household income2/12/200819Selection ProcessInitial ScreeningTimeliness and completenessDue DiligenceReference and background checksReview of eligibility and targeted LI AreasPanel ReviewEvaluation of investment, community development, management and execution capabilitiesConditional ApprovalApplicants notified to secure private resourcesFinal ApprovalParticipation agreement signed and grant funds obligated2/12/200820Timeline for 1st. Round ApplicationTwenty-three applications covering 27 states and DC received by deadline of May 29, 2001SBA evaluated applicants and gave Conditional Approval to seven on July 9, 2001Private matching resources must be closed by December 31, 2002 to be granted Final ApprovalAppropriated funds for operational assistance grants available for five years from commitment2/12/200821Proposed Investment Areas of Conditionally Approved NMVC Companies (CA NMVC)Adena Ventures:29 counties in Southeastern Ohio, 18 counties in Northeastern Kentucky, entire state of West Virginia, 3 counties in Western Maryland.CEI Community Ventures Fund:Eligible census tracts throughout Maine, New Hampshire and Vermont, with the majority of tracts being in the Northern regions of those statesDingman New Markets Growth Fund:The District of Columbia, 3 Maryland counties in the DC metro area; and Baltimore City, Maryland Murex Investments I:15 counties in Eastern Pennsylvania, 8 counties in Southern New Jersey, 2 counties in Northern DelawarePennsylvania Rural Opportunities Fund:33 counties in Central PennsylvaniaThe Southern Appalachian Fund:111 of 122 counties in Kentucky, 88 of 95 counties in Tennessee, 34 counties in Northern Alabama, 21 counties in Northern Georgia, 19 counties in Northern MississippiSouthwest Development Fund:The entire state of Arizona, with particular focus on the Phoenix and Tucson areas2/12/200822CA NMVCs Proposed Investment Areas Arizona2/12/200823More InformationSBA’s web site:http://www.sba.gov/inve-mail: nmvc@sba.govPeter C. Gibbs, Deputy Director, New Markets Venture Capital Program202-205-7574