# Presentation: 079140

## NEW MARKETS VENTURE CAPITAL (NMVC) PROGRAM

- U.S. Small Business Administration (SBA)
- Investment Division
- Office of New Markets Venture Capital

## What 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

## How 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 assistance

## NMVC 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 areas

## Typical 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 sources

## Unique 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

## SBA’s Financial Support

- Guarantee debentures issued by NMVC Companies
- Make grants to NMVC Companies  for operational assistance to smaller enterprises

## Advantages 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 institutions

## Advantages to Portfolio Companies

- Long term risk capital
- Proactive investor
- No cost operational assistance

## What is SBA’s role?

- Select NMVC Companies
- Ensure national and rural/urban distribution of program benefits
- Provide oversight

## NMVC 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 assistance

## Terms 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. government

## Terms 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 overhead

## SBA Oversight

- Annual compliance examinations
- Grant funding subject to audit
- Annual financial reports and additional reports are required
- Cross default between grant award and debenture guaranty

## NMVC 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 criteria

## Smaller 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 criteria

## Equity 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 permitted

## Low-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 income

## Selection 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 obligated

## Timeline 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 commitment

## Proposed 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 areas

## CA NMVCs Proposed Investment Areas 

_**CA NMVCs Proposed Investment Areas **_

- Arizona

## More Information

- SBA’s web site:
- http://www.sba.gov/inv
- e-mail:
- nmvc@sba.gov
- Peter C. Gibbs, Deputy Director, New Markets Venture Capital Program
-  202-205-7574