Market Opportunity

The Landscape

The Lower Middle Market

There are over 100,000 smaller companies in North America that represent more than 90% of all private company investment opportunities. These small businesses are responsible for creating two-thirds of all new jobs in America, forming the backbone of the domestic economy.

Despite their critical role, these companies remain historically underserved by institutional capital. The vast majority of capital is concentrated in funds over $1 billion, which focus on larger transactions and overlook the lower middle market entirely. We have observed this creates a significant supply and demand imbalance.

With less capital chasing a substantially larger pool of opportunities, the lower middle market has the potential to offer favorable dynamics for disciplined investors.

Capital Available by Fund Size vs Universe of Companies by Revenue Size

The Role of SBIC Funds

Essentials of Small Business Investment Companies
What you Need To Know

The U.S. Small Business Administration's ("SBA") SBIC program seeks to stimulate and supplement the flow of private capital to the lower middle market in order to finance small business operations, growth, expansion, and modernization. The SBA does not invest directly into small businesses through the SBIC program but instead provides funding to qualified SBIC Funds. SBIC Funds invest exclusively in American small businesses, with the SBIC Funds identifying promising opportunities and the SBA providing match funding through low-cost financing up to $2 for every $1 of private capital raised.

SBA Licensed

SBIC Funds are licensed and regulated by the SBA with significant oversight and examination requirements. The SBA oversees a highly selective licensing process, and only seasoned managers are approved after rigorous vetting, with fewer than 20% of applicants receiving approval.

Attractive Financing

SBIC Funds receive SBA-backed financing at attractive rates and terms up to 2x the private capital they raise, providing a structural return advantage over non-SBIC private credit strategies. SBA-backed financing is typically structured with long maturities (up to 10 years), no interim amortization, and fixed, below-market borrowing costs, creating a stable and predictable capital base.

Enhanced Return Potential

The combination of attractive government-sponsored leverage on attractively priced credit assets leads to stronger returns than non-SBIC private credit strategies, with more predictable cash flow than equity strategies. SBIC credit funds have, on average, delivered annualized returns 5-6% higher than non-SBIC private funds of the same vintages, with MOICs averaging 0.6x-0.8x higher.³

Rigorous Oversight

The SBA maintains active oversight of SBICs through a combination of ongoing reporting, portfolio monitoring, and periodic regulatory examinations designed to assess financial and regulatory compliance. Licensed SBICs are required to submit quarterly and annual reports, including fund-level financials and portfolio financing information, which allows the SBA to monitor leverage usage, valuations, and overall program compliance.

Proven Model

Over the past decade, SBICs have invested over $58 billion in more than 11,300 small businesses across America with historically very low default rates. Prior recipients of SBIC funding include Apple, Callaway, Costco, FedEx, Intel, Tesla, and Whole Foods.

Community Impact

Providing equity and debt capital to growing companies that have limited access to traditional capital markets. 21% of SBIC investments are directed to low-to-moderate income areas, supporting underserved communities.

SBIC Track Record

Historical SBIC Program Results⁴

The SBIC Program Private Credit Portfolio outperformed the Cambridge U.S. Private Credit benchmark (a broadly diversified U.S. private credit index, which is predominantly composed of non-SBIC funds), exceeding median Net IRR and median Net TVPI in 9 out of 9 vintage years from 2013 to 2021.

Source: SBA SBIC Investment Performance Report, as of September 30, 2024

Cambridge benchmark quartile ranking by vintage year

Vintage	Net IRR	Net TVPI	Net DPI	Net RVPI

Sources: Small Business Administration; Cambridge Associates, LLC

Total number of SBIC licensed funds benchmarked against Cambridge U.S. Private Credit benchmarks. SBIC U.S. Private Credit includes Mezzanine, Direct Lending, and general Private Credit.

Exclusion of Surrendered SBIC Funds: This analysis and data sets do not include the performance of surrendered SBIC funds - those that repaid their SBA debentures early, often due to strong performance and/or completion of their life cycle. As a result, the data may reflect an inherent bias, as these successful funds are omitted.

SBIC-licensed funds (private equity and private credit), relative to the 65% Cambridge U.S. Private Credit / 35% Cambridge U.S. Private Equity composite, demonstrate consistent outperformance of SBICs against the U.S. private equity and credit indices, which are predominantly composed of non-SBIC funds.

Source: SBA SBIC Investment Performance Report, as of September 30, 2024

SBIC Program Portfolio Cambridge median

Sources: Small Business Administration; Cambridge Associates, LLC

Exclusion of Surrendered SBIC Funds: This analysis and data sets do not include the performance of surrendered SBIC funds - those that repaid their SBA debentures early, often due to strong performance and/or completion of their life cycle. As a result, the data may reflect an inherent bias, as these successful funds are omitted.

As anticipated, DPI remains below Cambridge median benchmarks for the first five years, as SBIC funds typically prioritize recycling capital and commence distributions following the initial investment period.

¹ Source: PitchBook and S&P Capital IQ. PitchBook: Capital available to invest by fund size represents U.S. private equity overhang for vintage years 2016-2023. U.S. PE Funds: includes buyout, growth, co-investment, mezzanine, diversified PE, energy, and restructuring. As of 3/31/23.

² Source: S&P Capital IQ: Commercially-active businesses in the U.S. All subsidiary and business establishment data are combined. Additionally, public sector entities are excluded. As of 1/29/24.
³ Source: The Performance of Small Business Investment Companies by Institute of Private Capital (UNC Kenan-Flagler Business School). The survey encompassed 277 funds, focusing on vintage years from 2000 to 2020. It gathered information from SBIC members on various parameters, including fund size, SBA leverage ratios, percentage of equity investments, committed capital, net asset value (NAV), internal rate of return (IRR), and multiple on invested capital (MOIC).
⁴ The SBIC Program Private Credit Portfolio is not an investable portfolio and no investor obtained the results presented. The SBIC results shown reflect aggregate program-level data from the U.S. Small Business Administration and do not represent the performance of any current or future White Wolf strategy. Past performance is not indicative of future results. The performance of the SBIC Program may differ materially from the performance of any White Wolf investment strategy. Comparisons to the Cambridge U.S. Private Credit benchmark are provided for informational purposes only. The benchmark includes mezzanine, direct lending, and other private credit categories that differ from SBIC portfolios. Quartile rankings reflect Cambridge Associates' methodology and may use datasets with survivorship or selection biases. SBIC metrics are based on SBA data as of September 30, 2024 and may include estimates.