Public Policy & Research

Preserve Carried Interest. Under the “carried interest” model, the General Partner is paid profits only if the fund’s portfolio companies are profitable and successful, which helps align the General Partner’s economic interests with those of the capital investors.

• This alignment of interests is particularly important and strong for smaller funds investing in smaller businesses because private equity is a long-term strategy that pays out, if at all, years after the initial investment is made.
• Scale matters in lower middle private equity investing. The smaller the fund, the more likely it is to invest in domestic small businesses. The smaller the fund, the smaller the management fees are to run the fund and the greater the importance of the carried interest.

Opportunity Zones. Make Opportunity Zones attractive for small business investing (and job creation), not just real estate investments.

Interest Deductibility. Extend current framework using EBITDA (instead of EBIT) for the 30% limitation on interest expensing.

Section 1202. Modify Section 1202 of tax code to include SBIC investments made into socially disadvantaged business and in LMI areas and Opportunity Zones.

Acquired Funds Fees and Expenses (AFFE) Rule. Funds that acquire BDCs are currently required to provide a disclosure that inaccurately portrays the true costs of investing in BDCs. This disclosure essentially results in “double counting” the actual cost to shareholders of investing in BDCs.

• Because of this, the stock market indexes decided to remove BDCs, which led to an outflow of investment by institutional investors. The result has been less capital available for middle market businesses throughout the country.
• While the SEC proposed a rule to address this issue in August 2020, the SEC proposal does not ensure BDCs are re-included in the indexes. SBIA seeks a full exemption from the AFFE requirement for BDCs either through regulatory or legislative action.

Small Business Investor Tax Parity Act. Level the playing field to allow BDC investors the same 20 percent deduction on Qualified Business Income that REITs and S-Corp banks received in the 2017 Tax Cuts and Jobs Act because this direct fiscal stimulus would encourage investment in middle market companies where they need it most.

SBIC Bonus Leverage. Encourage existing SBICs to seek smaller enterprises in underserved communities/geographies by offering up to $25-50 million in additional leverage for investments in LMI (low- or moderate-income) areas and Opportunity Zones (maintaining SBA approved ratio of private capital to SBIC debentures). Zero subsidy, no appropriation needed.

SBIC Patient Capital. Waive existing geographic limits in current SBIC regulations to benefit underserved areas in all geographies.

Invest in Main Street. Amend the Small Business Investment Act of 1958 to rectify its historical mismatch with banking regulations and allow a bank or federal savings association to invest up to 15% of its capital and surplus in SBICs, subject to a bank regulator if above 5%.

SBIC Investment Capital. Recognize investment from universities, pension funds, and other state-chartered entities as regulatory capital, not “qualified non-private funds” subject to 30% cap/SBIC investment because those funds include private capital, not solely public capital.

• Reclassification would permit wider options for investment from universities, pension funds, and other state-chartered entities necessary to maximize earnings that retired public employees rely on.