Podcast Summary: How I Invest with David Weisburd

Episode E212: Unlocking $175M: Raising Venture & Private Equity Capital with SBICs
Date: September 12, 2025
Guests: Host - David Weisburd (A), Featured Guest - Eric (B), Third Voice/Occasional Commentator (C)

Overview

This masterclass episode dives deep into the world of Small Business Investment Companies (SBICs), demystifying how institutional and individual investors can leverage the program to access up to $175M in low-cost capital for investments in US small businesses. Guest Eric, who has raised more SBIC funds than anyone globally, walks listeners through the mechanics, opportunities, challenges, and evolving landscape of SBICs. The conversation covers fund structures, performance dynamics, advice for LPs and GPs, and recent legislative updates.

Key Discussion Points and Insights

1. Getting Into SBICs & What Makes them Unique

Time: 00:00–01:33

• Eric’s introduction to SBICs began in 2007 via a mezzanine debt team spinning out from Bank One—his first exposure led to significant success and shaped his career raising SBIC funds.
• SBICs enable investors to back US-based small businesses at scale with oversight from the Small Business Administration (SBA). Key advantage:
  • Access up to $175M at extremely favorable rates (100 bps or less over Treasuries) for 10 years, interest-only.
  • SBA acts more like a “special limited partner with capped upside” than a traditional lender.

    “I really look at the SBA differently. I think of them as like a special limited partner with a capped upside.” — Eric, [01:22]

2. Barriers to Entry & Eligibility (The 3-Prong Test)

Time: 01:43–03:15

• Licensing is rigorous and selective. Success depends on the right team and strategy.
• Eligibility for portfolio companies (the Three-Prong Test):
  1. NAICS code (industry)
  2. Employee count (typically <500; sometimes higher by industry)
  3. Financial thresholds - net worth under $19.5M and average after-tax income under $6.5M over two years
• Eric notes a helpful proxy: Companies with under $15M in EBITDA usually fit.

3. LP Universe & Return Profile

Time: 03:15–05:46

• Banks have historically been main LPs—over 300 bank commitments on Eric’s funds.
• Insurance companies, foundations, and a growing cohort of endowments (notably Michigan and Davidson College) participate.
• Returns have outperformed standard private credit and PE benchmarks, even on a smaller scale.

  “You look at the Institute of Private Capital’s numbers and SBA numbers, and they largely beat private credit and private equity outside of this program.” — Eric, [05:13]

4. Leverage, Risk, and Return Mechanics

Time: 05:46–07:09

• The SBA’s low-cost leverage amplifies returns; bottom-line IRRs often land in the mid-teens to low-20s.
• SBA’s involvement mitigates risk rather than acting as a pure leverage provider.

  “That capital allows for a larger team, a larger investment size... SBA capital not only enhances the return, but does also reduce the risk at the portfolio level.” — Eric, [06:42]

5. Growth and Recent Changes in the SBIC Program

Time: 07:09–09:53

• Growth accelerated due to expanded fund size caps (now $175M per fund, family of funds to $350M+).
• Larger asset managers (e.g., Oaktree, Barings) now use SBICs as part of their offering—even launching $300M and sub-300M vehicles for lower-middle market deals previously too small for their flagship funds.
• The emergence of “venture SBICs” and parallel vehicles shows the breadth of innovation.

6. Personal Investment Philosophy & Vantage Point

Time: 09:53–13:50

• Eric invests his own capital as an LP in 10+ SBIC funds, leveraging industry access:

  “I see who wins the deals, I know who I want to avoid... those are kind of all the key elements to making investments.” — Eric, [10:14]

• Key due diligence dimensions:
  • Alignment (with GP’s motives)
  • Integrity (long-term trust, reputation checks)
  • Wisdom (learning from prior funds; aiming for over 2.5x MOIC, >16.9% net IRR—beating medians)
• Despite protections and strong regulatory oversight, traditional private equity due diligence remains critical.

7. The SBA’s Expectations for Fund Managers

Time: 13:50–16:43

• Team track record is central—at least 8 investments and 4 exits is baseline.
• SBA values strong alignment, capital-raising ability, and GP economics.
• The diligence process is “unmatched”—involves FBI checks, 25 personal references per partner, and is difficult to “slip through.”

8. New Venture SBIC License & Parallel Structures

Time: 16:43–19:20

• Biden administration introduced the “accrual debenture license” to address the VC/growth capital gap.
• First example: Pelion Ventures raised both a traditional fund and parallel accrual SBIC, with $500M main + $125M in SBA leverage.
• Not all institutional LPs participate in levered vehicles—consultants and policy limitations often steer them away, despite clear benefits.

9. GP Profile & First-Time Fund Challenges

Time: 19:20–22:36

• Historically, small teams could clear with $20M; today, $30M+ is needed for a first close.
• Reason: SBICs with < $25M are much more likely to land in “Office of Liquidation.”
• Practical advice: GPs should include SBIC flexibility in LPAs up front to enable easier fund evolution.

10. Institutional Acceptance & Data Transparency

Time: 22:36–24:01

• SBIC fund sizes are generally $150M–$500M—deemed too small for most institutional investment consultants, creating opportunity for nimble investors.
• SBA is more transparent—benchmarking data versus Cambridge/IPC databases grows institutional comfort.

11. Legislative Updates and Policy Shifts

Time: 24:01–26:39

• Proposed “Investing in All of America Act” would:
  • Increase per-fund leverage from $175M to $250M, family limit to $475M, with inflation adjustments.
  • Incentivize investment in rural/low-income/manufacturing/natsec sectors via bonus leverage.
  • Eric foresees a “step function” increase in fund activity if leverage caps rise—much like crowdfunding after its limits increased.

12. Mistakes and Wisdom Gained as an LP

Time: 26:39–28:26

• Early error: backing first-time managers whose objective was solely “get to Fund 2” for fee growth, rather than realizing portfolio value.
• Now favors Fund 2 or later GPs who’ve learned SBIC nuances.
• Mis-timing the licensing process or leverage amount can hurt returns for LPs; SBA’s new fast-track process has improved outcomes recently.

13. Where GPs Go Wrong & Advice for Newcomers

Time: 28:26–30:50

• Problem: GPs trying to “fit” misaligned strategies into SBIC’s strict mandate; now partly solved by dedicated VC/growth programs.
• Eric’s career-defining advice:

  “Definitely the leadership in the team, definitely at the top. Their ability to create, to produce those returns again that were in the track record and really understand the dynamic. Who’s sourcing the opportunities, how do they work together? That’s helped me find the best, the best performers.” — Eric, [29:14]

• Successful SBIC teams have strong leadership, culture, a disciplined process, and know when to exit.

Notable Quotes & Memorable Moments

• “It’s pretty difficult to get through the licensing process. And you’ve got to have the right team that can get approved, the right strategy that fits.” — Eric, [01:45]

• “Just because it’s an SBIC fund, the rules of private equity or private credit do not change.” — David Weisburd, [14:02]

• “SBA’s diligence is unmatched and they don’t let things slide by...that’s why the programs perform so well.” — Eric, [14:20]

• “Reason why all that...SBIC’s that raised less than 25 million of private capital were six times more likely to go into the office of Liquidation.” — Eric, [20:54]

• “The bigger the number. It's kind of has this like exponential effect versus a linear effect.” — David Weisburd, [25:36]

• “I backed the wrong manager through their first fund when they realized their goal is really how do we get to fund two that’s going to be larger and have more management fees, etc.” — Eric, [26:46]

Timestamps for Key Segments

• Intro to SBICs & First Fund: [00:00 – 01:33]
• Licensing & 3-Prong Eligibility: [01:43 – 03:15]
• Investor Landscape & Returns: [03:15 – 05:46]
• Leverage & Risk Discussion: [05:46 – 07:09]
• Growth & Large Manager Adoption: [07:09 – 09:53]
• Eric’s LP Perspective & Due Diligence: [09:53 – 13:50]
• What SBA Looks for in GPs: [13:50 – 16:43]
• Venture SBIC License, Parallel Funds: [16:43 – 19:20]
• GP Fundraising Challenges: [19:20 – 22:36]
• Fund Sizes & Institutional Barriers: [22:36 – 24:01]
• Legislation & The Future: [24:01 – 26:39]
• Mistakes & Process Wisdom: [26:39 – 28:26]
• Where GPs Go Wrong, Career Lessons: [28:26 – 30:50]

Takeaways

• SBICs represent a powerful, underutilized investment structure for institutional and high-caliber investors aiming for risk-mitigated, leveraged exposure to lower middle-market US businesses.
• Success depends on thorough due diligence (especially team assessment), alignment with the unique regulatory framework, and strategic patience around licensing and capital structure.
• Legislative momentum may increase SBIC fund sizes and attract more large managers, while data transparency could expand the acceptance among traditional institutional investors.

For anyone evaluating SBIC funds as an LP or contemplating a first close as a GP, this episode delivers practical advice, guardrails, and an insider’s playbook for leveraging the program’s considerable benefits.