The Obama administration has been ratcheting up its participation in the private equity market - even as Republican presidential candidate Mitt Romney comes under criticism for his private equity record at Bain Capital.

It's doing so as part of the more than 50-year-old Small Business Investment Company program, administered by the Small Business Administration. In increasing numbers, firms have been taking advantage of low-interest leverage provided by the debenture SBIC program to raise senior loan funds, mezzanine funds and even buyout funds.

In an interview late last month, Sean Greene, a former entrepreneur and venture capitalist who supervises the SBIC program, said that one of the hallmarks of the post-financial-crisis economy has been the struggle that small businesses, often seen as the key to job creation in the United States, have had securing debt financing.

The SBIC's debenture program is designed to get small businesses the capital they need, be it senior debt, mezzanine debt or equity, as part of growth financings and buyouts, often with a sponsor at the helm. Greene is particularly interested in helping what he calls "gazelles" - fast-growing companies that account for a disproportionate amount of job growth.

"Long-term, more patient capital is critically important to those kinds of companies," Greene said.

In the fiscal year ended September 30, debenture SBIC funds provided $2.59 billion in financing to small businesses, according to the SBA. That was up 63 percent from the prior fiscal year and nearly double the average volume for the previous five years. All told, the SBA committed a record $1.8 billion to 22 debenture SBIC and unleveraged licenses in fiscal 2011, and Greene said more than 50 applications are in the pipeline. (The legislative cap is $3 billion in any one year.) The number of SBIC funds stands at nearly 300, with more than $17 billion under management.

Greene and his team at the SBA get credit for a good part of this expansion. One of their biggest achievements has been to reduce license processing time from more than 14 months in fiscal year 2009 to five and a half months in fiscal year 2011. Zia Uddin, managing director at Chicago-based Monroe Capital LLC, said it took two years from beginning the application process in early 2009 to reach a first close of about $200 million on its first SBIC fund early this year.

Under Greene's leadership, the SBIC licensing committee also appears to be approving a wider variety of investment strategies than in the past. That's proving tempting to buyout firms that might previously have seen debenture SBICs as mainly suitable for subordinated debt investments.

The Riverside Company, a lower-mid-market shop with offices in New York, Cleveland and elsewhere, structured its latest micro-cap buyout fund as an SBIC - its first time participating in the program. It raised $137 million this year in private capital, and secured access to $150 million through the debenture program, for a total fund of $287 million.

The debenture SBIC program has also benefited from some significant tailwinds. A tight fund-raising market, for example, has more sponsors thinking creatively about ways to raise money.

The SBIC program not only lets them leverage the amount of money they can raise from private investors, it also makes them more attractive to banks, which can use their commitments to meet requirements of the Community Reinvestment Act of 1977. Among the Riverside SBIC fund backers are BMO Harris Bank N.A. and Key Community Development Corp.

The economics for both sponsors and private investors in SBIC funds are compelling. For single SBICs, the amount of leverage available from the debenture SBIC program is the lesser of $150 million per fund or three times private capital, although two times is the normal cap, according to the Small Business Investor Alliance, formerly known as the National Association of Small Business Investment Companies.

Consider Monroe Capital, which through the last pooling of debentures is paying the holders of the 10-year bonds about a 2.9 percent coupon and (counting fees) an effective rate in the 4 percent to 6 percent range. The firm has then gone out with a uni-tranche product and made loans with rates somewhere between the Libor plus 350-550bps offered by asset-based lenders and the 14 percent to 15 percent rates offered by mezzanine firms, in some cases also taking warrants, according to Uddin. Greene estimates that SBIC funds get a 300-600bps pop in returns, compared with unleveraged funds.

In recent weeks, both The New York Times and The Los Angeles Times have run articles pointing out instances where employees lost their jobs while working for companies owned by private equity firm Bain Capital, which Romney founded in 1984.

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