The federal government has licensed the first group of investors under the Small Business Investment Company’s Critical Technology Initiative, which are expected to inject more than $2.8 billion into more than 1,000 portfolio companies, according to the Pentagon and the U.S. Small Business Administration. USA.
The SBICCT project aims to increase the flow of private capital in technology areas considered critical to US national defense capabilities and economic success, including component-level manufacturing technologies and processes. It is supported by the Pentagon’s Office of Strategic Capital (OSC) in partnership with SBA’s Office of Investment and Innovation.
The initiative aims to help address a major problem facing the Pentagon.
“Today, the Department of Defense depends on private capital to develop and commercialize critical technologies for our troops. Unfortunately, private markets don’t always have incentives to invest in these technologies, which often require long-term investments,” Defense Secretary Lloyd Austin said at the Reagan National Defense Forum in December 2022, when plans to launch SBICCT were first announced. said he and SBA Administrator Isabella Casillas , we are looking for new and creative approaches” to address this issue.
The SBICCT effort is designed to leverage SBA funds to provide loans and loan guarantees to investors who want to help companies finance companies working on cutting-edge technology that can help national security.
The US government began accepting applications for the initiative about a year ago. Since July, four funds have been licensed and nine have been approved by the Small Business Administration to raise private capital, DOD and SBA announced Tuesday.
“What the SBA does is we’re going to do our due diligence on the funds, and in partnership with the DOD, they’re going to do their due diligence and security analysis of those funds as well. And when we’re at the point where we’ve done our due diligence … we’re able to approve those funds to raise private capital. And we call that green light. So we’re giving them the green light to go raise their private capital. They can be ready immediately after the green light to hold a first closure, in which case … once they close in the capital, then we license them. They may need more time to raise capital, in which case, then we’ll license them with the first closing,” explained Bailey DeVries, director of the SBA’s Office of Innovation and Investment, during a call with a small group of journalists.
“The way it works is they’ll have capital commitments from private investors and commitment from the SBA to provide them with capital, and then over a period, usually a five-year investment period, they’ll then look for that capital to make the investments in the company. So that’s what we anticipate seeing over the life of these funds,” DeVries said.
Funds licensed under the initiative can use SBA-guaranteed loans designed to increase investment returns at the fund level, according to a news release.
“Each fund can access up to $175 million in credit, which can be accessed through new Accrual Liabilities, which aligns with longer-duration cash flows and equity-oriented investment strategies and can also accessed through standard long-term SBA bonds that match loan strategies,” according to the release.
“These 13 funds [that have been approved so far]taken together with other end-of-care investment funds, together project to invest over $4 billion in nearly 1,700 portfolio companies focused on all 14 DoD Critical Technology Areas and technologies and component level manufacturing processes. Additionally, these funds plan to invest in all asset classes, including seed, venture, growth, buyout, direct lending, special situations and funds of funds,” the release said.
The Pentagon will not select companies that receive funding from investors under the program, according to officials.
“There is no guidance or direction from the DOD as to which companies. What we’re looking for is we have sort of 14 critical technology areas and there’s an agreement that 60% of their portfolio will be invested in these more difficult, under-capitalized technology areas,” JR Gibbens, chief investment officer. in the Pentagon’s Office of Strategic Capital, DefenseScoop said on the call with reporters.
The 14 “critical technology areas” identified by Under Secretary of Defense for Research and Engineering Heidi Shyu as key to national security that the SBICTT initiative aims to support include AI and reliable autonomy; space; embedded and cyber sensors; integrated systems of networks of systems; generation and storage of renewable energy; microelectronics; human-machine interfaces; advanced materials; directed energy; advanced computing and software; hypersonic; biotechnology; quantum; and wireless technology of the next generation (FutureG).
“This first round of SBICCT Initiative funding represents an important milestone in demonstrating the power of public-private partnerships to build sustainable advantages by growing and modernizing our supply chains, strengthening our economic and national security, and benefiting development and commercialization of critical technologies that are key drivers of our U.S. industrial base,” Shyu said in a statement on Tuesday.
The Pentagon is planning to bring more investors into the fold. Additional applications to participate in the initiative will be accepted in future “quarterly submission windows”. The next filing deadline is November 15, the press release said.
Updated Oct. 22, 2024, 7:30 p.m.: This story has been updated to include comments from Bailey DeVries, director of the SBA’s Office of Innovation and Investments, and JR Gibbens, chief investment officer in the Pentagon’s Office of Strategic Capital, during a calls to reporters after Tuesday’s announcement.