September 25, 2025
The September 2025 SBIC debenture pooling decision brought welcome news for general partners. $1.46 billion of debentures were priced at 4.532%, a meaningful decline from the 4.963% rate in March 2025. At first glance, the difference may seem incremental, but for funds that utilize leverage, even modest shifts in borrowing costs can substantially alter net returns, fund economics, and overall competitiveness in the market.
This update is more than a headline, it signifies an opportunity for GPs to revisit their strategies, sharpen their positioning with LPs, and ensure their capital structures are calibrated for the environment ahead.
In the September pooling, the SBA priced $1.46 billion of debentures at 4.532%, reflecting both a decline in Treasury yields and a favorable spread for SBIC participants. This lower rate offers cheaper leverage than what was available earlier in the year.
It is crucial to remember that the SBA’s cost structure extends beyond the headline pooling rate. The program also carries an annual charge (currently 0.3465% for FY 2025) as well as trustee and underwriting fees. Taken together, SBIC debt today is somewhat cheaper than it was six months ago, giving GPs a window of opportunity to optimize their financing strategy.
For SBIC-backed funds, leverage is a critical input into return modeling. A lower fixed cost of debt broadens the spread between borrowing expense and portfolio yield, magnifying incremental IRR when investments outperform. If a fund strategy consistently produces net returns above 7–8%, lower leverage costs can materially improve outcomes.
Equally significant, this environment lowers the breakeven hurdle, enabling first-time or smaller funds to justify employing leverage sooner. Still, fees and annual charges erode part of the headline benefit. That makes it vital to model net borrowing cost rather than relying on nominal rates. Robust scenario analysis is no longer optional, it is a prerequisite for sound fund management.
General partners now face decisions that extend beyond simply noting a lower rate. The real question is how to act on it.
First, funds should update their leverage models, incorporating the 4.532% borrowing cost as a base case. Scenario testing against higher and lower Treasury environments will reveal how sensitive returns are to future rate volatility.
Second, timing becomes a strategic consideration. If Treasury yields continue to decline, future poolings could offer even lower costs. However, waiting introduces uncertainty. Locking in now secures fixed-rate debt at an attractive level and provides certainty for near-term deployment.
Third, the alignment of cash flows with debt obligations must be evaluated. For funds generating predictable current income via interest, dividends, or coupon payments servicing SBIC leverage is straightforward. Equity-heavy strategies, by contrast, may need to consider accrual debentures, which can defer payments but introduce their own complexities.
Finally, this environment creates a messaging opportunity with LPs. Cheaper leverage can be positioned as a structural advantage of the SBIC platform, demonstrating disciplined cost management and an enhanced return cushion.
Even with cheaper leverage, GPs must remain vigilant. Four risks stand out:
These factors underscore that leverage, while powerful, carries inherent fragility when paired with uncertainty in markets and policy.
The September pooling is a reminder that SBIC leverage should be treated dynamically, not statically. Treasury yields, pooling spreads, SBA annual charges, and investor demand will continue to evolve. GPs should make monitoring these variables a standing agenda item in fund management.
In addition, broader regulatory and legislative currents are reshaping the SBIC landscape. The SBA’s recent IDG Rule has expanded the toolkit with Accrual and Reinvestor Debentures, designed to align SBICs more closely with modern private capital strategies. Proposed amendments aim to streamline licensing for follow-on funds and encourage investment in strategic sectors like critical minerals and technology.
On Capitol Hill, bills such as the Investing in Main Street Act could lift bank SBIC investment caps from 5% to 15%, unlocking significant new institutional capital. Other measures, like the Investing in All of America Act, aim to incentivize SBIC activity in rural and low-income areas by exempting such investments from leverage limits. Simultaneously, proposals to broaden the accredited investor definition could expand the LP pool by allowing certification- or exam-based accreditation.
The SEC, too, is reshaping the environment. New private fund rules increase reporting and disclosure burdens, while recent guidance easing restrictions on retail allocations to private funds signals a gradual broadening of access. Together, these developments create a regulatory environment that is both more complex and more open, depending on the lens through which a GP views it.
The decline from 4.963% in March to 4.532% in September is more than a statistical adjustment, it is an actionable moment. GPs should refresh their leverage models, revisit timing, and sharpen their LP messaging. The combination of cheaper borrowing costs and a shifting regulatory environment makes this an opportune time to reassess strategy.
For those considering SBIC leverage, or already managing it, the imperative is clear: act deliberately, not passively. The tools, the rates, and the policy environment are aligning in ways that reward those who move with intention.
