From opportunity to allocations: how SBIC managers can win institutional capital

The Investing in All of America Act has created new opportunities for small business investment company (SBIC) managers. But legislative change alone will not unlock institutional capital.

For years, many institutional investors have viewed SBIC strategies with interest, yet relatively few have become significant allocators. The reason was not a lack of conviction in the asset class. More often, it came down to practical considerations: fund size, allocation relevance, access to institutional-quality reporting and governance, and restrictions that limited participation from certain investor groups.

The Act changes some of those dynamics. By expanding access to public university capital, increasing leverage capacity and supporting larger fund structures, it gives managers a stronger platform from which to compete for institutional allocations.

The question is no longer whether institutional capital is accessible to SBIC managers. Many of the familiar structural and regulatory barriers have been lifted.

In today’s new investing environment, SBIC managers must grapple with a more immediate challenge: if they want more institutional allocations, they must first ensure that their investment and operating platforms have the muscle to support the extra scale.
 

Why institutional investors historically passed

Institutional investors build portfolios at scale. A typical pension plan, endowment or insurance company may assess hundreds of manager opportunities each year while ultimately backing only a small number. Every manager selection process requires investment diligence, operational due diligence, legal review, governance approvals and ongoing monitoring.

As a result, institutional investors often prefer opportunities where they can deploy capital in amounts that are meaningful relative to their portfolios. Historically, some SBIC funds struggled to meet that threshold. Even where investors liked the strategy, smaller fund sizes could make allocations difficult to justify from a governance and resource perspective.

The result was a paradox: investors often appreciated the lower-middle-market opportunity but found it difficult to allocate at a scale that matched their requirements.
 

The Act makes institutional fundraising more realistic

One of the most important changes is not simply the increase in leverage limits. It is what those higher limits can enable.

Managers now have greater flexibility to build larger fund structures that can support larger commitments and potentially appeal to a broader range of institutional investors. At the same time, the removal of restrictions affecting public college and university endowments opens access to a pool of capital that was previously more difficult to access.

These changes help address two longstanding fundraising challenges: access and scale.

That does not mean institutional investors will suddenly begin writing checks. It does mean that managers now have a stronger foundation from which to build an institutional fundraising strategy.
 

Bigger funds are not enough

Many managers will understandably focus on the increased leverage limits. However, institutional investors are rarely persuaded by size alone.

What matters is whether managers can demonstrate a credible plan for deploying additional capital while maintaining investment discipline. The most successful managers will position increased scale as an outcome of a stronger platform, not as the investment thesis itself.
 

Build a fundraising story institutions want to hear

Institutional investors do not allocate to regulatory structures. They allocate to investment strategies.

The Act's incentives around manufacturing, critical technologies and underserved communities create an opportunity for managers to build differentiated investment narratives. For some firms, these areas align closely with broader investment themes that institutional investors already find compelling, including domestic manufacturing growth, supply-chain resilience and technological innovation.

However, investors will expect substance behind the story. Managers must be able to demonstrate a track record, sourcing capability and repeatable investment process. Institutional investors will look beyond the regulatory benefit and focus on whether the manager has a genuine competitive advantage in the sectors being targeted.
 

Expect institutional due diligence to intensify

The Act may expand access to institutional capital, but it will also raise expectations.

Endowments, pension plans and other sophisticated investors will scrutinize far more than investment performance. Reporting frameworks, valuation practices, governance structures, cybersecurity controls, compliance oversight and operational resilience will all form part of the diligence process.

If a fund manager fails to demonstrate that their governance frameworks are compliant and that their due diligence documentation is up to date, the consequences can be significant. For many institutional investors, an immature operating model is enough to sink a deal.

Look no further than Carne Group’s 2025 Change Study, which surveyed 200 European institutional investors and 251 fund-management executives. More than 82% of institutional investors said they had rejected a fund manager because of poor corporate governance, while 29% said such rejections were increasing dramatically¹.

Managers seeking institutional capital should use this moment to assess whether their operating model is keeping pace with their fundraising ambitions. Managers can protect themselves from disappointment by taking a few specific steps to assess whether their operating model is keeping pace with their fundraising ambitions.

For example, they could test whether their current deal flow is sufficient to absorb a larger fund. They could produce due diligence documents to illustrate to investors how the fund will maintain underwriting discipline. And they can do all of this before they even consider entering the fundraising phase.

Preparation is everything. The firms most likely to benefit from the Act may not be those with the largest platforms. They will be those best prepared to demonstrate institutional-quality infrastructure, transparency and governance.
 

The real opportunity

The Investing in All of America Act is often discussed as a regulatory reform. In practice, its greater significance may be as a fundraising catalyst.

For the first time in years, SBIC managers have an opportunity to broaden their addressable investor universe, raise larger pools of capital and compete more effectively for institutional allocations. The managers that succeed will be those that look beyond the legislation itself and focus on what institutional investors have always wanted: scale, transparency, governance and a compelling investment proposition.

Because while the Act may open the door to institutional capital, managers still need to walk through it.
 

Institutional readiness checklist

Before approaching institutional investors, SBIC managers should be able to answer yes to the following questions:

• Can our strategy absorb a larger pool of capital?
  Is there a sufficient deal flow to deploy additional capital without compromising investment discipline?
• Can we demonstrate a repeatable investment edge?
  Do we have a credible track record, sourcing capability and investment process in the sectors and markets we are targeting?
• Can our investment team scale with the fund?
  Do we have the people and expertise required to manage a larger portfolio while maintaining underwriting standards?
• Are our reporting and valuation processes institution-ready?
  Can investors expect robust quarterly reporting, well-documented valuation policies and consistent, transparent information?
• Are our governance and compliance frameworks sufficiently robust?
  Are responsibilities, controls and oversight clearly documented and able to withstand institutional due diligence?
• Are our cybersecurity and operational resilience controls up to date?
  Can we demonstrate that investor data, fund operations and critical systems are appropriately protected?
• Can our fund administration infrastructure handle greater scale?
  Are our systems, processes and service-provider relationships capable of supporting larger commitments and a broader investor base?
• Can we explain why greater scale improves the opportunity?
  Is increased fund size supported by the investment proposition, rather than becoming the proposition itself?
   

¹https://www.carnegroup.com/latest-thinking/change-2025-the-measure-of-a-moving-industry