Two often-overlooked tools for taxable, high-net-worth investors

Sometimes federal policy doesn’t just set the rules of the game, it tilts the field. Over the last few years, two policy-driven initiatives have become increasingly relevant for taxable investors allocating to growth-stage private companies and funds: (1) the capital gains exclusions available for Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code, and (2) the SBIC Accrual Debenture program administered by the U.S. Small Business Administration (SBA). Both programs have roots dating to 1958 (SBIC) and 1993 (QSBS). The programs are designed to direct private capital toward smaller domestic operating businesses, supporting job creation and fueling innovation, goals that have consistently attracted support across administrations and legislative majorities of both parties.

Both frameworks are intended to steer long-term, primary capital to small businesses that hire, build, and grow, rather than provide secondary liquidity for prior owners. For investors, that means the benefits are conditional on company characteristics, use of investment proceeds, and the holding period. When a manager’s strategy and portfolio construction align with the eligibility requirements, these programs can materially improve after-tax and after-fee outcomes versus an otherwise similar private equity allocation.

QSBS: A potentially powerful capital gains exclusion

QSBS refers to stock that meets the requirements of Section 1202 of the Internal Revenue Code. The details matter (including the issuer’s eligibility, how the shares are acquired, and timing), and the rules have evolved over time through legislation and IRS guidance. In 2025, they were enhanced in the “One Big Beautiful Bill Act”. Investors should review current law and their specific facts with counsel and a tax advisor, but when all the rules are satisfied and subject to hold requirements, 50% to 100% of eligible capital gains may be excluded from federal income tax.

QSBS is often discussed in a venture capital context, but it can also apply to growth equity. Growth equity funds typically concentrate in fewer companies and target a higher “hit rate” of realized gains at more moderate multiples. In a typical VC portfolio, which focuses on power law dynamics, a small number of outliers may drive most of the fund’s value creation; depending on position sizing and the per-issuer limits, some of that upside may not fully benefit from the exclusion. By contrast, a growth equity portfolio that produces more consistent outcomes across companies may be better positioned to have a larger share of total gains fall within QSBS-eligible parameters, assuming the underlying companies and the investment path satisfy the requirements.

SBIC accrual debentures: Government-sponsored, capped-cost leverage

A separate (and less widely understood) incentive is the SBIC Accrual Debenture program, which is sponsored by the SBA. This new form of SBIC fund was created in 2023 to broaden the types of investments in eligible companies to include equity growth capital. In broad terms, a private fund manager seeking to operate a Small Business Investment Company (SBIC) fund must go through a rigorous application process to receive a license. A licensed Accrual SBIC may be able to access long-term SBA debentures alongside private capital at a 1.25:1 ratio, subject to program rules and SBA oversight. While the accruing interest is senior from a payment-priority perspective, the principal is generally paid out alongside the capital of private LPs. The interest rate is fixed for ten years, periodically set at a modest spread to the 10-year treasury rate. Interest is not paid out until the SBIC fund makes distributions (or at maturity). Effectively, if the fund performs above a hurdle rate, the SBA resembles an LP with a capped return. This creates a potentially asymmetric risk-reward with the upside benefits of traditional leverage, but a less amplified effect on the downside.

In practice, the accrual debenture structure can be a particularly good fit for strategies that target qualifying U.S. operating companies and manage durations within the 10-year horizon of the debentures. This is where growth equity funds potentially have an advantage over venture capital funds, which typically have longer per-company hold periods. Many of the SBIC program’s company-eligibility concepts overlap with the broader policy goal behind QSBS for capital formation for smaller, domestic businesses, though the tests are not identical. For investors, the main takeaway is that manager selection and strategy design matter: not every growth-stage fund can (or should) pursue an SBIC license, and not every portfolio is well-suited to be leveraged at the fund level. That said, for the subset of managers and portfolios that do align, the SBIC platform remains an often-overlooked source of structurally advantaged capital.

Key considerations (especially for taxable investors)

• Eligibility is deal-by-deal: QSBS treatment depends on issuer eligibility, original issuance requirements, holding period, and other technical rules; SBIC eligibility depends on meeting SBA program requirements, including company qualification and ongoing compliance.
• Liquidity and timing matter: QSBS benefits are sensitive to holding periods; SBIC leverage adds duration management considerations.
• Leverage changes the distribution of outcomes: the seniority of the interest can amplify losses, so underwriting, portfolio construction, and manager controls are central.
• Policy risk is real: these programs exist because of policy choices, and future legislative or regulatory changes can alter their value.

For high-net-worth investors, not every growth equity allocation should chase a tax attribute or a government program. The best net outcomes often come from pairing strong underwriting and manager selection with an awareness of the incentives embedded in the system. QSBS and SBIC accrual debentures are two examples where policy can meaningfully shape after-tax and after-fee results when used appropriately, and when the underlying managers and investments do the heavy lifting.