[Senate Hearing 112-487]
[From the U.S. Government Publishing Office]
S. Hrg. 112-487
A SPOTLIGHT ON SMALL BUSINESS INVESTMENT COMPANIES AND THEIR ROLE IN
THE ENTREPRENEURSHIP ECOSYSTEM
=======================================================================
ROUNDTABLE
BEFORE THE
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
MARCH 22, 2012
__________
Printed for the Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED TWELFTH CONGRESS
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MARY L. LANDRIEU, Louisiana, Chair
OLYMPIA J. SNOWE, Maine, Ranking Member
CARL LEVIN, Michigan DAVID VITTER, Louisiana
TOM HARKIN, Iowa JAMES E. RISCH, Idaho
JOHN F. KERRY, Massachusetts MARCO RUBIO, Florida
JOSEPH I. LIEBERMAN, Connecticut RAND PAUL, Kentucky
MARIA CANTWELL, Washington KELLY AYOTTE, New Hampshire
MARK L. PRYOR, Arkansas MICHAEL B. ENZI, Wyoming
BENJAMIN L. CARDIN, Maryland SCOTT P. BROWN, Massachusetts
JEANNE SHAHEEN, New Hampshire JERRY MORAN, Kansas
KAY R. HAGAN, North Carolina
Donald R. Cravins, Jr., Democratic Staff Director and Chief Counsel
Wallace K. Hsueh, Republican Staff Director
David Gillers, Democratic Counsel
Jelena McWilliams, Republican Assistant Chief Counsel
C O N T E N T S
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Opening Statements
Page
Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana. 1
Moran, Hon. Jerry, a U.S. Senator from Kansas.................... 103
Witnesses
McWilliams, Jelena, Republican Assistant Chief Counsel, Small
Business Committee............................................. 3
Wides, Barry, Deputy Comptroller for Community Affairs, Office of
the Comptroller of the Currency................................ 4
Girard, Rick, Co-founder and Chief Executive Officer, Girard
Environmental Services......................................... 4
Kolln, Thies, Partner, AAVIN Private Equity...................... 4
Kopfinger, Carl, Senior Vice President, Community Capital Group,
Venture Capital and Mezzanine Investment Division, TD Bank..... 5
Penberthy, Dan, Chief Financial Officer and Executive Vice
President, RAND Capital Corporation............................ 5
Haskins, Harry, Deputy Associate Administrator for Investment,
U.S. Small Business Administration............................. 5
Bates, Roger, President, MEP R&H Supply, Inc..................... 6
Foster, Vincent, Chairman of the Board and Chief Executive
Officer, Main Street Capital Corporation....................... 6
Goodman, James, President, Gemini Investors...................... 6
Henriquez, Manuel, Chairman and Chief Executive Officer, Hercules
Technology Growth Capital...................................... 6
Rafalovich, Tim, Vice President, Community Lending and
Investment, Wells Fargo Bank................................... 6
Rothstein, Charles, General Partner, Michigan Growth Capital
Partners....................................................... 7
Palmer, Brett, Small Business Investor Alliance.................. 14
Gillers, David, Democratic Counsel, Small Business Committee..... 15
Sackett, Don, Senior Vice President and Business Manager, Olympus
Innov-X........................................................ 17
Alphabetical Listing and Appendix Material Submitted
Bates, Roger
Testimony.................................................... 6
Letter....................................................... 110
Foster, Vince
Testimony.................................................... 6
Prepared statement........................................... 112
Gillers, David
Tesimony..................................................... 15
Girard, Rick
Testimony.................................................... 4
Goodman, James
Testimony.................................................... 6
Article: Small-Cap Private Equity............................ 116
Written comments............................................. 121
Haskins, Harry
Testimony.................................................... 5
Henriquez, Manuel
Testimony.................................................... 6
Prepared statement........................................... 123
Kolln, Thies
Testimony.................................................... 4
Kopfinger, Carl
Testimony.................................................... 5
Prepared statement........................................... 137
Landrieu, Hon. Mary L.
Testimony.................................................... 1
McWilliams, Jelena
Testimony.................................................... 3
Moran, Hon. Jerry
Testimony.................................................... 103
Neale, Thomas Matthews
Prepared statement........................................... 156
Palmer, Brett
Testimony.................................................... 14
Penberthy, Dan
Testimony.................................................... 5
Prepared statement........................................... 139
Rafalovich, Tim
Testimony.................................................... 6
Prepared statement........................................... 142
Rothstein, Charles
Testimony.................................................... 7
Prepared statement........................................... 145
Rowe, C. E. ``Tee''
Prepared statement........................................... 151
Sackett, Don
Testimony.................................................... 17
Prepared statement........................................... 149
U.S. Small Business Administration
News Release................................................. 159
Wides, Barry
Testimony.................................................... 4
Small Business Investment Companies: An Investment Option for
Banks...................................................... 24
A SPOTLIGHT ON SMALL BUSINESS INVESTMENT COMPANIES AND THEIR ROLE IN
THE ENTREPRENEURSHIP ECOSYSTEM
----------
THURSDAY, MARCH 22, 2012
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The Committee met in a roundtable discussion, pursuant to
notice, at 10:09 a.m., in Room SD-428A, Russell Senate Office
Building, Hon. Mary L. Landrieu, Chair of the Committee,
presiding.
Present: Senators Landrieu and Moran.
Staff Also Present: Jelena McWilliams, Kevin Wheeler, and
David Gillers.
OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S.
SENATOR FROM LOUISIANA
Chair Landrieu. Good morning, everyone, and welcome to our
roundtable on SBICs. We have looked forward to this morning now
for weeks as we set the agenda for this year, and I thank all
of you. I understand there were some travel situations with fog
or weather and I think we are missing one or two of our
invitees. But I welcome you to this roundtable.
The difference, of course, is that this is not as formal as
a hearing. We really want there to be a good bit of exchange
over the next hour-and-a-half, potentially two hours, of this
hearing, and I thank you all for making yourselves available.
I apologize for being a few minutes late. I had to add a
meeting to my schedule this morning that we did not anticipate,
and it went a little bit longer than anticipated.
I am going to begin with a short opening statement to set
the tone for this roundtable, and then we will go through some
instructions about how a roundtable usually works.
We have had over a dozen roundtables since I have been
Chair. We find them to be extremely helpful in really
understanding how programs work or how they do not work or what
we can do to improve them, and it is all about this Committee's
effort to be as helpful and supportive as possible to
entrepreneurs in our country in a full range of ways,
particularly giving them access to capital, which is the
purpose of the SBICs.
Let me again thank you for joining us this morning. We will
explore opportunities and policy options to build on the
success of SBIC programs and increasing access to capital for
small businesses and entrepreneurs. We have assembled here
today experts representing investors, small business investment
companies, small business owners, officials from the Department
of the Treasury, and the SBA.
Today's discussion is the second in a series of three
roundtables we are holding to discuss start-ups and high growth
entrepreneurship. Our next roundtable on entrepreneurial
ecosystems will be April 18th. We are bringing together a wide
variety of experts, academics, policy experts, and state and
local leaders who are leading the way in creating stronger
entrepreneurial ecosystems in their cities, in their regions,
and in our country.
Ultimately through these discussions, we will identify
specific ideas and recommendations to be included in a
comprehensive piece of legislation that we hope to move through
Congress and that the President can sign.
As you all are well-aware, the Investment Company Act of
1958, or maybe you are not aware of this, which was signed into
law by President Eisenhower, established the Small Business
Investment Company Program. Not only was the bill signed by
President Eisenhower, it was co-sponsored by a very illustrious
group of Senators, including Lyndon Baines Johnson and Senator
William Fulbright.
It was also the subject of a hearing in 1958 by the Senate
Banking Committee's Subcommittee on Small Business. During the
hearing, the Subcommittee Chairman Joseph S. Clark said the
legislation is, `` . . . necessary to increase the availability
of long-term credit and equity capital for small businesses.''
He also said the Committee that approved the bill has pretty
nearly the entire spectrum of opinion throughout the country
with respect to the need for Federal assistance.
Under the SBIC program, the SBA licenses, regulates, and
helps provide funds for privately owned and operated venture
capital investment firms. SBICs are licensed and regulated by
the SBA. They use their own private money plus money borrowed
with an SBA guarantee. Typically they will borrow two dollars
for every one dollar of private capital.
Since 1958, SBICs have invested $76 billion to over 100,000
small businesses. We have funded Apple, FedEx, Calloway Golf,
Jenny Craig, and Outback Steakhouse, to name just a few. I want
to mention two very successful SBICs that are joining us here
today. One is Main Street Capital, from Houston, Texas. Will
you all raise your hand?
They received the honor of SBIC of the Year in 2010. One of
their recent small business investments, Gulf Manufacturing in
Humble, Texas, is an industrial manufacturing company
distributing across the country. Main Street Capital has
invested over $500 million in more than 90 small businesses.
Their companies employ more than 12,000 employees. So we are
very interested in hearing more from you all today. We
appreciate you all coming.
Gemini Investors, where are you sitting? Right next to
them? Great. You were recognized as the SBIC of the Year in
2009. One of your recent investments was in a company named
Center Rock in Berlin, Pennsylvania. Center Rock is the company
that designed the drill bit that saved the Chilean miners, and
the President recognized that in his State of the Union last
year. We are very grateful for you all being present today.
Last month, Ranking Member Snowe and I introduced a bill to
make, in our view, improvements and modifications to this
program. Our bill raises the statutory cap, as the President
has recommended, from $3 billion to $4 billion. The cap was
last increased in 2003. It is time to raise it.
It also increases the amount of leverage by SBIC licensees
under common control from $225 million to $350 million, called
the Family of Funds. These provisions were also included in the
President's original Start Up America.
Unfortunately, they were dropped by the House when they
passed the deregulation bill, which they sent over to us which
we are debating on the floor today. It is a deregulation bill,
not a capital bill, and one of the most significant provisions
was dropped by the House and we are going to try to see what we
can do to recover it.
For the past week, the Senate has been debating this bill
called the Jobs Bill, which is really a deregulation bill. It
extends new opportunities, but also some concerns about
companies going directly to the Internet and borrowing the
capital they need or soliciting investors through the Internet
called crowd funding, which is a very exciting but potentially
dangerous enterprise without the right safeguards, and that
debate is happening on the Senate floor, actually as I speak.
I have made it clear there were several problems with the
bill that came over from the House. I will not go into them all
right now because that is not the subject of this Committee.
But needless to say, I believe that SBICs have been an
important component of the work of the SBA, of the work of our
Federal Government.
I would like to see if there are any reasons why it cannot
be expanded beyond the $4 billion authorization. I am not sure
there is any rhyme or reason why we have been at that level for
all these years. I would be very interested in any of your
feelings about that.
I also want to say that as Chair of this Committee, I am
really, really focused on the quality of our programming as
opposed to the quantity of our programming. I am very
interested to find out who is responsible for evaluating the
SBICs and how we eliminate the low-performing, ineffective
SBICs and how we strengthen the stronger ones, and et cetera,
et cetera. I have a lot of other questions. So that is my
opening.
I want to recognize David Gillers and Kevin Wheeler who are
my two senior staffers, and on the Snowe staff, if you would--
--
Ms. McWilliams. Jelena McWilliams. I spoke with some of
you, and Matt Walker as well. Thank you for coming.
Chair Landrieu. So we are going to start, Barry, with you
and if you could just introduce yourself briefly and give a
one-minute little glimpse as to why you are here and what your
role is. I know that we familiarized ourselves generally with
who you are. Then we will begin by opening up with questions.
When you want to speak, you can put your name card up like
this. That way I will know to recognize you, and we will go
around and keep it open and flexible. If I am not asking the
right questions, please feel free to ask them yourself,
starting with Barry.
Mr. Wides. Good morning, Madam Chair.
Chair Landrieu. You have got to press your talk button. You
just press the button which lights up and you have to speak
right into your microphone.
Mr. Wides. Okay. Good morning, Madam Chair, and thanks for
the invitation. My name is Barry Wides, and I am the Deputy
Comptroller for Community Affairs at the Office of the
Comptroller of the Currency. We are the Federal agency within
the Department of Treasury that supervises national banks and
Federal thrifts.
Our role within Community Affairs is to encourage national
bank and Federal thrift investments in small business finance.
We have recently been involved in outreach to banks across the
country to make them aware of the opportunities to invest in
small business finance through the SBIC program. We have been
holding seminars and national teleconferences on this subject
and making them aware of the fact that they can earn Community
Reinvestment Act credit for investing in SBICs.
We will be putting out a paper soon that is sort of a how-
to guide for investing in SBICs. We are working very closely
with Harry Haskins at the SBA, as well as Carl Kopfinger who is
with one of the national banks that we supervise to make sure
that we make this understandable and help banks understand that
there are ways to invest safely and earn a good return in
SBICs.
Chair Landrieu. Thank you. Rick.
Mr. Girard. Thank you for inviting me. My name is Rick
Girard. My brother and I own Girard Environmental Services out
of Orlando, Florida. We are a commercial landscaping company.
Last year our revenue was around $20 million and currently we
are ranked number 57 in the country as far as landscaping
companies go.
We are one of the largest family-owned companies in central
Florida. We are one of the largest, probably one of the top
five largest landscaping companies in the State of Florida. So
we are a big small company.
Chair Landrieu. And you got your funding through one of the
SBICs?
Mr. Girard. Yes, ma'am. The SBIC played a very extremely--
an extremely important role in my company because in 2008,
2009, and 2010, our company actually grew. I opened five
offices in Florida in 2009 and 2010 as we were entering into
the recession. I added 100 jobs throughout the state. A lot of
people did not necessarily agree with my method, but that is
what entrepreneurs do. Entrepreneurs take risks. And looking
back, there is not really much I would change.
But the SBIC played an extremely important role where the
banks would not. So the SBIC played a very important role.
Chair Landrieu. Wonderful. Thank you, Rick. Thies.
Mr. Kolln. Good morning. Thanks for having me here. I am
Thies Kolln. I am with AAVIN Equity Partners. We are in Cedar
Rapids, Iowa. My partners and I have been running private
equity funds there based in Cedar Rapids for--actually one of
the my partners started with the fund that started in 1959. So
we have been with the SBIC program since the beginning. We have
run multiple SBICs as well as non-SBICs and have been with the
program for a long time.
Chair Landrieu. Thank you. Your insights will be very
helpful. We appreciate you being here. Carl.
Mr. Kopfinger. Yes, good morning, Senator, and thank you
for inviting me to participate today. I am Carl Kopfinger. I am
a Senior Vice President with TD Bank. I am based in
Philadelphia, Pennsylvania. I head up our investing in SBICs.
We have more than 60 SBICs under management right now, and we
continued to invest during the down-turn. So we like the
program very much.
Chair Landrieu. Thank you. Dan.
Mr. Penberthy. Good morning. I am Dan Penberthy. I am the
CFO and Executive Vice President of RAND Capital Corporation. I
am here to tell you all what you can do with just $15 million.
RAND is a BDC. We are publicly traded since 1971. We are a
founding member of NASDAQ and we also own a wholly-owned
subsidiary, RAND SBIC. I am also the current President of the
Upstate Venture Association of New York.
We operate in Buffalo, New York, an under-served and
economically depressed part of New York State. During the past
ten years, we have taken our $15 million, we have invested in
30 portfolio companies via 83 separate financing transactions.
These 30 companies right now represent over 1,711 jobs. We have
increased job growth by over 500 jobs over the past ten years.
We have also increased total revenues in these same companies
by over $200 million. We have had an impact through the SBIC
program. Some of our companies include MidAmerica Brick, an
abandoned plant in the economically-depressed town of Senator
Kit Bonds which is now the leading producer of bricks in
Missouri.
Synacor, founded by an--an Internet start-up founded by
students at the University of Buffalo has increased their
employment by 15 times and the revenues by 60 times since our
investment in 2002. They completed an IPO just 30 days ago.
Gemcor builds machinery in Buffalo that puts rivets into
airplanes. Gemcor has doubled its employment, doubled its
revenues, and it is shipping its aircraft machinery worldwide.
Every Boeing airplane ever made and in flight has been touched
by a Gemcor machine.
Chair Landrieu. Okay. And save all the rest of the
testimony----
Mr. Penberthy. Thank you.
Chair Landrieu. This is just a brief introduction. Harry.
Mr. Haskins. Good morning and thank you, Chair Landrieu,
for having me here. We appreciate your leadership on issues
involving the SBIC program. We have worked closely with your
staff and they have been tremendous.
The program has enjoyed a lot of success and positive news
over the past couple of years. We have reduced processing time
significantly across the board and essentially doubling our
productivity. We are building upon the success of the SBIC
platform to expand access to capital in the more under-served
markets via our impact fund initiative and early stage.
Chair Landrieu. Okay. And hold a minute because these are
just introductions. We are going to get back to you for your
opening. Go ahead, Roger.
Mr. Bates. Good morning, thank you. My name is Roger Bates.
I am a partner at Mangrove Equity Partners in Tampa, Florida,
and for the last three years have been serving as the President
of one of our portfolio companies, MEP R&H Supply, which is
headquartered in Broussard, Louisiana.
Chair Landrieu. Oh, wonderful. Thank you. Vincent.
Mr. Foster. Thank you, Senator, for holding this event. I
am honored to be here today. I am Vince Foster, CEO of Main
Street Capital. We operate out of a single location in Houston,
Texas. We are publicly traded on the New York Stock Exchange.
We first entered the program ten years ago in 2002 with a
single license. We received a second license in '06, began to
outgrow the program, and converted to a publicly-traded BDC in
order to stay in the program and continue to grow. So I am
interested in how we can keep better players in the program.
Chair Landrieu. Great. James.
Mr. Goodman. I am Jim Goodman from Gemini Investors in
Wellesley, Mass. and thank you for allowing me to be here and
speak. We are currently investing our fifth SBIC fund. We
entered the program in 1995. We have invested in 93 companies
since that point and we have put a little under $400 million to
work.
In the last eight years, our companies have created almost
10,000 jobs and also created a number of small businesses
themselves, in particular our franchising companies. So I would
like to be able to talk about all those things today.
Chair Landrieu. Manuel.
Mr. Henriquez. Good morning, Madam Chair. Thank you for
having me participate in this roundtable and for letting me
provide some overview on the benefits of the SBIC program.
Similar to Main Street Capital, when I started Hercules, I
looked at the SBIC program as an integral part of launching
Hercules and getting capital and getting access.
I am one of the unique players on this panel who invests
almost exclusively in the venture industry, and work with pre-8
revenue companies that are significant job creators and
innovators of American jobs and technology in this country.
I am proud to say under the SBIC program, we have two
licensees. We have over $225 million under the SBA program and
we have now been able to use that capital to invest in $750
million in 95 technology and life sciences companies since the
founding of Hercules. And I am very proud and a very strong
supporter of the SBIC program that made a difference in our
company when we started. So thank you for having us here.
Chair Landrieu. Tim.
Mr. Rafalovich. Yes, good morning. My name is Tim
Rafalovich, and I manage the alternative assets for Wells
Fargo, which includes our SBIC investments. Carl and I have the
unique kind of privilege of being able to be speaking from the
investment standpoint. We invest in SBICs. SBICs then have
general managers, many of which are here today, who invest then
in the companies, of which two are here.
So if the program wants to be expanded, it needs to take
place top down, which is through the investors and their
incentives to invest in SBICs. I have all sorts of statistics
on companies that we have invested in and how they have grown
that we can maybe talk about in the future, one that went from
63 employees to 1,167 just in a short period of time.
But one of the things I want to make clear as well is, a
lot of people might think because Wells Fargo is the largest
lender on the small business end of things, having deployed
about $14 billion in capital last year, that there might be a
little bit of a conflict of interest here. We do not believe
that there is a conflict at all. This is a win-win because many
of the SBIC investments made are investments that would have
never been made by a major bank.
And so, what happens is that the banks then will not fund
these smaller companies because there is a little bit too much
risk. SBICs do, but then Wells Fargo can come in a little later
and be able to refinance these. It is a good win-win and that
is why we believe in this program.
Chair Landrieu. Nicely put. Charles.
Mr. Rothstein. Good morning and thank you for including me
as well. I am Charlie Rothstein, a founder of Beringea, which
is Michigan's largest venture capital firm. We are also
managers of the Michigan Growth Capital Partners funds, one of
which is an SBIC. It is our second SBIC, so we, too, have had a
long relationship with the Small Business Administration. The
current SBIC was licensed last year as part of the Impact
Investment Initiative and it totals $130 million.
Chair Landrieu. Thank you so much. Let us start with Harry,
if we could, and go ahead, Harry. You manage this program
through the Small Business Administration, and for those that
are viewing and watching and will be reading the outcome, why
do you not go ahead and give us your opening comments, and then
we will open it up for general questions.
Mr. Haskins. Thank you. And rather than repeating some of
what I said, I will just continue to go on. We want to build
upon the success of the SBIC platform----
Chair Landrieu. And can you speak more closely into your
mic? It is a little awkward, but you have to lean forward.
Mr. Haskins. We want to build upon the success of the SBIC
platform, and we have expanded it to include a couple of new
initiatives, the Impact Fund Initiative and the Early Stage
Initiative. However, we believe increasing the authorization
level in the Family of Funds limit will have a positive impact
on the availability of capital for small businesses and can be
managed at minimal risk and no cost to the taxpayer.
We look forward to continuing our work with the Committee
to build upon the success of the program and to contribute to a
positive economic climate for small businesses.
Chair Landrieu. And explain how it is minimum risk from
your vantage point and no cost to the taxpayer.
Mr. Haskins. Well, the program currently operates under a
zero subsidy where the fees associated with the program cover
the cost associated with it.
Chair Landrieu. And has it been that way since its
inception?
Mr. Haskins. No. Up until around 2000, I believe, we
actually worked under appropriated funds where we had to
receive an appropriation and the amount of money we could
guarantee was limited by that appropriation. But the success of
the program and, more importantly, the success of the SBICs has
enabled us to move to a zero subsidy basis.
Chair Landrieu. Well, let me ask you this. Why do you think
then the President only recommended extending it from $3
billion to $4 billion? I mean, if it is low risk and no cost to
the taxpayer, why can we not go up higher than that?
Mr. Haskins. Well, our current authorization level has been
sufficient to support the growth of the program. Historically,
up to around 2009, we averaged about $700 million in authorized
commitments. We doubled that in 2010 and then increased it
again in 2011 to about $1.8 billion.
So we think the existing authorization was sufficient. The
increase to four should give us sufficient capacity over the
next few years to support the growth of the program. Obviously
it is worth revisiting if growth continues at its current pace
to see if it needs to be raised beyond that.
Chair Landrieu. Okay. I would like to talk about that later
on. Let me begin with some questions. Why do we need SBICs in
the spectrum of venture capital? I know this is a simple
question, but I would appreciate if one of you would just take
it and explain why this is important, because I think there is
a lot of confusion out there about venture capital and when
they come in and when they do not come in and where there is a
need for them. So, Vincent, we will start with you and then I
will go to Manuel.
Mr. Foster. Thank you. I think the reason we really need
SBICs is pretty simple, and that is, to continue on an earlier
point that was made, the best way to think about SBICs is they
begin where the banks end and they end when private equity or
regular institutional venture capital funds begin. There is a
huge void in between someone that is commercially bankable as a
small business and someone that is private equity or venture
capital eligible, and that is really the gap that we fill.
Another way to think about it is we provide cash flow-based
financing and cash flow-based capital, equity capital, debt
capital to small businesses which is literally not available.
Commercial banks will routinely, for larger companies, loan a
multiple of their cash flow and financing and that is how they
operate.
Small businesses have to borrow against their assets, their
inventory, and guarantee it.
Chair Landrieu. It is very difficult, including their
house?
Mr. Foster. Right.
Chair Landrieu. Their life insurance?
Mr. Foster. Everything.
Chair Landrieu. And their pension funds and their
children's college education. And this Chairman has had about
enough of that.
Mr. Foster. And the nice thing about the SBIC program, even
more than the 504 or 7(a) is personal guarantees are not
required and they are virtually unknown, as far as my
experience.
Chair Landrieu. And I just want to stress this point,
because the smarter I get on it, and I have got a long way to
go, but this country can never unleash the potential of people
who have little financial strength, but great character and
extraordinary intelligence and a tremendous amount of nerve, if
we do not find a way around the fact that you cannot get
capital from anybody unless you already have wealth. Do we
understand the problem here?
That is why I am going to stay on this. That is why this is
very interesting to me. Contrary to what the Chamber of
Commerce says, there are many, many, many businesses out there,
like this business right here, Rick, who can grow, who can show
how they can grow, but they do not want to pledge their house,
and maybe you have, or your home or your children's future to
go to a bank. Banks are only lending under certain
circumstances.
If we do not open up other opportunities like this, I do
not know how we grow ourselves out of this recession that we
are in or really tap the strength of America. So I really
appreciate, Vincent, you saying that. Manuel, do you have
anything else you want to add?
Mr. Henriquez. Madam Chair, I can speak to you as a first-
hand experience as an entrepreneur, and not to bring up my
heritage as a minority, when I started the company, Hercules, I
could not get bank financing. I could not get any bank to give
me capital.
I basically risked everything I had and approached the SBIC
as a lender of choice to be, frankly, the foundation of the
capital that we had to go out and fund and invest in
entrepreneur innovative companies that have gone on to create
hundreds and hundreds of jobs, thousands of jobs in California,
in Massachusetts, and in various regions of the Southeast.
So unlike most gentlemen on this panel here, we invest in
companies that do not have revenues. We invest in companies
that cannot get any bank financing. And if it were not for the
SBA program, the SBIC program that we rely upon as a source of
financing, a lot of this American innovation they refer to and
a lot of these dreams----
Chair Landrieu. Go nowhere.
Mr. Henriquez [continuing]. Of companies would never ever
come to fruition. And I am proud to say that through our
organization, we have well-known names that have received
capital through us such as Annie's Foods, the simple bunny
rabbit company that you can buy at Whole Foods.
Chair Landrieu. Love that, love that.
Mr. Henriquez. I am proud to say we have another company in
the drug discovery area that focuses on improving the quality
of life of cancer victims and they are making new biologics for
cancer drugs, which we all know from the FDA process, are very
scarce and hard to get ahold of.
We have companies in our portfolio that are dedicated to
clean energy, as the Bright Source technology, for example,
that does solar panels, and create new ways of generating
energy in the market. And then we have social media companies,
high profile names such as Box.Net, which is cloud computing,
which is growing exponentially a number of employees that they
are hiring and creating jobs.
So the SBIC program is an integral part of our capital
structure and a program that I would like to see, to your
point, expanded beyond the $4 billion that is out there, and
frankly, I would love to be able to see even to go beyond the
$350 million, because I can tell you, Madam Chair, that we
could put that money to work and we could put that money to
create jobs in this country for many, many more great ideas
that entrepreneurs have like Rick and others out there.
Chair Landrieu. Thank you. Charlie.
Mr. Rothstein. Well, sure, I was just going to add onto the
last couple of comments that----
Chair Landrieu. You have to press your button. I am sorry.
Mr. Rothstein. That is okay. I was just going to the last--
--
Chair Landrieu. Very complicated for very smart folks.
Mr. Rothstein. And now it is not. It really is not that
complicated. I was just going to add onto the last couple of
comments. We are clearly talking about debt financing and debt
works for companies that have predictable cash flow, but there
really is also a shortage of pure equity capital.
The venture capital industry has shrunken by some 40
percent over the last handful of years, and entrepreneurs are
starved for that kind of capital as well. Equity, unlike debt,
equity, you know, it allows companies to take greater risks
than does debt because there really is not any ticking time
bomb to it. It does not need to be repaid immediately. It
allows a company to be a bit more long-term in the way that it
thinks toward R&D and even the introduction of new products.
So that is something that we should work to address. The
institutional market that used to support venture capital firms
that were out raising funds is decreasing. Those institutions
are looking elsewhere. They are backing buy-out funds and other
types of alternative investment vehicles. So either maybe
within SBA or maybe outside of SBA we can come up with new
solutions.
Chair Landrieu. Charlie, do you know why that is shrinking?
Is it just the nature of the recession? Does anybody have an
idea about why the venture capital is shrinking? Because I know
that is why this bill flew over from the House, because there
is a real need. But I am not sure we are correcting it the
right way.
This crowd funding idea and the response, I think, if I am
reading this correctly, to use the Internet in a way that was
not legal to raise venture capital funds for businesses, which
sounds great and is very--it could be game-changing.
The problem is, if you do not have the right safeguards and
regulations, it could also, in my view, open up a whole pathway
of fraud that we have not even begun to even think about. But
is that what you are saying?
Mr. Rothstein. First of all, I do agree that the kind of
crowd funding issue is something that brings on significant
risks that, you know, we need to make sure that it is properly
structured so that people are not tricked into investing into
things that sound good over the Internet.
But I think, and many other members of the roundtable have
opinions on this, but one of the problems has been the lack of
access that the venture capital community has been able to
generate. There has not been an ability to get a company
public. The IPO bill is addressing that and lifting the
regulations that some of the smaller companies will face in
going public. I think that is a positive.
There has been--in the institutional market, many times, it
is a bit of flocking toward areas that seem hot. So whether it
would be the small buy-outs or hedge funds or whatever it might
be, that is where people were running and they have run away
from venture capital and it really has caused a dilemma within
the market. You could speak to, I am sure, all of us who
realize how hard it is to raise just a pure----
Chair Landrieu. Roger and then Thies.
Mr. Bates. To add to what these gentlemen have said, I
think one of the things that is important to understand about
the SBIC's place in the capital structure between the
commercial banking and equity is that they represent what I
like to call patient money. They think more like equity, even
though it is debt, and all companies will be challenged from
time to time. And where your commercial banks do not have a lot
of tolerance for those challenging times, these SBICs can
really make a difference in helping the companies get through
those and then back on the path to growth.
Chair Landrieu. And in defense of banks, which I do not
always defend, but in this case, they tell me constantly that
it is the regulators breathing down their necks, looking at the
loans on their portfolio, and while they might personally like
to be more patient, the regulators are not allowing them to be.
So I want you to know, we hear that a great deal. Thies.
Mr. Kolln. I think to address the question of kind of the
capital and sort of venture capital and that, I think one of
the things we have seen, and what is important about the SBIC
program is, it is focused on small businesses, so the
businesses we have to invest in are small businesses and small
funds.
What we have seen in general in the capital markets is kind
of increasing concentration of capital. And what that brings
about is the investors are big fund-to-funds, big pension
funds. They cannot invest in small funds very easily because
they have minimum amounts that they want to put into a fund.
Chair Landrieu. Like, for instance, what are the usual
minimums? They have to invest like $200 million or $100
million, $50 million?
Mr. Kolln. Well, yeah, $50 million.
Chair Landrieu. $50 million.
Mr. Kolln. If they have to invest $50 million, they need to
be investing that in a $500 million fund and a $500 million
fund, you know, has a number of principals. They are going to
invest in 20 companies. They are going to have to invest $25
million in each company.
Chair Landrieu. And that is more than Rick needs.
Mr. Kolln. Exactly. And it is the small businesses that
need 1, 2, 3, 5, $10 million maybe of capital that then have--
that then suffer because they are at the end of that waterfall
because the big institutions need to invest in big funds which
need to invest in big companies.
And that is where the SBIC program does a great service,
because the smaller funds can invest in the smaller companies
and provide capital to those companies that need 2 or $5
million of capital.
Chair Landrieu. And, Jim, I am going to get you and then
Manuel, but are we limited, Harry, in the SBIC program for what
a company can borrow?
Mr. Haskins. A single fund can borrow up to $150 million in
leverage.
Chair Landrieu. But borrower, a borrower to that fund, can
they invest in----
Mr. Haskins. An SBIC has an over-line limit, so essentially
10 percent of its capital base can be invested in a single
company.
Chair Landrieu. So that would be $15 million as your top
line from 150? Is that correct?
Mr. Haskins. Well, if the fund size is $150 million of
leverage, saying $75 million private capital, that would be a
$225 million fund size, so they could invest $22.5 million in a
single company.
Chair Landrieu. Go ahead, Jim.
Mr. Goodman. I just wanted to address the question that you
started out with which is why is there a lack of funding now.
You addressed specifically venture capital, but I would make it
even more broadly private equity.
I first got into the private equity business in the late
1980s in Boston, and the three or four leading firms back then
were doing deals where they were investing $5 million into $10
or $20 million sized companies. And those leading firms have
all been very successful and their funds now are 3, 5, $10
billion. And the smallest check they will write is a few
hundred million dollars.
Private equity, as a whole, has mushroomed dramatically.
Our fund is less than $200 million in total commitments,
including SBA's money. That now represents the bottom 5 percent
of the entire private equity world. So a $200 million fund,
which was a good-sized fund 20 years ago, that space has
largely been vacated, and the industry has exploded.
But your $10 million revenue company, like some of the ones
that we have invested in that I have identified, if they are
providing cooking oil equipment or they are a restaurant
franchise, that is not venture capital and it is no longer
where the bulk of private equity is.
So what this program does is it supplements and it fills a
void that was left by the migration of private equity firms
into much, much larger deals.
Chair Landrieu. That is the best explanation I have heard.
Thank you very much. I now think I understand better our
challenge. Manuel.
Mr. Henriquez. Living and breathing in the venture capital
ecosystem on a daily basis, which is what we do, and I myself
started in the venture industry back in 1987, the industry has
changed dramatically. It was first brought on with dramatic
change as now the infamous dot-com bubble blowup that we all
well know and understand in 2000, which was precipitated by a
second blowup that has not been written a lot about is the June
of 2000, which is the telecom blowup that occurred.
And then the market proceeded to go through an inordinate
amount of changes, including, of course, the now infamous Enron
and WorldCom changes on stocks and what have you. Despite some
of the comments said earlier, the venture industry is nowhere
near what it was in its historical levels by any stretch of the
imagination, peaking out around $98 billion in 2000.
Last year alone, the venture industry, according to Dow
Jones Venture Source, our leading source of information, they
did $33 billion of activities in investment last year to over
3,200 companies itself. I am proud to say that we help fill a
lot of that void by providing $630 million of capital to
venture stage companies that would otherwise not be able to
gain access to capital from a bank that exists today.
So we help these companies dramatically gain access to
capital because the venture industry is, in fact, or has shrunk
itself, but these companies still have a capital need to
continue to accelerate their growth. They are unable to bridge
that gap in capital they need with commercial banks.
We come in as an SBIC, take on that risk of financing those
pre-revenue companies in order to get the additional capital
they need to get their products and services out to the market
and eventually lead to quite dramatic job creation out there.
We help fill that crossing that chasm.
Chair Landrieu. Jim, do you want to say anything else? Put
your card down if you all--okay. Does anybody want to add
anything to this line of questioning? And then we are going to
go to our next question, which will be going completely off to
another point.
For those of you who do specifically look at companies, how
do you choose the companies to invest in? Where do you troll or
patrol or look out to find the companies? Do they come to you?
What mechanisms do those of you that are looking for smart
investments utilize--just go through that process a little bit
with us. Go ahead.
Mr. Foster. The main source, we call it deal flow, for lack
of a better word. The main source of deal flow that we see is
the local and regional investment banks. A lot of times, if you
think about it, the customers might have small businesses and
the investment banking organization might be managing the
income off the business.
Because of estate planning needs and everything else, the
owner of the small business, at some point, probably needs to
sell or get liquidity for his estate taxes. They might go to
the investment bank and say, Do you have a solution? Is there
someone we can talk to that might invest in our business that
might--you know, I know a buyer, but he or she cannot get the
financing.
So a lot of times, it is the regional investment banks,
local investment banks. The independent business brokers are a
huge source of deals. The accounting firms who do the estate
planning, the local accounting firms. The commercial banks will
often call us because someone comes in for a loan, if you do
not fit in that exact box, if you are one inch outside the box,
they cannot do anything, sometimes they will refer transactions
to us. And a lot of times it is word of mouth.
Chair Landrieu. Dan.
Mr. Penberthy. We look at transactions which are very
young, companies which would have typically $200,000 to a
million dollars in revenue. These are companies that will not
be talking with investment bankers, will not be--may not even
have a CPA firm involved. I often go in and talk to the
universities and talk about the value of a network. Networking
is the way that these transactions get done.
NASBIC itself does a great job. Now the Small Business
Investor Alliance (SBIA) does a great job, but it is sponsoring
networking events amongst ourselves. In the upstate New York
region, as I mentioned, I am the President of the Upstate
Venture Capital Association. We hold networking events across
the State from Buffalo down to Newburgh, New York, just outside
New York City, encouraging entrepreneurs to come forward with
their ideas.
At these events, we bring in funding providers to help make
introductions. Just yesterday, I held an event in Buffalo where
two companies stood up and made ten-minute presentations to
prospective fund-raisers. This is done every other month in
Buffalo, New York.
And it is all about the network, having entrepreneurs get
out there and meet people, and often, it takes multiple visits
in order to get financing done for these people. We will see a
deal two, three, and four times, and ultimately, we will help
them finance their business.
Chair Landrieu. Thies.
Mr. Kolln. Yes. I guess I will pretty much echo what Vince
said. There are a number of sources from which we get deals. A
lot of it is networking based. A lot of it is advisors to the
businesses, whether they are bankers or investment bankers or
attorneys or accountants who are advising the businesses. And
some of it is--and a lot of it is networking. So a lot of the
deals tend to be done kind of regionally.
Chair Landrieu. Now, if it is in the SBA's interest, which
is one of the missions of this small--and we are hoping to make
it an even more active agency, would it be beneficial to have
some funding at the agency level to encourage, host, and
partner with these networking opportunities, or do you all have
enough either time or resources to do that on your own?
I understand there is a Small Business Investor Alliance.
Who represents that here? Do you all--and you can speak up. Do
you all do networking? Is that what you all do?
Mr. Palmer. [Off microphone] We do network marketing with
the funds themselves and with some banks and others, but not
the entrepreneurs directly. Actually we are working on some
software that might be able to do more of that network
filtering.
Chair Landrieu. And would you identify yourself, Brett?
Mr. Palmer. Brett Palmer from the Small Business Investor
Alliance.
Chair Landrieu. Okay. Manuel, anything you want to add to
this?
Mr. Henriquez. The answer is that the SBIC program is not
well-known by many entrepreneurs. They are still--it is
fearful. It is a Government agency. They do not know how to on-
ramp it, how to approach it. A lot of our deal flow comes from
crazy ideas of entrepreneurs who want to create new
technologies or new solutions out there. A lot of them could be
just professors, could be engineers. They do not know how to go
around starting a company or formulate a company.
I think it would be incredibly useful if the SBA were to
provide forums by which to help entrepreneurs learn how to
create a company, learn how to get proper guidance on
formulating a company, and how to get a company off the ground.
There is an incredible amount of American ingenuity out
there that just needs a little bit of help getting itself
structured a little bit and learning how to on-ramp onto
speaking with financial sponsors out there. That in itself
would help create more jobs and create more confidence in the
marketplace.
So the SBA staff would really be incredibly beneficial by
helping these individuals learn how to gain access to this
capital. And on the West Coast, there is a lack of SBIC capital
out there to help, and also in many parts of the Northwest as
well. We are seeing a huge demand of capital that just cannot
find a place to look--to get capital in the marketplace today.
So that would be a huge helpful thing to have out there.
Chair Landrieu. Do we actually have a map of where the
SBICs are headquartered? Can we put that up somewhere? And,
Harry, will you speak to the issue of what the SBA is doing to
get out the idea to entrepreneurs and to others? Let us just
look at this map for a minute. This is the distribution by
state. I guess the darker have the more SBICs, so New York
would be leading with--what is that--46?
You know, the sad thing is that there are lots of light-
colored states, including my own, which have fewer SBICs. And
again, it is not so much the quantity, but the quality of the
SBICs. What I am going to ask the staff to do is do another map
with the top--how many do we have in the country?
Mr. Gillers. 292.
Chair Landrieu. 292? I am going to ask you all to do the
top 50 or the top one-third, I guess, of that and see where
they are operating to give us an idea where the more successful
ones are operating and where the gaps are.
Harry, what are you all doing about this to try to get this
accessible, physically, in many other places? Now, we also have
the Internet, which is a powerful tool of communication, so you
do not always have to be physically located with the
communications that we have today. But could you comment on
that?
Mr. Haskins. Yes. First I would just like to say something
real quickly regarding the comment made about education of
entrepreneurs. SBA does have a whole office dedicated to that,
Entrepreneur Development, and through its SCORE and SBDC
programs and other assorted programs.
Chair Landrieu. But SCORE has not been expanded in how
long? Has it been authorized, at what level, for how long? Who
knows that?
Ms. Wheeler. For at least the last two years.
Chair Landrieu. But what is it? It is a $7 million
investment that the Federal Government has made, $7 million, $7
million, that is it for the whole country. And that is the best
known mentorship program. We have attempted to get it raised,
and I have been blocked. Unfortunately, there is not enough
minority support right now for the expansion of SCORE or
something like it.
But $7 million, they have been at that level for, I do not
know, 30 years. Go ahead.
Mr. Haskins. But we do recognize the need for that kind of
education. With respect to the map, we have been focusing a lot
of our efforts on a couple points. One is obviously trying to
attract qualified management teams to the program, with a
particular focus on some of the under-served populations,
minorities and women, and we have had a fair amount of success
with that recently, more than doubling the number of
applications from those particular populations over the recent
past.
Also, we have been making the large outreach efforts to
limited partners, which are the source of capital for the
program independent of SBA, trying to attract banks and others
such as TD and Wells to the program so that there is a source
of capital for a qualified manager so that we can expand in
various areas throughout the country.
We do what we can, in a sense, to try and make the program
known as widely as we can by attending numerous conferences and
events that are attended by people who have an interest in this
space, and hopefully we can expand in a number of other areas
that are under-served.
Chair Landrieu. I am going to get Dan, to you, in just a
minute, but does anybody at this roundtable, knowing what you
know about the success of this program, have any ideas for
Harry about where he could look for experienced minority
entrepreneurs, particularly African-American, Hispanic, or
Asian?
Would business schools at Harvard, Stanford, or other well-
known schools, young people coming out but with the
prerequisite degrees, be interested in starting some kind of
fund like this? Or do you need to have real world experience
for a couple of years, maybe before you start them? Do any of
you all have any ideas for the Small Business Administration
about where we could get some more diversity into this program?
Go ahead, Thies.
Mr. Kolln. Well, I do not know that I have an answer to it,
but this is very much a kind of mentorship industry where you
learn by doing. I think it would be high risk to take even
bright, well-qualified students right out of business school
who have never managed a fund and focus on that.
So I think the question is, is growing the base with
experienced managers and----
Chair Landrieu. And mentoring some of the younger----
Mr. Kolln [continuing]. And mentoring. It is really a
mentoring kind of model and it always has been because, you
know, we are very small organizations. I mean, we have five
full-time investment professionals and I think that is probably
bigger than a number of SBICs out there. And I think, you know,
if there were ten or a dozen, that would be a very large fund.
Chair Landrieu. Tim.
Mr. Rafalovich. We invest in a fund called Central Valley
Fund. That fund is in Central Valley in California. Most of
those fund managers do speak Spanish and they have--a majority
of their companies that they invest in are all minority-owned.
So some of it has to do with location and expertise around the
fund managers.
Chair Landrieu. Manuel.
Mr. Henriquez. Clearly, with my last name and my name, I am
a minority. I am a Hispanic, of Latin background. I have to
echo. It is an apprenticeship program and I may say something
here that people may find a little bit offensive. You have to
lose money to learn how to make money. And you need to be with
an institution that is going to go through that apprenticeship
process for you to get developed as an asset manager, as a
portfolio manager, and that takes time; that you just do not
learn that out of the box.
I learned that, thank God, with my career at Bank of Boston
where I cut my teeth, which happens to be originally the number
two licensed SBIC in the country, I had the privilege to work
for. But it is an apprenticeship model.
It is very difficult to reach out to minorities. You have
to give the minorities the opportunity to lose money and that
is a very hard thing to do, especially in an economy that has
been contracting over the years. There are programs. There are
outreach programs for minorities that you can actually tap, but
that is something that should happen, but it is very, very hard
to do.
Chair Landrieu. Carl.
Mr. Kopfinger. Sure. Just to address what Harry had to say,
the program has attracted a number of women-owned, as well as
minority-owned, applicants applying to the SBIC program. For
example, Bob Johnson from BET Networks is sponsoring a group
and bringing in a team from the Carlyle Group.
In addition to that, there is another fund, Pharos, out of
Texas. Kneeland Youngblood, who is on the board of Starwood
Hotels and Burger King and some other large organizations,
including a large hospital chain, is also bringing together a
team of minority individuals to run his fund.
And as it relates to women-owned fund managers, there has
been a lot of disruption in the marketplace where you had
American Capital, which imploded, and a couple of other funds,
and some of the women that were part of that group have also
spun out and spawned their own funds.
So I think the answer is that a lot of the folks who have
the experience are now starting to mentor the junior folks to
come in and start some of these funds. And I think we need to
see more of that.
Chair Landrieu. And, Don, thank you for joining us. I know
you had a weather delay, but why do you not briefly introduce
yourself, take a minute or so, and then you can take a minute
to explain why the SBIC program is important to your business.
Mr. Sackett. Okay. Thank you very much. I started my
company in 2001, myself and one other gentleman. We are a
Boston-area company. And we took SBIC funding in early 2004,
actually from the gentleman sitting to my left, and it was--we
thought it was just a very good program. Like one of the
gentlemen said earlier, for a small business that had a few
million dollars in revenue, private equity really was not an
option.
Venture capital, the traditional form, was not a great
option because it was just too expensive. We would have to give
up so much ownership. So we went with the SBIC route and it was
a very good success. We had about 20 employees at the time of
the investment in 2004. We sold the company in 2010. We had
about 180 employees at that time. We had grown our revenue from
a couple of million dollars to about $55 or $60 million.
Chair Landrieu. And what is your company, Don?
Mr. Sackett. It was called Innov-X Systems and we made
scientific instrumentation, portable instrumentation, and we
manufactured it in Massachusetts. And I think one of the things
we are most proud of was 70 percent of our products were sold
overseas. So we were manufacturing in Massachusetts and we were
selling to China.
Chair Landrieu. That is great. That is terrific. I hope you
are getting ready to start another company.
Mr. Sackett. Well, that is why I am having lunch with this
guy.
Chair Landrieu. Good. So you and Dan will be having a
special lunch today.
Mr. Penberthy. I have got dibs on Don.
Chair Landrieu. All right. Anybody else? Vincent.
Mr. Foster. If you think about outside the SBIC world, how
mentorship really happens, most individuals get trained, like
the Bank of Boston example, through a larger organization. To
the point that Thies made, you know, if the average SBIC fund
only has five people, what are the chances that you train
someone and they are--whether they are minority or not--whether
or not they go out and start their own firm?
So this is kind of a segue into something I feel strongly
about. We had this cap on the size of the program at $225
million of Government financing, which is great, but because it
is made available on a two-to-one basis, that means once you
have more than $112.5 million in private capital, which is the
cushion for the program which is why the program does not lose
money, it makes money, you are not optimizing your capital. You
are starting to be less and less benefitted by the Government
leverage.
So there is an effective cap on the program of $112.5
million of capital after which the management teams stagnate,
go someplace else. We have lost a lot of them through the years
and they have gone on to have great careers, household name
private equity firms who started out in the program.
So if we could increase the size of the program for the
better managers, you are going to have larger organizations,
more training, more people spinning off starting their own
firms. I have got 30 people now. I am big enough where, you
know, some of my guys will spin off and start their own firms,
but it was not until I got to 25 or 30 where that was, you
know, we really had more formal training and we could really do
that.
So I think, you know, we know who the better performing
SBICs are. It is not going to cost any money. Let us create
larger organizations rather than keep the thing capped. It does
not really make a lot of sense.
Chair Landrieu. Maybe we could have a stage one, stage two,
or stage three where you earn your way up through those stages,
or something like that. Manuel, you wanted to speak about that?
And then I will get to Rick. But, Harry, I am going to ask you
for a response from SBA about making some of these changes that
might really significantly help and reward those that are the
most successful and help keep this moving forward. Manuel, go
ahead.
Mr. Henriquez. I absolutely echo the need to increase the
funding levels, whether it is the 350 with keeping the leverage
going up to 300, which would be beneficial, but if you really
want my opinion on helping the program expand and create the
next bench of future managers, it would be nice to be able to
cede to your point on staging of capital, that maybe some of
our own individuals that we have been--an apprentice within
organizations start spinning out.
They are not viewed by the SBA, for example, as an
affiliate and get wrapped up into the total licensing available
capital. It would be nice to be able to see that a young
manager spinning off from an SBIC----
Chair Landrieu. Could be their own fund.
Mr. Henriquez [continuing]. Could be their own fund. And
yes, you are right. Maybe they start off with only $75 million
of leverage, but that way you have at least training wheels, if
you will----
Chair Landrieu. Exactly.
Mr. Henriquez [continuing] On a manager and getting out.
But sometimes under the program, that related manager, if some
of that equity capital is helping them get started, could be
viewed as an affiliate of ours, which means it detracts from
our availability of capital. And I think that does a disservice
to spawning new talent.
Chair Landrieu. Does not make any sense whatsoever. Harry.
Mr. Haskins. First, we do support an increase in the Family
of Funds limit to allow people like----
Chair Landrieu. But what about the affiliate rule?
Mr. Haskins. We have an awful lot of funds that are formed
by partners that have left or younger partners that have left
an existing fund and started their own. They are only an
affiliate if, in fact, Manny was also to be part of the new
fund. So if it is actually a new fund with new managers, even
though they spun out from an existing fund, they generally are
not going to be constrained by the affiliation issue.
Chair Landrieu. Okay. So they have got to be able to stand
on their own to be a real fund. They cannot be set up and then
have to ask you, Manny, for advice every day. It has got to be
fish or fowl, in other words, if we could figure that out.
But I understand the benefit, because getting back to the
mentorship, that is exactly what you are hoping to do, is some
of the more successful SBIC funds are training some of the best
people in the world to be able to help Rick and Don take their
businesses to where they have taken their businesses. And you
want to encourage them to start their own kind of funds and
help the program grow more organically than just Federal
constraints.
I mean, if there is some way we could design this program
for the modern age, not the 1950s when it was created, but for
the 2012 which we are in, with the whole world that has changed
since then and really give our entrepreneurs in America access
to the capital they need to grow is, I think, what we are
trying to focus on.
Tim, let me get you and then, Rick, you have had your card
up. Let me get Rick. You have had your card up the longest.
Mr. Girard. I just want to say that there is a lack of
knowledge. A lot of people do not know the SBIC even exists. I
was looking for solutions to my problems for two years before
it was even brought up to me. When people need money, when
entrepreneurs need money--and most of them are smaller
companies, and I think it was a good question that you raised.
I have heard a lot about the caps and, you know, the upper
limits, but I do not know if I really heard a good answer on
what are the lower limits, because there are a lot of small
companies out there that need money and they do not know about
the SBIC program. And where do small companies go for money?
They go to the bank and the bank says, Sorry, I cannot help
you.
But nobody ever guides them and then leads them to the
SBIC. So I am just--just a suggestion. Is there any kind of
partnerships that should exist between the SBIC funds and the
banks? Because you guys are limited with resources, it sounds
like. You know, you have a few employees. A dozen employees is
a lot. But the banks are everywhere. So maybe there is a
partnership there that you could exploit.
Chair Landrieu. And, Rick, when you first approached a bank
at some point in the early part of your company--and we have
been joined by Senator Moran. Rick runs one of the most
successful landscaping companies in Florida and one of the
largest in the country. Correct, family raised?
Mr. Girard. Yes, ma'am.
Chair Landrieu. He could not get the money he needed from a
bank. SBICs have helped their company. What was the amount of
money, if you do not mind sharing, that you were trying to get
from a bank that you could not get? At some point you had to go
to the SBIC.
Mr. Girard. Well, in this transaction, this was a $3
million transaction, which, you know, is not a small
transaction. I am not sure if that answers your question.
Chair Landrieu. But you could not get it from a bank----
Mr. Girard. No.
Chair Landrieu [continuing]. And you had to find it from
the SBIC?
Mr. Girard. No, ma'am. And as a matter of fact, the bank--
you know, I had a bank. I was a performing loan. You know, my
company was growing. We missed our loan covenants. The bank
turned it over to a work-out officer and, once you are on that
list, you do not ever leave that list. So I was left with--the
only choice I had was to go out and find refinancing.
Chair Landrieu. It has come to my attention, shockingly, I
guess I should have known this, but my background is not as a
banker, but I was told recently that you could be a 40-year-old
entrepreneur and have failed to pay one or two months on time
of a student loan that you took out when you were 19 and be
disqualified from a loan today. Is that your experience or does
anybody want to comment? Do you know if that is true? Wells
Fargo, what would your bank say? Go ahead. Do you know if that
is kind of what the regulators are telling you?
Mr. Rafalovich. Did I all of a sudden start sweating? Is my
legal counsel here? Generally, I would say that might be an
extreme, but there certainly are restrictions that, you know,
credit is very important. We are a credit-driven culture.
Something like that where you have 20 years, you know,
typically that falls--after seven years it falls off your
credit report anyway.
But it is true and somewhat to the point that bankers do
not do a great job at knowing a whole lot about this program. I
can say that in my discussions, we invest in a lot of SBICs and
even our bank does not know that this option exists for a lot
of people. So I think that that would make a big impact if more
banks had the ability to say, Here is a group of SBICs. It does
not fit us. It would be a good opportunity to give them a call.
Chair Landrieu. Jim and then Tim.
Mr. Goodman. Well, I think actually the way the SBIC
program works, or at least a lot of us here, is with regard to
the banks, it is really a case of one plus one equals three.
The bank does not want to come in and just deal with the
entrepreneur that maybe does not have his financial statements
in order, is not willing, necessarily, or able to give a
personal guarantee. But when my firm or Vince's firm or others
like it come in and put a couple million dollars underneath the
bank, then we actually get a multiplication of what is
available to the small company.
So we view banks as our senior partner, if you will, in
helping to capitalize and make companies like Rick's
successful. It is not either a bank or an SBIC, but it is
working together. The SBIC provides the junior, more risky
capital, but the act of doing that gets the bank comfortable
and creates that much more availability for the company.
Chair Landrieu. And creates, in the long run, if things
work out, a great customer for the bank that they can make a
lot of money off of that particular business. That is exactly
the business that I think banks are supposed to be in, correct?
Mr. Goodman. Amen.
Chair Landrieu. Don, did you want something?
Mr. Sackett. My comment was that was exactly our
experience, what Mr. Goodman says. When we took our SBIC
funding, we got a bank line of credit on top of that that we
could not have gotten had it not been for the SBIC line, for
the exact reasons. The SBIC required a certain amount of
financial due diligence and financial reporting and statements
that were not there before that.
Chair Landrieu. And repeat for Senator Moran, if you do not
mind, how successful your business was. You were making medical
devices? Go ahead and tell him.
Mr. Sackett. It was scientific instrumentation that we
developed and manufactured in Massachusetts.
Chair Landrieu. And selling to?
Mr. Sackett. All over the world, mostly Asia. Seventy
percent of our sales were offshore. Half of those sales were to
Southeast Asia, mostly China.
Chair Landrieu. Very exciting. Rick.
Mr. Girard. I just wanted to add, I echo exactly what he
said. I would not have been able to obtain senior lending or to
be bankable without the SBIC funds coming into play. But, you
know, the bank is not the one who suggested it. The bank is not
the one who found it. I had to pay a lot of money to an
investment banker, sophisticated money investment banker, who
understood what the SBIC--even understood what it was before
they could even actually make an impact to get my company
bankable.
And for a $20 million company, you know, one of the largest
in Florida, what we do in our industry, you know, there is no
reason that a company like us should not be bankable.
Chair Landrieu. I do not know if anybody here is
representing community banks in the audience? If not, Harry,
what are you doing or what is the SBA doing to inform? We have
about 7,000 banks, I think roughly, in the country and we are
really pressing--I am pressing and I think I am joined by other
members of this Committee--for the SBA to be better partners or
the banks to be better partners with the SBA in all of our
programs. We have 504 lending programs, et cetera, et cetera.
What is the SBA doing today, now that you are a Cabinet
level position, which we are very happy that the President has
asked Karen Mills to be part of the Cabinet. What are you doing
with the community banks that are part of the SBA family to get
them to better understand SBICs?
Mr. Haskins. Well, with respect to the SBIC program, we
work with the bank regulators such as Barry and we have worked
with FDIC and others to make our presence known at various
events.
Chair Landrieu. In what specific ways? Do you know? Is that
what you or your office does?
Mr. Haskins. For example, I was in Denver a couple months
ago to appear at an FDIC conference, which was attended by
mostly community banks interested in investing in--potentially
investing in the SBIC program. And we have done other events
like that as well.
Chair Landrieu. Do we know how many new banks--let us just
say roughly last year, and if you do not know, you could submit
it--decided to take specific action to know about SBICs and ask
for some sort of special briefing or something like that? How
many new banks came into the program? I do not know how to ask
the specific question. Do you know what I am trying to get? Not
that you just share information with, but that respond to you
in some formal or official way they would like to be part of
it. About how many community banks do that?
Mr. Haskins. I do not think we have a good answer for that.
I would say the primary contact with the banking industry has
been through the fund managers as opposed to SBA directly, and
we sort of backstop them saying, Listen, we are here and
willing to assist you in any efforts you have to educate your
potential investors. And as I said, we are willing to deal with
them one on one or as a group.
We have a number of SBICs that work with community banks
very closely. For example, in Texas, there is an SBIC that is
formed entirely around community banks. We have a number of
SBICs in other States that have significant community bank
participation in their fund. And we work with them and tell
them, We are more than willing to meet with them individually,
talk to them over the phone, appear at events to educate them
as to the program. But I cannot give you a good answer as to
how effective we are in that.
Chair Landrieu. And, Treasury, what are you all----
Mr. Wides. Yes. The Comptroller of the Currency actually
has been out participating in some of these outreach events
that Harry just mentioned. We held about 40 or 50 sessions last
year with the Federal Reserve and the FDIC where we bring
community bankers in to locations, like Harry mentioned and
Denver was one, and educate them about the SBIC, the 7(a), the
504 program.
The OCC has held tele-seminars for our banks with SBA for
about the last four or five years on some of these topics,
7(a), 504, and then last month on the SBIC program that Carl
actually participated on. I will be happy to provide a copy of
this for the record----
Chair Landrieu. Thank you. Without objection.
[The information follows:]
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Mr. Wides [continuing]. Of this presentation that we
delivered. We had about 700 bankers on the line at the
Comptroller of the Currency. Walsh and I were at the
Independent Community Banker's conference last week in
Nashville. There were 2,200 community bankers there.
I did a presentation on the SBIC program, had good interest
from the community bankers, all of whom were saying the same
things that you are hearing around the Committee table today,
that they view the SBIC program as a way to bring in new
customers and to help grow their banking business. And I think
it is just a matter of getting the word out.
We at the OCC will be putting out a how-to guide for banks
to invest in SBICs later this spring, and, you know, we
continue to hold these seminars for banks, letting them know
that they can get Community Reinvestment Act credit for
investing in SBICs, so that hopefully is an incentive out there
that banks see as being in their interest as well as, of
course, the fact that they really can make money on investing
in these funds and grow their businesses through developing
relationships with the small businesses that are financed.
Chair Landrieu. Thank you. Carl, you wanted to say
something?
Mr. Kopfinger. Right. So I think Barry covered a lot of
what I was going to say. I was going to mention that we did
participate in a webinar for many of the banks, national banks
or super regional banks, community banks that wanted to learn
more about the SBIC program. I was going to mention that Barry
is working on a white paper, and I am working with him on the
white paper, that will be distributed to the banking community.
Chair Landrieu. Well, one of the big picture--and I will
get to you, Vincent, in a minute. We are going to try to wrap
up in about ten minutes. You know, I understand that it is in
the private sector's interest to make money as fast as they
can, as much as they can, and that is what a lot of people are
motivated by. I have no problem with it.
But I have learned, as the Chair of this Committee, that
there is great value and actually great strength in small
businesses that are just businesses that feed one family. But
that is a major contribution to make.
Although there are lots of people running around the
Capitol that want to promote the Gazelles and the big
businesses that they can spin off and everybody makes a lot of
money and maybe they sell the company internationally, and I am
all for that, in America, we have to honor the tradition of
small businesses that only want two restaurants, but they feed
15 families for 30 years. There is nothing wrong with that.
I think that our country has, because of the concentration
of capital, the rush to make as much money as you can and, you
know, ``die with all the toys,'' kind of attitude that we have
gotten away from just the basics of trying to get money out to
people who want to be their own boss, who have something to
contribute, who do not want to travel all over the world, they
just want to live in their neighborhood, raise their kids, go
to church, have a happy life. Is there anything wrong with
this?
This is why I so believe in community banks and getting
money to Main Street, so that this can be America. There seems
to be a cutting off of that kind of opportunity, and the only
way you get it is to, like I said, Senator Moran, you either
have to put your house at risk, your children's college fund at
risk, all the money that you own at risk to get money to start
a business, and all you want to do is feed your family and a
couple of your neighbors.
This is a big problem right now. I am determined to find a
way through this maze of all the fancy financing to figure out
a way to get back to that, because our main streets are thirsty
and dying because they cannot get the money they need.
So I think SBICs are one way. If we can help you all to be
even better at what you do, it may not be the only way to do
that. But with all due respect to these big funds and these big
billion-dollar, $5 billion, $10 billion IPOs and Facebook and
Google and everything, there are just a lot of people I
represent who just want to run a restaurant.
I met a young lady the other day. She runs five ice cream
stores. And you know what? She is real happy. She said,
``Senator, that is all I ever wanted to do, run my own
business. I have got five stores. I will be happy if I can do
that for the rest of my life.'' There is nothing wrong with
that.
Does anybody else want to say anything? Go ahead, Vincent.
Mr. Foster. I have kind of a simple suggestion, and I think
Harry does a fantastic job.
Chair Landrieu. You have got to turn your microphone on,
please.
Mr. Foster. I think Harry does a fantastic job with the
resources he has, but if you go to SBA.gov, try to find the
SBIC program. It is really hard.
Chair Landrieu. I will go. If I cannot find it, Harry, you
are going to hear from me.
Mr. Foster. Well, it is really hard to find.
Mr. Haskins. If you do find it, would you tell me?
[Laughter.]
Chair Landrieu. Where it is.
Mr. Foster. When you think about the lenders out there, the
younger people, they use the Internet a lot more than we do.
That is the first thing they do. They can find SBA.gov, but
from there--so we really need to spend a little bit of money
having a modern website. That is the first thing a lot of our
companies do, is update their website to attract more
customers. I think we can do the same thing.
Chair Landrieu. All right. That is going to be one of our
first recommendations to the SBA and then to Treasury.
Senator, did you want to add anything? We are very happy
that you joined us and why do you not say----
Senator Moran. No, Chairman, I just would thank you. I
think these roundtable discussions are often of greater value
than the hearings we host much more frequently.
Chair Landrieu. Yes, they are.
Senator Moran. I apologize for the schedule being such that
I only have been here for the last 15 or 20 minutes, but I
wanted to get a flavor for what was being said. We certainly
want to make certain that we do the things that allow capital
to be available so people can pursue the American dream.
Everybody has a different American dream and we want each to be
able to pursue their own.
I am so delighted to hear at least what I was able to hear
this morning and look forward to working with you on this and
other issues.
Chair Landrieu. Thank you. And I think, Vincent, while the
Senator is here, just again, one of the great points about the
program is no cost to the taxpayer and limited risk. If you
would just go over that again?
Mr. Foster. Sure.
Chair Landrieu. And you are the SBIC of this year, right?
Mr. Foster. Last year.
Chair Landrieu. Last year.
Mr. Foster. I do not think they have announced this year
yet. It is during Small Business Week.
Chair Landrieu. He was the best one last year in the
country.
Mr. Foster. So the way the program works is you take the
top end of the program. If you have more than one license,
which several of us do, you can get $225 million of long-term
Government-guaranteed financing at essentially the Government's
cost to capital, but it is on a two-to-one basis to your
private capital.
So for me to get $225 million guaranteed from Harry, I have
to go raise $112.5 million. That is the way due diligence is
performed to protect you because people are not going to give
me $112.5 million if they do not think I know what I am doing.
And their $112.5 million is on the hook first if we have
defaults with respect to how we deploy that $337.5 million.
And the--what else did you want me to cover?
Chair Landrieu. That was it.
Mr. Foster. And so, in effect, what we do with the money--
--
Chair Landrieu. The risk and the cost.
Mr. Foster [continuing]. Is we start where the banks stop
and we stop where private equity and traditional venture
capital begin. So we are in that much needed void in between.
Senator Moran. Thank you.
Chair Landrieu. Jim, and then we are going to wrap up with
you. Go ahead.
Mr. Goodman. Well, just specifically to the point of what,
if any, is the risk to the taxpayer, we have raised and managed
five SBIC funds. The first three, which are now fully mature
and have been sold off, generated more than $40 million of
profit to SBA under the Participating Securities Program.
But every one of our funds has paid back more than we have
borrowed. So we are a net generator of cash and profit to the
program. Obviously, we hope that continues, but I think it is
important to understand that if the program is well-managed, as
it has been, and it uses its discretion in licensing new
applicants, it can continue to exist at no cost to the
taxpayer.
I think that is a really important point here, is that a
well-run program, as Harry and his team have been able to do,
can generate some valuable capital, create jobs, and do so at
no cost to the taxpayer. We have been just one example of that.
Chair Landrieu. Dan and then Manuel and then we will end
with Treasury.
Mr. Penberthy. I will tell you real simply why it is at
zero cost to the taxpayer. RAND Capital borrowed $10 million,
just $10 million from the SBA through the SBIC program. We paid
interest on that at 6 percent, now above-market interest. We
have paid you back $9.1 million. So for roughly $900,000 net
risk to you at this time, we have created 500 jobs, created
$200 million in growth and revenue.
In 2011 alone, the employees of our portfolio companies
paid $7 million in Federal withholding taxes. We have created
jobs, created wealth at zero cost to the taxpayer. That is the
success of the SBIC. That is why it is important.
Chair Landrieu. Manuel and then we will end with Treasury.
Mr. Henriquez. Madam Chair, I want to go back to a point
you raised earlier, how do we get Middle America, Main Street
America the capital that it needs to have that young
professional run her five ice cream stores. Free thinking as
this forum you want it to be, suggestions I would tender to you
would be the following.
I think that historically, SBA had a program that had about
$25 million that was allocated to distressed economic regions.
If you want to really induce companies that invest in America,
you need to empower the equity to be that first lost capital
that Vince referred to earlier. What I would suggest, Madam, to
consider is that you want to encourage that equity capital to
come in and start the small SBICs, call it $25 million SBIC,
but they receive three or four times leverage on that capital
in order to allow that small entrepreneur to get a $100,000
loan or a $500,000 loan.
By having that equity capital be able to be leveraged a
little higher, but keep the fund at a smaller size from the
SBA, you actually may see smaller amounts of capital.
Instead of the billion dollars you are referring to, you
can go into that Main Street America through an economic
development program that way, which I think if historically the
SBA had a similar program on economic distressed areas, and I
do not think it has been well-capitalized or well-used because
there is no equity capital that wants to go into that small,
you know, distressed economic region.
So you need to create an inducement to have that capital
flow in there, and I think that you will see Main Street
America start getting that small amount of capital that it is
looking for.
Chair Landrieu. And, particularly, if you could partner
with some of our more entrepreneurial mayors in this country
that are trying to build their main streets, even in rural
America, as well as in some of the more urban settings that
have had effective economic development programs, that could be
an interesting partnership as well. Okay. Dan, last word.
Mr. Penberthy. RAND is willing to go out to those rural and
distressed areas. We went to Mexico, Missouri, and are building
bricks; started up a defunct brick plant there. We are down in
Waycross, Georgia, making boats. We are going to these severely
distressed areas making very small investments in companies,
and that is the importance of small funds to the program.
Chair Landrieu. Okay. Barry.
Mr. Wides. A couple of points. Yeah, we have been out
talking to community bankers about the SBIC program. A couple
points of feedback which I have shared recently with the SBA,
but I will share with you as well.
I think that there is an interest in using the Internet,
maybe the SBIC's website, to find funds that are currently
soliciting investors, and I would just encourage both--
encourage the SBA to see if there is a way that they could make
more prominent on their website funds that are soliciting
capital now. And then we can send banks that are looking to
participate to their website.
The other point that I have made to the SBA is that they
might consider posting fund performance so that banks can see
which Family of Funds have been the most successful. And I
think, you know, having the data and the information available
to the banks on fund performance, in terms of where they want
to place their capital, might be helpful. And we have gotten
that feedback from banks.
And just last point. In terms of your question about the
smaller business, the mom-and-pop business that you were
referring to a moment ago, the State Small Business Credit
Initiative is just getting up and going. The OCC has been out
meeting with the State agencies that are running those
programs, encouraging banks to participate. Many of them run
loss shares so that banks can take greater risk in those
programs and make the kinds of loans that we have been hearing
about that banks have been shying away from.
And then also, many of the very small loans, the micro
enterprise loans, are made by Community Development Financial
Institutions. CDFIs are certified by the Treasury Department,
receive money through the CDFI fund, and a lot of banks are
partnering with those CDFIs to provide them subordinated
capital debt so that they can go out and leverage the grants
that they get from SBA and the Ag Department and the Treasury,
which is then used to make the really small business loans to
those entrepreneurs in the low-income communities.
So we are out there trying to get banks more involved, but
I agree, it is a huge challenge.
Chair Landrieu. Okay. I am going to try to wrap up, but I
do not want to cut anyone off. Harry, do you want to say
anything?
Mr. Haskins. Just a couple comments. One is, as to the
information that Barry is referring to, we are looking into the
possibility of making that information more available in a way
that respects the confidentiality of the providers of the
information.
The second point is, we do not want to get entirely away
from our roots, in a sense. We do have a requirement. Congress
has seen fit to impose a requirement that 25 percent of all
investments by SBICs be in smaller enterprises as opposed to
just small business. So we try to make sure that the lower end
of the economic scale is being addressed as well.
Chair Landrieu. And what do we define as smaller
enterprise?
Mr. Haskins. It is essentially one-third the size of a
small business. So instead of $6 million in after-tax net
income and $18 million net worth, it is $2 million in average
after-tax income for the prior two years and $6 million in net
worth.
Chair Landrieu. Carl, anything else?
Mr. Kopfinger. I just want to expand on something that
Barry said. To the extent that some of the funds are out there
looking to solicit community banks for fund-raising, that would
be a great tool for me because we are a very active investor
and I get a lot of phone calls.
We are only investing within our footprint, which is from
Maine to Florida, so at least I would love to be able to have a
website to which I can refer them; if they are interested in
investing in the SBICs, then they can go to that website.
One other point that I would like to make that I had not
heard mentioned at all, too, is not only about the job
creation, but also with job creation comes tax revenues.
Chair Landrieu. Yes.
Mr. Kopfinger. Revenue taxes, payroll taxes, and with the
direct cutback in Federal allocations, this is a great way for
states to get additional revenue.
Chair Landrieu. Well, thank you all so much. This has been
very, very, very interesting, very helpful. I think we got a
tremendous amount of good information on the record. The record
of this hearing will stay open for two weeks, so anything else
you want to submit in writing, if there are other individuals
that want to submit a statement through you, we would like for
you to sign for it when it comes to the record. But if there is
a colleague of yours or another person that has strong
interest, maybe a professor from a think tank or university
that has written about this you would like to submit, but under
your name, please do.
I really thank you all for coming. We are going to
hopefully put a major bill together and try to get it down to
the Congress sometime in the next month or two. Thank you so
much. Meeting adjourned.
[Whereupon, at 11:36 a.m., the roundtable was adjourned.]
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