[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
        EXAMINING THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM

=======================================================================



                                HEARING

                               before the

       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS

                             UNITED STATES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                             JULY 25, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] 



                               

            Small Business Committee Document Number 113-033

              Available via the GPO Website: www.fdsys.gov




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. David Schweikert............................................     1
Hon. Yvette Clarke...............................................     1

                               WITNESSES

Pravina Raghavan, Acting Associate Administrator for Investment, 
  United States Small Business Administration, Washington, DC....     3
Steven Brown, President, Trinity Capital Investment, Chandler, 
  AZ, testifying on behalf of The Small Business Investor 
  Alliance.......................................................     4
John Sherman, Founder, Director and Former CEO, Inergy, LP, 
  Kansas City, MO................................................     6
Philip Alexander, CEO, Brandmuscle, Cleveland, Ohio, testifying 
  on behalf of the U.S. Chamber of Commerce......................     8
David T. Robinson, Ph.D., Professor of Finance, Fuqua School of 
  Business, Duke University, Chapel Hill, NC.....................    10

                                APPENDIX

Prepared Statements:
    Pravina Raghavan, Acting Associate Administrator for 
      Investment, United States Small Business Administration, 
      Washington, DC.............................................    21
    Steven Brown, President, Trinity Capital Investment, 
      Chandler, AZ, testifying on behalf of The Small Business 
      Investor Alliance..........................................    24
    John Sherman, Founder, Director and Former CEO, Inergy, LP, 
      Kansas City, MO............................................    35
    Philip Alexander, CEO, Brandmuscle, Cleveland, Ohio, 
      testifying on behalf of the U.S. Chamber of Commerce.......    37
    David T. Robinson, Ph.D., Professor of Finance, Fuqua School 
      of Business, Duke University, Chapel Hill, NC..............    44
Question and Answer for the Record:
    Question Submitted by Hon. Sam Graves to Mr. Raghavan........    46
Additional Material for the Record:
    Jose E. Fernandez-Bjerg, Chairman and CEO, Omega Overseas 
      Investment Corp............................................    47


        EXAMINING THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM

                              ----------                              


                        THURSDAY, JULY 25, 2013

                  House of Representatives,
               Committee on Small Business,
     Subcommittee on Investigations, Oversight and 
                                       Regulations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:04 a.m., in 
Room 2360, Rayburn Office Building, Hon. David Schweikert 
[chairman of the Subcommittee], presiding.
    Present: Representatives Schweikert, Chabot, Collins, Rice, 
Clarke, Velazquez, and Kuster.
    Chairman Schweikert. Good morning. The hearing comes to 
order. This is actually one that I have been personally looking 
forward to today.
    Today we take a look at a program that actually is 
fascinating. It started back in 1958, which was quite an 
education for me in how long. The founding principle of the 
Small Business Investment Company program that we are going to 
be speaking to today are based around something very simple: 
access to capital, and how do we help that.
    In Fiscal Year 2012 alone, $1.92 billion in capital 
commitments were made to licensed SBICs with a $3.13 billion 
investment in 937 small business enterprises that were 
ultimately capitalized by the SBIC.
    As the program grows in both size and dollars, it is 
necessary for us to guarantee that it continues to fulfill its 
mission.
    For today's hearing, what I am going to ask each of you, we 
appreciate the written testimony. A couple of things: help 
educate us on what is working in the program, the reforms that 
have been made in the last couple of years, and also, 
systematically, we would love it if you have a moment within 
the time of your testimony, share with us what you see would 
make it work better because the ultimate goal here is capital 
formation and creation of jobs for our country.
    Ranking Member?
    Ms. Clarke. Thank you very much, Mr. Chairman. Without 
being lambasted for stating the obvious, we all know that 
capital is the lifeblood for every small business. And without 
it, most firms simply would not survive.
    In 1958, Congress recognized the need for long-term funding 
for growth-oriented small businesses and created the Small 
Business Investment Company, or SBIC Program. SBICs are 
privately owned and managed investment funds, licensed by the 
SBA, that use their own capital plus SBA guaranteed funds to 
make investments in qualifying small businesses.
    Since its inception, the SBIC Program has provided more 
than $64 billion of long-term debt equity capital to more than 
165,000 small firms in Fiscal Year '12 alone. Investments from 
SBICs helped create or retain 69,000 jobs.
    While we know it takes capital to run a business and 
continued investment to grow, the current economic environment 
presents significant obstacles to startup and early stage 
businesses seeking funding. Though there have been steady 
improvements and the Federal Reserve has reported that credit 
markets remain historically tight, unfortunately, as a result, 
many firms are unable to access traditional debt financing. For 
these reasons, the alternatives offered by the SBICs to small 
businesses, including simple equity as well as hybrid equity 
and debt financing, is critical, and will only play a more 
important role in job creation moving forward.
    Although SBICs have helped bridge the gap between the need 
for capital demanded by entrepreneurs and the amount of funding 
available in the private market, there is room for improvement. 
SBA has estimated that the total unmet need for early stage 
equity financing for small businesses is approximately $60 
billion each year. Specifically, investments in low income, 
underserved minority communities fall well short of the rest of 
the country. According to SBA data, the percentage of SBIC 
investments to women and minorities and veteran owned 
businesses, as well as LMI areas, declined 17 percent last 
year, and is on pace for another decline in 2013.
    Clearly, changes at SBA, including new investment 
strategies, will be required to make a significant impact on 
the unmet capital needs of startups and businesses in 
traditionally underserved communities.
    In the best of times, capital access can be something of an 
ordeal. Today that task has become especially challenging, and 
not just for businesses seeking traditional funding. During 
today's hearing, we will take the pulse of the SBIC Program, 
examine areas ripe for improvement, and hear from witnesses on 
the front lines helping today's main street businesses become 
tomorrow's Fortune 500 companies.
    I would like to thank our witnesses and look forward to 
hearing their testimony on how to facilitate investment in our 
Nation's entrepreneurs and small businesses.
    With that, Mr. Chairman, I thank you, and I yield back.
    Chairman Schweikert. Thank you, Ms. Clarke.
    As a reminder, we have 5 minutes. You will see the system 
of lights. As you get to the yellow light, it means there is 1 
minute, and that just basically means talk faster.
    Ms. Raghavan?
    Ms. Raghavan. Yes.
    Chairman Schweikert. Did I get close? I have been 
practicing. Is the acting associate administrator for 
investment at the SBA. You have 5 minutes. Please share with 
us.

STATEMENTS OF PRAVINA RAGHAVAN, ACTING ASSOCIATE ADMINISTRATOR 
 FOR INVESTMENT, UNITED STATES SMALL BUSINESS ADMINISTRATION, 
  WASHINGTON, D.C.; STEVEN BROWN, PRESIDENT, TRINITY CAPITAL 
INVESTMENT, CHANDLER, ARIZONA; JOHN SHERMAN, FOUNDER, DIRECTOR, 
   AND FORMER CEO, INERGY, LP, KANSAS CITY, MISSOURI; PHILIP 
  ALEXANDER, CEO, BRANDMUSCLE, CLEVELAND, OHIO; AND DAVID T. 
    ROBINSON, PH.D., PROFESSOR OF FINANCE, FUQUA SCHOOL OF 
     BUSINESS, DUKE UNIVERSITY, CHAPEL HILL, NORTH CAROLINA

                 STATEMENT OF PRAVINA RAGHAVAN

    Ms. Raghavan. Chairman Schweikert, Ranking Member Clarke, 
and members of the Subcommittee, I am pleased to testify before 
you today to discuss the Small Business Investment Company 
Program. As many of you here today know, SBICs are part of a 
unique program at the SBA that puts long-term patient 
investment capital into America's small businesses, allowing 
them to grow and create jobs. Today, the SBIC Program serves as 
a model of a successful public-private partnership.
    The program, which began in 1958, is market driven. We do 
not make the investment decisions. Experienced private fund 
managers do. The program oversees 295 operating funds with over 
$19.2 billion in private and SBA guaranteed capital and 
commitments.
    SBICs invest in a wide variety of small businesses, such as 
R360 Environmental Services, which provides environmental 
solutions to the some of the world's leading oil and gas 
producers and providers. Although headquartered in Texas, the 
company has 26 facilities located across Louisiana, New Mexico, 
North Dakota, Oklahoma, Texas, and Wyoming, providing high-
paying jobs to hundreds of new employees in rural areas.
    Last year, the SBIC Debenture Program had its third 
consecutive record-breaking year in licensing and SBA 
commitments. In Fiscal Year 2012, SBA has licensed over 30 
SBICs with almost $974 million in private capital, and approved 
over $1.9 billion in debenture commitments.
    More importantly, debenture SBICs provide over $2.9 billion 
in financing to 795 small businesses across the country, more 
than twice the amount provided by debenture SBICs in Fiscal 
Year 2009. If you consider that SBICs issued only $1.4 billion 
in SBA guaranteed debentures, this means for every one dollar 
in debentures issued last year, small businesses received over 
two dollars in financing.
    In Fiscal Year 2013, debenture SBICs are on track to exceed 
Fiscal Year 2012, having already provided $2.6 billion to 671 
small businesses through June. SBA accomplished this while 
keeping the debenture program at a zero subsidy cost to the 
taxpayer.
    Much of our credit for keeping the program at zero cost is 
our licensing process. A licensing process consists of three 
basic steps, which is initial review, capital raising, and 
final licensing. In determining whether to grant a license to 
an applicant, SBA considers the factors identified in our 
statutes and regulations, which include management 
qualifications, track record, investment strategy, and fund 
economics.
    Even though a lot of work goes into evaluating the 
applicants, SBA has improved licensing processes and times over 
the past 4 years, reducing the average time from 15 months to 
less than 6 months. As a result, SBA expects to exceed last 
year's licensing numbers.
    To help new licensees navigate our program, SBIC's Office 
of SBIC Operations initiated new webcasts on various aspects of 
the program. SBA also cut in half the average turnaround time 
on key decisions and operations from 60 days in Fiscal Year 
2010 to 28 days in Fiscal Year 2012.
    Obviously with rapid growth, SBA is concerned about program 
risk. Key to managing program risk is good reporting. SBA 
recently implemented a new web-based system to help improve 
communications and reporting. In addition, this Fiscal Year, 
SBA published its annual report in order to improve 
transparency and accountability.
    With its processes and reporting in place, SBA believes it 
is poised to handle continued growth. We believe that a 
legislative change currently under consideration would allow 
this program to reach even more small businesses. The change 
would increase the SBIC Debenture Program authorization from $3 
billion to $4 billion. While SBA has never hit the $3 billion 
annual authorization over a 3-year period, SBA more than 
doubled the debenture commitments approvals from $788 million 
in Fiscal Year 2009 to over $1.9 billion in Fiscal Year 2012. 
SBA expects to exceed the $2 billion this Fiscal Year. With 
continued growth, SBA will outpace its current authorization 
level.
    We believe this modest change will allow the program to 
continue to grow, while keeping this program at a zero subsidy.
    In closing, the SBIC Program is well positioned to finance 
small businesses across the country, and I look forward to 
working with you on the policies to help us achieve this goal.
    Thank you, and I am more than happy to answer any questions 
you may have.
    Chairman Schweikert. Thank you, Ms. Raghavan.
    Our next witness is Steve Brown, who I am very pleased is 
from Arizona. Mr. Brown is the general partner of Trinity 
Capital Fund II, LP. Did we get that right? All right.
    Mr. Brown, 5 minutes.

                   STATEMENT OF STEVEN BROWN

    Mr. Brown. Good morning, Chairman Schweikert, Ranking 
Member Clarke, and the other distinguished members of the Small 
Business Committee. I want to thank you for holding this 
oversight hearing today and examining the Small Business 
Investment Company Program. And I am here today on behalf of 
the Small Business Investor Alliance, which is a premiere 
organization of lower middle market private equity funds and 
investors.
    As the chairman said, I am the managing member and the 
general partner of Trinity Capital Fund II. We are based in 
Phoenix, and we actually became licensed last year in September 
of 2012. And with our capital, currently the leverage that we 
have access to through the program, we are a little over $70 
million in capital available for the market. So we are very 
excited about that.
    Trinity focuses on equipment and fixed asset leasing and 
financing to both early stage and emerging growth small 
businesses, primarily backed by venture capital and/or other 
institutions. We often and sometimes do fund just privately-
owned companies as well.
    The industries that we fund most end up in the 
telecommunications arena, the manufacturing arena, and in 
technology. Our primary market focus is in the southwest and 
the west, but we will and have done deals throughout the United 
States.
    I personally have been in the business of privately funding 
companies for over 20 years, and specifically in this 
particular debt market. I have been doing this for 10 years, 
and, again, was introduced to the program a few years ago. I am 
very excited to be a licensee in the program.
    I have firsthand experience seeing these early stage and 
emerging growth companies struggle for capital. As the ranking 
member mentioned, it is a difficult market and has been for a 
number of years to find capital, and this program does meet 
that need. It is a long way between equity and solid debt 
financing that many of the banks offer, and this program fills 
that gap in many respects.
    At Trinity, we have and are funding manufacturing companies 
in the technology space, the energy space, the recycling space, 
all things that are important to the government and to the 
economy. Companies that we have funded to date in our fund 
include a solar cell manufacture that has strong revenue, has 
survived the solar manufacturing difficulties in the market, 
and we are proud to be a part of that. We have provided 
equipment to help them grow. A manufacturer of LED lighting, 
which is a new and efficient way of lighting, and we have 
provided financing for manufacturing equipment there. We have 
also provided financing for a California-based manufacturer of 
chips for fiber optic in the telecommunications space.
    We are currently working with a company in funding, 
literally as we speak in the next day or two, a tire recycler 
that has a great program of recycling tires and getting it back 
into that market and many other markets, including not just the 
tire industry, but plastics as well. So, we are excited about 
the portfolio of companies that we are funding.
    I would like to just take a second on the SBIC Program. As 
mentioned, it started in 1958 and has done wonderful things, 
funding many, many companies along the way, including icons 
like Apple, and Intel, and others. It is important to note that 
most of my referrals in this business come from banks--banks 
that cannot or are unwilling to fund these companies, which, 
again, shows a reason for the need for the program.
    Relative to the program, it is difficult to become a 
licensee, and that is good. We went through a very rigorous 
process to get licensed, and those that get licensed, I 
believe, having gone through the process, deserve to be able to 
manage this money. And I think that should continue.
    There are some important things, as has been mentioned. 
Congressman Steve Chabot, I believe is the name, introduced and 
sponsored the SBIC Modernization Act, H.R. 1106, which will 
increase the family of funds from $225 to $350. We think that 
is important for this program. We believe leadership is 
important. There are some leadership positions that we need to 
be filled, and we think that is very important that that 
happens soon.
    Technology is used in the marketplace and is available, and 
we think maybe some technology improvements could be made 
relative to us working, you know, with the Agency. And then the 
licensing process, it is a good and a stringent process. We 
think maybe some efficiencies can be handled there.
    In closing, I just want to reiterate the success, the 
strength, and my support of this SBIC Program. The Agency is 
licensing qualified candidates through a stringent and thorough 
due diligence process, which creates a high standard for 
licensees to meet before becoming licensed, and having success.
    On behalf of all SBICs, we applaud the efforts of the 
Agency and its employees, while encouraging continued 
improvements and efficiencies, as referenced herein, and in 
streamlining the process of licensing and communication with 
its candidates and licensees, and doing that without lowering 
the important high standard that has been set.
    So, we are glad to be a licensee and really proud to be 
here today.
    Chairman Schweikert. Thank you, Mr. Brown.
    Our next witness is John Sherman, founding director and 
former CEO of, is it----
    Mr. Sherman. Inergy.
    Chairman Schweikert. Okay. So you are going around playing 
with us.
    [Laughter.]
    So, Inergy Limited Partnership, and was it out of Kansas 
City, Missouri?
    Mr. Sherman. Yes.
    Chairman Schweikert. You have 5 minutes, Mr. Sherman.

                   STATEMENT OF JOHN SHERMAN

    Mr. Sherman. Thank you, Mr. Chairman. Thank you, Ranking 
Member Clarke and other members of the Subcommittee. My name is 
John Sherman, and I am from Kansas City, Missouri, near the 
congressional district of full Committee Chairman, Sam Graves. 
I appreciate the opportunity to be here today.
    I am an entrepreneur who has been fortunate enough to 
launch and successfully grow and develop two companies from 
scratch. I am here today because I have been asked to share 
with you my experience with the SBIC Program while building 
Inergy. Today, the company is publicly traded on the New York 
Stock Exchange.
    Three partners and I launched Inergy in 1998. We were 
seasoned professionals in the propane industry, and through our 
experience, we thought we could build a successful enterprise 
in the sector. The industry was fragmented with approximately 
5,000 independent operators across the United States. We 
believed we could build a scalable enterprise.
    Our strategy was simple: acquire local and regional propane 
operators with excellent customer service and safety records, 
grow the business rapidly both through acquisition, business 
improvement, and organic expansion, access the public capital 
markets to ensure our ability to continue to grow, and 
ultimately diversify under the broader energy sector.
    We funded the startup with $600,000 of our own money and 
raised $900,000 of equity from the seller of our original 
acquisition prospect. We went to several banks that turned us 
down for additional capital, but eventually obtained a $4 and a 
half million dollar acquisition loan. The bank loan was with a 
Kansas City bank. It had strict covenants and was personally 
guaranteed by us and our spouses. We were all in, so to speak.
    With the goal of ultimately going public, we knew that we 
would need outside equity to serve as a bridge to an eventual 
IPO. We recognized in addition to raising capital, we needed 
the financial expertise that comes with institutional capital. 
We were business operators, not financial professionals, and we 
needed access to expertise to help us get to that next level.
    We talked with a number of private equity and mezzanine 
financing firms. We ultimately connected with an SBIC, Kansas 
City Equity Partners, or KCEP, and on December 31st, 1999, we 
signed an agreement with KCEP for Inergy's first private 
investment. KCEP purchased a $2 million preferred interest in 
our fledgling company.
    It is important to point out that they did their homework 
and took the time to get to know us. They recognized we had 
deep expertise in our industry. Our business plan was solid, 
and the founders were at risk. Plus, they were flexible as to 
the financial structure, and they were not asking for control, 
which was important to us.
    We used that initial $2 million investment to acquire a 
number of small, independent propane operations over the 
ensuing months. We also benefited from the partnership with 
this SBIC, as they helped us to focus on what it would take to 
access public capital markets.
    By early 2001, we identified a significant potential 
transaction, Hoosier Propane, located in Indiana that would 
provide the critical mass necessary to take Inergy public. We 
secured bank financing and obtained $7.4 million in equity from 
the sellers, and they also carried back a $5 million loan, but 
that left a $16 and a half million gap. I think, as Mr. Brown 
referred to, you know, that is the most challenging part of the 
financing. A group of private investors, led by Kansas City 
Equity Partners, purchased a $16 and a half million preferred 
interest in Inergy as the anchor investment. All members of the 
group were qualified as SBICs.
    That $16 and a half million investment was the key piece of 
capital that allowed us to make this strategic acquisition. 
Very shortly after we closed that transaction, we filed the 
paperwork for our IPO process. Seven months later, in July 
2001, Inergy went public. We grew the company dramatically 
after that, completing more than 75 retail propane 
acquisitions, becoming the third largest propane company in the 
country, employing nearly 3,000 people.
    Over the years, we diversified into the midstream energy 
sector, and today the company is recognized as a major 
developer and operator of U.S. energy infrastructure, including 
storage, pipelines, and logistics assets.
    In May, we announced a merger with Crestwood Midstream 
Partners, which would create a $7 and a half billion midstream 
energy company that is extremely well positioned to leverage 
the growing importance of the emerging shale plays around the 
country. The combined company will continue to create jobs and 
invest large amounts of capital in energy infrastructure across 
the United States.
    We could not have done any of this, in my view, without the 
initial investment we received from these SBICs. We have raised 
literally billions of dollars of capital over the years, but 
nothing more critical as that early stage capital that the SBIC 
provided us. And that served as a platform for our long-term 
success.
    Thank you, again, for the opportunity to be here today.
    Chairman Schweikert. Thank you, Mr. Sherman.
    Our next witness is Philip Alexander, president and CEO of 
Brandmuscle, and also speaking on behalf of the U.S. Chamber of 
Commerce.
    Mr. Alexander, 5 minutes.

                 STATEMENT OF PHILIP ALEXANDER

    Mr. Alexander. Chairman Schweikert, Ranking Member Clarke, 
and distinguished members of the Subcommittee, thank you for 
inviting me to testify today on the SBA's SBIC Program that 
helps entrepreneurs and U.S. businesses to compete in the 
marketplace.
    As the chairman said, I am Phil Alexander, CEO of 
Brandmuscle, a recently SBIC-funded small business with offices 
in Chicago, Cleveland, Austin, and Los Angeles. I am here to 
speak with you today not only as CEO of Brandmuscle, but also 
as a member of the U.S. Chamber of Commerce.
    I came to the United States over 30 years ago to get an MBA 
from Case Western Reserve University. I pursued a career in 
marketing, and rapidly ascended to senior management positions 
both with national and international and local retailers, most 
recently as vice president of brand management at Pearl Vision, 
and prior to that, as Vice President of marketing for Western 
Auto, a subsidiary of Sears, Roebuck, and Company.
    In 2000, I left the safety and security of the company, and 
Brandmuscle was born. The company sought a solution to a common 
problem that was seen in marketing, actually something that has 
similarities in politics. I think as former U.S. House Speaker 
Tip O'Neill said, ``All politics are local.'' Well, we have the 
same issue in advertising. Our success is dependent on our 
understanding of what is needed, the issues of the local 
constituents and communities.
    Brandmuscle was launched to provide just such a solution 
for Fortune 500 companies who needed to respond to marketplace 
conditions and provide tools and a suite of services so that 
the local distributors, and local franchises, local dealers, 
could develop programs that were appropriate at the local 
level. Today, Brandmuscle has 550 full-time, well-paid 
professionals in the United States.
    Our early stage funding came from a variety of sources: 
initially, personal savings, and eventually an angel fund. 
Several successive infusions of venture capital allowed us to 
grow. We grew to about 150 employees, but reached a point at 
which even though we had the growth opportunity, we could not 
add any more than three to four employees because of our debt 
equity structure. Clearly, we had to do something different.
    Our initial investors needed to be taken out. The fund 
timing was over, but we needed cash to position us for 
expansion. We were too small to go public. Additional venture 
capital was too expensive. And unfortunately, since most of our 
assets were intangible property, typical debt financing was not 
available to us. Obviously, I think a challenge for us as a 
Nation as we move to more of a knowledge-based economy, 
companies like ours without intangible assets cannot find the 
financing.
    The SBA's SBIC program was unique in its ability to provide 
Brandmuscle with the resources for our next phase. This Federal 
government program at zero cost to the taxpayer allowed an SBIC 
fund manager to leverage up to twice the amount of their 
private capital in order to provide a company like Brandmuscle 
with cost effective mezzanine debt financing.
    In February of 2012, the Riverside Company, equipped with 
assets from their recently SBIC-backed fund, Riverside Micro-
Cap Fund II, signed a purchase agreement to fully acquire 
Brandmuscle, utilizing a mezzanine restructuring debt 
agreement. The Riverside Company that you may familiar with was 
recently named M&A's private equity firm of the year with over 
$3.5 billion of assets under management, acquired over 300 
companies, and have 200 employees worldwide. Brandmuscle had 
instant access to their managerial talent and the financial 
backing of a company like Riverside, thanks to the SBIC-backed 
fund.
    Riverside's SBIC-backed fund had also allowed the company 
to acquire two other companies that we were quickly integrated 
with. One was Centiv Services, a Chicago-based portfolio 
marketing automation company, and TradeOne, an Austin-based 
Texas promotion company. As a result, we were able to 
strengthen our position in the market and acquire vertical 
integration. The company grew to 550 employees, and we not only 
grew the business and earnings. We also have added 42 employees 
in the last 12 months.
    Chairman Schweikert and Ranking Member Clarke, without the 
SBA's SBIC Program, a company with the talent and resources of 
Riverside would not have looked at a company the size of 
Brandmuscle. I am convinced that it was the incentives that 
were afforded to Riverside by the SBIC Program which made us an 
attractive candidate for their consideration.
    In conclusion, from the day that I conceived Brandmuscle to 
the present, obtaining sufficient capital has always been a 
challenge. I know firsthand that in order for a company to be 
successful and grow, it needs the right capital at the right 
time. At no expense to the taxpayer, the SBA's SBIC Program 
fills a void.
    On behalf of the U.S. Chamber of Commerce Small Business 
Membership and myself, I strongly recommend that you retain, 
enhance, and strengthen this critical source of funding and 
capital for small businesses. To that end, I urge you to pass 
bill H.R. 1106, the Small Business Investment Company 
Modernization Act of 2013, into law.
    I thank you for inviting me to testify, and I look forward 
to answering any questions.
    Chairman Schweikert. Thank you, Mr. Alexander.
    Ranking Member Clarke?
    Ms. Clarke. Thank you, Mr. Chairman. It is now my honor to 
introduce Dr. David Robinson. Dr. David Robinson is a professor 
of finance and the William and Sue Gross Distinguish Research 
Fellow at Duke University's Fuqua School of Business, and a 
research associate at the National Bureau of Economic Research.
    He is one of the country's leading academic experts in the 
field of entrepreneurial finance, venture capital, and private 
equity. His work has appeared in the leading finance and 
academic journals and has been featured in the New York Times 
and the Wall Street Journal.
    As the vice chair of the World Economic Forum's Global 
Agenda Council on Finance and Capital, Dr. Robinson is involved 
in international efforts to strengthen our understanding of the 
importance of financial markets for promoting entrepreneurship. 
He also advises a number of technology startups in the Research 
Triangle Park area.
    He has earned his Ph.D. and MBA degrees at the University 
of Chicago, a master of science from the London School of 
Economics, and a bachelor of arts from the University of North 
Carolina at Chapel Hill.
    Thank you for being here today, Professor Robinson, and we 
look forward to your testimony.
    Chairman Schweikert. Professor Robinson, 5 minutes.

                 STATEMENT OF DAVID T. ROBINSON

    Mr. Robinson. Ranking Member Clarke, thank you for that 
introduction. Chairman Schweikert, members of the Committee, 
thank you for inviting me to testify before you today.
    Economic policy in the U.S. tends to focus on small 
business, but I think it is important to draw a distinction 
when we think about economic policy between supporting small 
business and supporting job creation. The best available 
economic data indicate that young businesses, not small ones, 
are the ones that are responsible for the lion's share of 
economic growth in our country, especially if we measure growth 
in terms of jobs.
    The confusion is understandable because almost all young 
businesses are, by their very nature, small, but most small 
businesses are not young. Small businesses are, without 
question, an essential and important part of the fabric of 
American life, but most are not important engines of job 
creation. If they were, they would not continue to be small. 
They would grow and become large organizations.
    Young businesses are a different story. Many fail, but the 
ones that succeed create jobs and, more generally, increase our 
country's economic dynamism. In this regard, the early stage 
SBIC initiatives are, in my view, laudable both in terms of 
their objective and in terms of their creativity. I think it is 
important that we think carefully about stimulating access to 
capital, not just for small firms, but for young firms.
    I would like, however, to draw your attention to three 
facts about early stage business activity that I think, taken 
together, should temper our expectations of policies that 
attempt to stimulate early stage business activity by extending 
leverage to equity investors in the market.
    First, my work with Alicia Robb at the Kauffman Foundation 
shows that debt, not equity, is the primary source of capital 
for new businesses. We have long understood that debt is 
critical for small businesses. Small businesses rely very 
heavily on debt financing, but it is kind of a surprise that 
new businesses rely so extensively on the banking sector for 
access to startup capital. This is true across a wide range of 
startups. Even venture-backed startups rely very heavily on 
access to bank capital in their very earliest years of life.
    As you have heard from Mr. Sherman's testimony, personal 
assets are critical in securing bank loans most of the time 
because home equity is such an important source of collateral 
for most individuals at the prime age for starting new 
businesses, which is typically in sort of the 35-year to 45-
year range. What this means is that the collapse of the housing 
market, it was as much a crisis for entrepreneurship as it was 
a crisis for the banking system.
    I think one of the things this tells us is that efforts to 
increase bank lending to this sector are incredibly important. 
And, you know, I think Administrator Raghavan's comments about 
the SBIC Debenture Program bear special consideration in light 
of the importance of that for startup activity.
    The second fact is that early stage investing is extremely 
risky. For every Google out there, there are literally hundreds 
of ideas that never make it out of an inventor's garage. There 
is a very understandable need to curb behavior that would 
result in excessive risk taking and discourage bad investment 
activity in the early stage SBICs. But I think it is important 
to acknowledge that some of the CIP provisions and the payback 
rules that are in place are going to inhibit investment in some 
of the most desirable areas of the economy where we would like 
to see investment. Those are kind of the speculative 
investments that are often associated with some of the most 
disruptive technological innovations.
    The third fact that I think we should bear in mind is that 
the gestation periods for early stage investments are 
prohibitively lengthy for many investors. It takes too long 
from the time of first investment to that IPO or M&A event for 
many early stage funds to earn a return. I think some of the 
most interesting features of the JOBS Act were those features 
that stimulated the development of the intermediate liquidity 
opportunities for early stage investors.
    So I think these three facts together conspire to make your 
job a difficult one. We are simply swimming against the current 
when we try to stimulate early stage investment activity by 
leveraging existing equity. And so, in light of that, what will 
be the underlying economic mechanism that will be responsible 
for success when we see it? In my view, it is this: early stage 
investors without sufficiently deep pockets are often 
discouraged from making speculative early stage investments 
because they are worried that their early investments will 
become diluted by later stage equity. It is not that they need 
more capital now. They need more capital to be available later 
so that they can make the follow-on investments.
    In my view, the success of this program will hinge on 
providing that capital to those early stage investors. Thank 
you.
    Chairman Schweikert. Thank you, Professor.
    As you heard the bell, we have a vote series that is about 
to be called. But we still have a few minutes or so. I thought 
we would move to the lightning round of questions.
    [Laughter.]
    And, Mr. Rice?
    Mr. Rice. I can go 5 minutes.
    Chairman Schweikert. No, no, no, no, we will shoot for the 
one. Lightning round. Mr. Rice?
    Mr. Rice. Professor, I am a tax lawyer and CPA by trade, 
and I have certainly seen the troubles that small businesses 
have with access to capital, and totally agree with you their 
primary source is the banks, and particularly small banks.
    Now, you know, coming out of the financial crisis, we had a 
flurry of laws designed to prevent banks from taking too much 
risk, but on the other hand, you have this conundrum that you 
are saying we need them to take risk if we are going to create 
these jobs and create this small business economy. So, we 
created a plethora of laws to avoid this risk, like Dodd-Frank, 
for example.
    In your opinion, does that stifle this small business job 
creation? Does that stifle this risk taking? I hear from my 
small bank friends and former clients that it is a real 
problem. Tell me your opinion.
    Mr. Robinson. Sir, thank you for the question. You know, in 
some ways you have expressed the dilemma perfectly. We want to 
put in responsible curbs against bad behavior, but at the same 
time, by curtailing risk taking, we are starving capital, 
preventing it from flowing to the very areas of the economy 
where we need it most. So I think there is no question that 
removing the regulations or lessening regulations around bank 
lending would help small business activity.
    Perhaps to say it a little more differently, I think that 
we need to move away from sort of a one-size-fits-all approach 
towards banking regulation to something that allows smaller 
banks that serve the small business sector more maneuverability 
than is currently afforded.
    Chairman Schweikert. Mr. Collins?
    Mr. Collins. Oh, thank you.
    Chairman Schweikert. Do you want to take the----
    Mr. Collins. Sure.
    Chairman Schweikert. Actually, can I do this, just because 
we are doing the lightning round? Ms. Clarke?
    Ms. Clarke. Mr. Chairman, I would like to yield to the 
ranking member of the Committee, Ms. Velazquez of New York.
    Ms. Velazquez. Thank you, Ms. Clarke, and thank you, Mr. 
Chairman, for this important hearing.
    Let me just say, Professor Robinson, I do not know how many 
times we hear about how Dodd-Frank is hindering the flow of 
capital to small businesses. But the fact of the matter is that 
the distinction is made by Dodd-Frank in the sense that the 
one-size-fits-all approach does not work. And, indeed, that is 
what Dodd-Frank does in the sense that if I ask any business 
who is lending to them, community banks, are not the big banks, 
are the community banks, are the independent banks.
    Dodd-Frank exempted the community banks from those 
regulations. They do not have assets of more than $10 billion. 
So, I just want for the record to reflect that. I am a member 
of the Financial Services Committee, as well as some of the 
members here, and they know that.
    I would like to ask the acting associate, Ms. Raghavan, and 
welcome to the capitol. You did a very good job in New York, 
and I hope that you continue to do a better job here. But I 
want to help you. I want for you to succeed. And this is a very 
important program as a tool of promoting economic development.
    And my questions are based in the new reality that the 
small business face is changing in America. It is more women. 
It is more blacks. It is more Latinos. And we need to make sure 
that the programs that are in place will benefit everyone.
    So, only 20 percent of businesses receiving financing in 
the SBIC Program are located, only 20 percent in LMI areas. 
This suggests that we need more SBICs licensed to make 
investment in these areas. Even though the statute in Section 
301(c)(3) of the Small Business Investment Act provides general 
guidance on that appropriate experience, the SBA has 
established rigid rules. While we want high standards, the SBA 
should be considering other types of experiences that clearly 
demonstrate qualifications for the SBIC Program.
    Will the SBA consider these alternative types of 
experiences in evaluating SBIC applications, especially to 
target more minority licensees and low income areas?
    Ms. Raghavan. Thank you for the question. We do agree that 
LMI areas, especially women and minorities, are very important 
to the program. In fact, with our new licensees of applicants 
of funds, we have had more women and more minority funds join. 
And we continue to actually press out and do a bigger marketing 
campaign, including using our district offices in the actual 
country to work with the fund managers to get to through the 
program.
    We are actually putting through clearance on our new 
licensing SOP, which is looking at the alternative ways of 
licensing applicants. And one of the things we are taking into 
consideration is different types of track records to ensure 
that we do have more investment funds that are looking into 
those hard impact areas.
    We so far have the impact funds. We have two of them. One 
is in Michigan looking at that economic development there, and 
we look to encourage more of those funds, including States as 
well as mayors' offices, to join the pension funds to be able 
to encourage more growth in LMI areas.
    Ms. Velazquez. Okay. Thank you very much, and I will be 
working on reaching out to you so that we make sure that 
changes are made.
    Mr. Chairman, I would like to ask unanimous consent to 
submit for the record the testimony of Jose Fernandez. He is 
the chairman and CEO of Omega Overseas Investment Corporation.
    Chairman Schweikert. You have unanimous consent.
    [The information follows:]
    Ms. Velazquez. Thank you, and I yield back.
    Chairman Schweikert. Thank you, Ms. Velazquez.
    As we are running, Mr. Collins had a question.
    Mr. Collins. Yeah. Thank you, Mr. Chairman. I would be 
quick, but, Mr. Brown, I am especially interested in the 
dynamic. As Mr. Alexander said earlier, the cost of venture 
capital was just too much. We all know the Golden Rule, ``He 
who has the gold makes the rule.'' And I am assuming, Mr. 
Alexander, you are talking about dilution. They would come in 
and say, sure, we will lend you some money; we are taking 80 
percent of your company, and for an entrepreneur who has put 
their heart and soul in it.
    Now, Mr. Brown, I guess my question is, being an SBIC and 
having government funding multiply your private investment, 
would you say that that allows you to be a little fairer, if 
you will, with companies like Mr. Alexander's so the dilution 
would otherwise be much worse for the investor if you did not 
have the leverage of the SBIC?
    Mr. Brown. The answer to that question is yes, and that is 
one of the benefits of the program. You know, dilution is a big 
issue for small businesses, for growing businesses. Equity is 
critical to get that done. We see that over and over again. And 
whether it is venture capital, private equity, or even private 
groups that come together to provide equity can be very 
dilutive to the founders, the people who are the heart and soul 
of the company that put it together.
    So, this program affords the opportunity to come in and 
provide debt with an equity kicker occasionally in the form of 
a warrant that provides much less dilution than might otherwise 
be had with equity. And so, it really is one of the unique and 
beneficial parts of the program that can save dilution for 
ownership and still, you know, provide some upside for 
licensees making----
    Mr. Collins. Yeah. One quick follow up. Does that also help 
you get private investors, the investors that come into your 
fund and you say we are going to be an SBIC, and I am going to 
leverage your money two to one, three to one. Therefore, we can 
be more fair, if you will, with the company.
    Mr. Brown. It does. It provides the opportunity for 
investors to receive a good return on their investment. And 
because of the leverage and the access to the capital at the 
cost that we have access to, it allows us to be competitive in 
the marketplace, and provide competitive offerings to those 
that really need it as opposed to some of the dilutive options.
    Mr. Collins. Thank you, Mr. Chairman. Thank you.
    Chairman Schweikert. Okay. Thank you, Mr. Collins.
    Mr. Chabot, it is nice having you here. I am not going to 
ask, but we were talking about your legislation a moment ago.
    Mr. Chabot. Thank you. I just want to put in a plug for it. 
Thank you, Mr. Chairman.
    Chairman Schweikert. And for our witnesses, how is your 
timing? We have a vote series. I think it is going to be about 
50 minutes is my best estimate. In your lives, are you able to 
come back?
    Mr. Robinson. Yes.
    Mr. Alexander. Yes.
    Mr. Sherman. Yes.
    Mr. Brown. Yes.
    Ms. Raghavan. Yes.
    Chairman Schweikert. All right. With that, then we are 
going to have votes on the floor of the House, so we are going 
to adjourn for about 50 minutes. And we will reconvene at the 
end of votes for another series of questions.
    And with that, we are at recess.
    [Recess.]
    Chairman Schweikert. Reconstitute the Subcommittee. Are we 
back on the record?
    Ranking Member, do you mind if I jump in with a couple of 
questions?
    Ms. Clarke. Please go ahead.
    Chairman Schweikert. Mr. Brown, you and I had a 
conversation yesterday, and I want to better understand because 
I partially also want to put this on the record not only from 
your testimony, but from our conversation. The mechanics you 
went through to basically be certified to be one of the funds 
that actually can put the money into Mr. Alexander's, you know, 
type of businesses, and where you thought it worked, and where 
you thought there might be some bottlenecks.
    It is okay. We were not talking about you behind your back, 
I promise. And where you thought that whether electronic 
pothole or maybe certain levels of review may be overkill. Mr. 
Brown?
    Mr. Brown. Yeah. So, our experience, you know, we are 
encouraged to and sought out a law firm. We actually used the 
firm of McGuireWoods in Chicago, and I found out that there are 
few that specialize in this. And we submitted a, you know, 
brief summary that was reviewed by the SBIC and had discussions 
with an analyst, and was essentially, as I recall, invited to 
move forward in what is called the MAQ process. It is a 
management assessment questionnaire. And we did that.
    We submitted our MAQ. It is a management assessment 
questionnaire. It is a very thorough questionnaire about who we 
are, our background, our track record, et cetera, for the team. 
And we went into what is called a MAQ phase or the pre-
licensing phase, I think it is called.
    Very good process. The analytical support or connection 
that we had there at the SBIC was good. Very smart folks that 
we dealt with. Really took time to understand our business, 
which was great.
    Chairman Schweikert. But my great hope is more just the 
steps you had to go through----
    Mr. Brown. Okay.
    Chairman Schweikert.--the costs you had. I am hunting for 
if there is anything, if I can turn to the acting administrator 
and say, hey, have you thought of this pothole? How do we make 
it faster, save money, and still have the same type of core 
costs?
    Mr. Brown. Okay. So, I will consolidate. Thanks.
    MAQ phase, we went to a meeting with the committee, and we 
got what is called a green light letter, which kind of got us 
through the MAQ phase, and then the opportunity then to 
formally apply for the license. And then, we went through a 
licensing phase where there was some of the same work that was 
done. There was also some additional work, but there was some 
of the same work that was done there.
    Chairman Schweikert. And share with me the timeline.
    Mr. Brown. So, we had a little different story, and let me 
just say that. We actually went from start to finish, from our 
application through, I am going to call it our first go round, 
was about 12 to 15 months. We actually had a change of 
personnel. We had to go back in, and we ended up with about 2 
years in the program.
    But had we not made the change of personnel, it would have 
been about a 12- to 15-month process, which we were 
anticipating going in. So, there was the MAQ phase, then there 
was the licensing phase, and then, as I recall, there was a 
second committee that we went and visited with at the licensing 
phase, and we were approved at that. And then, there was an 
additional committee that we did not need that ultimately 
voted. So, I believe that was basically the process.
    Timeline, as I shared, you know, sort of had it gone 
exactly the way we intended, it would have been about 12 to 15 
months. And then, the cost was, you know, for us was in the 
$200,000 to $250,000 range, and that is everything all in, 
legal, you know, just doing everything that we had to do to get 
to the finish line.
    Chairman Schweikert. Okay, Administrator Raghavan. I am 
going to get it just right. And I know for fairness, you have 
only been there how long?
    Ms. Raghavan. This is my third week.
    Chairman Schweikert. Okay. So, that final review, so it is 
sort of like a third committee at the very end that is here, we 
will say, at the Federal level?
    Ms. Raghavan. Yes.
    Chairman Schweikert. What can you tell me about that, and 
what can you tell me about what value you think that ultimately 
adds, because the hopeful participant does not actually really 
appear in front of that committee.
    Ms. Raghavan. Correct.
    Chairman Schweikert. So what does that one accomplish?
    Ms. Raghavan. Sure. So technically, it is the Agency 
committee, which is the committee he is talking about, the 
third committee, which has a group of all senior officials in 
the SBA: our associate administrator of CAP access, our 
associate administrator of investment, as well as our CFO. It 
is the actual committee that actually issues the license.
    The first two, the investment and the division committee, 
are actually committees that make recommendations, so they are 
working with the applicants. That is why we do the interviews 
to go through the process. And then, it is the agency committee 
that makes the final decision because the administrator signs 
off on the license.
    It is similar to what is in the private sector. They have 
several reviews of different portfolios that come in when they 
do funds to funds. So we mimic that process on purpose so that 
it is very similar. That committee works very well. They all 
have financial backgrounds, and they understand what we are 
looking for, and they have been looking at these. They get the 
entire briefing book that these gentlemen have put together, 
which includes their background history, their management fund, 
the organization structure, and where they plan to get the 
funds.
    Chairman Schweikert. Thank you.
    Ms. Clarke?
    Ms. Clarke. On the issue of the licensing, I wanted to 
circle back to, I think it was the ranking member, Ms. 
Velazquez, had talked a little bit about the licensing of the 
SBIC Impact Investment Programs in economically distressed 
communities. And I think you mentioned there are two licensees 
that have been approved specifically for the program.
    And my question is, why have more impact investment SBICs 
not been licensed by the SBA? The process, is it not having 
enough capital to really meet the criteria? What is it that you 
are finding?
    Ms. Raghavan. So the Impact Investment Fund is actually 
new. It is only in its second year, so that is one of the 
reasons, I think, everything that is new people do not 
understand, which is why we have an aggressive marketing plan 
to work with actually States and local governments to get the 
word out because it is really looking at the areas across the 
country.
    We have two that have gone through the program. We actually 
have six funds all together in our traditional SBIC Program 
that do impact investing. So all together, we have eight in the 
program.
    One of the reasons I think the Impact Investment Program is 
a different hurdle is the percentage that we ask. We are asking 
at least 50 percent to be in low/moderate income areas on the 
impact investing versus the normal SBIC fund. They can do 10, 
15 as they wish.
    But I think as we go around marketing and explaining the 
program, we should be getting more, which is the reason why we 
revamped even the limit to go up to $250 million as opposed to 
the $180 when it was started.
    Ms. Clarke. And is it that there is a certain assumption 
around the amount of risks that are involved with making 
investments in those impact areas that people do not want to 
take on, or have you gotten any feedback? Other than the fact 
that it is a new program, is there anything that you anticipate 
that makes people hesitant or companies hesitant to engage this 
particular----
    Ms. Raghavan. I think it is a new area for companies to go 
ahead and actually invest in. And so, we are trying to broaden 
to show them that they will get the same returns or similar 
returns that they get in other programs. And that is part of 
the education process that we at the SBA are doing.
    And I think the Michigan Fund is a perfect, sterling 
example of looking a big time pension fund to invest in impact 
areas, and we have a second fund in California doing the same. 
And as they get more press and people understand more about it, 
I think we can get some more funds in there. I think it is more 
about knowing that the risk involved is similar to any other 
type of risk that is taken in the market.
    Ms. Clarke. Very well. And, Mr. Brown, I just wanted to do 
a follow up because in your opening statement, you spoke to the 
virtues of the SBIC Program that you have embraced. But you 
also mentioned about licensing efficiencies was sort of like--I 
had a question about, you know, whether it is a lacking of 
efficiency. And I think you talked a little bit about the 
process and some redundancy and paperwork, or administrative 
activities. But was there something specific in the licensing 
that you found to be inefficient?
    Mr. Brown. I would maybe point to--sorry. Thank you. I 
would maybe point to sort of the technology or lack thereof. 
And, in fact, the program is now bringing online some of our 
opportunities to transfer documents, to file forms--468, I 
believe--and others. So, there is progress being made. But what 
we do not often do when we are transacting business is send 
lots of sort of hard paper files. And so, that happened during 
this process.
    So, I think the use of existing technologies in the 
marketplace, which I know the Agency is working on, will make 
the process more efficient. That would be a prime example of 
what I was talking about.
    Ms. Clarke. Okay, very well. Do you anticipate a full-
throated technological revolution with this process? Are we on 
our way?
    Ms. Raghavan. Well, as you know, we have been under 
sequestration and also continuing resolutions, which has made 
it a bit difficult to invest in technology. So, even though 
under those circumstances we were able to make our 468, which 
is an application online, and we just launched the web system, 
we are trying. In fact, one of our initiatives is to make sure 
it could go paperless. We are doing that in several initiatives 
across the Agency. But for the SBICs, it is very important. 
Naturally they work in an e-environment, and we are trying to 
make sure that we can also do that.
    But we put in plans for more budget for technology, so as 
the technology can be upgraded, we can serve their needs 
better.
    Ms. Clarke. And you fed right into my next question, and 
that was, how has sequestration affected the SBA's ability to 
provide effective oversight over your portfolio?
    Ms. Raghavan. It has definitely affected the travel cap. We 
have to do examinations of all the SBICs, so with the current 
travel cap, we were unable to do as many as we would like, just 
because we do not have the dollars to go. As well as we would 
like to do some more outreach and marketing, and part of that 
is going to conferences and making sure people understand the 
Impact Investing Fund, and working with the fund managers, and 
understanding our program. So, the travel has been very 
difficult. And obviously on the technology front, we have not 
been able to invest as much as we would like to to ensure
    On the program operations side, it has not been affected. 
We still continue to make sure our licensing times are down. We 
still continue to work with them remotely. But those are the 
effects we have had.
    Chairman Schweikert. And once again, I want to apologize to 
all of you for the nature of the chaos of today. It is just 
sort of the way this day will work.
    Is there anything you think that would be important for us 
to hear to put onto the record that we have not asked, that we 
have not pursued here? And it is always dangerous when you ask 
an open-ended question that you actually do not know the 
answer.
    In that case, I am going to move to a closing here. I am 
going to, and I did not see it in the normal script here. But 
is this a one-month Committee or one-week Committee being 
submitted to the record?
    Voice. Five legislative days.
    Chairman Schweikert. Okay. You each are going to have 5 
legislative days if you have other documents you would like to 
submit. You may also receive questions from those of us here.
    And actually, my ranking member does have another question. 
Ms. Clarke?
    Ms. Clarke. Thank you, Mr. Chairman. Thank you for the 
indulgence.
    Dr. Robinson, I had one final question for you, and that 
is, finding the right balance for government-backed investment 
programs can be challenging. If it permits too much risk, 
taxpayers can end up on the hook. If it does not take enough, 
the program will not spur economic activity in the areas unable 
to secure financing.
    What is your view on the current risk appetite for the SBIC 
Program, and is it too much, or too little, or just right?
    Mr. Robinson. Thank you for the question, Ms. Clarke. I 
think it is a delicate balance that we have to strike, and I 
understand both sides of the equation, both the need to make 
sure that we curb excessive risk taking and bad behavior, but 
also the very great need to spur risky investment.
    I think that we have to be very clear about what we want 
the objectives of the program to be and what we are trying to 
accomplish. I think if what we wish to do is promote 
innovation, you know, truly promote risk taking investment, 
then I think we probably need to scale back some of the 
oversight--well, I should not say ``oversight''--scale back 
some of the restrictions on investment.
    I think that if the objective is to, you know, provide more 
capital to the small business economy, then you probably have 
the balance about right. But, you know, the way I would look at 
it is, again, I would go back to what I said in my opening 
testimony. I think we need to draw a distinction between the 
small business economy and the entrepreneurial economy. And I 
think that if the objective of the program is spur 
entrepreneurship, then we need to do, in my view, dial the 
meter more towards risk taking.
    Chairman Schweikert. Thank you, Ms. Clarke.
    And a couple of other quick things here. Professor, I am 
going to actually hunt for some writings you have done, and if 
you can send me some. You actually said something that, in 
reflection, is brilliant: the difference between the small 
business and the growing, you know, the very young growth 
business, and how, you know, we often say ``small business,'' 
but these are very different than, like, our family business 
that may have been around 40 years that has just stayed some of 
the size. So, I would like to understand more about that 
because that may have a different risk appetite in what we have 
to do.
    Obviously, as members of Congress, there is this constant 
fear of do we wake up tomorrow and have a black swan type of 
event, something that was out in the tail. And we wake up the 
next day and we are Fannie or Freddie, or something of that 
nature. At the same time, if you have managed your exposure to 
certain consequences out there, have you, you know, done it in 
a robust enough fashion where we are actually meeting our 
mission.
    And with that, I ask for unanimous consent that members 
have 5 legislative days to submit statements and supporting 
materials for the record. And without objection--I always wait 
for someone to give me an objection one day--so ordered.
    Chairman Schweikert. And with that, the hearing now is 
adjourned.
    [Whereupon, at 12:02 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X


                   U.S. SMALL BUSINESS ADMINISTRATION


                         WASHINGTON, D.C. 20416


                              TESTIMONY OF


                            PRAVINA RAGHAVAN


             ACTING ASSOCIATE ADMINISTRATOR FOR INVESTMENT


                             AND INNOVATION


                   U.S. SMALL BUSINESS ADMINISTRATION


                  BEFORE THE U.S. HOUSE SMALL BUSINESS


       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS


                             JULY 25, 2013


    Chairman Schweikert, Ranking Member Clarke and members of 
the Subcommittee. I'm pleased to testify before you today to 
discuss the Small Business Investment Company (SBIC) program. I 
want to thank you for calling this hearing, and for your strong 
support of the Small Business Administration (SBA) and your 
commitment to providing growth capital to small businesses.

    As many here today know, the SBICs are part of a unique 
program at SBA that puts long-term patient investment capital 
into America's small businesses, allowing them to grow and 
create jobs. Today, the SBIC program serves as a model of a 
successful public-private partnership. The program, which began 
in 1958, is market-driven. We don't make the investment 
decisions; experienced private fund managers do.

    The program oversees 295 operating funds with over $19.2 
billion in private and SBA guaranteed capital and commitments. 
These SBICs invest in a wide variety of small businesses, such 
as JSI Store Fixtures in Milo, Maine, which manufactures 
specialty fixtures and displays for the supermarket industry. 
The company more than doubled its workforce from 80 to 200 
employees after receiving an SBIC investment in 2006. The 
company won an award last year from the Small Business Investor 
Alliance at the SBIC portfolio company of the year. Another 
great example is R360 Environmental Services which provides 
environmental solutions to some of the world's leading oil and 
gas producers to ensure environmental performance and 
compliance. Though headquartered in Houston, Texas, the company 
has 26 facilities located across Louisiana, New Mexico, North 
Dakota, Oklahoma, Texas, and Wyoming, providing high paying 
jobs to hundreds of new employees in rural areas. While the 
company has recently been acquired, R360 increased jobs by 40% 
after its SBIC investment.

    I am proud to tell you that last fiscal year (FY) the SBIC 
Debenture program had its third consecutive record-breaking 
year in terms of the number of SBICs licensed, new private 
capital, and SBA-guaranteed leverage commitments. In FY 2012, 
SBA licensed 30 SBICs with $973.9 million in private capital 
and approved over $1.9 billion in Debenture commitments.

    More importantly, in FY 2012 Debenture SBICs provided over 
$2.9 billion in financings to 795 small businesses located 
across the country, more than twice the amount provided by 
Debenture SBICs in FY 2009. If you consider that SBICs issued 
only $1.4 billion in SBA-guaranteed Debentures to support these 
financings, this means that for every $1 in Debentures issued 
last year, small businesses received at least $2 in financing. 
Over the past 5 years, SBIC debenture investment dollars were 
dispersed across a broad spectrum of industries, including 18% 
going to small U.S. manufacturing firms. In FY 2013, Debenture 
SBICs are on track to exceed FY 2012 financing dollars, having 
already provided almost $2.6 billion in financing to 671 small 
businesses through June 2013. SBA accomplished this while 
keeping the Debenture program at zero subsidy costs to the 
taxpayer.

    Much of the credit for keeping the program at zero subsidy 
cost is our licensing process. The licensing process consists 
of 3 basic steps: (1) Initial Review by SBA; (2) Capital 
Raising; and (3) Final Licensing. In the first step, SBA 
reviews the applicant's track record and performs initial due 
diligence, leading to a decision by SBA's Investment Committee 
as to whether to give the applicant a ``green light letter''. 
Once an applicant receives a green light letter, the managers 
have up to 18 months to raise the minimum private capital and 
submit a license application. After receiving the application, 
SBA reviews all legal documents and updated track records and 
performs further analysis and due diligence before 
consideration by the Investment Division Licensing Committee 
and then the Agency Licensing Committee, which is composed of 
the AA for Investment and senior SBA officials. SBA's 
Administrator then approves and issues the SBIC license. In 
determining whether to grant a license to an applicant, SBA 
considers the factors identified in its regulations (13 CFR 
Sec. 107.305), which include among other things: management 
qualifications; track record; proposed investment strategy; and 
fund economics. As a result of this process, only 1 of the 157 
Debenture SBICs licensed since 2002 has been transferred to the 
Office of Liquidation to date.

    Even though a lot of work goes into evaluating applicants, 
SBA improved licensing times over the past four years. It used 
to take almost 15 months on average to get a new SBIC fund 
licensed. That average is now less than 6 months. As a result, 
SBA is on track to exceed its FY 2012 licensing numbers, having 
already licensed 26 SBICs with almost $1 billion in private 
capital and approved over $1.5 billion in Debenture commitments 
in FY 2013 to date.

    To help this large group of new licensees navigate our 
program, SBA's Office of SBIC Operations has initiated webcasts 
on various aspects of the program. SBA also has reduced average 
turnaround times on key decisions in Operations by over 50%, 
from 60 days in FY 2010 to 28 days in FY 2012. This improvement 
helps SBICs get critical financings to small businesses in a 
timely manner.

    Obviously with rapid growth, SBA is concerned about program 
risk. Key to managing program risk is good reporting. SBA 
implemented a new web-based reporting system in FY 2013 to help 
improve communications and reporting from program participants. 
In addition, in the first quarter of this fiscal year SBA 
published its most recent annual report in order to improve 
transparency of the program and provide accountability.

    With its processes and reporting in place, SBA believes it 
is poised to handle continued growth. And we believe that one 
legislative change currently under consideration would allow 
this program to reach even more high growth small businesses. 
Specifically, the proposal would increase the SBIC Debenture 
program authorization from $3 billion to $4 billion. While SBA 
has never hit the $3 billion annual authorization limit, we 
have grown the program significantly in recent years. Over a 3 
year period, SBA more than doubled the amount of Debenture 
commitments approved, from $788 million in FY 2009 to over $1.9 
billion in FY 2012. SBA expects to exceed $2 billion in FY 
2013. With continued growth, SBA will outpace its current 
authorization level.

    We believe this modest change will allow the program to 
continue to grow without any significant additional risk to the 
taxpayer, allowing us to keep this program at zero subsidy.

    In closing, the SBIC program is well positioned to finance 
small businesses across the country. I look forward to working 
with you on policies that will help us achieve this goal. Thank 
you and I am happy to answer any questions you may have.
[GRAPHIC] [TIFF OMITTED] 82204.001

    Good morning Chairman Schweikert, Ranking Member Clarke, 
and Members of the House Small Business Subcommittee on 
Investigations, Oversight, and Regulations.

    Thank you for holding this oversight hearing today to 
examine the Small Business Investment Company (SBIC) program. I 
am here today on behalf of the Small Business Investor 
Alliance, the premier organization of lower middle market 
private equity funds and investors.

    My name is Steven Brown and I am the Managing Member of the 
General Partner of Trinity Capital Fund II, LP, based out of 
Phoenix, Arizona. Trinity Capital became a licensed SBIC in 
September of 2012, with a current investment capacity of $76 
million, assuming two tier SBA leverage. Trinity focuses on 
equipment and fixed asset leasing and financing to both earlier 
staged and emerging growth small businesses primarily backed by 
Venture Capital and/or other institutional investment. The 
industries we fund most are telecommunications, manufacturing 
and technology, with our primary market focused in the 
southwest and west, however we will fund deals in other US 
markets.

    Since our fund was only recently licensed, I can only speak 
to our direct experiences during the relatively brief period we 
have been in the program. However, because this hearing is 
performing oversight of the entire SBIC program, I am attaching 
a letter from our trade association that highlights the broader 
perspective they have seen across the industry over a longer 
period of time.

    Background

    What was true in 1958 is still true today. It is very 
inefficient and difficult for large financial institutions to 
provide capital to small businesses, even if the small business 
is profitable and trying to grow. To address this reality 
Congress and the Eisenhower Administration applied market 
principals as they created the SBIC credit facility that uses 
leverage to augment private investment in the small business 
market. Because of the way the program is structured, this 
leverage must be provided with a zero subsidy rate--meaning no 
cost to the taxpayer. The SBIC debenture program continues to 
successfully operate at its statutorily required zero subsidy 
rate. The SBIC debenture program has consistently run at a 
surplus of several hundred million dollars and the President's 
budget estimates that this surplus will grow next year. Since 
the creation of the SBIC program, SBICs have invested more than 
$58 billion in over 100,000 domestic small businesses. Some of 
these small businesses have since grown into icons of American 
free enterprise including: Apple, Intel, Outback Steakhouse, 
Callaway Golf, and many others. There are also thousands of 
other fantastic SBIC-backed businesses that are lesser known, 
but that are mainstays of local economies.

    SBICs are highly regulated private equity funds that invest 
exclusively in domestic small businesses. Debenture SBICs raise 
private capital, pass a rigorous licensing process, and then 
are able to increase the amount of capital available for 
investment by accessing leverage through an SBA-backed credit 
facility. These funds then invest in a portfolio of U.S. small 
businesses, creating jobs, fostering innovation, and fueling 
economic growth.

    The SBIC debenture program fills a critical need by 
providing growth and transition capital to small businesses. 
During the financial crisis SBICs scaled up to provide critical 
capital that saved many businesses and many jobs. The SBIC 
debenture program continued to operate at a zero subsidy rate 
throughout the financial crisis. Private capital of operating 
SBICs doubled over the past four years, growing from $3.4 
billion at the end of fiscal year 2009 to $6.8 billion today. 
This growth came at no additional cost to the taxpayer, a 
remarkable feat for a public-private partnership. This program 
is good public policy because it fills a critical market need 
that otherwise would largely go unmet while simultaneously 
providing real taxpayer protections. This is a rare alignment 
of market forces with thoughtful public policy.

    Trinity Capital is an example of how an SBIC Fund can 
provide critical capital to businesses that will now continue 
to grow long after the SBIC has exited the investment. Trinity 
Capital to date has funded equipment purchases for the growth 
of a manufacturing line with Suniva, a manufacturer of solar 
cells based in Atlanta, Georgia. Suniva has experienced strong 
revenue, has survived the solar manufacturing down market and 
is a strong US based manufacturer supplying the residential 
supply market. Our capital has helped grow capacity at the 
Suniva plant. We have also funded manufacturing equipment for 
Soraa, a US based manufacturer of LED lighting, an emerging 
technology that is replacing much of the existing lighting in 
the marketplace with more efficient and cost effective energy 
lighting. Soraa is experiencing growing revenues and has state 
of the art technology in this space. We have also funded 
Clariphy, a California based manufacturer of chips for fiber 
optic communications. Clariphy's product produces a much more 
efficient use of fiber optic networks resulting in more 
bandwidth and speed. Trinity financed test equipment for 
Clariphy, a company who is experiencing strong and growing 
revenue. We are currently funding a tire recycling company that 
takes tire manufacturing waste and grinds it into a product 
that is used for production back into the tire industry. 
Trinity is currently funding and plans to fund innovative US 
based companies that are providing both technology and know how 
to make existing processes more efficient and more profitable. 
Additionally we have already demonstrated a desire and ability 
to work with companies that are coming up with better and more 
efficient energy solutions and alternatives.

    Let me start out by highlighting how Congress can act right 
away to increase capital flowing to small businesses. 
Congressman Steve Chabot (OH-1) introduced the SBIC 
Modernization Act (H.R. 1106) earlier this year which increases 
a critical cap on the amount that successful SBICs can access 
through the SBA credit facility.

    In fact, thanks to the bipartisan work by this committee at 
the end of last year, the same legislation passed through the 
House of Representatives on December 17, 2012, with a very 
strong bipartisan vote of 359-36; however given the time 
constraints at the end of the year, the Senate did not act on 
the bill. Congressman Chabot reintroduced the bill this year 
with bipartisan support from nine of his colleagues. It is 
worth noting that a Senate version of the bill, backed by 
Senators Landrieu (D-LA) and Risch (R-ID), passed out of the 
Senate Committee with broad bipartisan support.

    It is important to note that H.R. 1106 does not increase 
federal spending or require new appropriations. H.R. 1106 
adjusts the maximum amount of leverage available to multiple 
SBICs to a limit of $350 million. The only funds that can 
access the higher limits are funds that have successfully 
operated an SBIC and have gone through the licensing process at 
least twice. Increasing this limit will keep proven small 
business investors in the program and increase the amount of 
capital flowing to small businesses. It is a logical to keep 
the best small business investors investing domestically. This 
increase has bipartisan, bicameral, and Administration support. 
We encourage its passage.

    Now let me turn the focus of my testimony to discuss issues 
that should be relevant as part of an oversight hearing. It is 
important to put on the record the very significant 
improvements to the SBIC program that have been implemented 
over the past several years. Licensing times have been reduced 
from a waiting period of nearly two years to about six months. 
The number of licenses issued per year has increased from fewer 
than 10 per year to 30 per year. This increase in licensing was 
achieved while maintaining, if not raising, the standards for 
licensure. Thanks to legislative improvements, the number of 
regulatory hurdles to normal fund operations has been reduced 
and has allowed SBA resources to be better allocated to address 
more pressing needs. These improvements are important and 
should not be overlooked.

    These reforms attracted more private sector investment and 
allowed SBICs to operate closer to the speed of business to 
back thousands of successful entrepreneurs. Despite the many 
improvements, there are still areas that require meaningful 
changes to maximize the program's ability to get capital in the 
hands of small businesses.

    SBA Leadership

    The biggest short term challenge that must be addressed is 
the departure of many key personnel at the SBA. The SBIC 
program has benefitted greatly by the quality of the people 
appointed to lead the SBA and the attention they paid to the 
SBIC program. SBA Administrator Karen Mills is expected to 
leave her post by the end of August and there is no word yet on 
who her replacement will be. There are also vacancies for the 
positions of the Deputy Administrator, the Associate 
Administrator for SBA's Office of Investment, which administers 
the SBIC program. These are all important positions at SBA that 
should be filled as soon as possible. The Senate confirmation 
process takes a long time, and without any new appointments by 
the President, this process will be ongoing through the fall. 
We do not want to see programs in charge of regulating and 
overseeing billions of dollars lacking strong leadership. There 
are significant questions about how licensing and certain 
operational decisions will be made when there is no 
Administrator. It is not clear who will be acting as 
Administrator when this position is vacated in August.

    Technology

    There are a number of major technological and information 
systems challenges that make it very difficult for SBA staff to 
administer the SBIC program effectively. We encourage a 
meaningful review and improvement in both the technological 
tools and the policies around them.

    One of the major problems for SBIC funds is the ability of 
the SBA to accept documents electronically. The SBA still 
requires SBICs to send hard copies for most documentation 
requests. The email system at SBA is unable to send or receive 
many documents. It is common that critical documents are 
delayed or lost in the mail room. The SBA needs to be able to 
communicate electronically. Further, it has been over a decade 
since laws were changed to require the acceptance of digital 
signatures, but the SBA requires paper copies, often with 
multiple copies. The SBA needs to modernize its documentation 
collection process to allow SBICs to communication and submit 
documents electronically.

    SBA has attempted to update some of their data collections 
into an electronic format. The SBICs applaud them for their 
efforts, but the execution can be improved. The new Form 468 
electronic system was delayed in coming on line and has been 
taken down to fix bugs. Once the system is complete and 
functional, it will provide great efficiency to SBA and to SBIC 
funds, but we are not there yet.

    SBA staff have important regulatory duties and need the 
tools to perform those duties well. We would encourage the 
Committee to review the technical capabilities of the SBA and 
consider outsourcing operations or services that require 
technologies that SBA is not able to provide their employees 
themselves.

    Licensing Process

    The process of applying for a license and becoming a 
licensed SBIC varies from fund to fund. In our experience, the 
process took longer than we expected, but we had a change of 
personnel along the way so we understood and it was successful 
in the end. The SBA could be more transparent with applicants 
after the submission of the Management Assessment Questionnaire 
(MAQ). The time frame between the MAQ and licensing could be 
reduced if the SBA establishes a consistent work flow process 
that is transparent to the fund applying for a license. This 
workflow process could be improved by allowing information 
sharing and establishing consistent communication between the 
SBA and the fund. It would also benefit the fund if there was a 
structure in place to see the estimated time remaining to 
become licensed.

    Dodd-Frank

    The last section of my testimony focuses on the threat of 
double regulation (in three potential situations) as a result 
of the Dodd-Frank Act. While the statute provides a limited 
exemption from SEC registration for SBICs that ``solely'' 
advises one or more licensed Small Business Investment Company, 
clarification is needed to prevent cases of double regulation.

    The first issue involves ``SBIC capital'' counting towards 
the $150 million threshold. If an adviser advises SBICs and any 
other private funds (and the total assets under management 
exceed the $150 million registration threshold), then the 
threshold for full registration is triggered. The SEC has taken 
the position that registration is triggered if an adviser to an 
SBIC has absolutely any capital in any non-SBIC, no matter how 
small. Therefore, many SBIC advisers are forced to register 
with the SEC in spite of the SBIC exemption.

    A second issue deals with fund managers that manage a 
licensed SBIC and a non-related Venture Capital fund. Both 
SBICs and Venture Capital Funds are excluded from SEC 
registration, but only if the manager ``solely'' manages these 
funds, and not another non-related fund. The SEC has taken the 
position that a manager of a Venture Capital Fund and an SBIC 
fund must register with the SEC if their assets under 
management exceeds $150 million. On their own they are exempt, 
but jointly they are captured in the regulatory regime.

    The third issue involves the regulation of SBICs by the 
states. There is no explicit language in the Dodd-Frank Act 
that excludes SBICs from state registration. Therefore, 
federally licensed and regulated SBIC funds must register with 
multiple states and territories. A technical correction is 
needed to remove this unintended double regulation, leaving 
SBICs fully regulated by their licensing and reporting entity, 
the SBA. SBICs would continue to be closely regulated by the 
SBA, as they have for 55 years.

    In closing I want to reiterate the success, the strength 
and my support of the SBIC program. The Agency is licensing 
qualified candidates through a stringent and thorough due 
diligence process which creates a high standard for licensees 
to meet before become licensed and having access to SBA 
leverage and thus becoming a valuable funding source to Small 
Business concerns and the economy at large. On behalf of all 
SBIC's we applaud the efforts of the agency and its employees, 
while encouraging continued improvements and efficiencies as 
referenced herein that can streamline the process of licensing 
and the communication with its candidates and licensees, 
without lowering the important and high standard that had been 
set by the Agency to award an SBIC License.

    Thank you for giving me the chance to share both my 
experience and the perspective of the SBIC industry. Please see 
the accompanying letter below from SBIA President Brett Palmer.

    Steven Brown, President TCI and Managing General Partner 
Trinity Capital Fund II (TCF)

    Biography - Steve Brown brings 28 years of lending, 
investment and leasing experience to TCF. Prior to starting 
TCF, he was a General Partner with Point Financial Capital 
Partners, which managed a Venture Leasing Fund and he led both 
originations and lease financing efforts for all early stage 
lease finance at Point. Prior to Point he served as the 
President and CFO of InvestLinc Financial Services, which was 
an early-stage Private Equity Fund Manager and Business 
Consulting Firm. Prior to InvestLinc, he was a partner in 
Cornerstone Equity Partners, a private equity fund manager, and 
was co-founder/manager of Cornerstone Fund I, a private equity 
fund based in Phoenix, Arizona. In addition, Steve has worked 
with private investment companies and banking institutions in 
both real estate and commercial lending and investment roles. 
He has served on the board of directors of numerous operating 
companies. Mr. Brown holds a B.S. degree from McNeese State 
University in Business Administration and Marketing.
[GRAPHIC] [TIFF OMITTED] 82204.002

[GRAPHIC] [TIFF OMITTED] 82204.003

[GRAPHIC] [TIFF OMITTED] 82204.004

[GRAPHIC] [TIFF OMITTED] 82204.005

                      Testimony of John J. Sherman


             Founder, Director and Former CEO, Inergy, L.P.


           Before the United States House of Representatives


                   House Committee on Small Business


                             July 25, 2013


    Good morning. My name is John Sherman and I am from Kansas 
City, Missouri, near the congressional district of full 
committee Chairman Sam Graves. I am an entrepreneur who has 
been fortunate enough to launch and successfully grow and 
develop two companies from scratch. I am here today because I 
have been asked to share with you my experience with the SBIC 
program while building Inergy, L.P., an energy infrastructure 
company.

    Three partners and I launched Inergy in 1998. We were 
seasoned professionals in the propane industry; and through our 
experience, we thought that we could build a successful 
enterprise in the sector. There were approximately 5,000 
independent propane retailers across the U.S. Many of the 
owners of these businesses were at or nearing retirement age, 
often without family members prepared to take over the 
business. We believed we could build a scalable business.

    Our strategy was simple:

           acquire local and regional propane operators 
        with excellent customer service and safety records;

           grow the business rapidly, both through 
        acquisition and organic expansion;

           access the public capital markets using a 
        Master Limited Partnership (MLP structure) to ensure 
        our ability to grow; and

           ultimately diversify into the broader energy 
        sector.

    We funded the start-up with $600,000 of our own money and 
raised $900,000 of equity from the seller of our original 
acquisition prospect. We went to several banks that turned us 
down for additional funds but eventually obtained an additional 
$4.5 million acquisition loan. The bank loan was with a local 
Kansas City bank, had strict covenants, and was personally 
guaranteed by us and our spouses.

    With a goal of ultimately going public, we recognized that 
we would need private equity to serve as a bridge to an 
eventual IPO. We also recognized that--in addition to gaining 
capital--we needed the expertise that comes with institutional 
capital and the business discipline that must go along with it. 
We were business operators, not financial professionals; and we 
recognized that we needed access to expertise to help us get to 
that next level. So we talked with a number of private equity 
and mezzanine financing firms.

    We ultimately connected with an SBIC, Kansas City Equity 
Partners (KCEP); and on December 31, 1999, we signed an 
agreement with KCEP for Inergy's first private equity 
investment, KCEP purchased a $2 million preferred interest in 
our fledgling company.

    It is important to point out that KCEP took the time to get 
to know us. They recognized that we had deep expertise in the 
propane industry, our business plan was solid, and the founders 
were at risk. Plus, KCEP was flexible as to our financial 
structure; and they were not asking for control, which was 
important to us.

    We used that initial $2 million investment to acquire a 
number of small, independent propane operations over the 
ensuing months. We also benefitted from the partnership with 
this SBIC as they helped us zero in on what it would take to 
access public capital markets.

    By January 2001, we had identified a significant potential 
transaction--Hoosier Propane located in Indiana--that would 
provide the critical mass necessary for us to take Inergy 
public. We secured bank financing and obtained $7.4 million in 
equity from the sellers. The sellers also carried back a $5 
million loan, but that left a gap of $16.5 million.

    A group of private equity investors led by Kansas City 
Equity Partners purchased a $16.5 million preferred interest in 
Inergy as the anchor investment. All members of the group were 
qualified as Small Business Investment Companies (SBICs). The 
other SBICs included Mid States Capital, Invest America, Kansas 
Venture Partners, Rocky Mountain Capital, Diamond States 
Capital, and Southwest Partners.

    That $16.5 million was the key piece of capital that 
allowed us to make a strategic acquisition. Very shortly after 
we closed that transaction, we filed the paperwork for the IPO 
process. Just seven months later, in July 2001, Inergy went 
public. We continued to grow the company dramatically after 
that, completing more than 75 retail propane acquisitions, 
becoming the third largest propane company in the country, and 
employing nearly 3,000 people.

    Over the years, we diversified Inergy into the midstream 
energy sector; and today the company is recognized as a major 
developer and operator of U.S. energy infrastructure including 
storage, pipelines, and logistics assets. In May, we announced 
a merger with Crestwood Midstream Partners, which will create a 
$7.5 billion midstream energy company that is extremely well 
positioned to leverage the growing importance of the emerging 
shale plays around the country. The combined company will 
continue to create even more jobs and invest large amounts of 
capital in energy infrastructure across the United States.

    We could not have done any of that without the initial 
investments we received from the SBICs. Although we have raised 
billions in capital over the years, no investment was more 
valuable to us than the SBIC capital we raised that allowed us 
to reach critical mass and take Inergy public.

    Thank you for the opportunity to share the Inergy story.
    [GRAPHIC] [TIFF OMITTED] 82204.006
    
    The U.S. Chamber of Commerce is the world's largest 
business federation representing the interests of more than 3 
million businesses of all sizes, sectors, and regions, as well 
as state and local chambers and industry associations. The 
Chamber is dedicated to promoting, protecting, and defending 
America's free enterprise system.

    More than 96% of Chamber member companies have fewer than 
100 employees, and many of the nation's largest companies are 
also active members. We are therefore cognizant not only of the 
challenges facing smaller businesses, but also those facing the 
business community at large.

    Besides representing a cross-section of the American 
business community with respect to the number of employees, 
major classifications of American business--e.g., 
manufacturing, retailing, services, construction, wholesalers, 
and finance--are represented. The Chamber has membership in all 
50 states.

    The Chamber's international reach is substantial as well. 
We believe that global interdependence provides opportunities, 
not threats. In addition to the American Chambers of Commerce 
abroad, an increasing number of our members engage in the 
export and import of both goods and services and have ongoing 
investment activities. The Chamber favors strengthened 
international competitiveness and opposes artificial U.S. and 
foreign barriers to international business.

    Positions on issues are developed by Chamber members 
serving on committees, subcommittees, councils, and task 
forces. Nearly 1,900 businesspeople participate in this 
process.
                              Statement on


      ``Examining the Small Business Investment Company Program''


                              Submitted to


                 THE HOUSE COMMITTEE ON SMALL BUSINESS


             SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND


                              REGULATIONS


                            on behalf of the


                        U.S. CHAMBER OF COMMERCE


                                   By


                  Philip Alexander, CEO of Brandmuscle


                            Cleveland, Ohio


                             July 25, 2013


    Chairman Schweikert, Ranking Member Clarke and 
distinguished members of the Subcommittee, thank you for 
inviting me to testify before you today on the Small Business 
Administration's (SBA) Small Business Investment Company (SBIC) 
program and its impact on the ability of U.S. businesses and 
entrepreneurs to compete, innovate and create jobs. I commend 
your efforts in holding this important hearing to better 
understand the SBIC program and the critical role it has played 
in the success and growth of my business.

    I am Philip Alexander, President and CEO of Brandmuscle, a 
recently SBIC funded small business that is currently 
headquartered in Chicago, with offices in Cleveland, Austin and 
Los Angeles. I am here to speak with you today, not only as CEO 
of Brandmuscle, but also on behalf of the U.S. Chamber of 
Commerce.

    The U.S. Chamber of Commerce is the world's largest 
business federation, representing the interests of more than 
three million businesses and organizations of every size, 
sector, and region. More than 96 percent of the Chamber's 
members are small business with 100 or fewer employees, 70 
percent of which have 10 or fewer employees. Yet, virtually all 
of the nation's largest companies are also active members. 
Therefore, the Chamber is particularly cognizant of the 
problems of smaller businesses, as well as the issues facing 
the business community at large.

    I came to the United States over thirty years ago with 
little more than the determination to obtain a first class 
education. After obtaining an MBA degree at Case Western 
Reserve University, in Cleveland, Ohio, I pursued a career in 
marketing and quickly ascended to senior positions with 
national and international retailers, serving as vice president 
of brand management for Pearle Vision as well as vice president 
of marketing for Western Auto, a subsidiary of Sears, Roebuck 
and Co.

    Although very successful within the corporate world, I 
always knew my entrepreneurial spirit would lead me to even 
greater opportunities should I strike out on my own. In 2000, I 
left the comfort and security of my company job and Brandmuscle 
was born. It was a solution to a common problem within the 
marketing industry that had challenged me for y ears; how do 
you roll out a national marketing campaign relevant to 
potential consumers within local markets and diverse 
communities? For a national company, building consistent brand 
equity across all markets is extremely important, yet many 
local perceptions influenced the purchasing decision.

    There are close similarities in politics that parallel this 
marketing dilemma. Former Speaker of the U.S. House Tip O'Neill 
coined the phrase, ``All politics is local.'' This axiom 
encapsulates the principle that your success is directly tied 
to your ability to understand and influence the issues of local 
constituents or communities. As you know only too clearly, 
attempting to communicate to the varying interests within a 
congressional district is a challenge, and trying to broaden a 
message and outreach nationally can be extremely daunting, 
especially when control of that message is distributed to many 
well-intentioned supporters throughout the country.

    Brandmuscle was launched as a powerful solution to unleash 
a company's brand where the buying decisions are made--in the 
local marketplace. Our local marketing software enables 
companies to empower their network of local distributors, 
dealers, franchisees and salespeople with everything they need 
to deliver brand-approved marketing tactics customized to local 
needs, tastes and other relevant differences that can affect 
the sale.

    Today, Brandmuscle, has reinvested the local market place 
and evolved into a world class suite of marketing services and 
solutions. We are proud to have as clients some of the most 
well-known corporate Fortune 500 companies. Some of our current 
products and services include the following:

          1. BrandBuilder allows a company to customize and 
        execute local marketing campaigns with legally 
        compliant advertising for virtually any type of media 
        on our local marketing platform and ad builder.

          2. Design Tracker allows a company to efficiently 
        manage local marketing and in-house graphics activity. 
        A large percentage of on-and-off premise marketing 
        materials are designed and produced locally by 
        distributors or branches. This business workflow 
        typically has a lack of cost controls, minimal 
        compliance with branding guidelines, and inferior 
        production capability.

          3. Display TrackerTM a web-based solution 
        that allows distributors to create customized Point-of-
        Sale (POS) materials at the retail level. The 
        application uses Variable Data Print technology to add 
        personal messages and account names to POS material 
        that is kitted for retailer distribution. This provides 
        a dramatic reduction in per unit pricing of POS 
        material to more closely assimilate long run print 
        pricing.

    Since its launch, Brandmuscle has been honored to receive 
numerous awards in recognition of our involvement with the 
community and our business integrity:

           2012 Medical Mutual Pillar Share Award, 
        Community Service
           2012 Crain's Cleveland Business Leading EDGE 
        Award, Entrepreneurs EDGE
           2011 Best Internship Program Award Finalist, 
        Northeast Ohio Software Association
           2011 Richard Shatten Civic Distinction 
        Award, Entrepreneurs EDGE
           2010 Weatherhead 100 Award, Council of 
        Smaller Enterprises (COSE)
           2010 Crain's Leading EDGE Award, 
        Entrepreneurs EDGE
           2009 Crain's Cleveland Business Leading EDGE 
        Award, Entrepreneurs EDGE
           2002 Innovation in Business Award, Smart 
        Business Network Magazine
           2002 Philip Alexander named ``Visionary'', 
        4th Annual SBN Innovation in Business Conference

    Today, Brandmuscle employs over 550 well-paid professionals 
in the United States, many of whom are still located in 
downtown Cleveland, Ohio, where the company was started. Given 
Brandmuscle's quick rise to success, it is easy to overlook 
important factors that brought the company to this level. Like 
many small business owners across the nation with a great idea 
and limited resources, `pulling yourself up by your own 
bootstraps' is the primary way I began my journey to achieve 
the American dream.

    With limited resources and no staff, convincing my first 
corporate client to purchase services from my fledgling company 
required almost as much innovation and marketing skills as it 
did to develop the product. Even though it was a memorable 
event when the first dollar arrived, there was little time to 
celebrate. Delivering on your commitments during the early 
stages of business development requires hiring capable 
employees and developing internal procedures that exceed the 
client's expectations. It takes extraordinary amounts of both 
human and financial capital to build a business. While I had 
confidence in my business and marketing expertise, acquiring 
enough resources to foster the accelerated growth needed to 
propel Brandmuscle to its current level of market dominance 
took an incredible amount of time and energy.

    There is one commonly misunderstood fact; for a fast-
growing, job-generating company like Brandmuscle to thrive, 
many diverse avenues of funding are essential. Irrespective of 
a company's profits, the inability to access a robust supply of 
external capital during critical times in the growth cycle can 
severely impact revenues, profit, jobs, and even the ability to 
survive.

    For Brandmuscle, early stage funding came from savings and 
an early Angel. Not long afterwards, several successive 
infusions of ``venture funds'' provided the foundation to drive 
revenue growth to a level that would support a payroll of 
approximately one-hundred and fifty jobs. Under that business 
debt/equity structure, Brandmuscle had reached a point in which 
the growth rate could only comfortably add another three or 
four jobs a year. We had not yet reached our full potential; 
our existing capital structure would limit our progress.

    While ``angel'' and ``venture capital'' funding had served 
the purpose in filling the gap between start-up financing and 
our current level of market maturity, different funding sources 
were needed to cash-out original investors and reposition us 
for further expansion. Brandmuscle was too small and did not 
have the resources to go public. Additional liquidity through 
venture capital funding from additional private equity 
placement was an expensive way to recapitalize, given our 
proven history of success. And we needed to do more than just 
recapitalize to grow--we needed additional capital, products 
and people.

    Commercial bank debt financing is typically not available 
to companies with the level of investment risk required that 
Brandmuscle had in 2012. Since most of our assets were 
intangible property, convincing banks to lend based on 
collateralizing those assets, was not practical.

    The SBAs SBIC program was unique in its ability to provide 
Brandmuscle with the resources for our next phase of innovation 
and aggressive growth within the distributed marketing 
landscape. This federal government program, which has zero cost 
to the taxpayers, allows for a SBIC fund manager to leverage up 
to twice the amount of their private capital in order to 
provide a company like Brandmuscle cost-effective, mezzanine 
debt financing in order to recapitalize and position us to 
foster more job growth.

    In February of 2012, The Riverside Company, equipped with 
assets from their recently SBIC backed Riverside Micro-Cap Fund 
II, signed a purchase agreement to fully acquire Brandmuscle 
through a mezzanine debt restructuring arrangement. Brandmuscle 
had instant access to the extraordinary managerial talents and 
financial backing of the Riverside team, a well-respected 
leader in PE management.

    Riverside's SBIC fund provided financial backing for the 
acquisition and merger of several other companies within their 
portfolio family providing us added opportunities. Brandmuscle 
was immediately able to integrate with Riverside's platform 
Centiv Services, a Chicago Illinois-based provider of marketing 
automation technology and digital print fulfillment services 
and TradeOne Marketing, an Austin, Texas-based trade promotion 
management company, to build out our distributed marketing 
platform. As a result of Riversides funding and counsel, in 
just over a year, Brandmuscle's newly acquired market strength 
and vertical alignment had dramatically increased income and 
earnings. This was not done at the expense of cutting jobs; we 
not only sustained our combined level of employment, but 
created an additional forty-two jobs.

    The Riverside Company is one of the largest and oldest 
global private equity firms in the nation with over $3.5 
billion in assets under management. With more than twenty-five 
years in business, they have completed over three-hundred 
acquisitions and have over two-hundred people worldwide. It was 
welcome news when Brandmuscle was able to obtain the cost-
effective, capital needed to make it to the next level. Just as 
important as the funding, was Riverside's commitment to nurture 
Brandmuscle with the goal of building it into a more effective 
enterprise through time-tested management techniques, organic 
growth and add-on acquisitions.

    Chairman Schweikert and Ranking Member Clarke, without the 
SBAs SBIC program, a company with the talent and resources of 
Riverside would unlikely seen value in engaging with an 
enterprise the size of Brandmuscle. Their SBIC baked Micro-Cap 
funds represents only a fraction of their massive portfolio. I 
am convinced that it was the incentives that were afforded to 
Riverside by the SBIC program which made us an attractive 
candidate for their consideration.

    In conclusion, from the day that I conceived the idea of 
Brandmuscle, to the present, obtaining sufficient capital has 
always been a challenge. I know firsthand that in order for a 
company to successfully grow, expand and create jobs, it 
requires the right type of capital at the right time. Seed 
money, start-up capital and different stages of growth capital 
all come at different costs, maturities and expectations. All 
sources of capital play a distinct and vital role in bringing a 
company to the next level as a business progresses through its 
life-cycle.

    At no expense to the taxpayer, the SBAs SBIC program fills 
a void by providing access to capital, especially mezzanine 
structured debt, for fueling the growth of small businesses 
where alternative funding is not available in the private 
sector. On behalf of the U.S. Chamber of Commerce's small 
business membership, and myself, I strongly recommend that you 
retain, enhance and strengthen this critical source of capital 
for small businesses. To that end, I urge you to pass the bi-
partisan bill, H.R. 1106, the `Small Business Investment 
Company Modernization Act of 2013' into law.

    I thank you for inviting me to testify and look forward to 
answering any questions.
    Congressional Testimony of Professor David T. Robinson, PhD 
before the Committee on Small Business Subcommittee o n 
Investigations, Oversight and Regulations

    Ladies and Gentlemen of the Committee: Thank you for the 
opportunity to testify before you today. Spurring startup 
activity in the US is central for promoting economic growth 
more broadly and I am grateful for the opportunity to speak 
before you on this important topic.

    Although economic policy in the United States tends to 
focus on small businesses, the best available economic data 
indicate that young businesses, not small ones, are responsible 
for the lion's share of economic growth in our country.\1\ The 
confusion is understandable: almost all young businesses are by 
their very nature small, but most small businesses are not 
young. While small businesses are undoubtedly an essential part 
of the fabric of American life, most are not important engines 
of job creation. (If they were, they would not continue to stay 
small.) Young businesses are a different story: most fail, but 
the ones that succeed create jobs and increase our country's 
economic dynamism.
---------------------------------------------------------------------------
    \1\ See John Haltiwanger, Ron Jarmin and Javier Miranda (2010) 
``Who Creates Jobs? Small vs. Large vs. Young,'' NBER Working Paper 
16300, or Ronnie Chatterji ``Why Washington Has it Wrong on Small 
Business,'' Wall Street Journal, November 12, 2012.

    In this regard, the early-stage SBIC initiative is laudable 
both in terms of its objective and in terms of its creativity. 
I would like, however, to draw your attention to three facts 
about early stage business activity that, taken together, 
should temper our expectations of policies that attempt to 
stimulate early-stage business activity by extending leverage 
---------------------------------------------------------------------------
to equity investors in this market.

    First, my work with Alicia Robb of the Kauffman Foundation 
shows that debt, not equity, is the primary source of capital 
for new businesses.\2\ While we have long understood that 
credit markets were important for small business, it is 
surprising that NEW businesses rely so heavily on the banking 
sector for access to capital.\3\ This is true for a wide range 
of startups: even high-tech, Venture Capital-backed firms rely 
heavily on access to bank debt through credit lines, personal 
and business bank loans.
---------------------------------------------------------------------------
    \2\ Alicia Robb and David T. Robinson (2013) ``The Capital 
Structure Decisions of Startup Firms,'' Review of Financial Studies.
    \3\ See also Alan Berger and Greg Udell (1998) ``The Economics of 
Small Business Finance: The Roles of Private Equity and Debt Markets in 
the Financial Growth Cycle,'' Journal of Banking and Finance 22:613-73.

    Because home equity is such an important source of 
collateral for most individuals at the prime age for starting 
new businesses, this means that the collapse of the housing 
market was as much a crisis in entrepreneurship as it was a 
crisis for the banking system.\4\
---------------------------------------------------------------------------
    \4\ Evidence connecting home equity to startup activity can be 
found in Manuel Adelino, Antoinette Schoar and Felipe Severino (2013) 
``Housing Prices, Collateral and Self-Employment,'' working paper, Duke 
University.

    The second fact is that early stage investing is extremely 
risky. Failure occurs often. Successes are rare, but are highly 
rewarded. For every Goggle or Apple, there are thousands of bad 
ideas that never make it out of the inventor's garage. There is 
an understandable need to create curbs inhibiting excessive 
risk-taking and discouraging bad investment performance, such 
as the provisions that are included in the early-stage SBIC 
guidelines. We must nevertheless be aware of the fact that 
these provisions are likely to discourage some of the most 
desirable investments from being undertaken: these are the 
speculative investments that are sometimes associated with the 
---------------------------------------------------------------------------
most disruptive technological innovations.

    The third fact that bears consideration is that the 
gestation periods for many early stage investments are 
prohibitively lengthy for many investors. Increasing the flow 
of capital into the sector will not change the waiting time 
between the first investment and the acquisition or IPO that 
will provide the return to the early-stage investor. The 
primary remedy here is increased liquidity in later-stage 
investment markets. Some of the most interesting features of 
the JOBS Act passed last spring are those features that 
stimulate the development of intermediate liquidity 
opportunities for early stage investors.

    These three facts conspire to make your job a difficult 
one. To put it simply, we are swimming against the current when 
we attempt to stimulate early stage investment activity by 
leveraging existing equity in the sector.

    Given these facts, what is the underlying economic 
mechanism that will likely be responsible for the successes 
that we do see?

    In my view, it is this:

    Investors without sufficiently deep pockets are often 
discouraged from making speculative early-stage investments 
because they are worried that their early investments will 
become diluted by later-stage investors. It's not that they 
need capital to make more investments now; they need more 
capital later to be used when follow-on investments occur. In 
my view, the key to this program's success will lie in its 
ability to amplify the amount of ``dry powder'' that early 
stage investors have on hand to participate in later-stage 
funding rounds as successful investments grow to fruition. 
Giving early-stage investors the confidence that they will have 
access to sufficient capital to take their investments across 
the finish line will be the hallmark of this program's success.

    Thank you.
                   House Committee on Small Business


       Subcommittee on Investigations, Oversight and Regulations


                         Hearing July 25, 2013


      ``Examining the Small Business Investment Company Program''


                        Questions for the Record


    Question: During your testimony, you mentioned that a 
Standard Operating Procedure (SOP) which looks at alternative 
ways of licensing applicants is currently in the agency's 
clearance process. This SOP is considered an interpretive 
regulation of a broader regulation, and as such, is covered 
under the agency's responsibility to perform a retrospective 
review pursuant to Executive Order (E.O.) 13563. Did SBA comply 
with E.O. 13563 and reach out to the small business community 
in its review of the licensing process? If so, what feedback 
did the agency receive? If not, why wasn't this process 
followed?

    SBA Response

    SOP 10 04 provides internal guidance to personnel engaged 
in the processing of SBIC license applications to ensure that 
those processes are consistent with statutory and regulatory 
requirements. The draft SOP 10 04 is the result of an ongoing 
effort by SBA's Office of Investment and Innovation (OII) to 
improve SBIC licensing procedures. It memorializes OII's 
streamlined processes and reflects current operational 
practices as well as input received over the past several 
years.

    In compliance with Executive Order (E.O.) 13563, since FY 
2009, OII has reviewed industry best practices and worked with 
applicants and stakeholders to identify improvements to our 
licensing procedures. The SBIC industry provided valuable 
feedback regarding processing times, ``green light letter'' 
expiration, and electronic-based licensing. As a result, we 
have decreased average licensing times by 54 percent and 
extended the green light letter expiration period from 12 to 18 
months. As I indicated at the hearing, OII is actively pursuing 
technological improvements for SBIC reporting as well as its 
other processes, subject to budget constraints. It is important 
to note that SOP 10 04 will not preclude the adoption of 
technology as it becomes available.
                     U.S. HOUSE OF REPRESENTATIVES


                      COMMITTEE ON SMALL BUSINESS


       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS


                                HEARING:


        EXAMINING THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM


                               TESTIMONY:


                        JOSE E. FERNANDEZ-BJERG


           CHAIRMAN AND CEO, OMEGA OVERSEAS INVESTMENT CORP.


                             JULY 25, 2013


    Dear Chairman Schweikert, Ranking Member Clarke and 
subcommittee members, thank you for allowing me to provide 
testimony on the Small Business Administration's Small Business 
Investment Company Program (``SBIC''), particularly on whether 
the SBIC program is meeting the capital needs of small business 
owners.

    My name is Jose Enrique Fernandez-Bjerg. I am the Chief 
Executive Officer of Omega Overseas Investment Corp., a private 
international banking institution. I am also a member of the 
Board of Directors of the Government Development Bank for the 
Commonwealth of Puerto Rico, and have served as a member of the 
Board of Directors of the Federal Home Loan Bank of New York.

    During my 40-year career in banking and finance, I have 
been involved in thousands of financial transactions, including 
managing the operations of Prudential Bache, Paribas, AG Becker 
and Drexel Burnham Lambert. From 1988 to 2004, I led Oriental 
Bank & Trust which evolved into Oriental Financial Group (NYSE: 
OFG), a firm that manages over $10 billion in assets; currently 
the second largest local bank in Puerto Rico. In 2005, I 
founded Omega as the first multi-sector institutional 
investment firm on the island. Omega's largest asset class is 
private equity and our international firm manages investments 
in the United States and over 50 countries. My 25 years of 
private equity experience includes my participation, since 
1994, as a member of the Investment Committee of the University 
of Notre Dame. As a Trustee of the University, we oversee $8 
billion of assets under management and over $2.5 billion in 
private equity holdings. The portfolio we have managed has been 
ranked among the top 10-performing portfolios in the country 
for the last two decades.

    I testify before this honorable subcommittee today to share 
my concern for the state of the investment ecosystem in several 
Low and Moderate Income jurisdictions of the United States, 
which lack adequate access to capital vehicles for small 
business owners. I would also like to share recommendations on 
how that ecosystem could be improved.

    Background on SBICs in Low and Moderate Income markets

    As stated by the SBA, the SBIC mission statement is ``...to 
improve and stimulate the national economy and small businesses 
by stimulating and supplementing the flow of private equity 
capital and long term loan funds for the sound financing, 
growth, expansion and modernization of small business 
operations while insuring the maximum participation of private 
financing sources.''

    The SBIC has historically being instrumental in achieving 
that mission. Nonetheless, that mission has been concentrated 
in certain parts of the Nation, such as New York, California, 
Chicago and Massachusetts \1\, while other parts of the country 
still face immense shortages of private equity capital. For 
instance, while the number of SBIC licenses has increased 
slightly (from 299 in 2011 to 301 in 2012), during that same 
period businesses located in Low and Moderate Income areas 
financed by SBICs has dropped by over 38% (from 321 in 2011 to 
216 in 2012) \2\.
---------------------------------------------------------------------------
    \1\ See SBIC Annual Report, Fiscal Year 2012, page 17.
    \2\ Please note that this dramatic drop might be partially 
explained by the number of participating securities SBICs.

    While the causes for such a discrepancy may be multiple, it 
seems indisputable that the current licensees are not focusing 
on growing their portfolio of investments in Low and Moderate 
Income markets. That fact exacerbates and perpetuates a vicious 
cycle by which small businesses located in Low and Moderate 
Income markets are not able to grow due to limited capital 
options, and therefore stay at a size below their potential, or 
in the more unfortunate cases, fail when they lack capital to 
expand and compete with better financed competitors. That is 
precisely the type of system failure that a program such as the 
---------------------------------------------------------------------------
SBIC is intended to address, and that we hope it can remedy.

    This testimony will summarize our analysis of the SBIC 
program's current limitations. The conclusion of our yearlong 
study is that investors in many Low and Moderate Income regions 
have little chance of receiving an SBIC license under the 
current program structure. However, we believe that there is an 
opportunity to correct this imbalance and implement program 
changes that can have a dramatic impact on the economic 
development of economically disadvantaged zones.

    Evolution of the Private Equity Ecosystem & the SBIC 
Program

    During the 70's the United States pioneered the private 
equity industry, with its geographic concentration near major 
financial centers or technological centers. In these regions 
the evolution of the private ecosystems is usually world class 
and self-funded from private sources. Thanks to the SBIC 
program, in the 90's the private equity industry was able to 
expand to less-developed surrounding cities/states, and the 
SBIC program provided much needed capital to the next 
generation of fund managers.

    By the turn of the century the SBIC program continued to 
evolve and began to implement more professional private equity 
industry practices, which began to outpace the economic 
development of disadvantage zones. At a recent SBIC conference 
we heard from a successful fund manager that under the new 
regulations ``I would have never received the license that I 
was awarded in 1999.''

    The most recent financial crisis caused the SBIC to 
increase restrictions based on private equity performance best 
practices. While necessary, the unintended consequence of those 
new restrictions was that it is not almost impossible to find a 
universe of managers that fit the SBIC licensing specifications 
in many Low and Moderate Income markets.

    Our task force has met with SBIC experts in Washington DC 
to discuss this issue. They concur with our conclusion that 
obtaining a license in Low and Moderate Income markets that 
lack a PE ecosystem is extremely difficult. The key reason is 
that Low and Moderate Income regions do not have developed 
private equity industries or professionals with enough direct 
experience to qualify for a license.

    SBA's Actions to address capital shortages in Low and 
Moderate Income markets

    The SBA recognizes that small businesses in Low and 
Moderate Income markets suffer from inadequate access to 
capital, and has taken recent steps towards remedying that 
deficiency. In particular, as part of the Start-up America 
initiative, the SBA created the Impact Investment SBIC program 
(hereinafter, the ``Impact Program''), for the purpose of 
providing access to capital to small businesses located in 
rural areas or employing residents of Low and Moderate Income 
or economically distressed areas.

    Based on the most recent Annual Report from the Office of 
Investments \3\ only two Impact licenses had been issued. While 
part of the limited number of Impact licensees may be due to 
its relatively recent creation, we have analyzed its 
requirements and believe the way the licensing process is been 
implemented may be putting insurmountable obstacles to its 
long-term success. For instance, per the SBA, ``Impact 
Investment SBIC applicants must submit the same documents, 
follow the same process, and meet the same high standards as 
any applicant to the SBIC program'' \4\ In fact, based on our 
analysis of the application process, the Impact License has 
very few advantages over the regular license, while it imposes 
more restrictions. Paraphrasing a senior SBA manager, applying 
for an Impact License ``may save you a couple of months in the 
evaluation process, but it won't be evaluated any differently 
than a regular license''.
---------------------------------------------------------------------------
    \3\ Ibid., page 19.
    \4\ SBA's Memorandum on ``Start-Up America Impact Investment SBIC 
Initiative Policy Update'' Dated September 26, 2012. https://
docs.google.com/viewer?url=http://www.sba.gov/sites/default/files/
files/External%25201mpact%2520Memo%25202012-09-26%2520final.pdf

---------------------------------------------------------------------------
    SOP limitations to an expanded Impact License Program

    For an applicant in a LMI area, some SBA requirements make 
the approval of an SBIC license quite difficult. For instance, 
the track record requirement, as stated by the SBIC program, 
includes the following:

           ``The track record contains investments that 
        are analogous to the types of investments that are 
        proposed for the SBIC with regard to size, stage, 
        structure, sector, or any other key variables.

           The track record contains a meaningful 
        number of full, positive realizations that have been 
        achieved within the past ten years.

           The overall performance of the track record 
        is strong on an absolute and relative basis across 
        multiple investment cycles. (Emphasis added.)'' \5\
---------------------------------------------------------------------------
    \5\ SBIC pre-screening instructions: http://www.sba.gov/content/
pre-screening-instructions

    If there is no, or a very limited, PE ecosystem in a LMI 
market, meeting those requirements of a ten year record, and 
multiple investment cycles becomes quite difficult. In addition 
to track record, SBA considers the broader qualifications of 
---------------------------------------------------------------------------
the applicant's fund management team, including:

           ``At least two team members have track 
        records that meet the requirements discussed above.

           The team members have a history of working 
        together and form a cohesive unit. (Emphasis added.)'' 
        \6\
---------------------------------------------------------------------------
    \6\ Ibid.

    While in New York City, San Francisco or Boston, there is a 
much higher probability of applying as a team that has a 
history of working together, in LMI markets where deals are few 
and far apart, that requirement could be very difficult to 
attain. In essence, LMI markets are in the proverbial chicken-
and-egg situation, since there are very few PE firms with a 
long history, and track record working together, the ability to 
benefit from programs such as the Impact SBIC is quite limited. 
But it is precisely programs such as the Impact SBIC that could 
---------------------------------------------------------------------------
allow for those funds to be created and flourish.

    Finally, I would like to bring to your attention the role 
of the banking industry in LMI regions like Puerto Rico. Puerto 
Rico's local banks also have to meet the FDIC's community 
reinvestment regulations (CRA). In larger markets banks work 
and invest in SBIC funds, which in turn help them comply with 
CRA requirements. Unfortunately, in Puerto Rico and other LMI 
areas banks meet their CRA requirements through basic mortgage 
lending and thus feel no need to work, invest, or establish 
SBIC funds.

    Recommendations

    Our task force respectfully recommends four courses of 
action to address the imbalance in disadvantaged regions:

          1) Conduct an investigation on the reasons why the 
        SBIC licensing process has not been as successful in 
        economically disadvantage zones. The analysis should 
        have a specific focus on understanding zones that lack 
        a private equity ecosystem. The report should provide 
        solutions to correct this imbalance and promote small 
        businesses and private equity fund market development.

          2) Conduct a thorough review of the SOP, with the 
        intent of easing certain SBIC Impact License 
        requirements in economically underdeveloped regions, 
        including:

                  a. Ease the need to demonstrate a significant 
                and prolonged track record in LMIs where the 
                existing PE ecosystem is fairly underdeveloped.

                  b. Ease the team requirements to allow 
                partnerships to be created, even if they might 
                not have worked directly in the past

          3) Promote the creation of more SBICs in LMI areas 
        by:

                  a. Assigning a portion of the Impact 
                allocation, possibly via an RFP, to fund SBICs 
                in selected underserved regions within the next 
                18 months.

                  b. Establishing a mentoring system for SBIC 
                Impact License applicants, including training 
                and education programs, which would allow for 
                the creation of SBICs in underserved regions 
                within the next 18 months.

          4) The SBA should work with the FDIC to promote that 
        local banks in places like Puerto Rico and other LMI 
        areas invest in SBIC funds, by revising the CRA 
        requirements in a way that would provide incentives to 
        go beyond their current practice of solely investing in 
        mortgages to comply.

    Conclusion

    While the creation of the SBIC Impact License is a step in 
the right direction, we respectfully suggest that its licensing 
process be modified to allow for the development of investment 
ecosystems in areas that have not benefitted from adequate 
access to capital. Certainly, these modifications should be 
developed while safeguarding the resources of the agency and of 
taxpayers. Nevertheless, we are confident that the current 
Impact License requirements could be eased to allow for the 
creation of new and successful SBICs with safeguards that are 
better suited to markets with limited PE ecosystems.

    Thank you very much.

                                 
