[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
INVESTING IN SMALL BUSINESSES: THE SBIC PROGRAM
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HEARING
BEFORE THE
SUBCOMMITTEE ON AGRICULTURE, ENERGY, AND TRADE
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
NOVEMBER 7, 2017
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 115-046
Available via the GPO Website: www.fdsys.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
27-466 PDF WASHINGTON : 2018
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
TRENT KELLY, Mississippi
ROD BLUM, Iowa
JAMES COMER, Kentucky
JENNIFFER GONZALEZ-COLON, Puerto Rico
DON BACON, Nebraska
BRIAN FITZPATRICK, Pennsylvania
ROGER MARSHALL, Kansas
RALPH NORMAN, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
DWIGHT EVANS, Pennsylvania
STEPHANIE MURPHY, Florida
AL LAWSON, JR., Florida
YVETTE CLARK, New York
JUDY CHU, California
ALMA ADAMS, North Carolina
ADRIANO ESPAILLAT, New York
BRAD SCHNEIDER, Illinois
VACANT
Kevin Fitzpatrick, Majority Staff Director
Jan Oliver, Majority Deputy Staff Director and Chief Counsel
Adam Minehardt, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Rod Blum.................................................... 1
Hon. Brad Schneider.............................................. 2
WITNESSES
Mr. Brett Palmer, President, Small Business Investor Alliance,
Washington, DC................................................. 4
Mr. Thies Kolln, Partner, Aavin Private Equity, Cedar Rapids, IA. 5
Mr. Michael Painter, Managing Partner, Plexus Capital, Raleigh,
NC............................................................. 7
Mr. Mark L. Walsh, Managing Director, Ruxton Ventures, Chevy
Chase, MD...................................................... 9
APPENDIX
Prepared Statements:
Mr. Brett Palmer, President, Small Business Investor
Alliance, Washington, DC................................... 27
Mr. Thies Kolln, Partner, Aavin Private Equity, Cedar Rapids,
IA......................................................... 76
Mr. Michael Painter, Managing Partner, Plexus Capital,
Raleigh, NC................................................ 82
Mr. Mark L. Walsh, Managing Director, Ruxton Ventures, Chevy
Chase, MD.................................................. 87
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
INVESTING IN SMALL BUSINESSES: THE SBIC PROGRAM
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TUESDAY, NOVEMBER 7, 2017
House of Representatives,
Committee on Small Business,
Subcommittee on Agriculture, Energy, and Trade,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:03 a.m., in
Room 2360, Rayburn House Office Building, Hon. Rod Blum
[chairman of the Subcommittee] presiding.
Present: Representatives Blum, Chabot, Luetkemeyer, Comer,
Bacon, Schneider, and Lawson.
Chairman BLUM. Good morning. Thank you all for being here
with us today. I call this hearing to order.
Despite a downward trending unemployment rate and
increasing signs of business optimism, small firms continue to
face a rigid lending environment. Capital for the nation's
small businesses, entrepreneurs, and startups is the difference
between a Main Street company in my home State of Iowa turning
on their lights or closing up operations for good. It could be
the difference between making payroll and letting a great
employee go. And I have been there and had to do that, so truer
words cannot be spoken.
While large companies finance their projects through debt
and equity markets, small companies regularly utilize
traditional bank lending to finance their endeavors. As a way
to inject more equity into the small business ecosystem to
address the gap in long-term financing, the SBA created the
Small Business Investment Company program, also known as the
SBIC program, in 1958.
SBICs are for-profit entities that manage investment funds,
but are licensed and regulated by the SBA. Through this unique
structure, investors apply to receive an SBIC license which
provides the ability to leverage private dollars with federal
dollars for investments in high-growth small businesses.
This program is what we are here to talk about today.
This Committee has actively been studying the SBIC program
for years. We examined two SBIC bills in the spring, one
looking at the individual leverage limit and a second that
looked at the threshold level in which a financial institution
can invest in the SBIC. This program continues to be a topic of
interest for this Committee.
Today, we will hear from SBIC participants that can share
with us how this program is operating on the ground and how it
impacts communities around the nation.
I am looking forward to hearing more about the role SBA
plays in this program as well. From the issuance of leverage to
the licensing process, it is important to know how SBA
interacts with the SBICs.
Like many of SBA's financial programs, where the federal
government has a role, robust and thorough Congressional
oversight is required to ensure taxpayer money is safeguarded
and protected. This Committee strives to create an environment
where small businesses can flourish, and this program fits into
that formula.
I appreciate all of the witnesses being here today. I look
forward to your testimony.
And I now yield to Ranking Member Schneider for his opening
remarks.
Mr. SCHNEIDER. Thank you, Chairman Blum. Thank you for
calling this hearing. And I want to thank the witnesses for
joining us today.
Access to capital is essential for every business, but
especially for smaller ones. Without it, most firms cannot make
improvements, expand, or hire qualified works that they need to
succeed.
In 1958, Congress recognized the gap in the financial
markets for long-term funding for growth-oriented small
businesses and created the Small Business Investment Company
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 small businesses.
The SBIC program helps fill the gap in the capital markets
for businesses that have outgrown the SBA's flagship 7(a) loan
guarantee program but remain too small or high risk for the
private equity industry.
The key to the program's success is leveraging federal
funds to expand the amount of private capital invested in
promising small firms.
SBA provides funding to qualified SBICs with expertise in
certain sectors of the economy. SBICs then use their own funds
and leverage from SBA to invest in these small businesses.
Their actions have facilitated over 3 million jobs total and
nearly $6 billion per year of investment in domestic small
employers. To date, small business investment companies have
assisted thousands of high-growth businesses, providing over
$100 billion in capital.
In this Congress, the House passed two pieces of
legislation from this Committee that expand the SBIC program.
The Small Business Investment Opportunity Act of 2017 increases
the cap for the SBIC that manages just one company from $150
million to $175 million. And the Investing in Main Street Act
of 2017 increases the percentage of capital and surplus banks
and federal and savings associations can invest in an SBIC.
Both measures seek to increase the flow of much-needed capital
to small businesses.
Despite these efforts, more work needs to be done, in
particular to diversify the program. Greater access for women
and minority-owned funds would, in turn, increase the dollars
flowing to women and minority-owned small businesses.
Similarly, additional efforts to invest in rural small
businesses could spur economic growth in these areas.
During today's hearing, I look forward to hearing from our
witnesses on how we facilitate investment in our nation's
entrepreneurs and small businesses. And I thank them in advance
for their testimony.
Thank you, and I yield back.
Chairman BLUM. Thank you, Mr. Schneider.
I would like to explain the timing. You may all be aware of
how the lights work, but if not, I would like to take a second
to explain that.
You will have 5 minutes to deliver your testimony. The
light will start out as green. When you have 1 minute
remaining, the light will turn yellow. Finally, at the end of 5
minutes, it will turn red. And I ask that you try to adhere to
that time limit.
Also, if Committee members have an opening statement
prepared, I ask that they be submitted for the record.
And now I would like to introduce our distinguished
panelists there.
Our first witness is Brett Palmer. Mr. Palmer is the
President of the Small Businesses Investor Alliance, also known
as SBIA, an association that has a focus on the SBIC programs.
We need a few more acronyms here, don't we?
With over 9 years at SBIA, Mr. Palmer is well-versed in the
intricacies of the program. His previous experience includes
time on Capitol Hill and at the U.S. Department of Commerce.
I appreciate you being here with us today.
Our next witness is Thies Kolln. Mr. Kolln is a Partner at
AAVIN Private Equity in my home district of Cedar Rapids, Iowa.
Go Hawks.
Mr. Kolln has spent approximately 15 years at AAVIN, which
focuses on late-stage and expansion-stage financing. Prior to
AAVIN, Mr. Kolln spent time working for the Boston Consulting
Group in Chicago and on the startup management team at Orbitz.
He has also practiced corporate law at Kirkland & Ellis in
Chicago.
Thank you for joining us today. It is always great to hear
the perspective of a fellow Iowan.
Our next witness is Michael Painter. Mr. Painter is
Cofounder and the Managing Partner at Plexus Capital in
Raleigh, North Carolina, where they focus on middle market
business. Prior to cofounding Plexus Capital, he worked for RBC
Bank and investment firms in both New York and North Carolina.
It is a pleasure to have you with us today, Mr. Painter.
And I yield now to Ranking Member Schneider to introduce
the remaining witness.
Mr. SCHNEIDER. Thank you.
It is my honor to introduce Mr. Mark Walsh, the Managing
Director of Ruxton Ventures here in Washington, a Washington-
based private equity firm that invests in technology, media,
and education companies.
Prior to this position, Mr. Walsh served as SBA Associate
Administrator for the Office of Investment and Innovation. In
this role, he oversaw all SBIC, SBIR, Accelerator, Incubator,
and other growth activities at SBA and was appointed to key
committees at the Securities and Exchange Commission and
Department of the Treasury.
Before his government service, he had a 30-year career in
technology, media, venture capital, and angel investing. Mr.
Walsh is a graduate of Union College and received his MBA from
Harvard.
Welcome, Mr. Walsh.
Chairman BLUM. Thank you, Mr. Schneider.
I appreciate all of our witnesses being here today.
Mr. Palmer, you are recognized for 5 minutes. You may
begin.
STATEMENTS OF MR. BRETT PALMER, PRESIDENT, SMALL BUSINESS
INVESTOR ALLIANCE, WASHINGTON, DC; MR. THIES KOLLN, PARTNER,
AAVIN PRIVATE EQUITY, CEDAR RAPIDS, IA; MR. MICHAEL PAINTER,
MANAGING PARTNER, PLEXUS CAPITAL, RALEIGH, NC; AND MR. MARK L.
WALSH, MANAGING DIRECTOR, RUXTON VENTURES, CHEVY CHASE, MD
STATEMENT OF BRETT PALMER
Mr. PALMER. Thank you.
My name is Brett Palmer. I am president of the Small
Business Investor Alliance. I would like to thank the chairman,
Ranking Member Schneider, and Congressman Lawson for being here
today, and the rest of the members of the Subcommittee and the
staff. Thank you for giving us the opportunity to share what we
know about the SBIC program and small business investing and to
answer your questions about it.
The SBIA is a trade association of small business investors
that includes the SBIC industry. The goal of the SBIA is to
promote a healthy ecosystem system for small business
investing, one that benefits both small businesses and their
investors and thereby promoting economic growth and job
creation.
Small business investment companies have been around since
1958, and what was true in the 1950s will always be true: Small
businesses need external, patient capital to grow and thrive
and it is really hard to access that type of capital.
Debenture and non-levered SBICs have increased the amount
of small business investment capital, with almost $6 billion
invested in fiscal year 2016, the last year of which we have
full data. All SBIC investments must be used for domestic small
businesses with at least 25 percent going to even smaller
enterprises.
SBICs invest across a broad range of industries and across
a broad range of geographies. And actually I think Congressman
Lawson's district runs from the northern part of Florida, and
Mr. Kolln here actually, I think, is looking at an investment
that would connect that corridor from Tallahassee to
Jacksonville.
I will let you talk about that.
It is common to see investments in manufacturing in low and
moderate income areas via SBICs. And this industry and
geographic spread is important, because SBICs are often the
first institutional capital into small businesses, which
benefit from their capital but also from their professional
help in scaling up their business, professionalizing
themselves, and building up boards.
The program is having the best and lowest loss rate in its
59-year history, which is important, because taxpayer
protection is the highest priority for the SBIC industry. There
is currently unprecedented private sector interest in getting
capital into small businesses via SBIC funds, and the private
sector is the leading critical component to making the program
work effectively. It is a market-driven program.
A recent Library of Congress study found that SBIC-backed
businesses created 3 million new jobs over the course of their
study and 6.5 million jobs. That is a period that included the
Great Recession and the tech bubble busting.
The study was performed with researchers from Duke's and
Pepperdine's business school and they found that debenture-
backed SBICs created, on average, about 125 new jobs and non-
levered, more equity-oriented SBIC investors created over 530
new jobs per small business receiving investment, which is
pretty big numbers. Those are not uniform across every small
business but the average.
Between these two types of investments, over 7 percent of
net new jobs in the United States came from SBIC-backed
businesses. That is an extraordinary number for a little known
program, but that is what the program is supposed to do.
These quiet successes were achieved while the debenture
program was one of the only major SBA programs that was able to
maintain a zero subsidy rate, which matters. Again, this covers
the period of the Great Recession and the tech bubble bursting
for the debenture program. And with the help of Congress and
the SBA, there has been significant operation reforms made over
the past 8 years or so and have been producing the positive
results that you have sought.
With this program having a great track record, there are
always areas for improvement that could be made both by the
private sector, on our side, as well from the government,
because there are many more communities that would benefit from
having access to this type of capital. With private capital
investment at record highs, we would like to see that spread
across more of the country, to more communities, to more
businesses, across more sectors, because there has been good
stuff that has occurred, but more certainly can and should be
done.
And with that, I would like to take a moment to thank the
Committee for passing those two bills that were mentioned
before. They are simple, commonsense bills that will help get
more capital out there to these worthy small businesses.
And with that, thank you for your time.
Chairman BLUM. Thank you, Mr. Palmer.
Mr. Kolln, you are recognized for 5 minutes.
STATEMENT OF THIES KOLLN
Mr. KOLLN. Thank you. Thank you, Chairman Blum, Ranking
Member Schneider, and Member Lawson, for the opportunity to
testify here today and for holding this hearing.
Access to capital is a tremendously important issue for
small businesses across the country, and the SBIC program
effectively helps to resolve that issue. I am eager to provide
you with my perspective as an SBIC fund manager and also a past
member of the SBIA board.
My name is Thies Kolln, and I am a partner of AAVIN Private
Equity, a private equity firm based in the heart of the
Midwest. Our central office is in Cedar Rapids, Iowa. We have,
at the time, two regional offices, in Madison, Wisconsin, and
in Kansas City, and cover our Midwest footprint through those.
I joined AAVIN in 2002, so I have been there for 15 years now,
and it was a return to my home city of Cedar Rapids.
At AAVIN we stay true to our roots by focusing on helping
small regionally based businesses grow. We specialize in late-
stage and expansion-stage financings, and we partner with
strong management teams that seek long-term business growth.
Our focus is on smaller investment opportunities, and they are
concentrated mostly in the upper Midwest States, such as Iowa
and surrounding States, although we do invest nationally.
And as Brett mentioned, we have one company now that we
invested in about a year ago THAT is based in Jacksonville and
recently acquired another company to help it expand into
Tallahassee. So we are covering the northern Florida market
with that. It is a company that does precast concrete for road
expansions and culverts and wastewater management mainly.
We have extensive private equity experience. There are
seven members of our investment team. We have made investments
in over 300 companies throughout our careers. Through our
firm's history, just in Iowa, we have helped deploy $34 million
in capital that helped create or sustain over 6,000 jobs. Those
numbers may not mean a lot in a place like Manhattan, but they
do for Iowa. These investments produce great growth for small
businesses, as well as returns for our investment partners,
which includes repayment in full to SBA and the American
taxpayer.
I have got some more detail in my written testimony, but I
will outline a little bit about the SBIC program. It has a
rigorous licensing process for prospective funds, which ensures
taxpayer protection and safeguards the program's reputation.
One requirement for licensing is that management teams have
extensive prior investment experience and good investment track
records.
We meet that demand. Our firm's experience dates back to
the start of the SBIC program in 1959, and we have basically
over 40 years of continuous SBIC management experience in our
firm.
Repeat licensing like this is a good thing as it
demonstrates to prospective small business partners our
previous fund successes, our commitment to serving this
undercapitalized market, and demonstrates to the taxpayer that
we are good stewards of tax dollars. We have a history of on-
time payments to SBA and overall compliance, with clean
examinations without findings.
We strongly support the SBIC program because it provides
the opportunities to supplement our capital with up to two
times more capital to deploy to small businesses to support
their growth.
Given the increase in concentration of capital among large
funds and institutions, it is difficult to find capital with a
dedicated strategy of investing in small businesses and in
small funds. And it is questionable whether many of the small
funds like AAVIN could even continue to fund small businesses
if it were not for the SBIC program.
We are often the first providers of institutional capital
into small businesses. We help professionalize small businesses
and make sure they have fundamentally solid operations and
partner with strong management teams to do so.
I will give a little bit of a history or a little bit of
some stories about some of our investments. We have made over
26 investments in Iowa. Our most recent was just completed last
month in Happy Joe's Pizza & Ice Cream.
I am sure you are familiar with that, Mr. Blum.
Chairman BLUM. Absolutely.
Mr. KOLLN. It is a family-run pizza parlor chain that was
founded in 1972. It has 54 locations across Iowa and other
Midwestern States. We have already hired additional people to
help it on a growth strategy and are right now looking at
additional locations to grow out the operations.
Chairman BLUM. [Inaudible]
Mr. KOLLN. He is still involved in it, yes. He is part of
the management team now. Well, Joe is retired. His son Larry is
still involved.
So that is just an example of our investing in Iowa. And
without the SBIC program we would not have had our successful
history of deploying growth capital to American small business.
The SBIC program has effectively helped us leverage our private
capital that we are able to raise and invest in small
businesses.
Thank you for holding this hearing. And I encourage the
Committee and this Congress to continue to fully support the
program so it may expand, support more domestic small
businesses, and create even more American jobs. I look forward
to answering any questions you may have.
Chairman BLUM. Thank you, Mr. Kolln. Let the record reflect
that Happy Joe's Pizza has some pretty darn good taco pizza.
Love it.
Mr. Painter, you are now recognized for 5 minutes.
STATEMENT OF MICHAEL PAINTER
Mr. PAINTER. Thank you, Chairman Blum, Ranking Member
Schneider, and Mr. Lawson for having us here today.
So I have been involved in the SBIC program for over 20
years. My partners and I used to work at a small regional bank
in North Carolina called Centura Bank, and we had a fund that
served to provide the growth capital that went beyond what the
traditional bank could provide. And in 2004 we have been out on
our own and formed our first independent SBIC, and we have now
invested in 87 companies that employ collectively thousands of
people.
So we have made a big impact, and we are one example of
many SBIC managers across the country who are making similar
impacts.
My message today is really about three things. One, this is
the most impactful and best example of a public-private
partnership that I know of. Second, it is a program that
supports a perpetually underserved area of the market. And
third, it is impacting real lives. It is easy to talk about our
program and our business in numbers and returns. It is
ultimately about real people, real companies, real communities,
and impacting lives and families.
As far as a program, public-private partnership that makes
sense, I think the key here that I know you all understand, but
I hope more people on the Committee and in Congress understand,
is that all of the dollars that we raise from the private
markets are at risk first, ahead of any Federal guarantees.
That is a critical part of the program and why it has been so
successful.
So in our case, we have 56 banks, 130 individuals, 18
family offices, and 9 institutions that have invested $475
million with us. That all is there protecting Federal
guarantees. So our dollars would be lost first, before the
Federal guarantees would be hit. So that is a big
differentiator in the public-private partnership world.
I also think you have a staff that has been there for a
long time that is driven by the purpose of the program. They
are motivated by the purpose and the impact of the program,
which is measurable and meaningful. And we have 50 years-plus
of success in this program. So I don't know of any other
public-private partnership that has had that level of success.
We also support a perpetually underserved area of the
market. There are over 100,000 small businesses in the United
States that have $10-$100 million in sales. Roughly half of
those are owned by somebody over the age of 40.
So you have this big portion of the market, roughly $2
trillion of value, that has to transition to the next
generation of owner-operators. Public companies have ready
access to the public markets to effect those transitions each
and every day. The private markets don't have that luxury,
particularly at the small end of the market.
I have been in this market for 20-plus years. It is
perpetually underserved. You have fund managers that come into
our market, they have success, and they go up market, because
it is easier to do 10 deals and grow by doing 10 bigger deals
than it is to do 10 deals, then 20 deals. It takes a lot of
fixed cost. We look at 100 opportunities to invest in 1.
So to really provide capital to small businesses, you have
to be committed to building a real business and putting
infrastructure in place, and that is not possible without the
SBA program.
And back to the real driver of this. We do impact real
lives. And I think telling stories about those lives is a good
way to visualize it for me. We have got a company, design shop,
in Orlando, Florida. This is Doug and Sherri Hughes, husband
and wife, started this company in 2000, and they serve the
trade show market. So they help companies prepare the materials
they need for trade shows and they now employ 50 people.
So husband and wife, 2000, start a business that now
employs 50 people, impacting their families, not just those 50
people, and their community.
Another example is Huseby in Charlotte, started by Scott
Huseby. He is a third-generation court reporter, comes from a
long line of court reporters. Saw a need to professionalize
this industry. He now employees 50 people at Huseby, and, more
importantly, he engages with over 1,800 court reporters across
the country to provide a steadier flow of business to people
all over the country.
So I look forward to taking questions about the program. I
care a lot about the program and about the purpose. It is an
impactful program. And I think the more stories that get out
there about the people behind it, the more support there will
be for it.
Thank you for having us.
Chairman BLUM. Thank you, Mr. Painter.
I now recognize Mr. Walsh, a former venture capitalist, for
5 minutes.
STATEMENT OF MARK L. WALSH
Mr. WALSH. Thank you.
Good morning. My name is Mark Walsh. And from late 2015
until January 19 of this year, I ran the Office of Investment
and Innovation, OII, or as we call it, Oy, at the SBA here in
Washington, D.C. My area oversaw, as was said, all SBIC, SBIR,
and Incubator, Accelerator programs. It was my first job in
government.
Before that, for 35 years or more, I had a career in
technology, the internet, and media with senior or C-Suite
positions at a wide variety of companies, including America
Online, GE, HBO, VerticalNet, and more.
For the last 17 years, I have been an active angel investor
and venture investor for a wide variety of startups and have
served on the board of directors for many of those companies
and other high-growth venture-backed entities. I have also
served as chairman of the Bipartisan Policy Center here in
Washington, D.C., the best think tank in town, in my personal
opinion.
The SBIC program is one of the most innovative, financially
successful, and well-structured government programs in
existence, period, close quote. But I left the program almost
10 months ago, and some recollections and remembrances are
dimmed by time. Also, my opinions are my own and are not meant
to reflect anyone else's or any other agenda.
As was said, the SBIC program takes low-interest debt and
provides it to professionally managed domestic venture capital
and private equity funds. These funds need an SBIC license to
get the investment.
The license application and approval process is super
rigorous and helps avoid mismanaged or ill-targeted funds from
receiving taxpayer dollars.
Further, a licensee reports all significant investment
activities to the OII on a regular quarterly basis, and there
are annual on-site inspections by OII trained teammates.
In short, OII is as vigilant an investor as any in the
private market, if not more so. However, as we all know,
investment entails risk, so OII also has a trained team of
workout experts who help funds that ran array of financial
health and, in some cases, assumed ownership and control of
failed funds and disposed of the assets at admirable salvage
valuations. But make no mistake: The amount of unrecoverable
investment was minuscule and was the envy of the private
sector.
The SBIC program is a fabulous example of a public-private
partnership, as was mentioned by my colleagues. My colleagues
in the organization and teammates were as motivated, talented,
and professional as any I have worked with in my private sector
career. Some of them are here today. And I enjoyed my all-too-
short stint immensely.
But I was asked here to address some ways to improve the
SBIC program. Nothing is perfect, and there are a few areas I
would like to address if I were still in charge.
Number one, outreach. We made extraordinary progress during
my time in discovering new funds and new types of funds and in
meeting and engaging more diverse fund managers--gender,
demographic, geographic, and market-focused diversity--more
than prior efforts. This happened because my teammates and I
made it a priority, and I would encourage the Committee to make
sure the program pursues that with vigor.
Second, promote and award certain types of funds. Impact
funds, which are aimed at social, environmental, educational,
or institutional improvement, as opposed to pure profit, are
important. The program should be more able to encourage impact
funds with lower interest rates, more attractive payback
options, or even faster application processing.
And speaking of that, number three, streamlining the
license process. I am sure you guys would agree that. The
amount of paperwork expected of a license applicant and license
holder is heavy. OII and the program should continue their
efforts to use available technologies to streamline these
processes.
Fourth, equity ownership. OII should have the ability to
receive a small amount of equity in the companies its capital
invest in. SBICs have held debt stakes in many iconic
companies. For instance, an SBIC in 1977 held over 4 percent
ownership in a small technology company called Apple. Imagine
if we had that 4 percent ownership stake today. OII should
continue efforts to create ownership upside for American
taxpayers through this program with equity ownership.
Fifth, more private sector partnerships. During my stint,
teammates and I created a wonderful board diversity initiative
called ONBoard, the Open Network for Board Diversity, with a
partner, LinkedIn, the professional social network. There are
many innovative private sector companies who would be partners
in new opportunities that OII should be freer to pursue.
And, lastly, networking opportunities between funds and
companies. OII is a natural clearinghouse for a wide variety of
data it collects about its funds and the companies that it
invests in, as you heard from my colleagues to my left. It
should have, in my opinion, more open access to the data for
industry observers, companies, funds, and analysts.
To conclude, there are improvements and opportunities that
I could detail beyond that, but these are some that I saw that
had great potential when I was at the agency.
And lastly, let me also mention the SBIA, or Small Business
Investor Alliance. They are the industry association focused on
the SBIC marketplace, as you heard Brett Palmer, their CEO,
testify a moment ago. Their staff, management, members, and
board were very helpful to me as I learned the program, and
they were great partners for our initiatives. I can't thank
them enough for their productive role in the ongoing success of
the SBIC program.
Thank you for inviting me today. And now I and my
colleagues are ready to help with any questions and comments
you may have.
Chairman BLUM. Thank you, Mr. Walsh.
Due to Ranking Member Schneider's tight time schedule, I
will reserve my time until the end. And I will now recognize
Mr. Schneider for 5 minutes of questions.
Mr. SCHNEIDER. Thank you.
And, again, I want to thank all of the witnesses for being
here and sharing your experience and your perspectives on a
program that clearly is making a difference in communities
across the country, in particular in the heartland, and we need
to continue to do that.
I just want to take the opportunity to touch on one issue.
I think one added value of the SBIC program is the leverage it
provides, the ability to work with public-private partnership.
But I know from experience, I know from your submitted
testimony, that there are many other added-value aspects to
this. For example, the involvement of the SBIC lenders with the
portfolio companies. I would like to open it up and have you
touch on some of those additional benefits that are provided to
your portfolio companies.
Mr. PALMER. Let me start.
It is important, because this isn't just money. You are
getting actual expertise. And I hear it all time from our
members. We actually have recently partnered with Ohio State,
their business school. There is something called the National
Center for the Middle Market that GE Capital funded to train
their portfolio companies. Well, GE Capital got broken up and
went six ways to Sunday around the world. It got complicated.
But they still had this training platform there.
We have now partnered with Ohio State, and actually today
one of these trainings sessions is going on, where portfolio
companies of SBICs are able to attend, and it is a platform for
training them how to scale up their business, how to attract
talent, how to retain talent, how to really grow their business
and scale up in a professional, organized way. And that is
something that we are doing and in a really concise, organized,
dedicated feature just for SBIC-backed businesses. And that is
going well. That is one example of one of the things that we
are doing.
Mr. PAINTER. I think that is a really important example.
The small businesses we invest in, they don't need to invent
new strategy. I mean, they know how to run their business, they
know how to manufacture their product or deliver their service.
What they haven't done before is scale that business. So
they need tools to learn how to do that. It is basic stuff,
basic blocking and tackling. We actually have four of our
operating company professionals at the Ohio State event this
week, and we have two of our internal people there so that we
can help learn ourselves better how to train our other
companies.
And that is one thing we are focused on, is we have right
now one full-time operating partner, so somebody who has run a
small business that is now working with four of our companies
to help them with their growth and putting in the frameworks
that are needed to help grow a business. And we are committed
to growing that platform.
That is a key point, that it is not money. The money is
important. That is the driver of us coming in. But we also have
to provide more value than just dollars to make an impact.
Mr. SCHNEIDER. Mr. Kolln.
Mr. KOLLN. And we are, as a small fund, and even by SBIC
standards a small fund, we are almost always the first
institutional capital, the first, other than family money, that
has been in the businesses that we invest in. Sometimes they
have never even had a bank loan before.
So it really is the first kind of outside capital, outside
advisors, outside board members that they take on in these
businesses, and it is a big step toward professionalizing them.
And one of the key things we do is help them add the management
talent and complete the management team that is there to help
run and grow the business.
Mr. SCHNEIDER. Mr. Walsh, as you go, as you give your
answer, also touch on how to try to expand the outreach to more
minorities and women-owned businesses.
Mr. WALSH. Fair enough. If I just might say, if you read
the press, it seems like all this money is going to, like, hip
companies in Silicon Valley and for the next Snapchat or
whatever. But, in fact, the gentlemen to my left and the men
and women who work with them are on the front line of
entrepreneurship. These are first-time investors in the lunch
bucket companies that make this Nation great. These are
companies that aren't that sexy in many cases, but they are the
people and the places that employ people sustainably. So that
is my answer to the first part.
To the second part of your question, it really ended up
being just going out there and shaking the tin cup. I mean, my
colleagues and I, during my stint, literally went to every
conference, every gathering, ads in newsletters, met folks like
the men to my left and other men and women, and just tried to
reach out to gender and racially diverse fund management. And
more importantly, tried to exhort and encourage those funds to
find companies that were owned and operated by diverse
management teams.
And a final point. This ONBoard initiative that I mentioned
was a way to get diverse directors into those private
companies, because a lot of times these companies had a board
of directors that all the last name, because they are a family-
owned company. So when they were trying to expand the expertise
of their board of directors, we would tell them to search our
area on LinkedIn for the resumes of domain expertise people
with diverse backgrounds and gender diverse and racially
diverse elements to bring those people on the boards of
directors.
Mr. SCHNEIDER. I think that is important. Oftentimes, these
companies have their board meetings when they shave. And so it
is important to expand that.
Mr. PALMER. Actually, one thing I would like to add to
that, Mr. Schneider, if it is all right, is we have tried very
hard to do that, and there is more to be done. Over the course
of 9 years, our chair of the board, four of our nine chairs of
the board, are women. In the private equity industry that is
unheard of. That is not 50 percent, but it is progress. There
is some more to be done.
And Mark, who did a fantastic job when he was running the
program, did push that, and more can be done. I think one of
the barriers, too, as far as the fund manager side is new funds
coming in, it is a risk to go through this regulatory process
that really is the size of a telephone book with hundreds of
thousands of dollars of expense. You want to make sure you can
get through it.
And so it is reputational risk, it is personal financial
risk. Having some clarity as far as what that is and getting
that streamlined would really benefit getting a broader range
of gender, race, and geography from where we don't have it now.
Mr. SCHNEIDER. Great. Thank you. And my time has long
expired, but thank you for your answers.
I yield back.
Chairman BLUM. Thank you, Mr. Schneider.
I will now recognize myself for 5 minutes.
Mr. Walsh, I did the mental math. I think 4 percent of
Apple today would be about $40 billion that we would have.
Mr. WALSH. I think a tad less, but it is a heck of a lot of
money, Mr. Chairman.
Chairman BLUM. I will take a tad of 40 billion.
Mr. Palmer, I think you mentioned in your testimony that we
are experiencing our best loss rates ever. What are those loss
rates? I was on a billion-dollar bank board for 15 years and I
was Chairman of the Director's Credit Committee. So if our loan
loss ratio ever got really low, sometimes we would ask: Are we
taking enough risk or taking enough chances in loaning money?
Could you address both?
Mr. PALMER. That is an excellent question.
The losses are the lowest, and the program has run at zero
subsidy for a long time, and that is good, ever since Congress
reformed that back in the 1990s. It is a mark of industry pride
that has been able to maintain that zero subsidy, we want to
take that case.
The measure that shows up as far as the losses is annual
charge. The SBA charges a fee on the leverage as a calculation
to offset what they think the loss history has been. It is now
down to 22 basis points on top of the leverage.
Frankly, there is a little bit of industry concern that
that maybe is too low, one, from a loss side; but, two, also
making sure--look, everyone likes low fees, but we want to make
sure we are maintaining that zero subsidy rate.
And so that 22 basis points which is calculated is low, and
that is fine, but that is assuming that things are going to
keep going the way they are now, which is great guns. So maybe
we want to take a look at relooking at that fee and maybe
setting a floor on that fee so that there is always enough of a
cushion in the future to maintain a zero subsidy rate.
But the investments themselves, because of the private
capital being the first loss position, you have to lose all
your own money first before the taxpayer money is exposed,
which is different from 7(a) and 504. It really does align
things in a good way as far as making good decisions and makes
it hard to lose money. It is not that it is not possible. You
can do it. People have risen to that challenge.
Chairman BLUM. Including the federal government.
Mr. PALMER. Including the Federal Government.
Quite, frankly, this is a case study in the Federal
Government working. And that doesn't get much attention too
often. But this really--it really is.
And so the loss rates are very low. They could do more
risk, frankly. One of the things that they did was cleaning up
the licensing program to minimize risk in 2008--2009, 2010,
really, which was really helpful in filling this massive
capital void that existed back then.
But at the same time, we ought to be taking a look smaller
funds. It is harder to get a big fund in a smaller State, Rocky
Mountain West and others, and the smaller funds are riskier. So
maybe the program does need to look at allowing some smaller
funds to more rural areas, smaller cities, to facilitate their
market where a $200 million fund might be too big.
But having funds in Boise or in Portland or in Colorado,
there are no SBIC funds in Colorado. I mean, that is a pretty
big State. There are investments there. But we need to get more
smaller funds out to some of these smaller cities and smaller
towns across the country.
Chairman BLUM. Thank you.
Mr. Kolln, a lot of Members on this Committee represent
rural areas. I am one of them. You are from my district. Can
you talk to me a little bit about the challenges, if there are
unique challenges, I assume so, in rural district, rural
lending, rural startups versus urban areas?
Mr. KOLLN. The biggest challenges in rural areas are just
that you don't have the concentration of companies. You don't
have as many companies. You don't have as many managers to hire
to start companies and to help grow companies. So it is really
the challenges are finding businesses, finding enough
businesses to make a fund work.
And that is why, as Mr. Palmer mentioned, we run a smaller
fund. And I think you have to be willing to run smaller funds.
And the SBIC program is a great way to do that to be able to
invest in these smaller areas.
But the challenges are finding the businesses and finding
talent and to help the companies grow.
Chairman BLUM. Thank you. My time is about expired. I have
more questions, so I will do it in a second round of
questioning.
I would now like to recognize the Ranking Member of the
Subcommittee on Health and Technology, my colleague from
Florida, Mr. Lawson, for 5 minutes.
Mr. LAWSON. Thank you very much, Mr. Chairman.
And thank you all for being here.
And I am real happy to see the collaboration between
Tallahassee and Jacksonville. It is quite interesting.
Districts separated by 200 miles.
But recently, in the last couple of months, we have had
women-owned businesses before the Committee, and minorities,
women before the Committee. And the staff has told us that
women-owned businesses are the fastest growing businesses in
America. But each one of those groups came in, and they
complained about access to capital.
And I was wondering, just listening to the testimony this
morning, it would appear that there must be some other factors
involved other than the business people coming in saying they
need access to capital, how they had to go to uncles, aunt,
grandparents, and so forth. I thought maybe you could share
some light on why this exists.
And I will tell you the reason why. In 1978, when I left
coaching at Florida State, and I spent some time in Iowa,
University of Iowa, needing just $10,000, and going from place
to place trying to get those $10,000 to go into business. That
was 39 years ago. Today, I don't think that should be an issue
for most people, even though I was able to eventually get it.
And so what is going on? I don't want to talk too much
because I got some other questions to ask. But what is going on
about access to capital for women and minorities today, Mr.
Palmer?
Mr. PALMER. There are challenges for all small businesses.
They are particularly acute for women and minorities, no
question about it. And if you look at the numbers, that bears
it out.
It varies on a number of ways. The SBA, I am not an expert
in all of SBA's program, but you are talking about $10,000-type
sizes, they have a micro loan program that serves that. That is
sort of below the scale of where the SBICs are. Most of the
SBICs are generally investing in businesses with a million
dollars or more. So, I mean, every small business would love a
million dollars or more. But some of them can't absorb it yet.
I think some of it is not knowing who to reach out to, sort
of the human circles associated with this. And this goes to
Mark's comment about reaching out. Reaching out to a broader
array of small businesses in communities. The SBA needs to get
out there. The fund managers need to get out there and do more.
There was actually a hearing on the Senate side on this
issue a couple weeks ago, and one of the things they mentioned,
which is a true problem, which is if a small business is women
owned or minority owned, in many cases they can lose that
classification if they get institutional investment into them,
which doesn't help them. Many of them are accessing government
contracts and things, and most of the investments aren't in
government-contract related businesses.
But that is an unintended consequence for accepting outside
capital that is designed to help them to fulfill a capital
access gap, and now they are being sort of hurt by it. So there
is some tweaks that could be made to address some issues like
that.
Does that change the underlying issue? No. I think the
biggest thing is just getting out there and beating the bushes,
more to Mark's statement. And Mark has really been committed to
this, to do more of it.
The chair of our board, her fund, by design, invests more
than half of her fund, it is called Ironwood Capital in
Connecticut, in women and minority and low income areas. So it
can be and is done, but it isn't done universally.
Mr. LAWSON. And Mr. Walsh, you stated that in Washington,
D.C., you say that this is one of the best advocates for
businesses and stuff, than anyplace else.
How did this compare with--and I know I don't have much
time--but minority and women-owned business access to capital
that you observe on the research that you all are involved in?
Mr. WALSH. Well, it is one of these questions that is
always worth pursuing as vigorously as possible, because it is
not only a question, it is a mandate. It is a proven fact that
corporations that have diverse boards of directors, gender and
racial diversity, perform better, their stock price performs
better than companies that don't. So to not have a diverse
board of directors and a diverse outlook is actually hurting
your shareholders.
But to get to access to capital, investors look at risk.
They look at the risk of where they are going to put their
dollars and what the outcome will be. And the challenge that we
saw in SBIC, to some extent, but also the SBA, for these women-
owned businesses and minority-owned businesses, is that they
needed to be better, bluntly, at describing their risk and
their ability to scale up. Because an investor wants to see a
company that will scale up and increase in size, have more
employees, grow revenue.
So the SBA has done a good job, but I think we can never
rest on any laurels in helping those companies build their
business plan, describe what they do, and help make the case to
investors that they can grow and scale, because otherwise why
would they would take investment and why would an investor
write a check?
So there are some women-owned venture capital firms, there
are some minority-aimed venture capital firms that chase deals
that are--companies that are run by minorities or women
management teams. I think we can never have enough of those,
and I think the SBIC program actually encourages more of those
than currently exist, and that is why the public-public
partnership element is so key.
Mr. LAWSON. Okay. With that, Mr. Chairman, I yield back.
Chairman BLUM. Thank you, Mr. Lawson.
What kind of a year is Florida State basketball going to
have this year?
Mr. LAWSON. They should be great. We didn't do well right
now in football, but I am looking forward to them doing better
this year.
Chairman BLUM. Thank you very much.
I would now like to recognize my colleague from Kentucky,
Mr. Comer, for 5 minutes.
Mr. COMER. Well, thank you, Mr. Chairman.
My first question is for Mr. Painter. Are the regulations
that SBA has in place to oversee the SBIC program working? And
are they sufficient for the size of the program?
Mr. PAINTER. So I think if you go back to 2009, there were
roughly 315 SBICs. Today there are roughly 315 SBICs. And there
has been a shift in terms of the number of debenture SBICs.
I do think there is adequate oversight. I think there are
some fixes that can be made with us working with SBA on some
just practical changes in the licensing process and oversight
process where you have some well-intentioned standard operating
procedures that have unintended impacts.
As an example, we close roughly one new investment per
month. And just because of the way licensing is set up, we
would have been in perpetual standstill and not able to get
licensed if we didn't get a special waiver in the licensing
process, because when you make a new investment, you have to
refile your application. So by definition, we would have just
been perpetually filing every month.
Some I think there are some commonsense changes that can be
made within the standard operating procedures that can really
help improve the efficiency and oversight.
Mr. COMER. Okay.
Mr. Walsh, you described the licensing process and the
amount of paperwork as being heavy. Are there improvements that
can be made in the program to address the concern and the
bureaucracy?
Mr. WALSH. So as I mentioned in my testimony, it was my
first job in government, and I was shocked, shocked, I tell
you, to find that there is a lot of paperwork in government.
Mr. COMER. Me too.
Mr. WALSH. So it is said.
I think the organization has made progress in allowing
these documents to be digital so that the access is able to be
granted to specific sets of the applicant and other parts of
the SBIC team. So digitizing all the documents actually is step
A.
Step B is making those documents standardized across
various elements. I mean, you just heard an example where a
fund is asked to start the cycle over every single time.
So I know this sounds maybe too simplistic, but having what
they call data rooms, where digital access to the types of data
and having the actual forms that you fill out be digitized, so
you can fill them out online, track them online, you the
applicant, and then the folks at the SBIC program, that, I
think, would go a long, long way to shrinking the amount of
time and effort and paperwork to getting approved.
Mr. COMER. So how does the SBA interact with the SBICs with
respect to the licensing process? Beyond licensing, how do they
work together?
Mr. WALSH. Well, the licensing process can take anywhere
from 3 to more than 3 months. It is typically around 8 or 9
months, I think, was the average when I was there, to get
approved. Then the fund has access to our capital. Every month
or, as was mentioned, every quarter, they put a full report out
of what they have done. And then at least once every 2 years,
typically every year, we have an on-site visit by one of our
analysts, physically visit the offices and make sure they are
for real.
I think our oversight is about as good as anybody in the
private sector. You heard earlier, I am not sure if you were in
the room, about the loss ratio being so low. I think that the
teammates that I had when I was there were about as careful as
I have ever seen, and I spent a lot of time in the private
sector.
So I am not sure it needs a lot of tweaking. In fact, I
think we might even see gearing back a little bit because the
loss ratio is so low.
Mr. COMER. Okay. Thank you.
Mr. Chairman, I yield back.
Chairman BLUM. Thank you, Mr. Comer.
I now like to recognize the Vice Chairman of the full
Committee, my colleague from Missouri, Mr. Luetkemeyer, for 5
minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. Great to be with
you.
I am just kind of curious. I am kind of familiar with
SBICs, but I was reading here in some of the information about
it that SBIC invests in established businesses using a
debenture SBIC to fund expansion.
Can you explain that, how that works?
Mr. PALMER. Sure.
Mr. LUETKEMEYER. Debenture is not a loan. It is more like a
security.
Mr. PALMER. Yeah. Well, the way the program works, the
leverage is at the fund level. So the SBIC raises, say, just
make the numbers easy, $50 million. It goes through a licensing
process. It then can access this credit facility through the
Federal Home Loan Bank of Chicago, a temporary basis. And then
every 6 months they take all of this credit facility, all the
money, all the obligations that have made to the credit
facility, they get pulled together, securitized, and sold into
a trust, and the government guarantees that. And that is where
those debenture are.
The form the capital goes to the actual small business can
go in several--can come in several different varieties. It can
be straight equity, it can be debt, it can be convertible debt,
it can be all sorts of all different structures in there, some
of which are recourse, some of which are not. But that is the
basic gist of the debenture.
Mr. LUETKEMEYER. Because you are taking, really, a first
dollar in in a lot of risky investments here, what kind of loss
ratio do you experience with SBICs?
Mr. PALMER. The way it is structured, unlike the 7(a) and
the 504 program where there is a loss sharing in the first
dollar loss, all the private capital is lost before the
taxpayer money is exposed, and there is ongoing review of the
portfolio both on a quarterly basis as well as on an every
investment basis as well as on an annual basis to make sure
that if the fund is going sideways the SBA does have the
capacity to cut off further access to leverage or if there is
regulatory noncompliance.
So the losses are very, very minimal. And actually the
program is actually run to zero subsidiary because of the fees
associated with the program since the late 1990s when Congress
reformed all the SBA programs. It is actually the lowest loss
ratio they have had in the 59-year history of the program.
And there is an annual charge that they add to the SBA
charges on the leverage that is now only down to 22 basis
points. The historical low on that was 28 basis points, and the
historical norm is closer to 70 basis points. So it is really,
really low, maybe even too low of a loss rate.
Mr. LUETKEMEYER. Well, that was going to be my next
question, is I see here with Mr. Kolln, he says something about
AAVIN received between 500 and 1,000 inquiries a year, yet only
finances roughly four to six small businesses a year. So if we
don't experience any losses, are we really taking any chances?
And we only have four out of six of 1,000 inquiries that are
financed.
Can you explain that to me?
Mr. KOLLN. Well, I think that is due to two things. One is
we get a lot of inquiries. A lot of them are not necessarily
ones that match what we are trying to do.
Mr. LUETKEMEYER. What are you trying to do?
Mr. KOLLN. Or what we can do. They may be looking for a lot
more money than we can provide. Or they may be--there are some
businesses, if they are looking for not enough, too small an
amount of money, it becomes difficult for us to do. Or the
company doesn't have the growth prospects that we are looking
for.
So we can't invest in every business that comes our way,
and we physically only have so many partners and so much time.
And once we get involved in the businesses, we are very
involved with the management teams and counseling them and
working with them. So we are just limited in the amount of
businesses that we can invest in.
Mr. PALMER. And just so I was clear on that, I was talking
about the loss to the taxpayer. That doesn't mean, necessarily,
it is private sector losses. I mean, there are losses, too,
where businesses are invested in and there is private capital
that is lost.
So, yes, that does happen and it is common. It is not
pervasive, obviously, but it certainly does happen regularly.
Mr. PAINTER. Well, the average loss rate at the fund level
would be you are going to lose on roughly 5 to 10 percent of
what you invest in. So not lose all of it, but on 5 to 10
percent of what you invest in, you will have some amount of
loss on that.
Mr. KOLLN. And that is consistent with our experience as
well.
Mr. LUETKEMEYER. Mr. Kolln, you are advancing funds here.
Are you taking an active management role in these countries or
an equity part in these companies, or are you just like a bank,
just loaning money to them and kind of watching them from the
sidelines?
Mr. KOLLN. It is typically a combination of debt and
equity. And we are always involved at kind of an active board
level with the companies. So we are not day-to-day operators.
We back and partner with management teams. But we are active
board members helping them with strategy, financing, treasury
functions, and kind of overall----
Mr. LUETKEMEYER. You are like a venture capitalist where
you will have somebody on the board?
Mr. KOLLN. Yes.
Mr. LUETKEMEYER. Okay. Very good.
I see my time has expired. Thank you, Mr. Chairman.
Chairman BLUM. Thank you, Mr. Luetkemeyer.
The Chairman of our full Committee just arrived.
Would the Chairman like to question? I can give you a
couple minutes if you will like.
Mr. CHABOT. I will see.
Chairman BLUM. We will begin now our second round of
questioning, and I would like to recognize my colleague from
Florida, Mr. Lawson.
Mr. LAWSON. Okay. Thank you, Mr. Chairman.
I don't have any data in front of me, as a former business
person, but if I were to guess, I would think that the
financing rate for minority-owned firms is low because of the
application process and a lack of technical assistance that is
provided to these firms.
Can you all provide your thoughts on the assessment and if
there is a need for technical assistance, not only in the
application process, but throughout the entire process of
becoming an SBIC?
Mr. PALMER. There are two different issues there. One is
getting minority fund managers. And one of the challenges with
getting more minority fund managers, and this applies to women
too, is to get an SBIC license, you have to have basically been
in a private equity fund before, and so you are sort of cycling
from the same pool. And to get beyond and a more diverse range
of fund managers, it is tough with the way that it is set up
right now.
So technical assistance isn't necessarily going to help
that. It will help a little bit as far as that there is greater
surety in getting to the licensing process, but you are still
drawing from a fairly small pool, as opposed to doing some
things to recognize professional experience people have, either
on the banking side or on the investment banking side, to get
more fund managers in that are diverse.
On the actual businesses accessing the capital, that is a
little bit all over the place. Some technical assistance there,
getting them steered to the right places, whether it be a
conventional bank loan, a micro loan, whether they need equity
investment and other matters.
A number of years ago, I was doing one of these sort of
Shark Tank-type things and helping small businesses. And there
was a minority-owned business there that was looking for a
couple million dollars. It was a third-generation business. And
people were saying, ``Oh, I would take this amount of your
business,'' and that sort of thing.
And I went to the guy afterwards and said, ``Don't give up
a dime of your business. You don't need to give up a single
drop of equity to get what you need to do. Don't lose control
of your business. Here are 5 or 6 people you can talk to that
can give you the capital you are needing for looking at your
loan, that you need.''
That is what that person needed. And frankly, it would have
been bad had it been--he would have been taken to the cleaners
if he had just gone with what people were sort of throwing out.
Now, that is not how the actual transactions get done.
But, yes, there is more education needed and more
understanding of how to access the right type of capital at the
right time of your business' development. And we try to do more
of that, and we probably can do more.
Mr. PAINTER. And it is a complex issue that I don't have
the answer for. But I know for me personally, I have three
daughters, and I know my oldest daughter asked me 3 years ago,
we were talking about work, and I said, ``Well, would you ever
want to come into my industry?'' And she said, ``Well, I didn't
know that was possible,'' because all she sees are men, and
mostly white men, in my industry.
So I think for that what we have struggled at Plexus is
when we are doing hiring process is to get diverse pools of
candidates that we can interview. And we are now working on
education programs with colleges so that people know that it is
an opportunity.
I think another really important point is there is a
treasure trove of data at SBA. And there is a group of really
smart people in the education arena that would love to analyze
that for public policy purposes and they can dig into issues
like that. It is such a complex issue that without getting the
best brains around the world to focus on it, I don't know that
we can solve it.
So I would really encourage consideration of figuring out a
way to unlock that data and allow people from the educational
world and policy world to analyze the data so we can solve
problems like that. And the data is there. It is just a matter
of somehow unlocking it and having access to it.
Mr. LAWSON. Okay. And I have less than a minute, but I want
to ask you a question because it is a big issue.
How does tax reform help small businesses?
Mr. PALMER. It helps a lot. I mean, the more small
businesses can understand a tax code, use it efficiently, the
more money they can keep to reinvest in their businesses, the
better off they are.
The bill was just released last week, everyone is still
going through the details, but our current tax system is
Byzantine and antigrowth. And a reform that gets to a lower tax
rate, that is simpler and pro-growth would be, I think,
universally accepted and supported.
Mr. PAINTER. I think it is important, too, just the
certainty around it. Again, taking it to the human level, when
we go to board meetings and we are sitting in Orlando, Florida,
with Design Shop, and you have people there that have real
money, real parts of their lives at risk and they are being
asked to make decisions about future spending, it is very
difficult to do that with uncertainty about where taxes are
headed. And if you give them clarity on a reduction in taxes,
then they become more comfortable spending that money for
growth.
Mr. LAWSON. Okay. Mr. Chairman, I yield back.
Chairman BLUM. That was a great question. Thank you, Mr.
Lawson.
I now recognize myself for 5 minutes.
Mr. Walsh, I am intrigued by your background. I am a
private sector guy myself. And this is my first gig, if you
will, in government. And you are a private sector guy, served a
couple years in government. Why did you serve in government?
Mr. WALSH. I knew my two predecessors in this job, knew
them well from the private sector. In fact, I hired and worked
with my direct predecessor. He told me this is the greatest
hidden secret in the Federal Government. This was effectively
the venture capital firm--or sometimes called the vulture
capital firm--the venture capital firm of the U.S. Government.
It was an incredible program. It was exciting to meet the type
of people involved. And in fact, at the end you actually saw
real impact in real people's lives with investment that made a
difference in companies that matter to our Nation.
So not to get out the flag and salute it, but I thought if
there was ever a place in the Federal Government where it would
map against my background, and I could hopefully add some
value, and I would see the outcomes being so fruitful, this was
the place.
Final point. I told any lovely spouse that in the job
everything I was hoping to see in government I saw times 10,
and everything I was hoping not to see in government I saw
times 10. So it was very, very eye opening to see all the great
things that were happening.
And sometimes, as we have heard some of the testimony
today, reflecting some of the grinding wheels of Government
made it a little tougher than it would have been. But overall,
it was aimed--I did it because it mapped against my background,
to your point, I saw the outcomes being so positive. And,
again, I wouldn't trade any minute in that job. I loved every
single bit of it.
Chairman BLUM. As a private sector person, what kind of a
grade would you give the SBA overall?
Mr. WALSH. The SBA or the SBIC program?
Chairman BLUM. Well, both.
Mr. WALSH. Okay.
Chairman BLUM. Both.
Mr. WALSH. I give the SBIC program an A minus. I think it
needs some improvement.
The SBA program--boy, am I going to regret this, but thank
you for putting me on the spot, sir--I think the SBA program is
a B minus. And mean no disrespect to my professional colleagues
at it. I think the SBA program, the other parts that we talk
about, I think they need some improvement and some outcome
improvements.
I think the SBIC is the shining--and I am biased--I think
the SBIC, SBIR, and Accelerator programs are the shining jewel
in the SBA family.
Chairman BLUM. Thank you. Do you grade on a curve?
Mr. WALSH. What is the best answer to give you, Mr.
Chairman, to that?
Chairman BLUM. Thank you for being frank.
Mr. Palmer, I looked in your testimony, the distribution of
SBIC, financing dollars by industry. Number one was
manufacturing. Good to see. Good to see. We can use more of
that in this country.
I was surprised by healthcare was one of the lower
percentages as far as industry segment that is invested in. Can
you talk about that? I mean, healthcare is a very dynamic and
growing part of our economy, and I am just a little surprised.
Mr. PALMER. It is. And I was surprised by that, too. The
numbers are what the numbers are.
We just gave an award for portfolio company of the year to
a company in Tennessee. It was healthcare company that provided
urgent care centers throughout Tennessee and I think in a
couple in Kentucky, too, this little entity that went from 7
employees to 500 employees providing medical care where there
wasn't any before.
So we certainly have some, and some great ones. But it is
relatively low, and I don't fully know why that is. But a lot
of it on the manufacturing side is generational transfer, where
the founders are retiring and their management team is buying
out the owner and reinventing the business. That is why there
is a large number of manufacturing and applying new
technologies. But on healthcare, I think Thies has something to
add there, but I don't know.
Chairman BLUM. Mr. Kolln?
Mr. KOLLN. I think part of it is looking at the companies
and the size of companies that SBICs are investing in, and we
are investing in smaller companies. Healthcare is such a large
industry that has huge, huge companies in it, and those
companies, there aren't as many small businesses necessarily
involved in it. And there are a lot of--there are just, pure
numbers-wise, I think a lot more small manufacturing and
service businesses out there. So the businesses that we as
SBICs tend to focus on and invest in skew differently maybe
than the economy as a whole.
Mr. PAINTER. Right. It is a much more developed industry on
the medical side. It is a much more developed system for access
to capital relative to manufacturing and service.
Chairman BLUM. I have got quite a few questions, so I guess
your answers to this one would have to be brief. But I would
like to hear from each one of you.
Give me what you think is the state of small business in
America today. What is the health, the healthiness of small
business in this country today?
We understand, to tag on to Mr. Lawson's great question, we
understand that tax reform is going to help. We understand
regulatory relief helps. We understand reducing uncertainty
helps. We also understand a robust and growing economy helps. I
get that.
But what is the state of small business today? Try to be
somewhat brief.
Mr. PALMER. Sure, I will be quick. I think, summed up in a
word, I think there is optimism. I mean, I think there really
is a lot of hope that the government is actually working with
them and some of the shackles are going to come off on
regulatory and tax.
So when I am traveling the country and talking to folks,
what I am hearing is a lot of optimism. There is always a
certain level of business uncertainty. Business uncertainty
business people can deal with. Political and regulatory
uncertainty, they can't. So I think optimism is what I hear the
most.
Chairman BLUM. Mr. Kolln.
Mr. KOLLN. I would second that, too. You stole my word,
Brett.
I think on the whole there is optimism. It is always
tempered with caution. But I think we see businesses more eager
to invest and grow now than they have been for a number of
years, I think.
Chairman BLUM. Mr. Painter.
Mr. PAINTER. There is undoubtedly no better place to start
and own a small business than the United States of America.
That is why I love doing what I do. I don't know what the
future looks like, but I know that you have resilient people
focused on growing small businesses with an employee base that
is a meaningful percentage of our economy. And we have plenty
of things we can work on and get better with SBA and on our
own, at individual funds, but it is healthy and it is thriving
like it always has and like it always will.
Chairman BLUM. Mr. Walsh.
Mr. WALSH. People are pumped up. It is cheaper to start a
business today because of technology and other tactics and
tools than ever before. And you can start businesses cheaper in
places that normally didn't used to have businesses.
So I think we have had sort of from cautious optimism, on
the other end of the scale. I think people are really, really
maximally pumped up. This is the place, it is cheaper to do,
and there are tools and tactics and money available to help you
grow.
Chairman BLUM. If I can just follow up on that. I find it
interesting. Uncertainty, I agree, is one of the biggest
impediments to expanding a business. You know what the rules of
the game are going to be tomorrow, how you prepare for it,
correct? What has changed as far as uncertainty to cause this
optimism? What has changed to cause the optimism?
I mean, healthcare, I guess one could say, is probably we
are more uncertain than ever on what is going to happen as far
as healthcare goes. I am just curious----
Mr. WALSH. Yeah. If I can toss a thought out. In the last
couple of decades, back in the day, if you left a large company
which used to have a pension and a very secure environment, the
old days of corporate environment, if you left to start a
business and it failed, your record, your career was
besmirched, right?
Today, in fact, failure is not a sign of a negative tint or
hue of your career. In fact, failure for many investors is a
sign of education. You learn a lot from failing.
So I think there is an element of risk that today's workers
are able to have a higher appetite for, because it doesn't take
as much money to start a business and you are not kind of
ruining your career arch by trying it and having it not work
out.
So the uncertainty of the capital structure, the
uncertainty of your cost structure, the uncertainty of your tax
structure, I think those are slowly getting better. But the
uncertainty about your career is also something that has kind
of, I think, been taken care of and made more positive.
Chairman BLUM. Anyone else on that?
Mr. PAINTER. I just think there is always going to be
uncertainty. There is always risk in small business. So just
simplifying the Tax Code so that people know the environment
they are operating in, and the less complex we can make it so
you don't have to hire teams of tax attorneys to help you
figure out how you need to operate, the better.
Mr. KOLLN. And part of it is just the spirit of small
business owners. Small business owners are optimists by nature.
You don't start a small business and look to grow a small
business if you are not optimistic about yourself and about
your company in the future. So that is what is great about our
industry and who we get to work with, is that there is a
natural optimism there, and I think people in small business
tend to try to see the future is bright.
Chairman BLUM. Speaking of not having as much of a fear of
failure, I think it was Mr. Painter, in someone's testimony
they mentioned out of 100 companies looked at, 1 qualifies for
financing.
Tell me about the other 99. In general, I know each one is
unique, but why don't they qualify? What are the problems with
the other 99?
Mr. PAINTER. Right. So I think the best way to describe it
would be is, if you think about the very mature market where
public companies have access to all types of capital, you have
hundreds of suppliers of capital that all have a different
focus. They find their niches and they focus on it and they
dominate it.
At the small end of the market, there are so many gaps. So
when I go in to meet with a company I don't understand--there
is probably 50 percent of them where we just don't understand
enough about what they do to be able to take that risk. So I
can't know everything about every industry.
So that is one piece. We have to focus in certain areas so
that we can ultimately protect taxpayer dollars and also
deliver a return to our investors.
Then you have companies that don't have the proper
accounting files, that we have issues that come up all the time
around accounting and we will think we are looking at numbers
of X, then we find out it is X times 50 percent.
So there are just a lot of things that have to happen to
close one transaction.
Chairman BLUM. Anyone else on that?
Mr. KOLLN. Yeah. I think of the 100 down to 1, I think the
first 80 of the 99, it is just not a fit. As Mr. Painter said,
they are either looking for a different type of capital than we
are able to provide, they are looking for much more capital,
much less capital, they are looking for more risky capital than
what we are providing, or they are looking for more like a bank
loan type of capital. So it is not a fit.
And then the other 20, it is either something peculiar to
the company or just sometimes you just can't come to a deal.
And it is just making a deal and sometimes it works and
sometimes it doesn't.
Mr. PALMER. And just to be clear.
Chairman BLUM. Mr. Palmer?
Mr. PALMER. It is not that those 99 don't ever get funded.
They might get funding from other sources. They just might be
barking up the wrong tree and need to get to the right tree. So
there is some of that, which also matters.
But, again, the approach, the preparation that people
have--and this goes to Congressman Lawson's point earlier of
the training--when you are approaching a professional firm for
institutional investment, what is it you need to explain. You
need to have a board, you need to have your books looked at
internally, with a real hard look, you know, what is it you
really want to do with your business.
And that isn't always sort of lined up coming in before
they are approached. And so if you don't have your ducks in a
row going in, your chance of success coming out are lower.
Chairman BLUM. When I am asked about--and this will be my
last question--when I am asked about the health of small
business, I often talk about a three-legged stool.
And the legs being, one, the economy in general. I always
say small businesses don't worry about taxes if they are not
making any money. So they need revenues and they need to make a
profit, first and foremost. So an expanding, robust economy is
so important to small businesses.
Second is the regulatory relief, which we are seeing now,
because regulations really hit small businesses to a greater
extent than large businesses.
And thirdly, tax, tax relief, if they do make a profit, so
they can keep more of their business, capital in their
business.
Am I forgetting anything there? Is it a four-legged stool,
five-legged stool? What is also important?
Mr. WALSH. I would add people. I think access to folks
where your business is located that are trained, that are
motivated, that you can motivate through your salary or your
bonus or your equity structure, and retaining those people.
I think something you have seen recently really pop up,
certainly in Silicon Valley and some of the other sort of
hotter places for startups, is the loyalty, that people are
changing jobs rapidly.
So discovering, recruiting, training, and keeping people. I
think what I would add, what I would suggest is a fourth leg.
Chairman BLUM. Anyone else? It is a good point.
Does anyone else up here have any further questions?
Mr. LAWSON. Mr. Chairman, I just want to state one thing,
if I could.
Chairman BLUM. Mr. Lawson, you are recognized.
Mr. LAWSON. In Florida, they require the businesses to pay
the intangible tax. But what I noticed, and I brought up to the
legislature back then, it cost them more for the CPA than what
the tax was, you know.
And so I filed a bill, and some people didn't quite
understand, to up the amount, limit of the intangible tax
beyond $25,000. Because I was doing it myself and I had to pay
the CPA all this stuff, fill out all these papers, and so
forth, and the fee was not as much as it was to pay the CPA,
you know.
So I can understand exactly what you are saying, Mr. Walsh.
But it was incredible what you have to pay the CPA just to do
the intangible tax.
That is all I want to say, Mr. Chairman.
Chairman BLUM. Thank you, Mr. Lawson.
Once again I would like to thank everyone, especially our
panelists, for being here today. I believe it is extremely
important to hear from those working on the ground, on the
front lines with these programs that we care so deeply about.
And as we continue to examine many of the SBA's programs,
your comments will be most helpful. You play an important role
in the ability of small businesses to grow and create jobs, so
I appreciate you all taking time out of your schedule to be
here with us today.
I ask unanimous consent that members have 5 legislative
days to submit statements and supporting materials for the
record. Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 11:18 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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Chairman Blum, Ranking Member Schneider, and Members of the
Subcommittee, thank you for the opportunity to testify today
and for holding this hearing, ``Investing in Small Business:
The SBIC Program.''
This hearing is important for highlighting the United
States Small Business Administration's (SBA) Small Business
Investment Company (SBIC) Small Business Investment Company
(SBIC) Program and the impact it is having on growing domestic
small businesses and creating American jobs. Access to capital
is a tremendous issue for small businesses across the country.
This program effectively resolves that issue. I am eager to
provide you my perspective as an SBIC fund manager and past
member of the Small Business Investor Alliance board.
My name is Thies Kolln. I am a partner of AAVIN Private
Equity, a private equity firm based in the heart of the
Midwest. Our central office is in Cedar Rapids, Iowa, but we
also have regional offices in Kansas City, Missouri and
Madison, Wisconsin. I joined AAVIN in 2002, and prior to
joining the firm I practiced corporate law in Chicago,
representing venture capital and private equity funds.
At AAVIN, we stay true to our roots by focusing on helping
small, regionally-based businesses grow. We specialize in late-
stage and expansion-stage financings, and we partner with
strong management teams that seek long-term business growth.
Our focus is on smaller investment opportunities--small
businesses seeking financings less than $10 million, with most
needing less than $5 million. Further, our activities are
concentrated mostly in the upper Midwest, such as Iowa, which
is an area of the country traditionally underserved by capital.
We are also weighted toward small businesses in manufacturing
and business services, but are diversified in other sectors
such as healthcare, technology, and communications.
AAVIN has extensive private equity investment experience.
The seven members of our investment team have made investments
in over 300 companies and have held multiple operating roles.
Through our firm's history, just in Iowa we have deployed
$34 million in capital that helped create our sustain over
6,000 jobs. Those numbers may not mean a whole lot for a place
like Manhattan, but they do for Iowa. These investments
produced great growth for small businesses as well as returns
for our investment partners, which includes repayment in full
to the SBA and American taxpayer.
To provide technical insight into the SBIC Program, my
testimony today will focus on three main areas: 1) AAVIN's
involvement in, and strong support for, the SBIC Program; 2)
AAVIN's investment process in small businesses through the SBIC
Program; and 3) AAVIN's impact on growing domestic small
businesses and creating American jobs through the SBIC Program.
SBIC Program Involvement
AAVIN has substantial historical involvement with the SBIC
Program.
A hallmark of the SBIC Program is its rigorous licensing
process for prospective SBIC funds, ensuring taxpayer
protection and safeguarding the program's reputation. One
requirement for licensing is that management team applicants
have extensive prior investment experience and good investment
track records. AAVIN meets that demand. Our firm's experience
base dates back to the start of the SBIC Program in 1959. We
have a long-term commitment to small business.
In its present-day iteration, AAVIN is currently on its
second Debenture SBIC fund, which became licensed in 2015;
however, our seven principals have successfully managed five
prior SBICs, with over 40 years of continuous Debenture SBIC
management. We have over 120 cumulative years of lending and
mezzanine investing experience. Such repeats of licensure as an
SBIC is a good thing, as it demonstrates to prospective small
business partners our previous funds' successes; demonstrates
our commitment to serving this undercapitalized market; and
demonstrates to the taxpayer that we are good stewards of
American tax dollars. Notably, we have a history of on-time
payments to SBA and overall compliance, with clean examinations
without findings.
AAVIN strongly supports the SBIC Program because it
provides the opportunity to supplement our private capital with
up to two times more capital to deploy to small businesses to
support their growth. This augmented growth capital helps small
businesses grow even more than AAVIN's private capital alone
could. Given the increasing concentration of capital among
large funds and institutions and the resulting difficulty in
finding capital with a dedicated strategy of investing in small
funds and small businesses, it is questionable whether many of
the small funds like AAVIN could even continue to fund small
businesses at all without the program. Importantly, our private
capital--and any private capital of any other SBIC fund--is
always in the first-loss position when making investments. So,
despite being leveraged with capital other than our private
capital, our interest is always in making sound investments
knowing that our private capital, which includes significant
personal investments by our management team, would be burned
through by an underperforming investment before any taxpayer
capital would lose even a dollar.
SBICs like AAVIN are usually providers of the first
institutional capital into a small business. Because of this,
the program is helping to professionalize small businesses, as
SBICs ensure the business's operations are fundamentally solid
along with their financials during the investment. This not
only primes businesses for greater growth but also gives them
greater long-term viability by strengthening their ability to
response to changing economic cycles, management team
transitions and other unforeseen events. AAVIN's investment
process works to that end.
Investment Process
While the SBIC Program makes available additional capital
to augment private capital, the actual act of investing in
small businesses itself is, and always will be, incumbent upon
the SBIC fund.
AAVIN's investment process not only protects the interests
of the American taxpayer and the firm's own investment
partners, but also that of the small businesses it partners
with to grow.
AAVIN receives over 500 to 1000 inquiries annually for
small business financings. Approximately 50 to 100 of those
inquiries we whittle down through our preliminary diligence,
then even further from there, eventually landing at
approximately 4 to 6 financings actually being conducted
through the fund annually.
Our deal flow is from significant proprietary sources that
we have developed over 40 years by focusing on a consistent
investment profile using our regional offices. Again, this
informs our geographic investment preferences. Notable among
those deal flow sources are local and regional banks, many of
which are too small to be called on by other funds and which
also cannot practically deploy their capital to small
businesses without an SBIC.
Our investment underwriting is rigorous and credit-based.
Characteristics of small businesses that we look for before
investing in are a positive cash flow; financial ratios, such
as total funded debt to Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA); a complete management
team with strong financial and operation leadership; a
defensible market position; and ultimately a growth
opportunity.
This is all to say that the rigorous licensing process and
continuous ongoing oversight of funds that the SBA applies to
the SBIC Program likewise applies to our processes in financing
small businesses.
A typical transaction for AAVIN provides under $2 to 5
million in financing to a small business. This is mostly debt
in the form of loans, but we usually take an equity stake in
the small business in conjunction with the loan. We partner
with the management teams and always make sure that management
holds equity interests in the businesses they operate--active
managers will usually own a greater stake in the business after
our investment than before.
Following the initial investment, AAVIN, as generally the
first institutional investor, supports the small business for
anywhere between three to eight years before. In that time, we
are repaying the SBA and providing returns to our investors.
We provide significant value over the life of our
investments through active involvement with the respective
small businesses. We provide assistance to our small business
management teams in many areas including strategic planning,
finance, marketing, recruiting, analyzing and closing
acquisitions or divestitures, developing treasury strategies
and assessing financial markets. These are the acts of
professionalizing the small business I mentioned as a core
outcome of the SBIC Program. To that end, we are truly partners
with small businesses.
Impact on Small Businesses
Through the SBIC Program, AAVIN helps small businesses
solve their need for capital, along with operating assistance
that aids professionalization. The upper Midwest is
traditionally lacking in alternative sources of capital,
particularly for smaller businesses. Unlike other fund
managers, AAVIN has not moved up-market to manage ever larger
funds that no longer focus on small business investing. We have
been able to keep our focus and strategy because of the
continued availability of the SBIC program.
When it comes to securing growth capital, equity financing
is often too expensive or unavailable for small businesses. To
finance their continued growth through equity alone, small
business owners would have to give up large amounts of control
of their businesses, if they could even find such capital at
all. Most private equity capital is focused either in specific
regions and industries such as Silicon Valley IT or Boston area
medical companies or in very large multibillion dollar funds
that aren't set up to make small investments. Small businesses
are also limited in their ability to get traditional bank
loans, which are often limited to a portion of the assets the
business has as collateral or the owners can provide through
personal guarantees. The SBIC Program fills this gap by
enabling a these businesses to access a more flexible source of
debt that is focused on meeting their capital needs.
The small businesses AAVIN invests in through the SBIC
Program may have many possible uses for capital, such as
expansion by purchasing equipment or facilities, hiring
additional employees to grow the business, acquiring other
small businesses, or providing operating capital.
Because of our location and our firm's investing
principles, we have a particular impact on small businesses in
Iowa. In our firm's history, we have made 26 investments in
Iowa small businesses, one as recently as the end of October in
Happy Joe's Pizza & Ice Cream.
Happy Joe's is a family-run chain pizza parlor that was
founded in 1972. The business also provides franchise
opportunities and has 54 locations across Iowa and other states
in the Midwest. We have an ambitious growth plan for this
company and have already made new hires into the organization
to carry this out. Our management team is currently looking for
more space for our expanded operations, which will enable them
to make additional hires. Our involvement with the business
will help it to create a larger geographic footprint, expand
its product offerings, and--most importantly--create more jobs.
Another example of our investment in small local businesses
is RuffaloCODY, headquartered in Cedar Rapids, Iowa.
RuffaloCODY provides fund raising, consulting, enrollment and
donor based management services to non-profit organizations;
primarily colleges and universities. The company manages on-
campus fund raising campaigns and telefund campaigns, where
RuffaloCODY hires students to perform the telemarketing process
for its clients. RuffaloCODY is the market leader in fund
raising services for non-profit organizations.
After an 8-year involvement that included a total
investment of $3.25 million, AAVIN exited RuffaloCODY. AAVIN's
investment helped the company grow from just over 100 to more
than 500 permanent employees, build out new facilities in Cedar
Rapids and provide thousands of students across the country
with part-time work raising money for their colleges and
universities. In 2014, the business announced it acquired
another business, forming Ruffalo Noel Levitz, to better
partner with colleges and nonprofit organizations to help them
enroll their classes, graduate their students, and engage their
donors. Our involvement with the company helped establish a
foundation for their growth into what the business is today.
We are proud of these investments because of the impact the
small businesses have on their communities by creating jobs and
spurring the local economy, not least because we ourselves live
in these communities.
Conclusion
But for the SBIC Program, AAVIN would not have its
successful history of deploying growth capital to American
small businesses, the backbone of our economy. The SBIC Program
effectively helps us leverage the private capital we are able
to raise for this purpose.
Conversely, but for the SBIC Program, American small
business access to capital would be worse. Without the program,
an enormous capital access gap would exist for small businesses
that traditionally lack alternative capital sources for growth.
Thank you to the Subcommittee for holding this hearing on
the SBA's SBIC Program and how it enables access to capital for
small businesses. I encourage the Committee and this Congress
to continuing fully supporting the program so that it may
expand, support more domestic small businesses, and create even
more American jobs. I look forward to answering any questions
you may have.
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Good Morning. My name is Mark Walsh, and I am pleased to
join you today to discuss the Small Business Investment
Company, or SBIC program. From late 2015 until January 19th of
this year, I ran the Office of Investment and Innovation (OII),
at the US Small Business Administration here in Washington D.C.
My area oversaw all SBIC, SBIR (Small Business Innovation
Research) and Incubator/Accelerator programs. I was a
Presidential appointee. It was my first job in government.
Before that I had a 35+ year career in technology, the
internet, and media--with senior or C-Suite positions at a wide
variety of companies, including AOL, GE, HBO, VerticaINet, and
more.
Further, for the last 17 years, I have been an active
``Angel'' and venture investor in a wide variety of start-ups,
and have served on the board of directors for many of those
companies and other high-growth venture backed entities. I have
also served as Chairman of the Bipartisan Policy Center here in
DC. I have a BA from Union College in NY, and an MBA from
Harvard.
I am happy to discuss the SBIC program, one of the most
innovative, financially successful and well-structured
government programs in existence. However, since I left the
program almost 10 months ago, I hope the committee will forgive
me if some of my recollections and remembrances are dimmed or
made suspect by the passage of time. Also, my opinions are my
own, and are not meant to reflect any one else's or any other
agenda.
The SBIC program takes low-interest debt issued by a
consortium of banks, backed by the SBA/OII, and provides it to
professionally managed domestic Venture Capital and Private
Equity funds. These VC and PE funds can only receive the non-
dilutive debt investment from OII after being granted an SBIC
License. The license application and approval process is
extraordinarily rigorous, and creates an efficient ``filter''
for mismanaged or ill-targeted funds from receiving taxpayer
dollars.
Further, a licensee is required to report all significant
investment activities, sales of companies, additional Limited
Partner investments, etc. to the OII on a regular quarterly
basis, and there are annual on-site inspections by OII trained
teammates to validate all the activities and efforts of the
licensee. In short, OII is as vigilant an investor as any in
the private market, if not more so. However, as we all know,
investment entails risk, so OII also had a trained team of
``workout'' experts who helped funds that ran awry of financial
health, and in some cases assumed ownership and control of
failed funds and disposed of the assets at admirable salvage
valuations. But, make no mistake, the amount of unrecoverable
investment was miniscule, and was the envy of the private
sector.
In short, the SBIC program was a fabulous example of a
public/private partnership, and one I was proud to be part of.
My colleagues and teammates, both career and political-
appointees, were as motivated, talented and professional as any
I have worked with in my career. I enjoyed my all-too-short
stint immensely.
But, I was asked here today to address ways to improve the
SBIC program. Nothing is perfect, and there are a few areas I
would try to address if I were still in charge.
1) Outreach: We made extraordinary progress during my
time in discovering new funds and new types of funds,
and in meeting and engaging more diverse fund
managers--gender, demographic, geographic and market-
focused diversity--than many prior efforts. That
happened because my teammates and I made it a priority.
The SBIC program should hire and motivate more and more
outreach teammates to reignite and continue that trend.
2) Promote and Reward certain types of Funds:
``Impact Funds'', (aimed at social, environmental,
educational, or institutional improvement as opposed to
pure profit) are wonderful entities. The SBIC program
should be able to encourage them with lower interest
rates, more attractive payback options, or faster
application processing. Currently, they are not
effectively treated any differently than other funds.
Also, SBIC had a ``Venture Fund'' category, aimed at
higher-risk start up investments, and those funds
should also have better terms made available for them,
as they are often structured to have less appetite for
debt.
3) License Processing Streamlining/Reporting
Requirement Streamlining: The amount of paperwork
expected of a license applicant and license holder is
heavy. OII and the Program should continue its efforts
to use available technologies to streamline these
processes. Some funds we tried to enroll and apply
chose not to because the paperwork and processes were
onerous and time consuming.
4) Equity Ownership: OII should have the ability to
receive a very small amount of equity in the companies
its capital invests in. The SBIC program, started in
the 1950's, has held debt-stakes in a number of iconic
companies. For instance, in 1977 it held over 4%
ownership in a small technology company called Apple.
Over the years, the program has had limited success in
taking equity stakes, but I feel that OII should
continue vigorous and energetic efforts to create some
ownership ``upside'' for American taxpayers through
this program with equity ownership versus only debt.
5) More Private-Sector Partnerships: During my stint,
teammates and I created a wonderful board-diversity
initiative called ONBoard (The Open Network for Board
Diversity) with a partner, LinkedIn (the professional
Social Network). There are a great number of innovative
and productive private sector companies who would be
wonderful partners in new and innovative opportunities.
OII should be freer to pursue those.
6) Networking Opportunities between Funds and
Companies: OII was not at liberty to cross pollinate
its investment funds with each other. Companies looking
for capital who called OII could not be told about PE
or VC funds that might be looking to invest in them.
OII is a natural clearinghouse for a wide variety of
data it collects about its Funds, and it should have
more ``Open Access'' to the data for industry
observers, companies, funds and analysts.
There are other improvements or opportunities I could
detail, but these are some that I saw great potential in when I
was at the Agency. I would encourage the Committee to work with
OII and the SBA to promote these ideas, if the Committee finds
them of value.
Before I conclude, let me also mention the SBIA, or Small
Business Investor Alliance. They are the industry association
focused on the SBIC marketplace. Their staff and management
were extraordinarily helpful to me as I learned the program,
and were invaluable partners for the initiatives me and my OII
colleagues pursued. Their Board and members were truly the
``best of the best'', and I can't thank them enough for their
productive role in the ongoing success of the SBIC program.
Thank you for inviting me today, and now I am ready to help
with any questions or comments the Committee may have.
Mark L. Walsh
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