[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


            INVESTING IN SMALL BUSINESSES: THE SBIC PROGRAM

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

                                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

                               __________

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            Small Business Committee Document Number 115-046
              Available via the GPO Website: www.fdsys.gov
                   
                   
                   
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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

                              ----------                              


                       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.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    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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