    [House Hearing, 116 Congress]
    [From the U.S. Government Publishing Office]

        SBA MANAGEMENT REVIEW: SMALL BUSINESS INVESTMENT COMPANY PROGRAM

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

                                     HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                                 UNITED STATES
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  HEARING HELD
                               SEPTEMBER 26, 2019

                                   __________

     [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                Small Business Committee Document Number 116-047
                 Available via the GPO Website: www.govinfo.gov

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    37-757                      WASHINGTON : 2019

    --------------------------------------------------------------------------------------

                       HOUSE COMMITTEE ON SMALL BUSINESS

                     NYDIA VELAZQUEZ, New York, Chairwoman
                             ABBY FINKENAUER, Iowa
                              JARED GOLDEN, Maine
                              ANDY KIM, New Jersey
                              JASON CROW, Colorado
                             SHARICE DAVIDS, Kansas
                              JUDY CHU, California
                               MARC VEASEY, Texas
                           DWIGHT EVANS, Pennsylvania
                            BRAD SCHNEIDER, Illinois
                          ADRIANO ESPAILLAT, New York
                           ANTONIO DELGADO, New York
                         CHRISSY HOULAHAN, Pennsylvania
                             ANGIE CRAIG, Minnesota
                       STEVE CHABOT, Ohio, Ranking Member
       AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
                            TRENT KELLY, Mississippi
                              TROY BALDERSON, Ohio
                              KEVIN HERN, Oklahoma
                            JIM HAGEDORN, Minnesota
                            PETE STAUBER, Minnesota
                            TIM BURCHETT, Tennessee
                              ROSS SPANO, Florida
                            JOHN JOYCE, Pennsylvania

                    Adam Minehardt, Majority Staff Director
         Melissa Jung, Majority Deputy Staff Director and Chief Counsel
                       Kevin Fitzpatrick, Staff Director

                               C O N T E N T S

                               OPENING STATEMENTS

                                                                       Page
    Hon. Nydia Velazquez.............................................     1
    Hon. Steve Chabot................................................     2

                                   WITNESSES

    Mr. Joseph Shepard, Associate Administrator, Office of Investment
      and Innovation, United States Small Business Administration,
      Washington, DC.................................................     4
    Mr. Brett Palmer, President, Small Business Investor Alliance,
      Washington, DC.................................................    21
    Mr. John Paglia, Professor of Finance, Graziadio Business School
      - Pepperdine University, Malibu, CA............................    23
    Ms. Ronda Penn, Chief Financial Officer, Plexus Capital, Raleigh,
      NC.............................................................    25
    Mr. Walt Rodgers, Chief Executive Officer, Family RV, Cincinnati,
      OH.............................................................    26

                                    APPENDIX

    Prepared Statements:
        Mr. Joseph Shepard, Associate Administrator, Office of
          Investment and Innovation, United States Small Business
          Administration, Washington, DC.............................    36
        Mr. Brett Palmer, President, Small Business Investor
          Alliance, Washington, DC...................................    39
        Mr. John Paglia, Professor of Finance, Graziadio Business
          School - Pepperdine University, Malibu, CA.................   102
        Ms. Ronda Penn, Chief Financial Officer, Plexus Capital,
          Raleigh, NC................................................   117
        Mr. Walt Rodgers, Chief Executive Officer, Family RV,
          Cincinnati, OH.............................................   122
    Questions and Answers for the Record:
        Questions from Hon. Velazquez to Mr. Joseph Shepard and
          Answers from Mr. Joseph Shepard............................   125
        Questions from Hon. Velazquez to Mr. Brett Palmer and Answers
          from Mr. Brett Palmer......................................   127
    Additional Material for the Record:
        Brian Lueger, Principal, Konza Valley Capital, Inc...........   128

        SBA MANAGEMENT REVIEW: SMALL BUSINESS INVESTMENT COMPANY PROGRAM

                                  ----------

                          THURSDAY, SEPTEMBER 26, 2019

                      House of Representatives,
                   Committee on Small Business,
                                                        Washington, DC.
        The committee met, pursuant to call, at 11:35 a.m., in Room
    2360, Rayburn House Office Building. Hon. Nydia Velazquez
    [chairwoman of the Committee] presiding.
        Present: Representatives Velazquez, Finkenauer, Kim,
    Davids, Chu, Schneider, Veasey, Delgado, Craig, Chabot,
    Balderson, Hern, Hagedorn, Stauber, Burchett, and Joyce.
        Also Present: Representative Bishop.
        Chairwoman VELAZQUEZ. The committee will come to order.
        I thank everyone for joining us this morning, and I want to
    especially thank the witnesses who have traveled from across
    the country to be here with us today.
        Since 1958, the Small Business Investment Company program
    has been an integral part of the SBA's mission to provide small
    businesses with affordable capital and helping them create good
    paying jobs. The specific goal of the SBIC program is to fill
    the gap between the availability of venture capital and the
    needs of ``high growth potential'' small businesses in startups
    and early stage situations.
        It achieves this purpose by partnering private and public
    investments in early stage and startup businesses. We need to
    look no further than companies like Apple, Tesla, and FedEx.
    They have all achieved what we hope for every small business--
    extraordinary growth and success. They each received early
    stage financing from SBICs.
        One of the SBIC program's greatest strengths is its hands-
    off approach, giving fund managers the autonomy and flexibility
    to invest in almost any business sector they choose, from
    apparel to cutting edge technology. This freedom, coupled with
    sound investment strategies, has led to the program's
    bipartisan popularity and success.
        In fiscal year 2018, SBA committed to guarantee $2.5
    billion in SBIC investments, and SBICs invested another $3
    billion from private capital for a total of $5.5 billion in
    financing for 1,151 small businesses.
        Though the SBIC program has helped increase the flow of
    affordable capital to worthy small companies, access to capital
    remains the number one priority for small firms across America.
    Congress can and should do more to ensure the program and its
    participants can meet growing demand. This includes
    periodically conducting oversight to ensure the program is
    being administered as efficiently as possible.
        Earlier this year, led by Ms. Chu, the House passed H.R.
    116, which will strengthen the SBIC program by allowing banks
    and Federal savings associations to invest up to 15 percent of
    their holdings into SBICs. This increase in capital available
    to small businesses, at no cost to taxpayers, will provide
    entrepreneurs with enhanced opportunities to grow and expand
    their businesses and create good paying American job in the
    process.
        However, we know that much more work needs to be done to
    fully optimize the rules governing the program. Over the past 2
    years, I have heard consistent complaints from SBIC funds and
    other industry stakeholders about serious delays in licensing
    approvals. Reports in the press indicate that approvals that
    used to take 6 months are now taking a year to complete, or
    even longer. These delays are costing would-be participants to
    look outside the SBIC program for opportunities to deploy
    capital to small private equity space.
        It is simply unacceptable for a federal government program
    to be operated so poorly that it becomes unattractive to
    potential participants.
        Another priority is to ensure that venture capital and
    private equity in the SBIC is reflective of the diversity that
    exists across the nation in terms of demographics and
    geography. That includes having women and minorities in
    leadership positions as SBIC fund managers and making sure that
    women and minority-owned businesses, as well as businesses
    located in rural areas, are receiving the investments from
    SBICs.
        On the first panel, I look forward to hearing from the
    Associate Administrator about how he has worked to address this
    concern and his plans to permanently fix these problems.
        I also look forward to hearing from the second panel of
    industry participants and insiders about other challenges and
    ideas to continue optimizing the program and increasing
    participation.
        Again, I want to thank the witnesses for being here, and I
    now yield to the Ranking Member, Mr. Chabot, for his opening
    statement.
        Mr. CHABOT. Thank you, Madam Chair.
        And before I begin my statement I wanted to quickly note
    that I unfortunately have to step away relatively early in this
    hearing because I have several other commitments that I have to
    address. I do apologize for that. I know this is a very
    important topic, and I fully support the chair in delving into
    these things, and I have full confidence that my colleagues on
    both sides of the aisle will ask the important and sometimes
    tough questions that are necessary.
        Traditionally, small businesses, entrepreneurs, and
    startups are extremely flexible organizations. They adapt and
    bend as the market moves. They see opportunity and jump at the
    chance to capitalize. However, they are moving quicker and in a
    more nimble fashion than ever before. With the advancement of
    technology racing forward, innovators are sprinting to create
    the next great American product and service.
        Yet, this Committee continues to hear that access to
    capital remains a top challenge for our Nation's smallest
    firms. Not only is it a challenge for the Nation's job
    creators, but often, it is also a roadblock that sometimes
    can't be bypassed. With options limited, Main Street businesses
    regularly turn to the SBA for financing assistance.
        From my state of Ohio down to Florida, and from coast to
    coast, small businesses are participating in the SBA's programs
    to build, grow, and create jobs for our nation.
        One option within the capital access toolbox at the SBA is
    the Small Business Investment Company Program, also known as
    the SBIC program. This program helps bridge the equity gap for
    small businesses by combining investment funds with small
    businesses. The SBIC program is a public-private partnership
    that has delivered results for America's small businesses and
    has helped launch some of the Nation's most prominent
    companies.
        The SBA runs potential funds through an extensive licensing
    process to ensure that they are prepared to participate and
    work with small businesses. Over the years, this Committee has
    worked in a bipartisan manner to study the program and develop
    legislation to ensure that the program reaches small businesses
    that require its assistance.
        Just last Congress, we passed legislation to increase the
    individual leverage limit within the program and to prioritize
    under licensed SBIC areas. Studying the program remains
    paramount and program performance will help Congress determine
    the next steps.
        Just as Congress measure the efficiency and effectiveness
    of the program, the SBA must implement efficient and effective
    rules and regulations for program participants to follow. If
    program timelines diverge or if performance waivers further,
    examination is required to ensure the integrity of the program.
        According to the SBA statistics, over 5,000 businesses have
    received SBIC funds in the last 5 years, all while operating on
    a zero-cost subsidy to the American taxpayer.
        In fiscal year 2019, the SBA similarly did not request a
    subsidy as the fees that were built into the program were
    projected to cover its cost. We are eagerly awaiting end of
    fiscal year 2019 performance results as third quarter results
    have been mixed with the number of new licensees approved by
    the SBA on a downtrend and the dollar amount of the debenture
    leveraged commitments down significantly.
        This hearing will allow members to learn more from the SBA
    about the program's performance metrics during the first panel,
    and how the program is impacting communities and neighborhoods
    from the participants that are testifying during the second
    panel. As with any capital access program that includes
    government participation, comprehensive oversight is required
    to safeguard American taxpayer dollars.
        Although the witnesses will be formally introduced shortly,
    I wanted to quickly thank all of them for participating,
    especially Mr. Walt Rodgers from Family RV. Family RV's
    operations are in Colerain Township in Hamilton County, Ohio.
    For those of you who do not know, Colerain is in my district,
    and approximately 30 minutes by car or RV from downtown
    Cincinnati. They are a great business, and we welcome them here
    today. And I know this hearing will generate a great
    conversation.
        One final point I would make, Madam Chair, I would ask
    unanimous consent that our newest member who will be here
    shortly, I believe, Dan Bishop of North Carolina, will be able
    to join our dais. It is my understanding that it will be
    confirmed on the floor that he will be on our Committee, a
    member of our Committee. I would ask unanimous consent that he
    would be able to sit with us.
        Chairwoman VELAZQUEZ. With no objection, so ordered.
        Mr. CHABOT. Thank you very much.
        And I will just mention a couple of quick things.
        Dan Bishop won a very closely watched election just
    recently down in North Carolina's Ninth District. It was a
    relatively close race. He has been a member of the North
    Carolina Senate, the North Carolina House of Representatives.
    Like myself, he was a county commissioner. I was a county
    commissioner in Hamilton County that Cincinnati is located in.
    He was a Hamilton County commissioner in Mecklenburg County in
    the Charlotte, North Carolina area. Where my mom is from
    Charlotte, by the way. He is going to be a valuable addition to
    our Committee. He is also going to be serving on the Homeland
    Security Committee. So I think he is going to be a great
    addition to this Committee.
        And at this time I yield back, Madam Chair.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        And if committee members have an opening statement, we ask
    that they be submitted for the record.
        I would like to take a minute to explain the timing rules.
    Each witness gets 5 minutes to testify and members get 5
    minutes for questioning. There is a lighting system to assist
    you. The green light comes on when you begin, and the yellow
    light means there is 1 minute remaining. The red light comes on
    when you are out of time, and we ask that you stay within that
    timeframe to the best of your ability.
        I would now like to introduce our only witness on today's
    first panel.
        Our first witness is Mr. Joseph Shepard, the Associate
    Administrator for SBA's Office of Investment and Innovation. In
    this role, he is responsible for managing the SBIC program, as
    well as the Small Business Innovation Research and Small
    Business Technology Transfer programs. He has been in this role
    since his appointment in 2017. He previously held a position in
    the office during the George W. Bush administration.
        Mr. Shepard, you are now recognized for 5 minutes.

    STATEMENT OF JOSEPH SHEPARD, ASSOCIATE ADMINISTRATOR, OFFICE OF
        INVESTMENT AND INNOVATION, UNITED STATES SMALL BUSINESS
                             ADMINISTRATION

        Mr. SHEPARD. Thank you, Chairwoman Velazquez, Ranking
    Member Chabot, and members of the Committee. Thank you for
    inviting me to testify today.
        I appreciate the opportunity to talk about the SBA Small
    Business Investment Company program and the work of the
    Agency's Office of Investment, which has oversight
    responsibilities for the SBIC program.
        The office was created by Congress in 1958 at a time when
    no private equity industry existed in the United States. The
    office was established to supplement private equity capital and
    long-term loan funds that are not available in adequate supply
    to small businesses.
        Today, it has grown to a $30 billion program with $14.2
    billion of that representing the SBA guaranteed portion.
        So how is SBA managing that growth?
        Since my arrival in 2017, we have focused on operational
    improvements in two significant areas--improving the Agency's
    examinations process and improving our information technology
    systems. I have done this even as we have reduced processing
    times related to new license applications and reduced the
    number of denials relative to license applications.
        We have been focused on improving the examination process
    and improving IT systems because those improvements will better
    position the Agency to advance the SBIC mandate into the
    future.
        At the beginning of 2017, almost half of the licensed SBICs
    had not received a mandatory 2-year compliance examination as
    required by law. I am pleased to say that in just over a year
    we were able to get 100 percent compliance. We are now in the
    process of hiring and adding a new senior examiner position to
    maintain our progress.
        With respect to IT, the infrastructure that supports our
    SBIC program is outdated and is in need of improvement. SBICs
    would certainly attest to the challenges of the current legacy
    system, that it is difficult and slow when required information
    is uploaded. We are now hiring an IT project manager, a
    position that the program has never had before.
        Working with our Agency's CIO, we have made great strides
    to modernize and improve our technology by taking steps to
    update the legacy system with a new software platform. This
    will better protect and secure the program's financial data, as
    well as improve data entry, processing times associated with
    SBIC WEB data collection portal.
        Another area of activity has been program outreach. Over
    the last 3 years, we have participated in close to 50 external
    engagements. Last month, I traveled to Arkansas and Oklahoma to
    promote the SBIC program in rural areas. The trip included
    meeting with Native American leadership, a first for the
    program.
        Next, let me give you a snapshot of the SBIC program
    through numbers. There are just over 300 SBICs currently
    licensed by the SBA. Over the last 4 fiscal years, the program
    has been above 300 with a high of 315 in 2017. License
    approvals had been on a downward trend from 2013 through 2017,
    but significantly increased last year in 2018.
        With regard to licensing times, the process has taken
    anywhere from 5 to 8 months over the last 5 years and is
    typically dependent on those seeking a new license versus a
    subsequent license. In comparison, similar private sector
    activity can take up to 24 months.
        Something that our program office will continue to watch is
    liquidation numbers, which unfortunately increased from 2018 to
    2019 with four SBIC licensees transferring to liquidation. When
    reviewing SBIC program participation and investment, we are
    frequently asked for demographic information on SBICs and the
    small businesses that SBICs invest in. While the mission of the
    program is to supplement capital where it is not in adequate
    supply, the SBA and the SBIC program do not make decisions
    about which small businesses receive capital from SBICs.
        SBA provides a license and provides a government guarantee
    on investment dollars, but it is the SBIC that decides where
    and how those dollars will be invested. Over the years, I know
    some in Congress have discussed providing statutory direction
    on where those investments should occur. That is a discussion
    we would look forward to having with you, your staff, and
    program participants to determine how better to supply capital
    in those areas in our Nation that do not have an adequate
    supply.
        Let me also advise the Committee on implementation of
    legislation regarding licensing in under-licensed states, the
    Spurring Business and Communities Act. Recently, our office
    published guidance for potential applicants and the guidance is
    available on the SBA website.
        I am proud of the SBIC program and the SBA team that works
    diligently to facilitate investment in America's small
    businesses, and I look forward to working with the Committee.
    And I want to thank you again for the opportunity to testify
    today.
        Chairwoman VELAZQUEZ. Thank you, Mr. Shepard.
        I have consistently heard that the Office of Investment and
    Innovation is severely understaffed, and in your testimony
    before the Senate Small Business Committee you stated your
    office may need more people. Specifically, I am concerned with
    reports of needlessly long delays in approving licenses.
        Who currently heads the Office of Licensing, and how does
    the number of employees in that office compare to when you took
    over in early 2017?
        Mr. SHEPARD. I actually added two employees to the
    licensing office.
        Chairwoman VELAZQUEZ. When?
        Mr. SHEPARD. After I took over. After I took over in 2017.
    So I have added----
        Chairwoman VELAZQUEZ. Who currently heads the Office of
    Licensing?
        Mr. SHEPARD. We have an acting director in that capacity.
        Chairwoman VELAZQUEZ. How many employees did the Office of
    Investment and Innovation have when you first took office in
    early 2017, and how many are there now?
        Mr. SHEPARD. Well, I can tell you that we are currently 91
    percent staffed.
        Chairwoman VELAZQUEZ. Can you tell me how many were in the
    office in 2017 and how that number has changed?
        Mr. SHEPARD. I would have to look at that number. I do not
    have that information.
        Chairwoman VELAZQUEZ. Will you please send this Committee
    the response to that question in writing?
        Mr. SHEPARD. We have 76 now allocated.
        Chairwoman VELAZQUEZ. Okay. I just want to know----
        Mr. SHEPARD. Seven that we are hiring.
        Chairwoman VELAZQUEZ.--how does that compare to.
        Mr. SHEPARD. Very good.
        Chairwoman VELAZQUEZ. I am holding an organizational chart
    here for your office and it shows that there are 69 full-time
    employees in your office, 5 vacancies, and 2 new positions. For
    the vacancies, how long have each of them been vacant?
        Mr. SHEPARD. I would have to get that information.
        Chairwoman VELAZQUEZ. And you will get back to us?
        Mr. SHEPARD. Absolutely.
        Chairwoman VELAZQUEZ. Just yesterday I looked on USAJobs
    myself to see how many job postings you have for your office
    and I found zero. How do you explain this after you testified
    before the Senate in June that you need more people? Why are
    those positions not on USAJobs?
        Mr. SHEPARD. I am not sure about why. I can tell you of the
    76 that we have allocated to the program, that we are in the
    process of interviewing seven.
        Chairwoman VELAZQUEZ. Do you intend to fill the vacancies?
        Mr. SHEPARD. We are in the process. We are in the process
    of interviewing now and hope to fill those in the next 60 to 90
    days. Absolutely. We are in the process now.
        Chairwoman VELAZQUEZ. Those vacancies have been vacant
    since when?
        Mr. SHEPARD. That information I will have to get to the
    Committee.
        Chairwoman VELAZQUEZ. How can we, as members of Congress,
    be assured that you are doing everything you can to have the
    appropriate staff when the positions are not even being posted
    publicly?
        Mr. SHEPARD. Well, we, again, have 91 percent of the office
    is staffed.
        Chairwoman VELAZQUEZ. I am not talking about the 91. I am
    talking about the fact that you went before the Senate
    Committee and you testified that you were in need, that you
    were understaffed. Since then, we checked online and you have
    no postings.
        Mr. SHEPARD. I believe what may have happened is they were
    posted, the postings closed. I know that we vetted the resumes.
        Chairwoman VELAZQUEZ. Okay.
        Mr. SHEPARD. The certifications.
        Chairwoman VELAZQUEZ. I only have 5 minutes.
        Mr. SHEPARD. Now we are in the process----
        Chairwoman VELAZQUEZ. Will you get back to us?
        Mr. SHEPARD. Yes.
        Chairwoman VELAZQUEZ. Mr. Shepard, in SBA's Congressional
    Budget justification for fiscal year 2020, it says that the SBA
    will complete an evaluation to determine how the SBIC
    examination process can be streamlined. Until 2017, SBIC
    license approvals commonly took 1 to 2 weeks. That was in 2017.
    In fiscal year 2017, they took on average 3 months, and some
    took 6 months to a year for approval. In fact, from 2010 to
    2016, 26 licenses were approved per year, but from 2017 to
    2019, only 16 were approved each year. Why the delay?
        Mr. SHEPARD. I am not sure about those numbers and look
    forward to visiting with your staff more about them. I can tell
    you that when we looked at 2017 to 2019, in terms of average
    approval time, it was 7.03 months average for approvals. When
    we go back and look at 2014 through 2016, that number is
    actually higher. It is 7.2. Downward trend since 2013, but in
    2018, we had 25 licenses.
        Chairwoman VELAZQUEZ. Let me ask you one last question
    because my time has expired.
        I would like to stay on the topic of licensing. Is it true
    that your office is contracting out a large amount of that
    examination work instead of doing the work yourself?
        Mr. SHEPARD. In licensing, we do not contract anything out
    other than FBI background checks with an interagency agreement.
    And we are seeking to----
        Chairwoman VELAZQUEZ. Are you not contracting out
    examination work?
        Mr. SHEPARD. With examinations and the Examination Office,
    which is a different office than the licensing, we do contract
    work out.
        Chairwoman VELAZQUEZ. Will that explain the delays?
        Mr. SHEPARD. When I arrived, as I mentioned in my opening
    testimony, a little over half of the SBICs had been examined,
    half had not been. And so we needed to surge to get to 100
    percent statutory compliance. We required contracting to do
    that because we did not have the staff to do it.
        Chairwoman VELAZQUEZ. My time has expired.
        I now recognize the Ranking Member, Mr. Balderson, for 5
    minutes.
        Mr. Hagedorn is recognized for 5 minutes. Thank you.
        Mr. HAGEDORN. Thank you, Madam Chair. I appreciate it.
        Mr. Shepard, good to see you today.
        So yeah, very important program, part of the SBA. I mean,
    you have these businesses, great business models, ideas. They
    want to expand. Just need a little bit of help with the
    capital. And so we appreciate the intent of the program, and
    all the people who are trying to get behind it and do the job.
        I have heard similar things that the Chair brought up, that
    maybe there is some slow walking here or maybe not as much
    emphasis to our small businesses as they would like to see. I
    guess today they will have a chance to explain or talk a lot
    about that.
        But just in a general sense, how long does it take for
    these licenses to come about, and from a process of a small
    business to receive any capital enhancements, generally when
    they start the process, how does it work and how long does it
    take?
        Mr. SHEPARD. Well, the SBICs actually determine the
    investing to the small businesses. So how quickly that occurs
    is something between the SBIC and the small business concerned
    that receives the money.
        Mr. HAGEDORN. There is no kind of historical data to kind
    of give some indication as to generally how long it takes, or
    just every situation is so different you cannot track it? Is
    that what you are telling me?
        Mr. SHEPARD. I think there are differences about the due
    diligence required by an SBIC on a small business concern. Some
    are going to take longer than others. We will look into that
    information and be glad to sit down with you and share that.
        Mr. HAGEDORN. I actually represent a rural district in
    Southern Minnesota, 21 counties, and the largest city,
    Rochester, home to the Mayo Clinic is 115,000, and from there,
    you know, lots of small communities. But great small businesses
    ideas, and folks are expanding in our rural communities every
    day. And I know some of them could use the assistance of the
    SBA and this program. And I think last year the President
    signed a bill. Actually, the Spurring Business and Communities
    Act, which if I understand, a good chunk of that is supposed to
    be devoted or directed to small business opportunity in the
    rural areas.
        Do you have any update on how we are doing there? Have you
    seen an increase in small business activity that you contribute
    to in the rural areas?
        Mr. SHEPARD. Absolutely. We have been very focused because
    of last year's memorandum of understanding between former
    Administrator McMahon and Sunny Perdue, the secretary of
    Agriculture. We began taking on conferences and having
    conferences, talking about rural investing. We have had several
    outreach events, some of them I mentioned in my testimony,
    where we have community development workshops where we talk
    about rural investing, the need for rural investing. We have
    done a couple of those in Oklahoma, Arkansas, North Carolina,
    Maine. We also bring in the other Federal agencies. We do that
    in partnership with USDA, talk about their Rural Business
    Investment Company program, in conjunction with the SBIC
    program. Talk about Community Reinvestment Act credits. We
    often in those workshops have the FDIC, the Federal Reserve,
    and the comptroller of the currency there, to talk about that
    activity and how the financial institutions that are in those
    areas can invest in small business companies, Small Business
    Investment Companies; that is a way to channel, deploy their
    capital into a Small Business Investment Company that can then
    invest in those demographic areas that are rural.
        Mr. HAGEDORN. So in your opinion, the implementation of
    that act is on schedule or it is going well? I mean----
        Mr. SHEPARD. Well, in terms of----
        Mr. HAGEDORN. If I have had people tell me that they
    thought there was, again, a little bit of foot dragging, how
    would you respond to that?
        Mr. SHEPARD. The act, obviously, has been passed and the
    guidance is on our website. And we have not received any
    applications for that but it is on the website, and the
    guidance is there and the applicants can----
        Mr. HAGEDORN. Should we a little bit more proactive rather
    than waiting for them to come to you? I mean, is it not part of
    your job to go out there and make sure that folks understand
    what is available? And maybe me, too. I should get more
    involved and understand the law better so I can help our small
    businesses when we speak. But perhaps that is something I can
    gain from you or your organization down the road if that would
    be okay.
        Mr. SHEPARD. Yes. And we bring that up every time we have a
    community development workshop. We talk about that.
        Mr. HAGEDORN. Okay. Thank you. I yield back.
        Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
        Now we recognize the gentlelady from Iowa, Abby Finkenauer,
    Chair of the Subcommittee on Rural Development, Agriculture,
    Trade, and Entrepreneurship.
        Ms. FINKENAUER. Thank you, Madam Chairwoman. And thank you,
    Mr. Shepard, for being here today.
        We know that Small Business Investment Companies, SBICs
    program started in 1958. SBICs we know have invested billions
    across our country creating jobs and creating opportunity all
    over the country. And one of those SBICs known today actually
    as AAVIN, a private equity, has operated in my district in
    Cedar Rapids, Iowa, since the beginning of the program.
    Partnering with SBA has allowed AAVIN to make decades worth of
    investments that have strengthened our local and our national
    economy. The company has grown jobs in my district, whether by
    giving a boost to Happy Joe's Pizza, which I think most people
    in Eastern Iowa are very happy that they did, or supporting the
    development of local telecomm firms. The SBIC program has done
    a lot for places like Northeast Iowa. But its continued success
    depends on how well SBA runs the program. And current
    management is exactly what I am concerned about here today.
        Let's take licensing, for example. SBA needs to efficiently
    issue licenses to investment companies so they can participate
    in the program, lend, and then also help our small businesses
    grow, obviously. But for the first 4 months of this fiscal
    year, the SBA did not issue a single license. I do not want the
    good work of SBICs and all that they do to actually be
    threatened simply because SBA seems to be asleep at the wheel
    in this regard.
        I understand your office has actually failed to simply even
    provide reasons for why an application has been denied, and I
    am wondering today, what is one of the more common reasons of
    why these applications are denied and these licenses are
    denied, and then why have applicants not been given reasons in
    the first place?
        Mr. SHEPARD. Thank you for the question.
        I do want to correct the assertion that applicants are not
    given reasons, because they are. And they always are. And not
    only might they be given a reason by phone or by email about
    why a denial occurred, we also give them an opportunity to
    perhaps re-do their investment plan so they can get an SBA
    license to operate an SBIC, because that is the intent of the
    program.
        Ms. FINKENAUER. So what is a common reason?
        Mr. SHEPARD. A common reason why a denial may occur? It
    could be maybe the investment plan is outside the regulations
    or the statute of what an SBIC should be investing in. So real
    estate, for example, the program does not do that. It does not
    do project management. So that could be an example of a reason.
        Ms. FINKENAUER. Would this be why SBA for the first 4
    months did not issue a single license? Did they all fall under
    that reason, or what is the reason that SBA has not issued a
    single license in the first 4 months of this year?
        Mr. SHEPARD. Well, I can tell you that last year we issued
    25. This year we are at 14. And we are continuing to work,
    before Monday, to do more.
        Ms. FINKENAUER. So what is your plan to reduce--I am glad
    to hear before Monday you are planning to do more, but do you
    have a plan moving forward here to reduce these delays in
    licensing approval?
        Mr. SHEPARD. Well, as we look at the approval process as I
    mentioned in my testimony, 2017 through 2019, we are showing
    7.03 average, better than the 2014 to 2016 average. And always
    want to be more efficient, more effective, and process as
    quickly as possible, balancing our stewardship responsibility
    in terms of risk, but always trying to improve and do better.
    One of the reasons why I added two more people to licensing was
    just for that reason, to license, to speed that up if possible.
        Ms. FINKENAUER. Great. Well, it is very clear today but
    there are some tweaking that still needs to be done, making
    sure that folks are getting what they deserve and what they
    need to make these investments in our communities across the
    country and how important this program is. You know, we have a
    lot of work to do here and I want to make sure that we all take
    it very seriously and make sure again that folks get what they
    need and SBA is doing its job.
        So thank you, Mr. Shepard, for being here today. And my
    time is expired.
        Chairwoman VELAZQUEZ. Well, we have 21 seconds, and I would
    like for you to yield to me.
        Ms. FINKENAUER. I would love to yield to Madam Chair.
        Chairwoman VELAZQUEZ. The 7.3 is what? Is it per year? Is--
    --
        Mr. SHEPARD. 7.03 is an average from 2017 through 2019.
        Chairwoman VELAZQUEZ. The gentlelady yields back.
        Now we recognize Dr. John Joyce from Pennsylvania, Ranking
    Member of the Subcommittee on Rural Development, Agriculture,
    Entrepreneurship, and Trade.
        Mr. JOYCE. Mr. Shepard, thank you for being here.
        Madam Chair, thank you for hosting this very important
    meeting.
        Small businesses are the backbone to American industry. And
    in my home state of Pennsylvania, small businesses account for
    more than 99 percent of all the businesses. They have allowed
    us to achieve the sixth largest economy in the Nation, worth
    more than $700 billion annually. However, in the underserved
    and rural communities, like those that I am proud to represent
    in South Central Pennsylvania, obtaining capital remains a
    common barrier to growth. By leveraging private dollars with
    Federal dollars, SBA's SBIC program increases the availability
    of long-term capital to small businesses which may not be as
    attractive to the traditional lenders.
        Since 2019, SBICs have invested more than $1.8 billion in
    393 businesses across Pennsylvania, with over $130 million
    invested in fiscal year 2018 alone. Pennsylvania's businesses
    have received financing from SBICs in 2016 that supported over
    5,000 employees, and that number hopefully continues to grow
    today.
        But I have concerns. This program demonstrates that, yes,
    there is public policy that can succeed when it aligns with the
    power in the private market. But I am concerned, as other
    members have addressed this as well today, Mr. Shepard, about
    the apparent delays in the licensing process that have been
    noted in SBA's management review. Our Chair and our Ranking
    Member, Mr. Chabot, discussed the downturn in the number of
    approvals of licenses, and obviously, the number of dollars
    that go with them.
        It is not clear that we can justify why these numbers have
    decreased, and it is not an understanding that is something
    that is clear to me at this point from the dialogue and from
    the questioning from our Chair and from previous members.
        Now, you did testify in the Senate Small Business, and they
    obviously asked you these same questions in their hearing with
    you in February. Were you able to follow up and provide them
    with the answers to these questions: (a) why we are seeing a
    decreased number of license approvals; and (b) what is your
    plan? How do we move forward? We, as members of the Small
    Business Committee, who take this challenge so seriously, what
    is the message that you were able to provide to the Senate
    subsequent to that hearing, please?
        Mr. SHEPARD. We are in the process of getting answers back
    to the Senate, to answer your first question.
        Chairwoman VELAZQUEZ. That was in June?
        Mr. SHEPARD. Yes, ma'am.
        Chairwoman VELAZQUEZ. How long is it going to take?
        Mr. SHEPARD. I will have to check with our team and see
    where we are.
        Chairwoman VELAZQUEZ. No, you are in charge.
        Mr. SHEPARD. Yes, ma'am.
        Chairwoman VELAZQUEZ. You are in charge of the program. It
    is your responsibility. You knew that you were coming before
    this committee, and you also knew that we were paying attention
    to your appearance before the Senate Committee. How could you
    come here and not be prepared to answer? I am sorry; I will
    give you more time.
        Mr. JOYCE. Madam Chair, we are on the same page here. No
    apology is necessary.
        We take this charge quite seriously. And this Committee
    shares those concerns.
        Now, just for clarification, the Committee that you
    appeared for in the Senate was in February; correct?
        Mr. SHEPARD. June.
        Mr. JOYCE. In June, okay. So that meeting, and you are
    still preparing to answer those questions at this point in
    time? And we do not have any kind of ability to take this
    message of why there are so many delays in the licensing?
        Mr. SHEPARD. The answers will be forthcoming.
        But I want to correct the assertion about the licenses. I
    had mentioned in my opening testimony that there had been a
    downward trend from 2013, and that last year we had 25. So we
    had a good year last year, an upward tic. I mentioned that we
    are at 14 this year and aspiring to do more before the end of
    the fiscal year.
        In terms of the comment about rural, we would welcome the
    opportunity to visit with Committee to talk about how we might
    be able to channel and get direction from the Committee through
    statute to put more money in rural areas.
        Chairwoman VELAZQUEZ. Dr. Joyce, would you yield for a
    second?
        Mr. JOYCE. Yes, ma'am.
        Chairwoman VELAZQUEZ. Of the 25, how many were repeat
    applicants?
        Mr. SHEPARD. About half.
        Chairwoman VELAZQUEZ. Okay.
        Mr. JOYCE. Madam Chair----
        Chairwoman VELAZQUEZ. Thank you for yielding.
        Mr. JOYCE. Of course. Madam Chair, if I might just
    continue.
        I think the message that I am going to ask you to take with
    you is that these loans, these licenses for rural, South
    Central Pennsylvania, for small businesses that cannot go and
    reach to traditional lenders, these are important. These are
    important for the growth of the people that we represent. This
    charge is taken quite seriously. I look forward to you to
    returning to us with those answers.
        And at this point, Madam Chair, I yield.
        Chairwoman VELAZQUEZ. The gentleman yields back. Thank you.
        I now recognize the gentlelady, Ms. Davids, from Kansas,
    for 5 minutes.
        Ms. DAVIDS. Thank you, Chairwoman.
        Mr. Shepard, my hope was to talk with you about the
    diversity issues that we are seeing in women and minority-owned
    businesses' investments and how the SBIC program impacts those.
    I think I can just make a blanket statement that when
    investments are not being made, it disproportionately affects
    marginalized communities. And after the line of questioning
    that we have heard so far, a number of concerns have come up
    that I think I would like to just follow on.
        One is when you testified before the Senate Committee and
    indicated that you were not sufficiently staffed, my question
    is if you are not advertising on USAJobs, how are you finding
    people? You said you are in the process of going through
    applicants. What is the other mechanism that you are using to
    find applicants?
        Mr. SHEPARD. If I may, we did post on USAJobs. Those
    postings have closed and we are interviewing for those seven
    positions now. So it went on, came off, and now we are going
    through the interview process. USAJobs is the primary location
    that our Human Resources Department uses to advertise.
        Ms. DAVIDS. Okay. That would have been a good response to
    the question about the USAJobs earlier.
        So to follow on one of the lines of questioning from Ms.
    Finkenauer, the 4 months that you did not issue any licenses,
    have you evaluated what the impact of the failure of the
    program to issue licenses has had on the investments that would
    have taken place? And what the low number as compared to last
    year, what the impact of that is? Because the program is
    supposed to be helping spur investment and innovation, and if
    you are at half the number of licenses as you were last year,
    just over half, then how are you looking at the delta between
    last year and this year?
        Mr. SHEPARD. Well, again, we did issue 25 last year. We are
    at 14 now, and we have more that we are processing currently
    this week.
        Ms. DAVIDS. So we are in September.
        Mr. SHEPARD. Right.
        Ms. DAVIDS. How many more months are left in the timeframe
    that you are talking about? Is this the fiscal year or is this
    the calendar----
        Mr. SHEPARD. Fiscal year is what I am talking about.
        Ms. DAVIDS. So are you going to issue nine more licenses in
    the next 2 days?
        Mr. SHEPARD. We are not going to issue nine more licenses
    in the next 2 days.
        Ms. DAVIDS. Not nine?
        Mr. SHEPARD. Maybe four, we hope.
        Ms. DAVIDS. Okay. So are you planning on evaluating the
    negative impact on investments that, I mean, this body has
    allocated and started a program that has been successful and
    has helped a lot of businesses thrive. Have you looked at the
    negative impact that the failure to issue licenses is going to
    have? And if not, do you plan to?
        Mr. SHEPARD. We issue licenses as quickly as possible. I
    mentioned the downward trend. I mentioned about what we did
    last year. Our licensing times are in a good place when you
    look at 2017 to 2019, and so we are doing----
        Ms. DAVIDS. Can you explain to me what ``in a good place''
    means?
        Mr. SHEPARD. Well, when we compare 2017 to 2019 with the
    7.03 average license time compared to the 3 year period prior,
    2014 and 2016, we have beat that. So from a processing
    standpoint, we have done a better job than from 2014 through
    2016.
        Ms. DAVIDS. You have done a better job of processing but
    not actually licensing?
        Mr. SHEPARD. Those are actually----
        Ms. DAVIDS. You have done a better job of denying licenses?
        Mr. SHEPARD. No. Actually, our denials are better. We have
    done fewer denials in that 2017 to 2019 period. But to clarify
    my point, we have actually licensed quicker. So applicants that
    have come in received an SBA license to operate an SBIC, that
    is what I am referring to when I mentioned the 7.3 number.
        Ms. DAVIDS. Okay. So I have another question I am going to
    submit in writing.
        But can you tell me what the consequence is? I saw that you
    have previously had leadership positions in venture capital,
    investment banking, private equity, investment fund management.
    Can you tell me what happens usually in the private sector when
    you fail to perform at the same level that was previously
    performed at in terms of investments?
        Mr. SHEPARD. Well----
        Ms. DAVIDS. What would happen if you showed up and talked
    to your private equity investors and said we normally invest in
    25 companies but this year we only did 14?
        Mr. SHEPARD. I think it would be a good idea to visit with
    the staff about capital formation, which we do not control. We
    can only process the applicants that come in to the program. So
    that is part of what I am trying to convey is that we do not
    control capital formation. We do not control the formation of
    the SBICs. We can encourage it, but ultimately, they have to
    raise the capital and they have to come in. And they do come
    in.
        Ms. DAVIDS. Okay. I have gone over my time but that is the
    second time that you have put the onus of responsibility for
    this solely on your staff. And that to me is questionable
    leadership. And we will follow up with additional questions in
    writing.
        I yield back.
        Mr. SHEPARD. And if I may, the staff is doing a wonderful
    job. I am really talking about capital formation that takes
    place in the marketplace that is beyond the SBA's control.
        Chairwoman VELAZQUEZ. Time has expired. The gentlelady
    yields back.
        Now we recognize Mr. Balderson, from Ohio, Ranking Member
    of the Subcommittee on Innovation and Workforce Development for
    5 minutes.
        Mr. BALDERSON. Thank you, Madam Chair.
        Good morning, Mr. Shepard. Overall, how is the performance
    of the program today compared to 5 years ago?
        Mr. SHEPARD. We have had the challenges that I have
    mentioned with technology, which we have improved. We had the
    challenges with the examinations, which we have taken to 100
    percent. Five years ago we were not examining at the level that
    we are now with 100 percent compliance. So we have improved in
    the areas of technology. We have improved in the areas of--I
    have mentioned licensing approval time several times. Our
    denials are down. We deny fewer. So IT improvements, licensing
    improvements, and with our modernization efforts, and
    especially examinations, it has improved drastically from not
    examining, which is a statutory requirement in the Small
    Business Investment Act. What I inherited was about half had
    not been. Now we are at 100 percent, much better there.
        Mr. BALDERSON. Is there more risk today than there was 5
    years ago?
        Mr. SHEPARD. In terms of size, there is more, certainly
    more capital at risk, $4.2 billion of SBA guarantees. So if you
    look at the amount of capital that is in the marketplace with
    the program with the guarantee, that could be one argument that
    there is more risk.
        Mr. BALDERSON. So if the performance is good, then why the
    downturn? I mean, some of the performances you have stated and
    you answered one of the questions I have asked. If it is good,
    what is the downturn?
        Mr. SHEPARD. In terms of licensing activity?
        Mr. BALDERSON. Yes. Yes.
        Mr. SHEPARD. The 2013 through 2017, sometimes explaining
    what happened in 2013, to 2014, to 2015, to 2016, constriction
    in the private equity industry, fewer people coming in. Again,
    we can only process applications that come in to the SBA. Why
    there were fewer from 2013 and why that downward trend
    occurred, we do not know the answer to that. Again, we can only
    process those applications that come in to the SBA.
        Mr. BALDERSON. So now, are the applicants up or down?
        Mr. SHEPARD. Well, last year we had 25. The previous year
    had been the downward trend.
        Mr. BALDERSON. Okay.
        Mr. SHEPARD. So up when comparing that downward trend to
    last year.
        Mr. BALDERSON. Okay. In your testimony, you discussed many
    of the challenges faced by small business investors. You go on
    and talk about the risk that creates for the American taxpayer.
        All right. Second panel. All right. So I am going off what
    the Ranking Member had here.
        Madam Chair, I yield back my remaining time.
        Chairwoman VELAZQUEZ. Okay. The gentleman yields back.
        The gentlelady from California, Ms. Chu, Chairwoman of the
    Subcommittee on Investigations, Oversight, and Regulations, is
    recognized for 5 minutes.
        Ms. CHU. Mr. Shepard, I want to recognize the success of
    the SBIC program, which is amongst the oldest at SBA. This
    program would help countless small businesses to secure capital
    and financing that they otherwise could not access through
    traditional private equity firms and is responsible for
    millions of new and sustained jobs at minimal cost to the
    government, and it is a priority for both Democrats and
    Republicans in Congress because it is so successful. That is
    why I have a bill, H.R. 116, which would increase capital for
    SBICs, and it was passed at the House at the beginning of the
    Congress and is currently waiting consideration in the Senate
    which would allow banks to invest up to 15 percent of their
    capital and surplus into one or more SBICs subject to the
    approval of the appropriate Federal bank regulators. And that
    is an increase from the current allowed percentage of 5
    percent.
        However, I believe that the SBA is not taking this program
    seriously. And one reason for the downturn in approvals could
    be the lack of outreach to potential SBIC applicants. The Small
    Business Investment Alliance has criticized your department for
    failing to effectively conduct outreach to prospective SBIC
    applicants. For example, they cite that at a recent event in
    New York, you attracted only one audience member. And in May
    2019, they reported that you held an outreach event in Maine
    and disinvited the state's only licensed SBIC from attending.
        So I would like to ask you, Mr. Shepard, about why there is
    this lack of outreach to potential applicants. I mean, we know
    that the SBA struggled to attract more women and minority-led
    SBICs, but we know that SBICs make more investments in minority
    and women-owned small businesses than their counterparts. Why
    this lack of outreach, and what are you going to do about it?
        Mr. SHEPARD. Well, I had mentioned in my opening testimony
    that the last 3 years we have actually had 50 engagements,
    external engagements. We talk about women and minorities. We
    talk about rural. We talk about the SBIC program. We talk about
    the need for the program.
        Ms. CHU. Mr. Shepard, you said 50. Do you have the
    attendance figures for them? Because we talk about one person
    attending.
        Mr. SHEPARD. I can get those for the Committee in terms of
    attendance.
        Ms. CHU. I mean, you can hold all these events but there
    could be no actual outreach to people. So nobody is attending.
        Mr. SHEPARD. Well, the intent is to outreach, is to inform,
    is to educate, and that is the intent of having these
    engagements, the close to 50 we have had the last 3 years.
        Ms. CHU. Well, I would like to follow up with other lack of
    classes that you are supposed to be holding. SBA's standard
    operating procedures require SBIC licensees to attend an SBIC
    regulations class but your office has reportedly not held or
    scheduled any in-person regulation classes since November 2019.
    The SBA website, however, still states that this training takes
    place several times per year in Washington, D.C. Why has there
    not been an in-person training session held in nearly a year?
        Mr. SHEPARD. Well, let me first say that no one has been
    held back or denied leverage or a license because of that. That
    provision is being waived currently by the program office. We
    are discussing a new model and a new way to do it, an online
    certification. We do not think it makes a lot of sense of the
    staff to have to have a 1-day training seminar and have people
    come in to Washington, D.C. to do that. So going into fiscal
    year 2020, the intent is to and will be to have an online
    certification for that and revise the provision accordingly.
        Ms. CHU. Well, you should make it clear in your standard
    operating procedures if that is what you are doing.
        I would like to address another issue, which is that you
    have voiced some concern that SBIC programs have grown too
    quickly and left the taxpayer overexposed with $14.2 billion in
    capital guaranteed by the SBA. But actually, SBA leverage is
    provided to SBICs at a zero subsidy rate and is eventually paid
    back in full to the government. And in fact, if an SBIC's
    portfolio loses money, private investors' capital must be
    completely exhausted before the SBA guaranteed capital is
    impacted. And so while the SBA can guarantee up to $175 million
    per SBIC, the program actually operates at zero subsidy and
    does not require any congressional appropriations. In fact, the
    program even managed to maintain its zero subsidy rate
    throughout the Great Recession.
        My time has run out, but let me say that it is false to say
    that the SBIC program has grown too quickly and is leaving the
    taxpayer overexposed.
        Mr. SHEPARD. May I respond?
        The context in which that statement may have been made may
    have been in regard to the subsidy model. And in 1992, a
    subsidy model was put in place to oversee the SBIC program it
    had $900 million in SBA guarantees. My comments were it has
    been 27 years. We are using the same subsidy model. It has
    grown from $900 million to $14.2 billion in SBA guarantees. The
    Federal Credit Reform Act came out in 1992. Again, using the
    same model, let's revise the model to make sure that taxpayer
    losses do not occur. So that is the intent.
        Chairwoman VELAZQUEZ. Time has expired. The gentlelady
    yields back.
        Now we recognize Mr. Hern, from Oklahoma, Ranking Member of
    the Subcommittee on Economic Growth, Tax, and Capital Access,
    for 5 minutes.
        Mr. HERN. Thank you, Madam Chairwoman.
        It is really good to be here today as a small business
    owner and business man, job creator for over 34 years. This is
    near and dear to my heart. As the Chairwoman said, I also Chair
    the Subcommittee, Ranking Member on the Subcommittee on Growth,
    Tax, and Capital Access. Access and capital is very important.
    And so for that I am very supportive of what hoe SBIC is and
    what it is about but I am also very concerned about the lack of
    utilization.
        The Chairwoman mentioned and asked you the question of how
    many of the 25 were new applicants and you said about half for
    last year. So of the 14, let's get clarity on that. Of the 14,
    how many of those are new for this year?
        Mr. SHEPARD. I do not have the exact statistics on that but
    can get it to the Committee.
        Mr. HERN. So let me ask a question you might know. So what
    is your office budget? How much is the budget that supports you
    and your office, your staff?
        Mr. SHEPARD. $1.8 million.
        Mr. HERN. So you have got a $1.8 million budget and you
    cannot know the makeup of only 14 applications that 70
    something people are processing this year. And like my
    colleague from Kansas said, asked you the question, you are
    going to try to hit that number this fiscal year which closes
    on Monday, try to make up the difference between 25 and 14?
        Mr. SHEPARD. On the 14 number, Congressman, four are first-
    time applicants and 10 are subsequent applicants.
        Mr. HERN. So I would say with 70 office folks working,
    analysts or whatever they care called, folks in your office,
    you processed four new applications this year?
        Mr. SHEPARD. Actually, 14.
        Mr. HERN. Of the 14?
        Mr. SHEPARD. That is where we are currently today.
        Mr. HERN. Right, but 10 of those are repeats.
        Mr. SHEPARD. Ten are repeats.
        Mr. HERN. So it is pretty easy to figure out if they are
    performing or not, so I would think that process is not the
    same as somebody that is coming in brand new that you are
    trying to do the examination on. So only four had a complete
    examination done, I would assume because you are monitoring
    these performances along the way; is that correct?
        Mr. SHEPARD. It is. And we are staying within that 5 to 8
    month application licensing process time that I mentioned
    earlier.
        Mr. HERN. So I am going to borrow some data from the Senate
    Small Business hearing that said that the normal approval rate
    is roughly 20 percent but now it is 11 percent.
        Do those numbers mean anything to you?
        Mr. SHEPARD. I would have to check those numbers. I am not
    sure about those figures.
        Mr. HERN. I would have thought that after the Senate Small
    Business Committee that you would probably be really tuned up
    to really defend yourself when you came here but it does not
    appear that. We are kind of getting the same responses that the
    Senate got. So I guess for once, we are all being treated
    equally and we are getting the same information as the Senate
    and the House together.
        Mr. SHEPARD. And Congressman, if I may.
        Mr. HERN. Sure.
        Mr. SHEPARD. In terms of annual, the denials that have
    occurred in 2017 through 2019, we only had 5.28 denials per
    year on average. The previous 3-year period it was a larger
    number. From 2014 through 2016 it was 8.96 denials per year. So
    I am not sure if that is what we are getting at, but I am
    certainly happy to get with your staff and with this Committee
    and provide that information for more clarity.
        Mr. HERN. So let me ask this question. How do you
    attribute, or what do you attribute to the reason for the lack
    of utilization of this program? You said it is not your people
    and I appreciate that. So if it is not your people, the program
    is the same, the economy is growing, is it lack of leadership?
    I mean, what is it exactly?
        Mr. SHEPARD. Well, you are asking about----
        Mr. HERN. I mean, I am not asking you to self-incriminate,
    but there is not a whole lot in business. Things kind of stop
    at the top.
        Mr. SHEPARD. Thank you for that question. You are asking
    about the decline from 2013 through 2017 that occurred. We
    would like to study that more. We have got in our budget to do
    to study.
        Mr. HERN. Can I stop you? Because I am going to run out of
    time here. But going from 25 to 14, you do not have to go back
    very far to see that you are performing at about a 50 percent
    rate from one year over the next. Does that not concern you at
    all?
        Mr. SHEPARD. Well, we can only process the applicants that
    are in the licensing queue. We cannot control the number of
    applicants that----
        Mr. HERN. Does it not concern you that if you have got
    zero, so you just, I mean, we are okay with just spending
    taxpayer money? I mean, that is why people dislike Washington,
    D.C. There is zero accountability, and that is what we are
    trying to do is provide oversight. What the Senate asked you to
    do is provide information back. We are asking almost identical
    questions that the Senate asked in June, you know, some 3
    months ago. I cannot imagine if you are not doing any
    applications really what you are doing a whole lot of, so I
    would think that you could respond very quickly. And here we
    are. We are getting the same responses they go. And so I guess
    we will wait in perpetuity for the answers, but I know the
    Chairwoman is pretty passionate about this, and I doubt that
    she is going to let you go very long.
        Mr. SHEPARD. Well----
        Mr. HERN. My time is expired, Madam Chairwoman.
        Chairwoman VELAZQUEZ. The gentleman yields back. Thank you.
        Mr. SHEPARD. If I may?
        Chairwoman VELAZQUEZ. No, the time has expired.
        I now recognize Mr. Stauber, from Minnesota, Ranking Member
    of the Subcommittee on Contracting and Infrastructure for 5
    minutes.
        Mr. STAUBER. Thank you very much, Madam Chair. And I really
    appreciate the opportunity to speak and you holding this.
        Mr. Shepard, I am not going to pile on but I will tell you
    that I, too, am a business owner for 30 years. If the success
    rate my brothers and I had in our small sporting goods store in
    Duluth, Minnesota, if we operated at your efficiency, we would
    have been out of business a long time ago.
        So I will tell you this. I think you know that small
    business is the engine of our economy. And when you do not
    support them the way we have asked you to, it is a detriment to
    Main Street America and Main Street Minnesota. The economy is
    going good. We have people, we have in particular women that
    want to get into small business. It is an opportunity to live
    the American dream. And I am just going to say that this member
    of Congress is extremely disappointed in what is happening in
    this program, and it needs to be fixed. And I do not think you
    have a lot of time to fix it.
        Thank you, Madam Chair.
        Chairwoman VELAZQUEZ. The gentleman yields back.
        Let me take this opportunity to welcome Mr. Bishop, from
    North Carolina, to the Committee.
        Mr. BISHOP. Thank you, Madam Chairman. I am delighted to be
    with you and I am learning already.
        Chairwoman VELAZQUEZ. Okay. Thank you.
        Mr. Shepard, thank you very much for taking time to walk us
    through our many questions. You know that you have to get back
    to us----
        Mr. SHEPARD. Correct.
        Chairwoman VELAZQUEZ.--with some of the responses that you
    were unable to provide today. And I hope you will get back to
    us by end of business next Friday. I am sure we will stay in
    touch on this issue in the coming months, and you are now
    excused.
        We will now take a moment while we get our next panel
    settled. Thank you.
        Mr. SHEPARD. Thank you. And always welcome the opportunity
    to come before you and your staff and program participants.
    Thank you.
        [Recess]
        Chairwoman VELAZQUEZ. Welcome to our witnesses on today's
    second panel. I will take a minute to introduce each of you
    before you give your testimony.
        Our first witness today is Mr. Brett Palmer, President of
    the Small Business Investor Alliance. In this role he works to
    foster a healthy environment for small business investing and a
    strong and profitable lower middle market. Mr. Palmer served in
    the executive branch as a presidential appointee in the
    Commerce Deparmtent as Assistant Secretary for Legislative
    Affairs and as the previous Deputy Assistant Secretary for
    Trade Legislation. He holds a history degree from Davidson
    College. Welcome.
        Our second witness is Dr. John Paglia. Mr. Paglia is the
    Senior Associate Dean of Academic Affairs and a professor of
    finance at Pepperdine University. A recognized expert on the
    topic of small business financing, Dr. Paglia has delivered
    over 50 presentations, including over a dozen keynote
    addresses. He was awarded in 2016 with a consultancy contract
    with the Library of Congress Federal Research Division as a
    private equity and venture capital expert to conduct research
    on the economic impacts of the SBA's SBIC program. Welcome,
    sir.
        Our next witness is Ms. Ronda Penn, the Chief Financial
    Officer of Plexus Capital, located in Raleigh, North Carolina.
    She has 17 years of experience in public accounting with Dixon
    Hughes Goodman, LLP, where she served as an audit partner with
    a primary focus on private equity funds. Ms. Penn also has
    specialized knowledge with private equity funds, which include
    regulatory reporting and investment accounting related to small
    business investment companies. She is a graduate of the
    University of North Carolina at Greensboro, where she earned a
    Master of Science in Accounting. Welcome.
        Our next witness is Mr. Walt Rodgers, who was supposed to
    be introduced by the Ranking Member but I believe he is now in
    the Judiciary Committee. Mr. Rodgers is Chief Executive Officer
    of the Family RV Group, with multiple locations throughout
    southwestern Ohio and across five states. Family RV opened its
    doors in 1968 as Corian RV. Today, Family RV is a wide-
    encompassing dealership that also sells parts and accessories.
    Mr. Rodgers joined the company this past February but has a
    long history of leadership roles with numerous companies. You
    are welcome, sir.
        And now, Mr. Palmer, you are recognized for 5 minutes.

    STATEMENTS OF BRETT PALMER, PRESIDENT, SMALL BUSINESS INVESTOR
    ALLIANCE; JOHN PAGLIA, PROFESSOR OF FINANCE, GRAZIADIO BUSINESS
       SCHOOL-PEPPERDINE UNIVERSITY; RONDA PENN, CHIEF FINANCIAL
    OFFICER, PLEXUS CAPITAL; WALT RODGERS, CHIEF EXECUTIVE OFFICER,
                               FAMILY RV

                       STATEMENT OF BRETT PALMER

        Mr. PALMER. Thank you very much, Madam Chairwoman.
        Chairman Velazquez, members of the Committee, thank you
    very much for holding this hearing.
        My name is Brett Palmer. I am president of the Small
    Business Investor Alliance, the trade association that
    represents small business investors and Small Business
    Investment Companies in particular. We appreciate you having
    this hearing.
        Small Business Investment Companies, commonly called SBICs,
    are highly regulated, private equity and venture capital funds
    that invest exclusively in domestic small businesses. They
    invest across the country to states and places that are often
    passed by or passed over. They provide long-term capital and
    cannot be used to offshore jobs. The debenture leverage that
    the SBICs can access has maintained a zero subsidy for decades,
    including through the financial crisis and the Great Recession.
        And these are not just my assertions, they are the law.
    They come from SBA data, and they have been documented by
    independent research. One of the researchers is to my right and
    a former teacher of mine.
        I think everyone can agree that the following facts and
    findings by those independent researchers are pretty
    impressive, that SBIC-backed businesses created over 3 million
    net new jobs. That is a lot of jobs. The cost to the taxpayer
    to create these job was about $35 for each new job created.
    That is a fantastic return on investment. SBIC capital is
    spread much more evenly across the United States and is not
    concentrated in the money hubs of Silicon Valley or Wall
    Street. SBICs get money to where it is needed.
        The majority of SBIC funds invest in traditionally
    undeserved regions of the United States, particularly Kansas,
    Minnesota, Nebraska, North Dakota, South Dakota, the Upper
    Midwest, Alabama, Kentucky, Mississippi, Tennessee. These are
    not the bastions of capital but there are a lot of Americans
    there and there are a lot of small businesses. It is a great
    opportunity.
        And it has been touched only a very little, but
    manufacturing matters. And SBICs invest heavily in
    manufacturing. SBICs have been found to invest in all seven
    major industrial sectors. This is a national program with
    national benefits. I think if you asked everyone on this
    Committee, and I think you have heard some of that day, every
    member and every member of Congress, and every one of your
    constituents, they would all agree that we need more small
    business investment and not less. And the Trump administration
    Congress clearly want more small businesses growing,
    particularly manufacturing and particularly in ways that keep
    jobs here in the United States and not offshored.
        Now, the second part of my testimony makes me distinctly
    uncomfortable because I do not like having to say this but the
    truth is what is going on is a bit bizarre, that the only
    person who we are not sure supports these goals is the person
    paid by the taxpayer to promote small business investment. His
    actions and record run completely counter to the statutory
    mandate of the program and to the small business agenda. His
    management model could be summarized as linger, languish, and
    fester. This does not benefit anyone, particularly small
    businesses. The testimony given by the SBA this morning, which
    is all of a page and a half, half of which is hello, how are
    you, and not a lot of substance, compared to--it is kind of
    pathetic--compared to our testimony which is kind of a
    catalogue of incompetence. I mean, you do not normally see
    congressional testimony the size of a small phone book. But we
    have to document it because the record is clear and the record
    is true and the record is not pretty.
        The licensing for new small business funds is down 46
    percent for the first 3 quarters of this year. Leverage
    reserved, a leading indicator for future small business
    investments, is down 39 percent and it is on pace to be down 50
    percent for the year. That represents billions of dollars of
    small business investment that just will not happen.
        You heard some statistics today, they are a little bit odd,
    from the previous witness, about how in 2018 they licensed 25
    funds. Well, that is true because the previous year he stopped
    licensing. So if you suddenly jam up the pipe and then suddenly
    you get a pop at the end, hey, are you not doing great? Not so
    much.
        In 2017, for example, there were 15 funds licensed. I think
    the number of 11 of those were licensed before he got there on
    January 20th. The remaining four were from the following 8-1/2
    months. And so the idea that it popped up to 25, we are doing
    great, that is not so great. Fourteen licenses with 2 or 3 days
    left in the fiscal year is not an impressive number. He has
    spent significant funds, maybe wasted, we do not know, on
    contractors, while refusing to hire mission-critical positions
    and managers. And frankly, I think you heard some misleading
    testimony earlier. Yes, there were two people added to the
    licensing team, but they were taken from the program
    development team. The program development team is in charge of
    recruiting new funds, particularly women and minorities. So you
    take away from one, you move it to the other and you say you
    added two. And by the way, in the process you undercut the
    ability of bringing in new funds to undeserved areas and
    undeserved people. That to me is not a recipe for success.
        He also touched on all the efforts and time spent on IT.
    Yes, the SBA's IT is in need of improvement and we have been
    for a long time advocating for updating that. But a lot of
    money has been spent, there has been no progress made, and
    instead of things getting better, earlier this summer the
    entire SBA regulatory reporting system collapsed. And in that
    collapse they lost a whole lot of regulatory data. SBIC funds
    had to go reenter the data once it was opened, and once it was
    opened they could do it but that was thousands of man-hours and
    a lot of money. That is just not how a financial regulatory
    system should work. So if you spent all the last 2-1/2 years
    trying to upgrade your IT and spending taxpayer money to do it,
    should it not be getting better?
        The mismanagement is creating unnecessary risk to the
    taxpayer while harming capital access. That is not the way it
    is supposed to go. Further, the associate administrator
    repeatedly blocked congressional requests from Republicans and
    Democrats, House and Senate, for a taxpayer funded study on the
    impact of the SBIC program. Why was Congress and the public
    denied access to the report for over 2 years? Was it because
    the Library of Congress said the study is working and living up
    to the statutory mandate? The report he hid from you was
    released only when we used the Freedom of Information Act to
    pry it loose. This is another example that this is not just
    mismanagement, it is hostility. And there is a lot more I can
    say and a lot more I will. I welcome your questions and your
    comments but we are begging you to get the leadership of this
    office to allow the program to work. So thank you very much.
        Chairwoman VELAZQUEZ. Thank you, Mr. Palmer.
        Mr. Paglia, you are recognized for 5 minutes.

                        STATEMENT OF JOHN PAGLIA

        Mr. PAGLIA. Dear Chairwoman Velazquez, Ranking Member, and
    members of the Committee on Small Business. My name is John
    Paglia. Thank you for the opportunity to testify before you
    today.
        Sound deployment of capital in the U.S. is central for
    promoting economic growth, and I am grateful for the
    opportunity to speak to you on this important topic. I grew up
    in a household where my parents owned and operated small
    businesses, so this topic is very personal. I also worked
    closely with small businesses as a CPA, business appraiser,
    consultant, advisor and corporate director. At Pepperdine
    University, where I am a professor of Finance and senior
    associate dean at the Graziadio School of Business, I co-
    founded our Pepperdine Private Capital Markets Project in 2007,
    which provides lenders, investors, and the businesses that
    depend on them with critical data to make optimal investment
    and financing decisions. As part of this research, I also co-
    led the launch of our Pepperdine Private Capital Access Index,
    a quarterly economic indicator designed to measure the demand
    for, activity, and health of the private capital markets.
        I would like to share three key observations revealed in
    our most recent Pepperdine Private Capital Access Index Survey
    based on data collected from July 18, 2019 to August 2, 2019.
        First, 56 percent of small business owners surveyed
    indicated it is difficult to raise new equity financing. Fifty-
    nine percent indicated it is difficult to raise new debt
    financing.
        Second, 60 percent of small business owners say the current
    business financing environment is restricting growth
    opportunities for their businesses. Fifty-four percent
    indicated it is restricting their ability to hire new
    employees.
        Third, 39 percent of businesses are planning to raise
    funding in the next 6 months. If unsuccessful, 68 percent cite
    slower business growth, and 46 percent indicate they would have
    to reduce their number of employees.
        So the consequences of small businesses not obtaining
    capital and financing timely are potentially severe and
    detrimental to overall economic health.
        One such program that has demonstrated success providing
    much needed small business funding is the Small Business
    Administration's SBIC program. Fairly recently, during 2015 to
    2017, I had the honor and privilege of working with co-author
    professor David Robinson at Duke University and the Federal
    Research Division of the Library of Congress to produce three
    research papers studying the SBIC program. Our research
    addressed the general topics of diversity and inclusion, job
    creation, and SBIC's fit into the broader financing landscape.
        Based on our analysis, we concluded that the SBIC program
    has demonstrated relative strength with respect to diversity
    and inclusion, success on the job creation front, SBIC-backed
    companies created nearly 3 million jobs from 1995 to 2014, and
    a more balanced funding distribution in the small business
    financing landscape across company sizes, industries, and
    geographies.
        But there remains work to be done. Small businesses could
    benefit by having more capital available, as well as expedited
    access to funding, especially as needs arise and their capital
    structures change. Finding ways to achieve faster and more
    efficient capital deployment would increase their chances of
    success and serve to further job creation and economic growth.
        Small business financing and capital formation would also
    benefit greatly with increased transparency and robust
    educational programming. Small businesses have at best a
    moderate understanding of how to efficiently and effectively
    navigate the financing and capital markets to get the money
    they need.
        Accordingly, when small businesses need financing and
    capital, some freeze and choose not to pursue, or spend lots of
    time chasing opportunities that are not a good fit. If they do
    pursue funding, their mindset is do I qualify for funding
    versus a larger company mindset of what is the price of
    funding?
        In summary, despite the successes of various programs,
    including the SBIC program, small businesses continue to
    struggle to find the financing and capital they need to grow
    and hire new employees. Reducing frictions in the system,
    increasing transparency and educational opportunities, and
    increasing the amount of capital available would serve to
    further strengthen the foundation for economic growth.
        Thank you again for the opportunity to share these points.
    I am happy to answer any questions and address comments. Thank
    you.
        Chairwoman VELAZQUEZ. Thank you.
        Ms. Penn, you are now recognized for 5 minutes.

                        STATEMENT OF RONDA PENN

        Ms. PENN. Madam Chair and members of the Committee, thank
    you for holding this hearing, and thank you for asking me to
    testify.
        I am Rhonda Penn, and I am the chief financial officer for
    Plexus Capital. Plexus Capital is a small, North Carolina-based
    company, and we are helping small businesses in the United
    States do big things. I am excited to talk to you about the
    program today that has allowed our team to stay focused on
    supporting perpetually undeserved small businesses.
        My team at Plexus has managed SBICs for 22 years and
    witnessed the success of the program. I have personally worked
    with multiple SBICs and the SBA staff for more than 24 years.
    The sole purpose of the SBIC program is to provide capital to
    small businesses.
        Plexus invests in Main Street America small businesses
    across all industries. We are currently operating our fourth
    SBIC fund. It is a $400 million fund, and we are over 80
    percent invested at this time.
        We have a good working relationship with our analyst, Raoul
    Rodriguez at the SBA. We speak often. He genuinely cares about
    the program and he works hard. He offers advice on how we can
    improve, and I am happy to do the favor and give it back to
    him.
        Together with the SBA, Plexus has invested $1 billion in
    108 small businesses. We consider the SBA our partner and our
    largest investor. Our profit capital investors include banks,
    individuals, family offices, and institutions. We have raised
    $475 million of private capital. And this is key as to why this
    program is unlike any other public-private partnership as far
    as I know. In other programs, public money is put at risk
    alongside private money or ahead.
        But the SBIC program is unique in that it operates at a
    zero cost to taxpayers, and we, along with our partners, put
    our capital at risk first.
        But the real story of the SBIC program is about people,
    jobs, and communities behind the businesses that we support.
    Often we are measured based on financial metrics, but the
    driver behind every return we generate includes real people
    with families impacting their communities like the 26 employees
    at Plexus capital and the thousands of employees at the 108
    small businesses that we support.
        I will share with you just a few stats about the
    investments at Plexus. More than 80 percent of Plexus
    investments are in smaller concerns. The SBA defines a smaller
    concern as a business that has less than $6 million in net
    worth and less than $2 million in average 2 years of net
    income. More than 20 percent of Plexus investments have been in
    low to moderate income zones. More than 40 percent of Plexus
    investments are businesses owned by minorities and veterans.
    Overall, revenue growth for all Plexus investments has
    increased by more than 30 percent over the life of the
    investments, and jobs have grown by almost 30 percent during
    that time.
        So I have talked about the importance of the program, how
    it impacts people and communities. I just want to speak briefly
    about the future of the SBIC program.
        There are approximately 100,000 small businesses with sales
    between $10 and $100 million. Roughly 50 percent are owned by
    baby boomers. The continuity of these businesses and the
    millions of jobs in these businesses are dependent upon the
    successful transition of the estimated $2 trillion of ownership
    to the next generation of owner-operators. These small
    businesses need the SBIC program.
        To conclude, the SBIC program is a vital source of capital
    to small businesses. It is a prime example of how the Federal
    Government and private sector can work together to grow the
    economy and create jobs. I am thankful to this Committee for
    your support of the program. Plexus stands committed to pursue
    opportunities to strengthen the program with you. Thank you.
        Chairwoman VELAZQUEZ. Thank you, Ms. Penn.
        Mr. Rodgers, you are now recognized for 5 minutes.

                       STATEMENT OF WALT RODGERS

        Mr. RODGERS. Madam Chair, congressmen and congresswomen, it
    is an honor to be here today testifying in front of the
    Committee.
        My name is Walt Rodgers. I am the CEO of Family RV Group,
    formerly Colerain RV. Founded in 1968 by the Jung family,
    Colerain RV started as a small, family-owned RV dealership in
    Cincinnati, Ohio, with little more than 10 campers for
    inventory. Today, just over 50 years from those humble roots,
    the company has expanded to include dealerships throughout
    Ohio, Kentucky, Indiana, Tennessee, and Georgia. Given the
    unique nature of our business, the patient and flexible capital
    from our SBIC partners Northcreek, Spring, and Resolute, has
    been instrumental in facilitating and expediting this growth.
        Before proceeding about the impact of the SBIC program, I
    would like to provide a little bit more detail about the
    history of the Family RV Group. In the late 1960s, Charles and
    Lolly Jung decided to undertake the challenge of opening an RV
    dealership. With only a few campers on a lot and a sign on a
    small home, Colerain RV was born in a northern suburb of
    Cincinnati. The bootstrap effort instilled a focus on family
    and customer service and still remains a core value of our
    company today.
        By 1975, Colerain expanded to nearly 100 vehicle operations
    with brands including Mallard, Thunderbird, and StarCraft
    trailers. Over the next 20-plus years, not only did the
    company's stock expand, so, too, did the impact and influence
    of the Jung family.
        In 1988, Chuck Jung joined the family business to help his
    parents operate and grow operations. Shortly thereafter, Chuck
    was followed by his brother Steve and the two siblings led the
    company through another period of growth and success. The
    company relocated to its current 12-acre Cincinnati facility in
    1996, and given the rapid growth, brought on Wade Stepp, an
    operating partner and owner with extensive industry knowledge
    in the early 2000s. Wade, Chuck, and Steve made the decision of
    the next decade to focus on geographic expansion, acquiring
    single store locations in Dayton, Columbus, and Indianapolis,
    Indiana. By 2015, the company started looking for the next
    growth avenue. The addition of three new facilities began to
    strain the infrastructure, and rather than continue growing
    slowly in location by location, management realized the need to
    acquire not only additional talent and resources to support
    these operations, but also the opportunity to expedite growth
    through larger and more frequent acquisition activities.
        This impasse led to the transaction that involved
    Northcreek, Spring, and Resolute in January of 2016. Kidd and
    Company, a Connecticut-based private equity firm led the
    transaction providing and arranging capital to recapitalize the
    business, refinance Colerain's existing debt, increase cash
    needed for working capital, and acquire assets of Northside RV
    in Lexington, Kentucky. Given the many uses of capital and
    overall need, debt was required to properly finance the company
    while maintaining the flexibility needed to pursue growth
    opportunities beyond Northside. However, as an RV dealership,
    the main source of bank financing is floorplan debt, which
    allows companies like ours and automobile dealerships to pursue
    the expensive inventory essential for our stores and showroom.
    It can often be difficult to find other lenders that are
    willing to provide additional debt alongside or below such a
    facility.
        Despite the uniqueness of our situation, our SBIC partners
    were able to get comfortable with the transaction structure and
    business in general to provide the capital we needed. I truly
    believe that the distinct characteristics of the mezzanine debt
    provided by Northcreek, Spring, and Resolute, specifically the
    lack of amortization and willingness to be subordinated to the
    senior floor plan, provided the perfect solution for our needs
    and not only gave Colerain the necessary growth capital and
    flexibility, but allowed us to secure the initial floor plan
    facility and larger ones thereafter that may not have been
    possible with other capital providers.
        That transaction in 2016 immediately impacted the growth of
    the company with the acquisition of Northside. The addition of
    this platform and its assets created the Family RV Group and
    immediately increased revenue to nearly $120 million, while
    expanding the company's workforce from 130 to 180. With that
    acquisition, the group has completed another transaction,
    Dunlap RV, under the Family RV Group with locations in
    Nashville; Knoxville; Ringgold, Georgia; and Bowling Green,
    Kentucky. Though no direct capital was provided by our SBIC
    investors in this instance, the lack of amortization on their
    debt facilities allowed us to build cash on the balance sheet.
    By the time the Dunlap transaction needed to be financed, we
    had accumulated enough cash to fund the acquisition ourselves.
    Not only did this flexibility allow us to add Dunlap but also
    position and capitalize Family RV for further growth.
        Today, Family RV is an over $180 million business. It is
    continually looking to grow, improve, and support communities
    in which we operate. As I mentioned before, our business now
    employs some 300 American workers, more than twice that were
    employed in 2015.
        When the Jungs opened their single location mom and pop
    shop in Cincinnati, they never----
        Chairwoman VELAZQUEZ. Mr. Rodgers----
        Mr. RODGERS.--I am sure they never envisioned that.
        Chairwoman VELAZQUEZ. During the question and answer period
    you may be able to finish or add something that you feel
    strongly about.
        Thank you to all of you for being here today.
        Now I recognize myself for 5 minutes.
        Mr. Palmer, since you have been at SBA for so many years,
    can you please discuss anything that you find that you need to
    say or react to Mr. Shepard's information provided to the
    committee regarding licensing delays and approval rates?
        Mr. PALMER. It is regulatory roulette. I mean, you never
    know what you are going to get. They can move quickly when they
    feel like it. There was a fund that submitted their green light
    application in July, which is the early start of the process.
    My understanding is they were approved for license last week.
    It was about 40 days. Hey, that is great. The question earlier,
    if you are a repeat license, you should be able to move
    quickly. That is light speed. We have other repeat funds that
    are in good standing that have put their green light letter in
    which is the first start before you are even allowed to submit
    your license application that have had to wait over a year. I
    think some of the statistics are going down since 2013, well,
    2013 was a spike year after the financial crisis because we
    were filling gaps. I mean, look at the overall trend. And there
    is going to be a normal fluctuation, a little up and down. I
    get that. But you cannot do all your homework the night before
    and expect to do it well. I mean, businesses have to have some
    consistency. So the idea that you have got 14 licenses through
    363 days of the fiscal year and then in the last 2 days
    suddenly you are going to wake up and get it all done, that is
    not fair.
        I think on the personnel side, there are mission critical
    positions. Regulation matters. Regulation is a taxpayer
    protection. You have three area chiefs that are managers and
    oversee the actual regulators. Two of those three are vacant
    and they have been vacant for a very long time. There are all
    these contractors being hired, all these studies are being
    done. To the best of my knowledge no one has ever seen the
    results of any of those studies, but no one is getting filled.
    I think the last employee to be added to the Office of
    Investment was in February of 2018. And that just does not
    work. That is creating risk where there is no need for it. The
    money has been appropriated. The FTEs are there. And I think,
    and I think this might be a question for the Committee, that a
    number of those FTEs have been actually ceded back to other
    parts of the agency. So I think if we want to get more
    diversity and more geography we have got to get the program
    working. I think the underlying core is right but just the
    management is not.
        Chairwoman VELAZQUEZ. Thank you.
        Dr. Paglia, we know that the SBIC program has historically
    struggled with attracting and licensing women-led and minority-
    led SBIC funds. Your report noted SBICs have better racial and
    gender diversity in leadership positions compared to the
    broader private equity community, and these diverse SBICs are
    more likely to invest in low to moderate income regions of the
    country. Did you look at whether diverse fund managers have
    better investment returns than nondiverse managers? And if not,
    why?
        Mr. PAGLIA. Yes, that is a good question. And so we did
    take a look at that question. We wanted to understand if there
    were any discernable return differences between diverse and
    nondiverse fund manager teams. And by looking at the years of
    1995 to 2015, we examined that very question. We concluded that
    there was no statistically significant difference between fund
    returns among those two groups.
        Chairwoman VELAZQUEZ. Okay. Thank you.
        Ms. Penn, in your written testimony you talk about
    financing small businesses owned by baby boomers who might be
    wishing to retire soon but want to preserve their independence
    as small businesses. How many of those financings have gone to
    small businesses that have converted to a co-op or other
    employee-owned business models?
        Ms. PENN. Our fund does not work those types of
    transactions. We mostly are working with transactions moving to
    a strategic buyer. But Mr. Palmer may be able to speak on
    SBIC's others.
        Mr. PALMER. Sure. I mean, there is a broad range of
    investing types. I do not know of any co-ops, but I can look
    into that. But ESOP transactions, which are related
    transactions, certainly a number of SBICs have done those. And
    I think there might be one or two that are even forming to
    specialize in that. But I need to look some more into the co-op
    action.
        Chairwoman VELAZQUEZ. As a general matter, do you think
    SBA's capital access and investment programs should be more
    accessible to ESOP co-ops and employee-owned businesses?
        Mr. PALMER. I think they should be more accessible to more
    small businesses and to reflect the diversity of structure and
    geography and industry sector as much as possible.
        Chairwoman VELAZQUEZ. Mr. Rodgers, thank you. I am
    interested in hearing about how your business found its way to
    an SBIC fund, and how did you find the SBIC fund that made the
    investment in your business?
        Mr. RODGERS. Sure. Thank you.
        Well, originally, as I understand, the SBIC fund was
    referred to us through our PE firm, Kidd and Company. And it is
    probably important to talk about the fit and the impact of the
    fund. So in the space in which Family RV operates----
        Chairwoman VELAZQUEZ. If you could be brief because my time
    has expired.
        Mr. RODGERS. Certainly. So it is all about access to
    capital versus traditional banks. And banks are not comfortable
    with the floor plan arrangement typically in our industry, and
    there is more flexibility within the fund. And lastly, the bank
    loan mechanism with amortization is not as friendly to
    companies like Family RV as the fund is.
        Chairwoman VELAZQUEZ. Thank you.
        Mr. RODGERS. Certainly.
        Chairwoman VELAZQUEZ. Now, we recognize the gentleman from
    North Carolina, Mr. Bishop, for 5 minutes.
        Mr. BISHOP. Thank you, Madam Chair. I appreciate the
    opportunity before I officially joined your Committee, but I
    certain wanted to remain. I noticed that as I sat down that we
    had a witness from North Carolina. Thank you, Ms. Penn, for
    being here and learning about Plexus, which I was happy to do.
        I was curious. I think I heard, I believe, during your
    testimony that you spoke highly about the relationship that you
    had with the reviewer at SBA that you work with. But I have
    also heard some disturbing things today, which are new to me.
    And I wondered if you had any insight about the approval issues
    that we are hearing about and delays. Is that something that
    Plexus experiences? And if not, do you have any ideas about why
    not?
        Ms. PENN. I was speaking specifically about our
    relationship with our analyst who has worked with us for about
    5 or 6 years. We have experienced more delays in recent years
    and we are working with the SBA to improve that. We have not
    been through the licensing process in recent years but we are
    now submitting a request for our fund five. And the procedure
    that Mr. Palmer spoke about earlier regarding there is a time
    period where you are requesting to submit an application. And
    we have been in that process for about 5 months right now, but
    Mr. Palmer may have more to add to that.
        Mr. PALMER. Sure. So the relationship between the SBIC fund
    managers and the SBA is excellent among the career staff and in
    the senior leadership of the SBA. That is not the problem. It
    is not perfect but, hey, that is how regulators work, and we do
    the best we can.
        The political leadership of the Office of Investment is
    just incompetent, and frankly, hostile to the successful
    operation of the program. And I do not say that lightly or with
    any comfort from me.
        But on the licensing side, you do have these massive delays
    that are unnecessary, and some of them were I think
    misrepresented by the previous witness. Yes, it takes time to
    raise private capital. We are about to host a large private
    equity connection between fund managers, small business
    investors who are raising funds and institutional investors.
    There is massive interest in investing in the private into
    small businesses, you have SBICs. The problem that the
    institutional investors are having--banks, pension funds,
    endowments--is that there are not enough SBICs to put money
    into. That they are moving so slowly they have to go back to
    their own investment committees and say, hey, I have tried to
    put money into this but they have been sitting in the SBA's
    inbox or on somebody's desk for extended periods of time so I
    need to go back and get permission. They are actually cutting
    back on their allocations into small business because they
    cannot get it through the SBA. That is not what I think the
    goal of this Committee or the goal of the program is.
        Mr. BISHOP. Thank you, sir.
        And Ms. Penn, one follow up to that. Are you finding that
    in the North Carolina market that there is a great deal of
    additional potential for SBICs to be involved and that they are
    not forming because of these regulatory roadblocks?
        Ms. PENN. So we, in addition to being in North Carolina, we
    work with and invest all across the country. It seems that
    demand for capital is higher than ever and investors are
    seeking ways to invest their money. So right now I believe
    demand is as high as it has ever been.
        Mr. PALMER. And one thing I would add to that is that North
    Carolina has an exceptionally healthy and robust SBIC market.
    There is certainly more to be formed but they are in
    Greensboro, they are in Raleigh, they are in Charlotte. There
    is one forming in Wilmington. You have got them all over the
    place. And frankly, the more, the better. And frankly, we would
    like to get more of them in other parts of the country as well,
    more in North Carolina, but also undeserved states.
        Mr. BISHOP. The final question, if I may, again, for Ms.
    Penn, Mr. Shepard referred to a rural investing workshop in
    Carolina. Is that something that your company was aware of and
    participated in? Is that the sort of thing you would do? And if
    not, do you have any ideas about how that might be more
    effective for attracting folks in North Carolina and giving
    them ideas on how to proceed?
        Ms. PENN. I was not and did not attend. I do believe that
    more education and more communication about the program would
    help it significantly. I am constantly surprised at how little
    people know about this program and what a great program it is.
        Mr. BISHOP. Thank you, Madam Chair.
        Mr. PALMER. Can I add one piece to that?
        Mr. BISHOP. Yes, sir.
        Mr. PALMER. That event was actually in North Carolina, I
    believe at UNC. It was attended, but it was so poorly attended
    because it was held the day after the National Conference of
    SBIC funds that was 700 miles away. And it is not something
    that the SBA did not know about. He was actually invited to be
    a speaker at that event. So to have it 700 miles away after you
    have just been in a big conference really minimizes the
    effectiveness of it. That is consistent.
        Mr. BISHOP. Thank you, Madam Chair.
        Chairwoman VELAZQUEZ. The gentleman's time has expired.
        Now we recognize Ms. Davids from Kansas for 5 minutes.
        Ms. DAVIDS. Thank you, Chairwoman.
        So in light of the previous panel's testimony I am going to
    very briefly as one unanimous consent to submit testimony from
    Konza Valley Capital in Overland Park, which is in my district-
    based SBIC.
        Chairwoman VELAZQUEZ. Without objection, so ordered.
        Ms. DAVIDS. And second would just like to say I am going to
    follow up with written questions, at least one written question
    to Mr. Palmer and then others if they would like to chime in
    related to leverageable capital. So Konza Valley Capital uses
    the Evergreen Fund structure which is maybe less used. So I
    want to delve in with the experts here about the reinvesting
    and that sort of thing. And I will do that with written
    questions to you all.
        So I want to go off of the testimony we heard earlier from
    Mr. Shepard and then Mr. Palmer, some of the statements that
    you made earlier. I am really curious about the current waiver
    of classes related to regulations and compliance that SBICs
    have and that there have not been classes offered. Can you tell
    me a bit about--in his words he said that no one has been held
    back. I am less worried about--I am worried about all of it,
    but I am less worried in this moment about folks feeling held
    back and more about if this is going to cause problems for
    SBICs in the future because if this is the mechanism by which
    they learn to comply with the law and then if they potentially
    run afoul of that later, then whose fault is it really? So if
    you could speak to that. And Ms. Penn, as an SBIC who maybe is
    familiar with those classes, would love your input, too.
        Mr. PALMER. Sure. It is a very complicated program.
    Complicated law, complicated regulations, complicated
    financing. And those classes have been held at least about once
    a quarter every year for decades. And we have helped organize
    them. They are incredibly helpful because you get to talk to
    the regulators who really understand it because this is
    complicated. These are very smart people, very educated people,
    but you want to get it right because if you do not you are
    breaking the law. It is very helpful. They just stopped, sort
    of went into the abyss last year. We have not been able to get
    any response from them. He mentioned that they are going to use
    taxpayer money to create an online regs class. We did that. We
    took the exact content that they have. We have built an online
    regs class. They know it. It is set to go live I think this
    week or next that does the exact same thing because they did
    not. So if they are going to do an online regs class and use
    taxpayer money to do it, stop.
        I actually wrote a letter to the CFO to let them know that,
    to make sure that that was getting up there. It is very
    effective. It is very helpful. If we want to use new
    technology, hey, that is great, but do not reinvent the wheel
    with the taxpayer dime.
        Ms. PENN. These regulation courses are instrumental to
    helping us know how to manage the SBICs. You can read the regs.
    They are complicated and hard to follow so these courses really
    help you understand so that you do not make decisions where you
    are breaking the law.
        Ms. DAVIDS. Thank you.
        And then the only thing I want to, the last thing I want to
    say is that I, as a first-term member of Congress, I wanted to
    be on this Committee because in the Kansas City Metro area and
    the Third District in Kansas where I have the honor of
    representing, the entrepreneurship is baked into the DNA of the
    place. So many of the programs that we hear about in this
    Committee are instrumental in small business growth and
    entrepreneurship in my community. And what I heard today was
    very alarming. And I also want to say that all the other times
    that I have been in here, the SBA programs are supported across
    the board, Republicans, Democrats, it does not matter. People
    know that small business is really important and that there are
    plenty of other programs in the SBA that I know are functioning
    well. And I have not up to this point heard anything that is a
    red flag or alarming like I did today. And I will just ask that
    all of you be open to me reaching out, our office reaching out
    to you to do follow up questions and do more insight into what
    is going on with this specific program.
        Thank you. I yield back.
        Chairwoman VELAZQUEZ. The gentlelady yields back.
        Now the gentleman from Illinois, Mr. Schneider, is
    recognized for 5 minutes.
        Mr. SCHNEIDER. Thank you, Madam Chairman. I want to thank
    the witnesses. And after the comments from my colleague from
    Kansas, you know, we should be here today celebrating the SBIC
    program. We should be honoring those small business
    entrepreneurs who take an idea and develop a business model,
    seek to get the capital to take that model to market, look to
    hire people to create the jobs that grow our economies. And
    having spent my career as a consultant working with family
    businesses, the clients and investments you all make, I
    understand the values these businesses bring. And I understand
    the power that a well-functioning SBIC program could actually
    provide in these communities. And the fact that we are falling
    short is a misuse of taxpayer money because we are not living
    up to the potential. But it is also hurting the growth of our
    economy.
        Mr. Palmer, I want to turn to you first. I hear your
    frustration. I share your frustration. Two questions. How new
    is this phenomenon you are explaining or describing? And what
    would be the things that could most quickly change it and turn
    it in the other direction?
        Mr. PALMER. Excellent questions one and all. Thank you very
    much.
        There is always going to be frustration with regulations.
    That is normal. There is a normal level that is a reasonable
    level, and then we try to push and minimize but that is this.
    This really has been for 2-1/2 years been a mess. It started
    with day one of the political appointee taking over the
    program. I will mention that he ran the program at the end of
    the Bush administration when I was in the Bush administration,
    too. Not overlapping. But it was a disaster then but the clock
    ran out because he was only there for about 13 months. And if
    you look at the hearings from 2009, you see that documented.
    There was no reason for it then. It took years to undo the
    damage of that. It will take some time here, too. I think you
    need to change the management. I do not think you need to
    change the focus from the administration because they do care
    about small business. I do not think you need a change in
    Congress. They care about small business. They just need to be
    allowed to work. I think they need to hire some key people that
    they have not been allowed to hire in key management positions
    that they have money for. But I think you just need someone who
    is willing to let the staff do their job and do the regulation
    that they need. And we can disagree on different things at time
    but we are not trying to get someone to do their job.
        Mr. SCHNEIDER. Ms. Penn, I am going to turn to you. You are
    on your fourth fund.
        Ms. PENN. Yes, sir.
        Mr. SCHNEIDER. You have been investing, I think you said,
    108 investments focusing on the $10 to $100 million segment of
    the market. How critical to the growth of the communities you
    are investing in, the companies you were investing in to the
    communities that these operate in is speed of this access to
    capital, the ability to process, to review a proposal, process
    it quickly, and get the capital of these companies quickly, how
    important is speed on that?
        Ms. PENN. Very. We are on our fourth fund. It is a $400
    million fund. It is over 80 percent invested. We need a fifth
    fund.
        Mr. SCHNEIDER. Great. Thank you.
        And Mr. Paglia, as you look at it, and you come at it from
    an academic standpoint. I know you are a CPA. I am the son of a
    CPA, so I have some appreciation by osmosis. But these
    companies are looking, they need people, they need funds. They
    need the ability to do that to grow. We can help that by
    investing in workforce development. We can help that by
    investing in programs like the SBIC program that is a public-
    private partnership. What do you see as the impact? What do you
    see as the opportunity?
        Mr. PAGLIA. Well, I think there is a real opportunity in
    the early stage investment side of things. One of the reasons
    why this capital penetrates smaller segments of the marketplace
    is because of this public-private partnership, the leverage it
    has created for the funds. And so I think this sort of a model
    would work fairly well with younger companies that create a
    significant number of jobs. I also think that as you look at
    the dispersion of capital around the country, there are some
    geographic areas where the number of businesses per capital
    event is significantly higher than others. And that suggests
    there are some additional opportunities to deploy capital, to
    grow jobs, create healthier economies, and engage more of a
    diversity and inclusion application as well.
        Mr. SCHNEIDER. All right. And thank you.
        I am running out of time, but Mr. Rodgers, I do not want to
    leave you out. Family RV you described is a growing business,
    going into new markets. I know from experience that many of the
    RV dealers across our country are family-owned businesses.
    Started out with a similar story to your company. How many
    people do you employ now, today?
        Mr. RODGERS. Today, just over 300.
        Mr. SCHNEIDER. Okay. Starting from two people selling RVs
    on their lot.
        Mr. RODGERS. That is right.
        Mr. SCHNEIDER. That is the kind of example of companies
    that we are looking to invest in. And whether it is an RV
    business or a new technology business, a service business or a
    manufacturing business, we have the ability to grow our
    economy. Small businesses drive our economy. They create the
    jobs new. They strengthen our communities.
        Madam Chairman, thank you for having this hearing. Thanks
    again to the witnesses for being here. We have got to get this
    right.
        Chairwoman VELAZQUEZ. Thank you. The gentleman yields back.
        I have one more question.
        Mr. Paglia, since you have conducted research on the SBIC
    space and given the fact that this is a very important program,
    specifically a private-public partnership, what recommendations
    or suggestions can you suggest to make it better?
        Mr. PAGLIA. Yes. Thanks for the opportunity to weigh in on
    that.
        I do think that any time you can make programs run more
    efficiently and send the capital out, deploy the capital to
    those businesses that need it in a faster fashion, it is going
    to allow the economy to work and grow at a much faster rate. So
    I would just suggest that you take a very hard look at this
    program and the opportunities to extract efficiencies out of
    the current operating model and structure and then also
    supplement with some increased capital.
        Chairwoman VELAZQUEZ. Thank you.
        Mr. PAGLIA. You are welcome.
        Chairwoman VELAZQUEZ. We want to thank all of the witnesses
    for taking time out of their schedule to be here with us today.
        We have now heard about one of the federal government's
    most popular public-private partnership programs. It is an
    engine of small business job creation and has contributed to
    the growth of countless small businesses, some of whom have
    become the largest and most powerful companies in our economy.
    However, if we intend to continue enhancing access to
    affordable capital for small businesses, it is clear we must
    take a hard look at the SBIC program, especially the way it is
    currently being administered. We owe it to the entrepreneurs,
    as well as to the taxpayers at large, to ensure that these
    federally-backed finance programs are being run efficiently.
        I look forward to working with my colleagues on both sides
    of the aisle to come up with bipartisan solutions to this
    issue.
        I would ask unanimous consent that members have 5
    legislative days to submit statements and supporting materials
    for the record.
        Without objection, so ordered.
        If there is no further business to come before the
    committee, we are adjourned. Thank you.
        [Whereupon, at 1:26 p.m., the Committee was adjourned.]
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