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


    SBA MANAGEMENT REVIEW: SMALL BUSINESS INVESTMENT COMPANY PROGRAM

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                                 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                     
          
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                   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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