[Senate Hearing 116-554]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 116-554

                REAUTHORIZATION OF SBA'S SMALL BUSINESS
                       INVESTMENT COMPANY PROGRAM

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP

                                 of the

                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 26, 2019

                               __________

    Printed for the Committee on Small Business and Entrepreneurship
    
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]    


        Available via the World Wide Web: http://www.govinfo.gov
        
                              __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
39-486 PDF                 WASHINGTON : 2022                     
          
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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                     ONE HUNDRED SIXTEENTH CONGRESS

                              ----------                              
                     MARCO RUBIO, Florida, Chairman
              BENJAMIN L. CARDIN, Maryland, Ranking Member
JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
RAND PAUL, Kentucky                  JEANNE SHAHEEN, New Hampshire
TIM SCOTT, South Carolina            EDWARD J. MARKEY, Massachusetts
JONI ERNST, Iowa                     CORY A. BOOKER, New Jersey
JAMES M. INHOFE, Oklahoma            CHRISTOPHER A. COONS, Delaware
TODD YOUNG, Indiana                  MAZIE HIRONO, Hawaii
JOHN KENNEDY, Louisiana              TAMMY DUCKWORTH, Illinois
MITT ROMNEY, Utah                    JACKY ROSEN, Nevada
JOSH HAWLEY, Missouri
             Michael A. Needham, Republican Staff Director
                 Sean Moore, Democratic Staff Director
                           
                           
                           C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Rubio, Hon. Marco, Chairman, a U.S. Senator from Florida.........     1
Cardin, Hon. Benjamin L., a U.S. Senator from Maryland...........     3

                               Witnesses
                                Panel 1

Shepard, Mr. Joseph, Associate Administrator, Office of 
  Investment and Innovation, U.S. Small Business Administration, 
  Washington, DC.................................................     4

                                Panel 2

Palmer, Mr. Brett, President, Small Business Investor Alliance, 
  Washington, DC.................................................    27
Muro, Mr. Mark, Senior Fellow and Policy Director, Metropolitan 
  Policy Program, Brookings Institution, Washington, DC..........    99
Ozkazanc-Pan, Prof. Banu, Ph.D., Associate Professor of 
  Management, UMass Boston, Visiting Associate Professor of 
  Sociology, Brown University, Boston, MA........................   113

          Alphabetical Listing and Appendix Material Submitted

Brookings Institution report ``America's Advanced Industries: 
  What They Are, Where They Are, And Why They Matter''              136
Brookings article ``Reshoring: Why It's Not Easy''...............   224
Brookings article ``Is America's Seed Fund Investing in Women- 
  and Minority-Owned Businesses?''                                  227
Cardin, Hon. Benjamin L.
    Opening statement............................................     3
Muro, Mr. Mark
    Testimony....................................................    99
    Prepared statement...........................................   101
Ozkazanc-Pan, Prof. Banu
    Testimony....................................................   113
    Prepared statement...........................................   115
    Responses to questions submitted by Senator Hirono...........   245
Palmer, Mr. Brett
    Testimony....................................................    27
    Prepared statement...........................................    30
Rubio, Hon. Marco
    Opening statement............................................     1
Shepard, Mr. Joseph
    Testimony....................................................     4
    Prepared statement...........................................     7
    Responses to questions submitted by Chairman Rubio and 
      Senators Booker, Hawley, Hirono, and Rosen.................   233

 
                        REAUTHORIZATION OF SBA'S
                   SMALL BUSINESS INVESTMENT COMPANY
                                PROGRAM

                              ----------                              


                        WEDNESDAY, JUNE 26, 2019

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 3:17 p.m., in 
Room 428A, Russell Senate Office Building, Hon. Marco Rubio, 
Chairman of the Committee, presiding.
    Present: Senators Rubio, Ernst, Young, Kennedy, Romney, 
Hawley, Cardin, Cantwell, Shaheen, Coons, and Duckworth.

OPENING STATEMENT OF HON. MARCO RUBIO, CHAIRMAN, A U.S. SENATOR 
                          FROM FLORIDA

    Chairman Rubio. Today's hearing of the Senate Committee on 
Business and Entrepreneurship will come to order. I apologize. 
We are in the grips of a terrible plot against the Senate Small 
Business Committee. They keep scheduling like 18 votes at the 
same time as our meeting. I think we are going to change our 
name. But anyway, so the members will be coming in and out. I 
do not know what the--no one can tell us exactly what the 
future holds, but they will keep us up-to-date here on it. And 
Senator Cardin will be in in a minute.
    I am going to abbreviate my opening statement in the 
interest of time so we can get through this and not delay it 
any further.
    Today we are going to be having a pretty good conversation 
about the SBIC program, which is one of the earliest SBA 
programs. The impetus was a Federal Reserve Report that showed 
significant gaps in the business credit and equity markets, 
with the most prominent gap being found in the small business 
sector. And the report recommended the SBA to create a program 
to provide equity financing to small businesses. This resulted 
in the SBIC program that, in turn, popularized the venture 
capital model of investment in the 1960s and 1970s. And since 
then, the program has continued to provide venture capital 
financing to fill the gap in investment in small business by 
the private sector.
    The impact of the program is immense. In 2017, the Library 
of Congress prepared a report that measured the role of the 
program in small business job creation. It only covered the 
timeframe between October 1995 and December 2014, but found 
that the program created almost 3 million jobs during this 
period, which is one new job created for every $14,000 in SBIC 
investment. It also looked at administrative costs, and found 
the average administrative cost was approximately $35 per job 
created. So it is a clear example of the type of public-private 
partnership that fills a gap in the private marketplace and 
creates quantifiable results.
    It is a proven program that has historically met investment 
needs not being met by the private sector, and so it is prudent 
to reassess the state of investment in the United States, 
identify gaps in financing, and evaluate the opportunities that 
exist for this program to fill those gaps under current 
example.
    For example, there are meaningful market failures in the 
current configuration of the American innovation and advanced 
manufacturing ecosystem. The United States is beginning now the 
difficult work of confronting Chinese industrial policy, which 
has a clear goal of dominating the most important industries of 
the century, through government support, credits, access to 
guaranteed market share in their own large, domestic market. 
And so it is prudent for us to consider how we align public 
policy to address these market failures in the light of this 
direct national competition.
    The access to capital challenge that is facing innovative 
American firms with high-growth potential is damaging our 
country's competitiveness, and the financing gap is not being 
filled by private investment. Today, venture capital funding in 
the U.S. is highly concentrated by geography, primarily in 
areas like San Francisco, New York, and Boston, and by 
industry, largely to information and communication technology 
companies.
    The relatively short window for expected returns, combined 
with the prioritization of highly scalable, capital-light 
businesses for investment, skews funding toward digital 
technology and skews it away from capital-intensive 
manufacturing sectors with longer profit horizons. So creating 
an environment in which U.S. firms can compete globally, while 
creating jobs in the United States, is in our vital interest, 
because if the policy fails to address it, the United States 
will continue to lose to other nations, both in our capacity to 
produce now and our capacity to innovate in the future.
    These small advanced manufacturing firms, in particular, 
face a debilitating lack of access to critical finance in the 
U.S. Innovative firms engaged in complex, advanced 
manufacturing production require larger amounts of capital and 
they also require more time than non-production firms. While 
these kinds of firms can often find financing for the earlier 
stages of their development, they face difficulty accessing 
financing when they reach the larger-scale production and 
commercialization stage. Since innovation and production are so 
closely interwoven in advanced manufacturing, losing the 
ability to engage in advanced manufacturing production is 
prohibitive to the ability to innovate and conduct high-level 
research and development.
    So the SBIC program is uniquely positioned to play a role 
in filling this gap in financing and to leverage private 
domestic investment. After all, one of its tenets is to support 
industries that will undergird our national competitiveness.
    Our discussion today will explore the role of the SBIC 
program, the role it can play in this national discussion, as 
well as further expand upon its history, stability, and 
success. I look forward to discussing this with everyone.
    Are you ready?
    Senator Cardin. I am ready.
    Chairman Rubio. All right. I will turn it over to the 
Ranking Member.

 OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, A U.S. SENATOR 
                         FROM MARYLAND

    Senator Cardin. First, let me apologize for the lateness of 
starting this. As I am sure the Chairman has explained, we have 
been in a series of votes on the floor of the Senate, and there 
has been some discussion as to how we are going to proceed 
later today. I was involved in some of those discussions so I 
apologize for being a little bit late.
    I want to welcome all of our witnesses. This is our seventh 
hearing in regard to the reauthorization of the programs under 
the Small Business Administration.
    I think we all understand that the building block needed to 
start and grow business is capital, so today's hearing is 
particularly important. It was in 1958 that the Small Business 
Investment Act was passed by Congress, which recognized the 
realities that for small business it is very difficult to find 
investment dollars.
    Since then, the SBIC program has invested more than $97 
billion in 10,000 small businesses, including many well-known 
companies like Intel, Apple, and FedEx. Last year alone, SBIC 
facilitated more than $5.5 billion in investment to more than 
1,100 high-growth companies across the country, at zero cost to 
the American taxpayers. This funding is vital because 
traditional venture capital is overwhelmingly concentrated in 
urban centers in New York, Massachusetts, and California, with 
less than 1 percent of all venture capital going to businesses 
in rural communities.
    The lack of diversity is not just geographical. Around 2 
percent of venture capital goes to women-owned businesses, and 
only 1 percent goes to black- and Hispanic-owned businesses. 
That is not acceptable.
    There are businesses in every community throughout America 
that could achieve growth if only they had the capital, and 
that is why we need the SBIC program.
    Consider, for example, Zentech Manufacturing, a Baltimore 
company that designs and builds high-tech circuit boards, 
cables, and other parts for companies in the defense and 
medical technology industries. When Zentech needed capital to 
prevent a takeover that would have shut down the company in 
Maryland and shipped dozens of jobs overseas, an SBIC fund was 
the only entity that could provide the type of capital Zentech 
needed.
    Since then, the company has increased its workforce by more 
than 60 percent and has successfully competed against overseas 
companies for contracts, reassuring manufacturing jobs here in 
the United States. These are well-paid jobs that are lifting 
families into the middle class.
    The simple truth is that traditional venture capital 
industry is doing an inadequate job of directing capital to 
communities most in need, and companies like Zentech are 
missing out on the opportunities for growth and job creation as 
a result.
    The SBIC program fills a very wide gap in traditional 
venture capital markets. But more importantly, SBIC is a good 
investment for the taxpayers. According to the 2017 Library of 
Congress report, SBIC creates one job for every $35 spent 
administering the program, and SBIC investments support 
minority- and women-owned businesses more than twice as often 
as traditional venture capital. That is not enough, but at 
least it is better.
    While SBIC does is a better job of reaching underserved 
communities, we still have to do a lot more. Our focus today 
must be on how we can take the SBIC program from a good program 
to a great program, a more inclusive program that reaches 
underserved communities frozen out of the traditional venture 
capital markets.
    We can begin by exploring how to build a pipeline of 
diverse investors into the SBIC program, because we know that 
racially and gender-diverse SBIC funds investment more 
frequently in minority- and women-owned businesses. We also 
need common-sense reforms to make the SBIC program more 
attractive to investors and more efficient for those who run 
SBIC funds, especially expediting the licensing process.
    These are some steps that will significantly improve the 
SBIC program as well as create jobs and value in communities 
nationwide. So I am looking forward to the discussion we have 
today, how we can improve the SBIC program, and the role that 
this Committee can play in facilitating those changes.
    Chairman Rubio. Thank you. Our first panel is one witness. 
Joseph Shepard is the Associate Administrator of the Office of 
Investment and Innovation at the Small Business Administration. 
He held the same position in the Administration of former 
President George W. Bush.
    Mr. Shepard, thank you for being here. We will begin with 
your testimony, and again, our apologies.

STATEMENT OF JOSEPH SHEPARD, ASSOCIATE ADMINISTRATOR, OFFICE OF 
INVESTMENT AND INNOVATION, U.S. SMALL BUSINESS ADMINISTRATION, 
                         WASHINGTON, DC

    Mr. Shepard. Good. Good. Thank you, both, Chairman Rubio, 
thank you, and Ranking Member Cardin, thank you as well, and 
members of the Committee who will join us later, I am sure. I 
appreciate the opportunity to be here before you and discuss 
the reauthorization of SBA's Small Business Investment Company, 
or SBIC, program.
    I have spent a great deal of my private equity career in 
and around the SBIC program. In addition to having worked for 
an SBIC, several of my mentors were trained in SBICs, and from 
them I learned much of my on-the-job training and due 
diligence, financial analysis, investment structure, and 
transaction processing.
    Prior to assuming my current position at SBA on March 22, 
2017, the SBIC program's capital-at-risk increased 1.8 times 
from $7.9 billion as of September 30, 2010, to $14.2 billion as 
of December 31, 2016. During this time, the SBA did not keep 
pace with this growth in areas such as technology, 
examinations, risk, SBIC program costs, and personnel.
    During my time at SBA, I have worked with the SBA team to 
identify challenges faced by the SBIC program, and together we 
have been endeavoring to modernize the program and make 
improvements. During this time, I have enjoyed the support and 
leadership of former administrator Linda McMahon, and I greatly 
appreciate the hard work of the SBIC program team and all my 
colleagues at the SBA.
    Following is a brief summary of the select improvements 
that we have made within the SBIC program.
    There have been no major technology improvements to the 
SBIC program since 1994. Since my arrival at SBA, it has been a 
priority of mine to modernize the SBIC program's information 
technology infrastructure. During the past two years, we have 
transitioned the legacy SBIC Web data collection system to 
SBA's Office of the Chief Information Officer, conducted an 
extensive review of the SBIC program's existing technology, 
procured a new software platform, and this year began the 
configuration of the new software. The implementation of this 
new software platform will allow the SBA to improve the 
information associated with the SBIC program and dramatically 
improve the SBA's data security, risk management and oversight 
capabilities.
    Prior to my arrival, challenges associated with the SBIC 
examinations were present, as a result of issues and practices 
prior to fiscal year 2017. A 2013 SBA Inspector General report 
had also identified deficiencies in the management of the SBIC 
examination process.
    Statute requires that SBICs be examined at least every two 
years. SBA began fiscal year 2017 with an estimated 56.9 
percent of SBICs in statutory compliance. In fiscal year 2017, 
I recommended and then implemented an examination surge. Today, 
statutory compliance has improved dramatically and is now at 
100 percent.
    Additionally, to better mitigate current and future credit 
risk in the SBIC program, the SBA enhanced its credit standard 
to require that all SBICs with SBA guaranteed leverage be 
examined within an 18-month time period.
    In fiscal year 2018, I initiated the creation of a new 
econometric subsidy model to replace the SBA's 27-year-old 
model. The result is an improved subsidy model that is 
reflective of the inherent risks associated with present-day 
private equity investing, and we believe will more accurately 
project future losses and long-term costs of the current SBIC 
program to taxpayers.
    The SBIC program also has a total operating cost each year 
that is not covered by subsidy. SBA's total cost to operate the 
SBIC program during fiscal year 2018 was $27.3 million. Since 
my arrival we have focused on ways to reduce taxpayer costs 
associated with SBIC program expenses.
    In 2017, SBA increased licensing fees paid by SBIC 
applicants and examination fees paid by operating SBICs. Both 
fees had not been increased since 1996.
    Finally, the SBIC program's workforce needs to evolve. 
Approximately 31 percent of the program's current position 
descriptions are 15 years or older, and 41 percent are 7 to 13-
years-old. The oldest position description is 22 years old and 
was last revised in 1997. A contractor has been engaged to 
assist us in revising all outdated position descriptions. SBA 
will continue to hire additional staff and fill current future 
vacancies. New positions are also being created and filled, 
including an IT project manager, IT data scientist, senior 
examiner, senior risk and investment policy officer, and an 
investment accounting and analytics officer. I am committed to 
hiring for an organization that can support the program of the 
future.
    In conclusion, actions taken over the last two years have 
improved the SBIC program. Many of these changes and 
improvements are generational in nature with no previous such 
improvements occurring since the 1990s or for the past 20 
years. As a result, the SBIC program is in a better position 
today to face the challenges of the future.
    Thank you.
    [The prepared statement of Mr. Shepard follows:]
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Rubio. Thank you. Mr. Shepard, I want to begin my 
questions by--I want to read you the statement of policy of the 
Small Business Investment Act. It is the law that created this. 
In creating this program, this is what Congress stated as its 
intent.
    Here is a quote: ``Stimulate and supplement the flow of 
private equity capital and long-term loan funds which small 
business concerns need for the sound financing of their 
business operations and for their growth, expansion, and 
modernization, and which are not available in adequate 
supply.'' End quote. That is the stated intent.
    It seems to me that Congress made clear when they passed 
it, and it is reiterated in many reforms to the law, that the 
intent of the SBIC program is to provide patient capital to 
small businesses that private financial markets do not 
otherwise provide.
    So let me ask, do you agree with Congress' enacted law and 
stated intent----
    Mr. Shepard. Oh, absolutely.
    Chairman Rubio [continuing]. The goal of the--well, do you 
agree that the intent--let me just ask it this way. Do you 
agree that the law and the stated intent is to supplement the 
private market by increasing the flow of long-term funds to 
small businesses?
    Mr. Shepard. Yes.
    Chairman Rubio. Okay. Because in your testimony you implied 
that risk has increased in recent years, or at least has been 
undervalued, making necessary and update of the subsidy model 
SBA uses for the SBIC program. So, for example, you say that 
from fiscal year 2010 to 2018, the program experienced charge-
offs where SBA expenditures on loans have defaulted, of $281 
million for the debenture program.
    As you are aware, charge-off costs are not the only payment 
factor in the program. The SBA can recover assets on loans that 
have defaulted. They can charge fees on operating loans to 
cover costs.
    Is it not it true that during the same period the SBIC 
debenture program operated on a zero-subsidy basis?
    Mr. Shepard. That is correct, yes.
    Chairman Rubio. And is it also true that during this period 
the fees the SBA charges on the debenture SBIC program has been 
lower than the historical average?
    Mr. Shepard. Yes, absolutely. That is correct.
    Chairman Rubio. So you say in your testimony that upon your 
initiative, the SBA will begin to use a new econometric model 
to calculate its costs, that the model will include new 
assumptions like macroeconomic factors, private equity 
elements, private equity fund characteristics.
    You answered the first question agreeing, right, that the 
purpose of this is to provide funding that private market was 
not meeting. One of the purposes of the SBIC program is to fix 
that market failure, to increase the long-term patient capital 
that goes into small businesses, which would not be made 
available without the program.
    It is true, I think you would agree, that part of achieving 
this purpose is investing in small businesses that are 
themselves investing in innovations and new products which are, 
by definition, more uncertain investments than what the private 
market writ large has to offer.
    Mr. Shepard. Right.
    Chairman Rubio. So will the assumptions you have added to 
the historical model SBA has used, will it increase or decrease 
the time horizon of capital financing for these small 
businesses?
    Mr. Shepard. Yes. Thank you for--good question, Chairman. I 
thank you for the question. The intent of the subsidy model, 
that will not impact the disbursement of capital. The intent 
there, and with a lot of the things that I mentioned in the 
opening comment, were generational, things that have not been 
fixed, getting the program ready for the future, getting it 
ready for whatever may come.
    We looked at the subsidy model and we looked at how the 
portfolio was constructed, currently about $15 billion, and its 
move into more equity-oriented investments. When the model was 
built it was more debt-oriented, so I wanted to make sure--and 
we, as a team, wanted to make sure that we were accounting for 
future losses, and let's have a better model in place so as to 
stewards the taxpayer dollars we do not experience loss in the 
future. That was the intent.
    Chairman Rubio. You agree the metrics, the private 
financial markets are used, are more short-term, or sorry. I 
guess, let me ask you, are the metrics the private market uses 
more short-term or long-term in their views than the current 
SBA model?
    Mr. Shepard. I think they are similar. I think a lot of the 
investing activity that takes place in the SBIC model, the 
majority of it is subordinated debt of mezzanine, and it has 
got, you know, a maybe 3-, 5-, 7-year time horizon, very 
similar to the private sector. So I do not feel like there is a 
disconnect there, by any means.
    Chairman Rubio. Well, and which private equity elements 
will be used in assessing the default risk of--say there is a 
company that is developing a new cancer drug or a 
telecommunications equipment that can compete with Huawei. And 
would private equity elements investment in small business 
taking on these challenges without an SBIC program?
    Mr. Shepard. Well, to the subsidy model, we will be working 
with OMB. The implementation will occur in 2021. We are 
reviewing those right now, in terms of what those will be. They 
will be more macroeconomic in terms of trying to anticipate 
macroeconomic factors in our economy. And so it will be less 
oriented toward specific industries and more oriented toward 
the economy as a whole.
    Chairman Rubio. Well, I guess my last question--and I am 
going to turn it over to the Ranking Member--in developing the 
model, have you considered the shortfalls of equity valuation 
methods like the capital asset pricing model or others that are 
commonly used in the private markets, and undervaluing the 
development of long-term innovative product?
    As an example, which investment would capital asset pricing 
model more highly value, buying a share in an index fund in the 
S&P 500 or taking an equity stake in a company that, for 
example, is making new agricultural machinery to pick crops 
like strawberries in Florida that have been done manually? So 
do you take into account, in the model, the well-established 
shortfalls of this valuation method?
    Mr. Shepard. Yes. We are going to need to do that, without 
question.
    Chairman Rubio. Thank you. Ranking Member.
    Senator Cardin. Mr. Chairman, thank you very much for being 
here and for your service. You heard in my opening statement 
the concern I raised about opportunities in the traditional 
venture capital markets for women-owned businesses and minority 
businesses. And then I cited the SBIC numbers, which are twice 
as strong but still, I hope we all would agree, unacceptable.
    So what are your recommendations for how we can have a more 
diverse use of the SBIC funds and use it to help particularly 
women- and minority-owned businesses?
    Mr. Shepard. Right. Well, you know, I publicly stated 
before that, as the Chairman read, looking for areas in the 
intent and the mission of the SBIC program, to look for areas 
where there is not an adequate supply of capital, and certainly 
women, veterans, minorities, rural areas hit all of those 
areas. And I would say, as you look at our numbers, and as we 
have talked in the past, they are anemic in the impact that the 
program has had in a lot of those areas. Much room for 
improvement.
    And so I could not agree more that there is more that we 
should do and need to do. I will note that SBA invests and 
backs the capital that goes to the SBIC, and the SBIC 
investment managers are the ones who make those investments.
    Senator Cardin. I understand that completely. So how do we 
get--and that is why I said I think the key is to get more SBIC 
investors that are diverse, that represent diverse communities, 
including rural communities. How do we go about doing that?
    Mr. Shepard. I think what we have got to do is we have got 
to back up and look at the licensing phase, and make 
determinations about what kind of SBICs are going to be 
licensed and what plan are they going to put before the SBA, in 
terms of where their focus is going to be. Are you going to 
focus in women and minority areas? Are you going to focus in 
rural areas? And we have got to make the determinations there 
and then keep them on plan once they get into the marketplace, 
if they successfully get an SBA license.
    And I would look forward to working with your team to talk 
about--and the Committee--to talk about how can we do that? How 
can we do that inside the SBA to make that happen?
    Senator Cardin. So for entrepreneur development we have 
special programs to try to help our veterans, to help women. Do 
we need a similar program for the SBIC?
    Mr. Shepard. I think we could certainly do it within the 
current framework, but again, it begins in how do we license 
and who are we licensing to?
    Senator Cardin. So let me get to the licensing issue here, 
because I know that Chairman Risch, when he was Chairman of the 
Committee, held a hearing that dealt with the concerns about 
the length of time on the licensures, the complications. We 
have been told a lot of potential licensees decide not to go 
through the process because they think it just takes too long, 
and that, at least the information that we have, it is getting 
worse rather than better, as far as the process itself for 
licensure. The numbers of SBIC licenses that have been granted 
has gone down.
    So how do you streamline the license process to encourage 
more investors but also do it in a way that recruits in 
underserved communities?
    Mr. Shepard. Right. Well, the technology improvements that 
I have talked about are certainly going to help. We are 
hopeful, by the end of the summer--by the end of the fiscal 
year we will have implemented what we are calling the licensing 
tracker. So that should help us streamline and make our process 
more efficient. So that is one way, from a technology 
standpoint.
    When we have more startup, first-time small business 
investment companies, and we have seen an uptick in those, it 
does take a little longer to vet those. In the private sector 
it take anywhere from a year to two years. We are nowhere near 
that timeframe. We do a much better job. But there is always 
room for improvement. And so do we add more people? I am taking 
care of the technology standpoint. So that speaks to process 
and improving the process and having a better process in place.
    In terms of how do we get participants that are going to 
invest in some of these areas you have mentioned, we are going 
to have to do that by encouraging those people to come in, and 
again, are there ways to do that? Do we do that through 
regulation? Do we do that through statute? I think those are 
conversations that we need to have about the best way to impact 
the few, if you will, to impact those applicants that are 
coming in to invest in those types of small businesses.
    So let me ask you one last question dealing with early 
stage investments, because that would also target more to 
underserved communities if we had early stage investment. The 
program we did start was terminated, I believe for the reason 
that it was claimed not to be cost-effective. Does this need 
still exist, and how do we make it cost-effective?
    Mr. Shepard. Well, that was one of the reasons. There also 
was not a high degree of interest. A lot of it was the way the 
current program is built, is the majority of the funds that 
come in are subordinated debt or mezzanine. They are investing 
in operating companies that have existing cash flows that can 
service that debt that they are borrowing through the SBA 
guarantee. And so they are not early stage or seed companies.
    And so that is what you are seeing in the portfolio right 
now, if you will. That is what you are seeing in the SBIC.
    Senator Cardin. But would not early stage investment have a 
tendency to reach more of the underserved areas that are more 
women, more minorities, more rural?
    Mr. Shepard. Certainly startups and certainly early stage, 
and one other thing is we do have unleveraged small business 
investment companies. The majority of those do invest in early 
stage. They are welcome to come into the program at any time, 
because it is not a credit risk to the government. It is not a 
credit risk to the SBA. So they do come in to get the license, 
and many of them do invest in that area.
    Senator Cardin. Thank you, Mr. Chairman.
    Chairman Rubio. Senator Romney.
    Senator Romney. Thank you, Mr. Chairman and Ranking Member. 
I appreciate the focus on this Committee on building our 
economy and providing opportunities for all our citizens.
    I am interested in understanding just where it is in the 
entire spectrum of investment that this investment activity 
that you carry out is playing a meaningful role. I do recognize 
that there is an underrepresentation in the private equity and 
venture capital world in businesses that are led by or founded 
by minorities and women. Having worked in that industry for 
some time, I would note that in my own experience very few of 
the people that came to us with proposals were minorities or 
women, although we did invest in a number. Meg Whitman at FTD, 
Judy George at Domain, and Linda Mason at Bright Horizons. And 
like most, some were successful and some were not.
    I do know that in the industry there is more money chasing 
deals than there are good deals, and my experience is that, 
well, at least from firms I knew, we would have invested in a 
Martian if we thought we could make money at it. So it was not 
that we were afraid of investing with a particular type of 
American. We just wanted the best deal we could possibly find 
that made a bunch of money for our investors, and, ultimately, 
for ourselves.
    Given the fact that there is so much money in private 
equity today, billions upon billions, and so much money in 
venture capital, with SoftBank and others that are just 
flooding the market, where are the gaps where the private 
market is not reaching, that this investment activity on the 
part of the SBA is reaching?
    Why do you exist, if you will, in this investment activity 
as opposed to just turning to the private market? Where are the 
gaps? Where are the places that you feel you need to play a 
role? Is it with regards to minority opportunities? Is it with 
regards to investing in things that have social values that may 
not have the high enough return to justify a standard venture 
capital investors? Is it a certain region of the country? Are 
you playing a redundant role that can be filled by the private 
sector, or are there really areas that you are filling that 
would not be filled otherwise?
    Mr. Shepard. Yes. Senator Romney, thank you for your 
question. I will say that the small business investment 
companies are certainly internal-rate-of-return driven. They 
are trying to return to their limited partners a certain retain 
that has been promised to them, and then return the capital 
back to the SBA, that has been borrowed from the SBA. So their 
incentive is often return-based as opposed to based on 
investing in certain types of businesses. It maybe women-, 
minority-, veteran-owned, or geographic as well, in terms of 
rural investing. We would need to make some modifications to 
the program to incentivize that investment activity, otherwise, 
than its current state.
    In terms of gaps, we need more information, and I am 
working on getting a study together, hopefully beginning early 
in 2020, that will specifically address that issue, because we 
have a concern about it as well, and where in the marketplace 
is the need? I will tell you that in 1999, the program size was 
about $3 billion. It is now close to $15 billion. But there is 
a component of that portfolio that are business development 
companies, for example. They are now at about $3 billion. It is 
a pretty large concentration of the portfolio. It is between 20 
and 25 percent. And the majority of those publicly traded 
companies do provide unitranche debt, which is also senior 
debt.
    And so there are certainly places where you can look at the 
portfolio and you can look at the activity and you can see 
competition with the free enterprise system. And the intent, of 
course, is to provide capital in those areas where there is not 
an adequate supply and not be competitive.
    And so not a great answer, because there are some unknowns, 
and we need to have some more information to define that 
better.
    Senator Romney. I would just note that I would think, in 
traditional venture capital and private equity, that there 
really is not a need for the government to participate and to, 
if you will, juice or leverage the returns that are available 
to private investors and private funds, that the reason for 
this activity potentially being supported by Congress and by 
our government and taxpayers is if it is focused on addressing 
a particular area where the need is not being met, where the 
private market is not reaching.
    And if the private market is effectively reaching every 
area then there is no particular reason for the taxpayer to 
subsidize returns to private equity and venture capital funds. 
And even then, even if there are gaps, one would have to ask, 
are we better trying to find ways to get the people that live 
in those gaps, or the individuals that are affected by those 
gap areas, to have better access to the private markets, or 
should government step in?
    So these are, I think, real questions that I hope we will 
be able to answer.
    Mr. Shepard. Right. And one other thing I will add, we are 
certainly, as you have mentioned, at an all-time high, in terms 
of private equity, close to $3 trillion, and maybe have 
surpassed that, private equity-based in the United States. And 
we have seen a decline in licensing activity because there is 
such an opportunity to raise capital in the private markets 
with LPs there, and I think that is part of the reason we have 
seen a steady decline of fewer SBICs, because they have been 
able to access that capital a different way.
    Senator Romney. Thank you, Mr. Chairman.
    Chairman Rubio. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman, and thank you 
again for introducing legislation that is topical today to fix 
this problem as it relates to women-owned businesses being 
penalized if they actually have equity investment from being 
able to participate in the SBA program. So I am assuming that 
you agree that that is a good solution to fixing that problem.
    Mr. Shepard. I am not sure what.
    Senator Cantwell. So currently if you are a woman-owned 
business and you receive equity investment, they are saying 
that that counts against your minority ownership. Look, we have 
a major problem in America that women are underrepresented in 
our economy, and there are lots of reasons for that, but we 
need to work a lot harder on this Committee to make sure that 
access to capital, technical and skilled training, barriers 
that are inhibitors to that, we change the law to allow women-
owned businesses to be sole-source, contract-approved at the 
Federal level. For the first time, Federal Government made 
their threshold numbers. So capital importance of opportunity, 
the Women's Centers, all these things are important to bringing 
up that number, which is a very low number.
    Frankly, my colleague, Senator Shaheen, and I, we like 
women as women-owned businesses because chances are they create 
products that we like and they are more geared toward the 
things that we are interested in.
    But the bottom line is we need half of our economy to be 
more entrepreneurial, and to do that they have to have access 
to capital and changing this law so they are not penalized. 
That was my question. Do you believe that we should continue to 
help women-owned businesses not be penalized under the Federal 
law?
    Mr. Shepard. Absolutely. That should not be a barrier to 
entry in our economy, by any means.
    Senator Cantwell. And you support the Women Business 
Centers?
    Mr. Shepard. Absolutely. They are a great product and one 
of the good things we have at SBA.
    Senator Cantwell. And do you agree that they are key tools, 
because again, part of some of the other programs that we have, 
again, have been oriented more toward a lot of retired CEOs, 
and that is great, but again, women come in to pitch them on an 
idea that they have, and they do not have familiarity with what 
the women are talking about--the market, the product, the 
solution. And so the Women Business Centers of the SBA helps 
fund a really key tool for somebody to just show up in a 
community and go, ``Where do I get started?''
    Mr. Shepard. I agree. My mother was an entrepreneur when I 
was young, and she could have really used those. And so there 
are a lot of women today benefiting from that Small Business 
Administration resource, and it is a wonderful thing we have.
    Senator Cantwell. And the other thing we have figured out 
is they do not want to borrow as much as the guys want to 
borrow. They are just a little more--they did not want to 
borrow, you know, $500,000. They wanted to borrow smaller loan 
amounts, so also achieving that.
    But I want to, again, thank Chairman Rubio for co-
sponsoring this legislation. I am hoping our colleagues will 
help support this so that that private sector investment will 
not penalize women ownership from getting access to these 
Federal programs.
    Thank you, Mr. Chairman.
    Chairman Rubio. Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman. Thank you--what 
do I call you, Commissioner Shepard?
    Mr. Shepard. Associate Administrator.
    Senator Kennedy. Administrator.
    Mr. Shepard. Associate Administrator Shepard.
    Senator Kennedy. Okay. Thanks for being here today.
    Mr. Shepard. Thank you, Senator Kennedy.
    Senator Kennedy. Why don't you like SBICs?
    Mr. Shepard. I actually do.
    Senator Kennedy. Well, you know, one of the things that I 
have learned since I have been up here--I have not been up here 
for a while--but you have to watch what people do, not what 
they say.
    Mr. Shepard. Right.
    Senator Kennedy. So you have been Associate Director I 
think two terms.
    Mr. Shepard. Yes.
    Senator Kennedy. And you are--while you are in office, the 
average number of SBICs approved is 11.
    Mr. Shepard. Mm-hmm.
    Senator Kennedy. When you are out of office, the average is 
double that.
    Mr. Shepard. Mm-hmm.
    Senator Kennedy. That tells me you do not like them.
    Mr. Shepard. Yes.
    Senator Kennedy. Why is that?
    Mr. Shepard. Yes. I do. I think in the Bush administration 
I was in that position for a little over a year----
    Senator Kennedy. Yes, and you averaged 11.
    Mr. Shepard [continuing]. And we had the Great Recession, 
and we had a lot of funds that----
    Senator Kennedy. And you are averaging 11 now.
    Mr. Shepard. And--and----
    Senator Kennedy. And the normal is 20.
    Mr. Shepard. Mm-hmm.
    Senator Kennedy. I mean, if I am a small business woman or 
man, and let's say I have got an $8 million company----
    Mr. Shepard. Right.
    Senator Kennedy [continuing]. But I have got promising new 
software, and I go to SoftBank or Sequoia Capital and ask for 
money, they are not going to even see me, are they?
    Mr. Shepard. Right. Right. Probably not. Yes.
    Senator Kennedy. Okay?
    Mr. Shepard. Yes. Yes.
    Senator Kennedy. That is the purpose of an SBIC. Correct?
    Mr. Shepard. Mm-hmm. In many instances, yes.
    Senator Kennedy. So let me ask you again, why don't you 
like them?
    Mr. Shepard. Yes. Yes. Well, I do. I absolutely do.
    Senator Kennedy. Well, then why don't you approve them?
    Mr. Shepard. Yes. Well, we have been approving them.
    Senator Kennedy. Not very quickly.
    Mr. Shepard. We are doing--we are doing as good a job as we 
can. We can always do better.
    Senator Kennedy. Do you need more people, or do you----
    Mr. Shepard. We may need--we may need more people.
    Senator Kennedy [continuing]. Or do your people just--I 
mean, it is not only that you are not approving them--and I am 
not suggesting that your analysis should not be rigorous----
    Mr. Shepard. Yes, sure.
    Senator Kennedy [continuing]. But when you are not in 
office----
    Mr. Shepard. Right.
    Senator Kennedy [continuing]. It seems to go much more 
quickly.
    Mr. Shepard. Mm-hmm.
    Senator Kennedy. And it is not just the denial, it is the 
delay.
    Mr. Shepard. Right.
    Senator Kennedy. That is what most people hate about 
government. It is the stall and restall.
    Mr. Shepard. Sure.
    Senator Kennedy. I mean, if you continue going at the pace 
you are going, the average age of your applicants for an SBIC 
license----
    Mr. Shepard. Right.
    Senator Kennedy [continuing]. Is going to be deceased.
    Mr. Shepard. Mm-hmm. Mm-hmm. Mm-hmm. Yes.
    Senator Kennedy. So what is the problem?
    Mr. Shepard. Yes. Yes. Well, I think, you know, last year 
we licensed 25, and we had a period of time where we actually 
licensed faster than we had ever done before, in 5.1 months. We 
had a lot of subsequent funds, so we licensed faster.
    We are seeing more startup funds or new funds. Those take a 
little longer to process, and so that extends our licensing 
time from five months to, say, seven months.
    Senator Kennedy. Well, but, isn't there a--I am sorry for 
interrupting you but I have only got 5 minutes.
    Mr. Shepard. Sure. Sure. I understand.
    Senator Kennedy. Rubio is tough.
    Mr. Shepard. Yes, sir.
    Senator Kennedy. He is tough.
    Mr. Shepard. Yes.
    Senator Kennedy. But if you have got a brand-new license 
application, but you have a lot of folks who have had one 
SBIC----
    Mr. Shepard. Correct. Yes.
    Senator Kennedy [continuing]. And they are applying for a 
second one----
    Mr. Shepard. Right.
    Senator Kennedy [continuing]. It would seem to me that the 
second one should go more quickly.
    Mr. Shepard. We can move them faster.
    Senator Kennedy. No, you do not. No, you do not.
    Mr. Shepard. Yes.
    Senator Kennedy. It takes just as long, and in some cases, 
longer, and I do not get it.
    Mr. Shepard. Yes.
    Senator Kennedy. I mean, to me there is a--yes, there is a 
lot of venture capital out there. There is venture capital all 
over hell and half of Georgia.
    Mr. Shepard. Yes. Sure.
    Senator Kennedy. But unless you are a big girl or a big 
boy, you are not going to have access to any of it.
    Mr. Shepard. Right.
    Senator Kennedy. That is what the SBIC is for.
    Mr. Shepard. Right.
    Senator Kennedy. That is your job.
    Mr. Shepard. Yes. Yes.
    Senator Kennedy. Not once I do get an answer out of you 
guys, you just say, ``Denied,'' and I say, ``Why?''
    Mr. Shepard. Yes.
    Senator Kennedy. And you say, ``If I told you, I would have 
to kill you.''
    Mr. Shepard. Yes. Yes.
    Senator Kennedy. Why don't you tell people why you are 
lying to them?
    Mr. Shepard. Well, we do.
    Senator Kennedy. No, you do not.
    Mr. Shepard. We have----
    Senator Kennedy. Why isn't there an appeals process?
    Mr. Shepard [continuing]. We--we--we have not had any 
denials at the agency committee level.
    Senator Kennedy. Yes. It is because you do not give them an 
answer.
    Mr. Shepard. Well, we----
    Senator Kennedy. It is because you stall them and restall 
them.
    Mr. Shepard. Well, we--we--we answer them as quickly as 
possible at that level, and we have approved several at that 
level, and we have not had a lot of denials there. I think one 
of the things to keep in mind is we cannot force capital 
formation. They have to decide to apply----
    Senator Kennedy. Okay.
    Mr. Shepard [continuing]. And----
    Senator Kennedy. I am about to run out of time and I want 
to land this plane on time.
    Mr. Shepard. Understood.
    Senator Kennedy. Mr. Shepard, I do not know you. I know you 
are a fine person.
    Mr. Shepard. Mm-hmm.
    Senator Kennedy. I do not think you like SBICs. Either that 
or you have got folks who just are not competent.
    Mr. Shepard. Okay.
    Senator Kennedy. I think applicants deserve an answer when 
they are denied. I think you should tell them why. I think that 
if you really do not support SBICs you are in the wrong job.
    Mr. Shepard. Right. Understood. Yes.
    Senator Kennedy. And it does not look to me like, based on 
your behavior, you support them.
    Mr. Shepard. OK.
    Senator Kennedy. Now I am not telling you, do not be 
rigorous in your analysis.
    Mr. Shepard. Understood. Yes.
    Senator Kennedy. This is taxpayer money.
    Mr. Shepard. Right.
    Senator Kennedy. But I am telling you, I am suggesting to 
you, if you have a bias against SBICs, you ought to go run for 
the Senate or something.
    Mr. Shepard. Right. Right.
    Senator Kennedy. But you should not be doing what you are 
doing.
    Mr. Shepard. Right. Well, I do like the program and would 
look forward to visiting more with your staff about some of 
these instances, and making sure that we clarify some things.
    Senator Kennedy. Thank you for your service.
    Mr. Shepard. Thank you very much.
    Chairman Rubio. Before I turn it over to Senator Shaheen I 
want to just take on that, because I do not want to forget to 
bring it up. When we talked about the new models that you are 
going to be using to calculate the costs, it is going to 
include assumptions--I read them out already--macroeconomic 
factors, private equity elements, private equity fund 
characteristics. And you initiated this new model.
    Are these assumptions that you are coming up with, are 
those required by the Federal Credit Reform Act or the Office 
of Management and Budget?
    Mr. Shepard. The Federal Credit Reform Act does speak to 
the fact that you should have a model, that underlying model 
that mimics the type of investment activity. And so that is 
what we are trying to do with this Federal Credit Program.
    Chairman Rubio. Right. But the FCRA and the OMB only 
require the use of Treasury discount rates.
    Mr. Shepard. Mm-hmm.
    Chairman Rubio. That is the only ones they require. So 
these are ones you chose.
    Mr. Shepard. We are working on selecting them. They have 
not been selected yet.
    Chairman Rubio. But those are the ones you are leaning 
toward choosing or using, correct?
    Mr. Shepard. Yes, sir. Correct. And we will vet that with 
OMB and make sure that it is done right. There is no question 
about that.
    Chairman Rubio. Yes, and I guess, building on what Senator 
Kennedy's question was, how is this evaluation of the program 
not you substituting your own priorities for those that 
Congress has laid out?
    Mr. Shepard. Oh, and it is not intended to be a 
substitution, by any means, Chairman. It is intended to do a 
better job of making sure that we secure taxpayer dollars and 
that we do not have losses. So it is trying to improve the 
program to make it better from a loss standpoint.
    Chairman Rubio. Senator Shaheen.
    Senator Shaheen. Well, just--my time needs to go back up to 
five minutes.
    Chairman Rubio. I do not even look at it so you can go 
ahead. I do--only for Kennedy do I look at the time. Everybody 
else----
    Senator Kennedy. You better watch Rubio.
    Senator Shaheen. I know. Really. Just to be clear, so that 
I understand what your response was to Senator Rubio, I 
understood you to say that the criteria that you have laid out 
are not criteria that are required by the law. Is that correct?
    Mr. Shepard. I--we have--I am not sure about that. We have 
actually----
    Senator Shaheen. Well, can you get an answer for this 
Committee?
    Mr. Shepard. I absolutely can. Yes. Yes, ma'am.
    Senator Shaheen. Mr. Chairman, if you could share that 
answer as soon as we get it, I would appreciate it.
    Chairman Rubio. Sure. I think we know the answer but we are 
more than happy to hear what----
    Senator Shaheen. I agree.
    Mr. Shepard. Thank you.
    Senator Shaheen. So I guess I have to say, Mr. Shepard, I 
found your responses to Senator Kennedy totally unacceptable, 
because the SBA's statistics show that the average licensing 
timeline for SBICs rose to 8.2 months in 2017, from 5.1 months 
in 2016, and that the program has led new license requests to 
decline from 29 in 2017, to just 17 in 2018.
    So again, I do not know what has caused this, but I know 
that you are in charge, and that the program is going in the 
wrong direction.
    Mr. Shepard. Mm-hmm.
    Senator Shaheen. So I think it is incumbent on you to find 
out what is causing the decline in license requests and the 
increasing timeline, so that we can fix that.
    Mr. Shepard. Correct. Yes.
    Senator Shaheen. Because I agree with Senator Cantwell. As 
I have traveled around and looked at what is happening in the 
economy right now, one of the things that we know is that 
women-owned businesses are increasing much more dramatically 
than other businesses, women- and minority-owned businesses, 
and that they are employing people at a greater rate. And we 
also know that women-owned businesses have a much harder time 
getting access to capital.
    And so I guess what I want to know is what is SBA doing to 
make clear to women and minorities that the SBIC program is 
available to help reduce barriers to new entrants. So what are 
you doing to reach out to women and minorities to ensure that 
they understand that SBIC is something that they can 
participate in as well?
    Mr. Shepard. Right. Well, there are two answers. The Small 
Business Investment Companies who actually make the investments 
are the ones that would be having the majority of the dialog 
with those women-owned businesses and making investment 
decisions about whether they are going to invest in them or 
not.
    On our side, in terms of licensing, it would be making sure 
that the female fund investors can invest, using SBIC as a 
vehicle for an investment fund. And we have a few, but as I 
mentioned, Senator Cardin, we need more, and we do not have an 
issue with that at all. We just do not have very many female 
prospective fund managers that come in seeking an SBA license 
to operate an SBIC.
    Senator Shaheen. And so are there things that you think SBA 
might do to encourage more women and minorities to be able to 
do that?
    Mr. Shepard. I think we could certainly improve in that 
area. Yes, ma'am.
    Senator Shaheen. And what kinds of things do you think 
might be possible for SBA to do?
    Mr. Shepard. I think we could maybe use some of our other 
partners within the SBA to communicate that message better, and 
also use our education team that we have in-house within the 
SBIC program to have better outreach to those groups and those 
entities.
    Senator Shaheen. Well, I would certainly encourage you to 
do that----
    Mr. Shepard. I appreciate that.
    Senator Shaheen [continuing]. Because as we look at where 
job creation is happening, there are tremendous opportunities 
there. And so I hope SBA will encourage the SBIC program to be 
more inclusive.
    Mr. Shepard. Yes, ma'am.
    Senator Shaheen. Thank you, Mr. Chairman.
    Chairman Rubio. Seven minutes left. You did not need the 
reset.
    Senator Hawley.
    Senator Hawley. Thank you, Mr. Chairman. Mr. Shepard, I 
have got to be honest with you. My office has heard a lot of 
complaints from SBICs about your process, and to be frank with 
you about your leadership. And so like other members of this 
Committee I think I am trying to get to the bottom of this. But 
when I say ``a lot,'' I mean a lot.
    So was the SBIC approval process inadequate before you came 
to office? I mean, is that the issue here, that you have had to 
clean up? Is your position that we are approving way too many 
of these, and the whole thing needed to be overhauled?
    Mr. Shepard. Not at all. I mean, there are certainly 
improvements that need to be made, and I have put those in the 
written testimony, and before you got here talked a little bit 
about some of those enhancements and improvements. But the 
intent is to make the program better and to streamline.
    Senator Hawley. So that explains why there has been a 50 
percent reduction in the approvals, in the way that Senator 
Kennedy was asking?
    Mr. Shepard. Just the processes alone should not account 
for that. I think----
    Senator Hawley. So do you know--how many staff are in your 
office?
    Mr. Shepard. Total? We have got 82 is our count.
    Senator Hawley. So how many staff vacancies are in the 
office?
    Mr. Shepard. We have got 11. Eight are in the process of 
recruitment and three are about ready to be recruited.
    Senator Hawley. What about senior management positions? Do 
you have any of those that are unfilled?
    Mr. Shepard. We have a deputy position that needs to be 
filled. That is the only senior management.
    Senator Hawley. You know, a major complaint from the SBIC 
is the time it is taking to process applications, schedule 
interviews, classes, even doing something as simple as actually 
sending a license to the applicant once they have been 
approved. What accounts for that? Are you not adequately 
staffed? Is your staff not good at their job? I mean, what is 
the--what are we to believe? What are we to conclude?
    Mr. Shepard. Our staff is fantastic at their job, and they 
are wonderful people. And I think more of it, we could 
certainly look at our personnel and look at our size.
    Senator Hawley. I mean, if your staff is really good at 
their job, but the program does not seem to be functioning, and 
the processes are fine, I mean, what are we left to--I mean, 
who is the weak link then? I mean, where does that leave us?
    Mr. Shepard. Yes. The program has doubled in size, and so 
we have got a lot more work to do. And so we are certainly--we 
certainly could look at personnel and driving up those numbers.
    Senator Hawley. Why don't you give applicants who deny the 
opportunity, or who are denied approval, the opportunity to 
amend their application, to account for whatever would have 
caused the denial?
    Mr. Shepard. I think unless--unless it is an issue of--
unless it is some kind of a legal issue, I do not know why we 
would not do that, and that is something I will look into with 
our team, because they certainly should have an opportunity to 
adjudicate or to come back around and have a fuller discussion.
    Senator Hawley. It just seems strange that after applicants 
spend who knows how many hours--tens, hundreds of thousands of 
dollars, raising millions of dollars in private capital, 
seeking a license, that you do not give them either the 
courtesy of an explanation, to Senator Kennedy's point, or the 
opportunity to fix their application. I mean, that seems 
strange to me. Don't you think so?
    Mr. Shepard. I would agree, and I need to look into more of 
why that may be happening and some of those areas where that is 
happening.
    Senator Hawley. Let me ask you something else. In December 
2018, Chairman Rubio's Spurring Business in Communities Act 
became law. I was not here then but that is an important bill 
to me, because it gives first priority to SBIC applicants who 
are located in under-licensed states like mine, like the State 
of Missouri, and it removes certain capital requirements to 
make it easier for applicants from underserved states like mine 
to participate in the program.
    So that was over six months ago. Where are we on 
implementation?
    Mr. Shepard. We are close and we are going to have it done 
by the end of the fiscal year, so in this next quarter.
    Senator Hawley. So when can I expect to see results in 
Missouri small business investment as a result of your 
implementation?
    Mr. Shepard. Yes. I think at the beginning of the next 
fiscal year, starting in that first quarter, we will start 
promoting that and talking about that program.
    Senator Hawley. So you have taken steps toward 
implementation?
    Mr. Shepard. Oh, absolutely.
    Senator Hawley. Yes. For example?
    Mr. Shepard. Well, we have taken steps toward finalizing 
the legislation, and we are starting to plan outreach to talk 
about and announce it.
    Senator Hawley. Wait. Okay, wait. So you are starting to 
plan outreach. So you have not actually done any 
implementation?
    Mr. Shepard. We have an event in Oklahoma planned in 
August, to talk about--to talk about the underserved and the 
under-licensed.
    Senator Hawley. Okay. So that will be your first event.
    Mr. Shepard. Yes, sir.
    Senator Hawley. So so far you have not done anything.
    Mr. Shepard. So far what, sir?
    Senator Hawley. So far you have not done anything. You said 
in August. This is June.
    Mr. Shepard. Oh, this is outreach, outreach about the 
program. We are close to implementation and should have that 
done in about----
    Senator Hawley. So you have not done any implementation 
yet?
    Mr. Shepard. No implementation yet. No, sir.
    Senator Hawley. Okay.
    Mr. Shepard. Yes.
    Senator Hawley. You know, are you aware that Committee 
staff invited several SBIC fund managers to testify here today 
but none agreed to do so, for fear of reprisal from you?
    Mr. Shepard. I did not know that, and that----
    Senator Hawley. Don't you think that is alarming?
    Mr. Shepard. It is unfortunate.
    Senator Hawley. What accounts for that?
    Mr. Shepard. I do not know. I do not know. That should not 
be the case, but I do not know.
    Senator Hawley. No, it should not be the case. What should 
we do about that, do you think?
    Mr. Shepard. Yes. I do not know. They should be here. I 
would like them to be here. I would like us to have a good 
conversation with those SBIC fund managers.
    Senator Hawley. Hm. Have you ever delayed or denied the 
processing of an applicant as a form of punishment or reprisal?
    Mr. Shepard. Absolutely not.
    Senator Hawley. You are sure about that?
    Mr. Shepard. I am pretty sure. Yes, sir. I do not know why 
anyone would ever----
    Senator Hawley. You are pretty sure or you are 100 percent 
sure?
    Mr. Shepard. I am 100 percent sure I----
    Senator Hawley. And you are--you are----
    Mr. Shepard [continuing]. Would not do that.
    Senator Hawley. Okay. You are on the record and you are 
under oath.
    Mr. Shepard. Understood. Yes, sir.
    Senator Hawley. Thank you, Mr. Chairman.
    Chairman Rubio. I guess, I know it has been a tough 
hearing. You can hear some of the pushback and I would just 
comment, you know, we read through some of this and you sort of 
see some of the language--we see the performance, and we see 
sort of in your testimony and this discussion about providing 
sort of private equity-type structures and metrics to the 
program moving forward as a way to justify sort of why the 
program is not delivering the same numbers as it did in the 
past or historically has done, and sort of couched in the sense 
that we want accountability for taxpayer dollars.
    But I think one of the reasons why this program exists is 
the acknowledgment or the belief by members of Congress that 
private equity--I think this problem has gotten worse--
fundamentally undervalues innovation. And so you see these buzz 
words like private equity to justify the reduced activity and I 
get concerned, I personally do, you know.
    And I think one of the trends we have seen is the 
finalization of our companies, particularly the management of 
companies, has come into being. You have seen less investment 
in things that have a longer life, for example physical assets 
like equipment or machines or plants or even research and 
development. Industrial innovation has paid a price, in my view 
anyways, as we financialize corporate governance and corporate 
decisionmaking. At some point, the financial markets concluded 
that it was just too risky to invest in these sorts of things 
anymore.
    And so it would be ironic if the very program that was 
designed to help small business overcome financialization of 
these decisions was financialized itself.
    And so when we add what we have heard from you today, these 
new metrics that are being designed, with the numbers that we 
have seen and some of the other things that have been brought 
up, I think you understand that this Committee is pretty--for 
lack of a scientific term--fired up about not just the 
direction this program is going but our view as to the 
direction it is being taken.
    And I hope that came across today. It certainly did for me.
    Mr. Shepard. Yes, sir.
    Chairman Rubio. I do not know if the ranking member has 
anything to add.
    Senator Cardin. Thank you, Mr. Chairman.
    Mr. Shepard, I think there is a general consensus here on a 
couple of things. First, we like the SBIC program. Democrats, 
Republicans, small businesses, we like the SBIC program.
    Secondly, we are not satisfied with the time it takes for 
an application to be received and the numbers that are being 
approved and the outreach to underserved communities not having 
investors.
    I would point out, you indicated that the program has 
grown. Our information shows that actually there was a 
reduction in the total funds in the SBIC from fiscal year 2017 
to fiscal year 2018. It actually went down.
    So that is unacceptable. When you look at the total volume 
today, it is about what it was four years ago. So it is not the 
type of growth that we would have expected in the SBIC program.
    So this is a hearing on reauthorization. There is something 
not working. If it is the law, let us know how we need to 
change the law so Congress can give you the tools you need 
through statute. If it is the way that your agency is organized 
and the resources that you are getting, let us know that so 
that we can deal with it. If it is a matter of capacity in your 
agency, we need to know that also. That is our responsibility 
on oversight.
    But the bottom line is this is a very important program. It 
is not meeting the expectations that we have set for it in 
total availability and it is not fairly distributed among all 
of the communities that need small business financing.
    So this is an opportunity for you to present to us ways 
that we can improve the law and give you the tools you need 
because you have bipartisan support for this program. So I 
would just urge you to take advantage of that and get that 
information to this committee.
    Mr. Shepard. We will do so and appreciate that, Senator. 
Thank you.
    Chairman Rubio. Senator Hawley, anything else?
    Senator Hawley. No.
    Chairman Rubio. Thank you. Thanks for being here today. We 
are going to transition to the second panel. Again, our 
apologies for the late start.
    I will introduce the second panel as they come up. It will 
buy us some time here.
    Brett Palmer is the President of the Small Business 
Investor Alliance. In his role at the SBIA, he represents small 
business investment companies and the institutional investors 
in these funds.
    Mark Muro is the Senior Fellow and Policy Director of the 
Metropolitan Policy Program at the Brookings Institution. He 
focuses his work on regional technology, ecosystems and 
economic development. He has published extensively on digital 
trends, automation, advance industries, and regional 
development issues.
    Dr. Banu Ozkazanc-Pan--did I say that right?
    Ms. Ozkazanc-Pan. Pretty good.
    Chairman Rubio. I like getting names right.
    Ozkazanc-Pan----
    Ms. Ozkazanc-Pan. Ozkazanc-Pan.
    Chairman Rubio. Ozkazanc, I have to say it faster, perfect. 
Dr. Ozkazanc-Pan, is an Associate Professor at the University 
of Massachusetts and a Visiting Associate Professor of 
Sociology at Brown University. Obviously, you do not have a 
non-compete there. That is great, you are in two places.
    Her work examines diversity and inclusion in organizations 
and entrepreneurship. Her latest research focuses on the 
effects the venture capitalists have on the flow of resources 
in entrepreneurial ecosystems.
    So I will just begin from my left to my right. Mr. Palmer, 
thank you, and the floor is yours.

 STATEMENT OF BRETT PALMER, PRESIDENT, SMALL BUSINESS INVESTOR 
                    ALLIANCE, WASHINGTON, DC

    Mr. Palmer. Thank you, Chairman Rubio.
    My name is Brett Palmer. I am President of the Small 
Business Investor Alliance.
    I would like to thank the Chairman, the Ranking Member, and 
the other Senators participating today for taking part in this 
hearing, for reviewing the Small Business Investment Company 
program, discussing small business investment generally, and 
answering any questions you may have about it.
    The SBIA is the trade association of small business 
investors that includes the SBIC industry. The goal of the SBIA 
is to promote a healthy ecosystem for small business investing, 
one that benefits both small businesses and their investors, 
and thereby promoting economic growth and job creation.
    Small business investment companies have been around since 
1958. And what was true in the 1950s will always be true. Small 
businesses need external capital to grow and to thrive and to 
reach the next level. And it is really hard to access that type 
of capital.
    Debenture and non-levered SBICs have increased the amount 
of small business investment capital, with over $28 billion 
invested domestically over the last five years. All SBIC 
investments must be used exclusively for domestic small 
businesses with at least 25 of those investments going to 
smaller enterprises, which is a smaller standard than the small 
business standard.
    SBICs cannot be used for an investment for short-term 
projects and cannot be used for moving jobs offshore. By law, 
SBICs are focused on America.
    SBICs provide an important national benefit because SBICs 
are often the first institutional capital into small 
businesses. SBICs help with not only capital but also expert 
advice on how to scale up and professionalize as a company 
grows.
    SBICs invest across a broad range of industries and across 
a broad range of geographies. It is common to see investment in 
manufacturing and other not so flashy industries and in low and 
moderate income areas, as well as parts of the country 
generally overlooked or flown over.
    In contrast, venture investment is extremely concentrated 
and a lot of private equity investment is also concentrated. 
SBICs invest in a far, far more broader footprint. This is one 
of the reasons why we need more SBICs and we need them in more 
places.
    The SBIC program has a very strong taxpayer protection 
system built into the system. It is maintained at zero subsidy 
now, the SBIC debenture program, for about 22 years since 
Congress reformed in the late 1990s.
    The SBIC program continues to have some of the healthiest 
and strongest payback period in its 60-year history. The annual 
charge that Chairman Rubio mentioned is a fee that covers 
potential losses to the program. It is at its lowest rate in 60 
years. The SBIC leverage has continued to operate that zero 
subsidy and we expect that to continue.
    There is a strong private sector interest in investing in 
small businesses, and particularly via Small Business 
Investment Companies, which is critical because the private 
sector is the leading component to make the program work. This 
is not a subsidy program. It is not a grant program. It is not 
a prop up failing businesses program. It is a market driven 
program where market forces are aligned with a clear public 
benefit of more jobs, more innovation, and more geographic 
dispersion of opportunity.
    A 2017 Library of Congress study, which you all have 
mentioned, highlighted that the SBIC program has backed 
businesses that created 3 million jobs and support an 
additional 6.5 million jobs over the 20 year period, an 
incredibly efficient rate to the taxpayer. This study was 
performed by researchers from Duke and Pepperdine's Business 
School.
    Your average debenture-backed SBIC business added 125 new 
jobs. Non-levered and equity oriented SBICs created over 530 
new jobs per small business. That is an average, that is not 
universal for each one. But to put that into perspective, over 
the 20-year period of the study, that represents about 7 
percent of the net new jobs in the United States from SBIC-
backed businesses. That is an extraordinary number for a little 
known program, but that is what it is supposed to do.
    Most of these companies will never even consider going 
public. They will never be written about in the Wall Street 
Journal. But they almost all grow, changing lives and 
supporting communities.
    All of these quiet little business successes add up to 
something big, which is the reason the SBIC program has broad 
bipartisan support. The SBIC program is good, but it is not 
perfect and there are limits to any government program. Every 
government program can benefit from congressional oversight, 
regular reforms and updates, and we thank you for having this 
hearing.
    We welcome the oversight and we want to work with Congress 
to make improvements. There are still significant market gaps 
that are leaving too many small businesses unable to grow due 
to a lack of capital.
    My written testimony, which is far more robust than you see 
from normal congressional testimony--it is almost a phone book 
that you see before you--is broken into three categories 
because it is an unusual program. It is a plain English of how 
the program works, is the first section.
    The second section is ideas for improving the operation of 
the program and for using the program to shrink what is 
commonly called the ``valley of death'' because there are still 
a lot of businesses that are good businesses that are not able 
to access the capital they need to access that next level.
    And third, and regrettably, is a sampling of the profoundly 
frustrating dumbfounding mismanagement that is creating 
unnecessary risks and cutting off of capital to small 
businesses.
    I would like to thank Senator Rubio, Coons and others here 
for their efforts to be thoughtful and deliberate about 
manufacturing in particular, and we would like to see an 
international policy as we compete globally against the Chinese 
and others to really create that long-term investing.
    I would be happy to answer any of your questions.
    I would also mention, with the few seconds I have left, 
that I would like, if the chance presents itself, to respond to 
some of the questions directed to the first witness that I 
think, frankly, need significantly more fleshing out to give a 
full picture of the truth.
    But with that, I would hand it over to Mr. Muro.
    [The prepared statement of Mr. Palmer follows:]
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    Chairman Rubio. Mr. Muro.

  STATEMENT OF MARK MURO, SENIOR FELLOW AND POLICY DIRECTOR, 
METROPOLITAN POLICY PROGRAM, BROOKINGS INSTITUTION, WASHINGTON, 
                               DC

    Mr. Muro. Thank you, Chairman Rubio, Ranking Member Cardin, 
members of the Committee who I assume will see this material 
otherwise. Thank you for inviting me today.
    My expertise revolves around what my group at Brookings 
Institution calls America's advanced industry sector. More on 
that in just a sec.
    But I want to suggest how the SBIC could be better 
positioned to support those industries that our particular 
industry claims we need to talk about. Specifically, I want to 
urge that the committee explicitly prioritize advanced 
manufacturing enterprises when it revisits the SBIC's 
activities in the coming months.
    Not all industries matter equally. Indeed, these high-
productivity, high-pay innovation industries anchor American 
competitiveness, and matter inordinately. We need to think 
about them and nudge the SBA's and the SBIC's services and 
resources toward support of those.
    What are advanced industries? Why do they matter? Brookings 
defines these industries as those in which the R&D spending per 
worker reaches the top 20 percent of all industries and the 
share of workers with significant STEM knowledge exceeds the 
national average.
    We count three energy, 12 service industries, and 35 
manufacturing industries. This super sector is dominated by 
strong advanced manufacturing. Among these 35 manufacturing 
industries is automaking, aerospace, pharma, medical devices, 
computers, semiconductors, chemicals and their huge supply 
chains.
    Why do they matter so much? The advance industries sector 
encompasses much of the nation's most crucial economic 
activity. It anchors the traded sector, generates above average 
productivity, and supports long supply chains. It spreads 
innovation because its inordinate R&D spending drives product 
and process innovation, both within enterprises and then 
through spillovers throughout the economy.
    And then this group of industries I am talking about train 
and employ the nation's STEM workforce. They find them, they 
locate them, they hire them, they train them both engineering 
talent but also non-BA technical workers, what we call blue 
collar STEM.
    We can go over a few of the statistics here. They are 
delivering value, these industries. Advanced industries perform 
90 percent of the private sector R&D in our country.
    Advanced industries, including advanced manufacturing, are 
extraordinarily productive. Each worker generated approximately 
$250,000 worth of output last year, twice the amount of the 
other sectors.
    And advanced industries punch way above their weight in 
generating our GDP, $3.7 trillion worth of output, 18 percent 
significant. Advanced manufacturing, about 40 percent of that.
    The bottom line is this, without a competitive advanced 
sector, it is going to be simply not possible for the U.S. to 
maintain global preeminence, sustained prosperity, and renew 
national unity. So I want to bring that national imperative 
into this discussion.
    But here is the problem, as we have been hearing, there is 
now abundant evidence that the primacy of America's advanced 
industries, and especially its advanced manufacturing sectors 
being contested and eroding. Slipping U.S. R&D investments, low 
STEM graduating production, thinning of manufacturing 
ecosystems is our problem.
    So we are going to need to intervene here. But the 
challenge of finance is a very real additional challenge. 
Inherent biases of VC and capital resources skew the existing 
small firm financing system away from these capital intensive 
manufacturing enterprises.
    There is a role to intervene here. Policy should address 
this.
    The SBIC is clearly a useful tool for some of this work and 
should be further enabled to assist advanced manufacturing 
concerns in the coming years.
    The lack of sectoral specificity in the program and in loan 
making means that public funds are not always maybe channeled 
to the highest and best use in this national purpose.
    And then we have heard about the repayment structure which 
begins immediately and is comprised of an SBA annual charge 
plus interest due, just simply is not conducive to the nature 
of the long-term product development timelines that advanced 
manufacturing firms require.
    So I endorse several of the ideas that I think are being 
discussed. Explicit prioritization of advanced manufacturing 
growth makes a ton of sense and the Committee could provide for 
more robust and patient capital in SBIC funding.
    The SBA should adopt an ethos of investing in the national 
interest here. It is not just a technical matter. The national 
interest needs to enter this discussion and I think this 
Committee has been strong on that.
    America's medium- and long-term competitiveness will be 
heavily influenced by its success in expanding these advanced 
industries. Success or failure will be determined, meanwhile, 
by our choices--something I think you have written about--and 
what we choose to do and not to do in a world of great 
competition.
    So I think working to improve the availability of patient 
capital for smaller advanced manufacturing firms would be a 
good choice.
    So thank you again for having me.
    [The prepared statement of Mr. Muro follows:]
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    Chairman Rubio. Dr. Pan.

 STATEMENT OF BANU OZKAZANC-PAN, PhD., ASSOCIATE PROFESSOR OF 
 MANAGEMENT, UMASS BOSTON AND VISITING ASSOCIATE PROFESSOR OF 
            SOCIOLOGY, BROWN UNIVERSITY, BOSTON, MA

    Ms. Ozkazanc-Pan. Thank you.
    Chairman Rubio, Ranking Member Cardin, and Members of the 
Committee, thank you for the opportunity to testify here today.
    In addition to my very long title, I am the founding 
director of the Venture Capital Inclusion Lab at Brown 
University and happy to speak further about some of the work 
that we are doing.
    Today, I will provide a broad overview of the VC industry 
and then go on to discuss the specifics as they relate to women 
and minorities.
    The VC industry last year saw record growth in investments. 
Last year, the industry invested around $130.9 billion across 
8,948 deals and raised $55.5 billion across 256 funds, 
representing record amounts compared to the dot com boom era.
    During this time, around 62 percent of total invested 
capital was due to deals sized $50 million or larger. VC mega-
funds, or those raising $500 million or more, accounted for 57 
percent of all capital raised. These large funds were partially 
supported by the involvement of private equity and corporate VC 
investments.
    During this time, we saw that both deal size and valuations 
grow, particularly in early stages. Right now, $25 million 
deals or larger now represent almost 62 percent of all early 
stage deals by value. However, whether the pace of such 
investment activity is sustainable continues and needs to be 
seen.
    There is some concern about the amount of available capital 
and whether it is being deployed efficiently. In addition, the 
majority of VC investments go to pharma, biotech, and software 
industries with software representing the largest single sector 
for VC money.
    Despite the growth of VC investments, the situation for 
women and minorities is quite different. On the investor side, 
a 2017 report by TechCrunch found that women represented 8 
percent of all partners in top 100 VC firms. Only 1 percent of 
survey's 713 VC firms had Black decisionmakers, coming out with 
a whopping 7 individuals, while Hispanic decisionmakers were 
represented at 1.5 percent and Asians at 24 percent. Overall, 
85 percent of decisionmakers in the U.S. VC industry are male 
and 73 percent are white.
    On the entrepreneur side, less than 1 percent of Black 
women receive VC funding and startups with a female CEO have 
received only 2.7 percent of all VC money.
    We see that all male teams represent 82 percent of all VC-
backed startups. Blacks represent 1 percent, Latinos around 2 
percent, and Asians around 18 percent. In general, Whites 
represent about 77 percent of all VC-backed companies.
    Despite these challenging facts, 40 percent of all current 
businesses in the U.S. are women-owned. These businesses have 
been growing at impressive rates. Between 2007 and 2018, women-
owned businesses grew at 58 percent compared to 12 percent 
growth across all businesses. Women of color-owned businesses 
grew an impressive 163 percent during the same time.
    Despite this growth, revenues generated by women of color-
owned businesses have dropped between 2007 and 2018 by 21 
percent, whereas non-minority-owned business revenue grew by 
17. Research shows that if revenues generated by minority 
women-owned businesses matched those currently generated by all 
women-owned businesses, they would add 4 million additional 
jobs and $1.4 trillion in revenues to the U.S. economy.
    Similarly, if minority-owned businesses were at 
entrepreneurial parity, the U.S. would gain 1.9 million firms, 
13.2 million more employees, and an additional $2.9 trillion in 
gross receipts.
    The challenges are taking place at a historic moment. The 
U.S. is changing in terms of demography and this will mean new 
consumers, markets, and opportunities will emerge. At the same 
time, increased global competition requires investments to make 
the U.S. economy strong and competitive.
    SBICs can provide these investments and can be even 
stronger in terms of employment and job creation.
    New programs, such as on-ramps for women and minority fund 
managers and investors can boost the already better than 
industry numbers for gender and racial diversity in SBICs. They 
can allow expanded deal flow options and networks and move away 
from some of the group think and pattern matching that allowed 
the VC industries to fund companies like Theranos. They can 
take advantage of new customer segments and consumer needs that 
can be served through diverse firms.
    By investing in industries beyond those associated with 
traditional VC funding, we can build a sufficiently diversified 
economy. And by continuing to fill the gaps in capital 
resulting from mega-deals in the VC community, we can expand 
opportunity across geography, gender, and race.
    Thank you.
    [The prepared statement of Ms. Ozkazanc-Pan follows:]
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Rubio. Thank you.
    Let me start here. Mr. Palmer, you have been the president 
of the association that represents the SBIC companies for many 
years now, right?
    Mr. Palmer. Eleven years, yes.
    Chairman Rubio. So before this hearing, we tried to get 
fund managers to come testify. We could not get a single person 
to come and tell us about their experience. Why will not--
Senator Hawley touched on it pretty extensively. Why are they 
not here today? Why will they not come?
    Mr. Palmer. Well, there are some that had legitimate 
business conflicts, but there is legitimate fear. The Associate 
Administrator is well known to the industry. His style is one 
that certainly leaves significant open questions. The fund 
managers believe they have a fiduciary duty to their investors 
and they are afraid of retaliation where there are so many 
steps in the process that are judgment calls that if they go 
against you, you have got a big problem. And they feel that 
they cannot, in good faith to their investors, speak publicly 
lest they put their investors at risk.
    Chairman Rubio. The bottom line is that there are members 
of your organization, these investment companies, who feel that 
if they come testify before the elected representatives of the 
U.S. Senate about the status of the program and how it is 
working, that they are going to get hurt, that there will be 
decisions made on the margins that is going to harm them and 
ultimately put in danger their obligation to their investors. 
They are afraid to come----
    Mr. Palmer. Yes.
    Chairman Rubio [continuing]. Because they are afraid they 
are going to be retaliated against.
    Mr. Palmer. Yes, and though it is difficult to quantify 
those judgment decisions, there have been events that have 
happened in the past that they look at, and on the face of it, 
say that to me looks like retaliation for not hiring him or 
speaking out against him previously and we just do not feel 
that we have--they will do it privately. And it is a challenge 
because there is--being in the sunshine is important. But they 
have an obligation and they are legitimately scared. I tried to 
talk to them.
    Chairman Rubio. And I raise this without him being here and 
able to respond because he was asked the question directly 
earlier.
    Mr. Palmer. Right.
    Chairman Rubio. So we have now on the record his response 
to that question and we have your statement here, so that 
Senator Hawley's comments do not just stand on their own but we 
now have a representative of the association.
    Dr. Pan, there is, as you know, the requirement--the SBA 
essentially requires that an SBIC applicant have two fund 
managers. They have to both have previous experience and 
expertise with the program.
    I have drafted a proposal that would allow applicants to 
have a single fund manager with the experience and provide SBA 
training to applicants whose management team has no previous 
experience with the program.
    My question is do you believe this provision could help 
expand the pool of potential fund managers? And would this kind 
of proposal help to increase diversity in the venture capital 
and private equity communities?
    Ms. Ozkazanc-Pan. Thank you for your question, Mr. Rubio.
    I do believe these are good first steps to ensure that 
there is opportunities available for women and minority fund 
managers, and sometimes experience and exposure could be one 
way in which they feel left out. So I think a program like 
this, with additional elements, could be very beneficial to 
diversifying SBIC fund managers.
    Mr. Palmer. I can give you a case of that that is exactly 
true. The past chairwoman of my board, Carolyn Galiette with 
Ironwood Capital, she will tell you point blank that she would 
never have gotten licensed today--even though she is on her 
third or fourth license--if they had the standards now in place 
for licensure that she had back then. And her fund invests, by 
design, more than half of her investments are in women, 
minorities and low-income areas as a top tier firm.
    Chairman Rubio. Mr. Muro, I wanted to sort of lead into the 
question with the following statement. There is two orthodoxies 
that have been in place for some time which frankly, I have 
dealt with and confronted and, in some cases, at some point 
potentially even supported in some of the decisions.
    The two orthodoxies are these: the first is that there is a 
very limited role for government to play writ large across 
everything. And I am a person who believes in limited 
government. But that the bottom line is the private market will 
determine what is a good idea or not a good idea, particularly 
in the role of investment.
    And the second orthodoxy is that we are headed into an era 
that is good for us, in which we would innovate here but then 
make things somewhere else. And then we would be on the high 
end and let someone else make it. We will innovate the 
software, we will innovate the ideas, and then someone else 
will build it and that is better for the U.S. consumer.
    These are the two orthodoxies.
    The problem with the first one, that first one, is that 
investment today, it is my view but I think it is supported and 
the report we put out earlier this highlights this, the 
financialization of so much of our corporate and business 
activity in this country has driven investment decisions toward 
how can I get the highest return for the lowest risk in the 
shortest amount of time? That is what is being rewarded and 
that is what is driving investment decisions.
    So that is the first problem with simply saying the private 
market will take care of it, is that when you do that, when 
your focus is on how can I get the highest return in the 
shortest amount of time with the lowest amount of risk, you are 
not going to invest in research and development. You are not 
going to invest in innovation. It may be the greatest idea in 
history or it may be a total flop.
    And that is problematic because of the second point. And 
that is this notion that we are going to invent things here but 
they are going to be made somewhere else will not last forever. 
So there is a lot of noise out there about Huawei. What people 
are missing about Huawei and telecommunications is an important 
piece but it is just one piece of a much broader strategy in 
which China, as an example, has used the government support of 
its national champion companies to establish dominance in a 
series of critical fields to the 21st century.
    So how it works is you are one of these companies. You have 
government-backed credit. You have a guaranteed protection in 
the domestic marketplace. So here is a billion people that only 
you can sell to. Plus, we are going to give you money.
    So what do these companies do? They can now go abroad in 
rail cars. They can flood the market with batteries or 
robotics. And no one can compete with them until none of their 
competitors exist and they have created a dominance in that 
industry.
    And so I wanted you to address--the first point, I think, 
is well established and you can talk about it. But it is the 
second one that I want people to understand, that what is 
flowing away from us in the 21st century will eventually be the 
innovation, as well. But there is a value, an inherent value, 
in the jobs that are created as a national priority in those 
industries that we are going to have to have a response to.
    We are going to have to have a collective national 
response--that does not have to be partisan, by the way--on 
China's industrial policy. Because we are not competing with 
businesses like ours. We are competing with national champions 
backed by the government of the soon to be largest economy, not 
per capita but gross largest economy in the world with 
extraordinary market resources that are going to, in essence, 
leave us in a world where their companies will dominate all of 
these fields at the same time as the financialization of our 
corporate and investment decisions is leading us further and 
further away from the kinds of things we need to do to compete 
against them.
    So I told you it was a long question.
    Mr. Muro. Yes, I think you are pointing to some of the most 
critical issue we are facing. We know there are market failures 
on market irregularities and how resources flow at home. What 
has happened, I think, is that we are realizing that by 
allowing, by failing to support some of these sectors, they are 
flowing offshore on their production end and it is no longer 
simply a choice between innovation and production.
    More and more, we are learning that innovation requires 
specific inputs and detailed iterative knowhow. And even the 
accumulation of knowledge in specific regions that become 
warehouses of knowledge. So we have to manage and protect those 
because you can lose--there are many examples, solar PV cells, 
electric motors, rare earth elements, LEDs, many others, where 
we thought we were just off-shoring the production and pretty 
soon it turned out that we were losing control and leadership 
in the creativity.
    And it is because innovation is not a high-flown purely 
intellectual activity. It is about small, embedded iterative 
product iterations and process improvements. We have to be able 
to manufacture so that we can innovate.
    And I think that logic has gotten somewhat skewed. I think 
the innovation has gotten associated simply with digital 
innovation and we have lost track of how things actually are 
created in plants.
    Chairman Rubio. And I will turn it over to the Ranking 
Member, other than to say that even in the digital space that 
is true. So the platform known as the internet and all of the 
transactions that take place in it has spawned a bunch of 
innovation. One of them is mobile payment, right? Today, China 
has--you could argue that we innovated the platform upon which 
it is occurring. But the innovation and the application of it, 
when it comes to mobile payment, they lead the world both in 
adopting it but also in all of the technologies that are 
related to it.
    So at some point in the future, when all of these other 
companies around the world want to go on a mobile payment 
system because that is what everyone is doing, they will 
control--even in the digital space--that industry and the 
technologies that drive it. The 5G is another example.
    The Ranking Member.
    Senator Cardin. Let me thank all of our witnesses.
    This has been certainly an interesting hearing, a little 
bit livelier than most of our hearings. But the focus is on the 
reauthorization of Congress of the SBIC programs. As I said in 
the beginning, this is our seventh hearing on reauthorization 
of parts of the SBA.
    So I just really would like to get your views, I hope we 
could get some short answers. But the SBIC program, you all 
believe is an important tool available for small businesses?
    Mr. Palmer. Yes.
    Senator Cardin. And it appears, from the way that you have 
presented your testimony in response to the Chairman's 
question, that it is not doing everything it should be doing 
today. Is that a fair enough statement?
    Mr. Palmer. Not as much as it could be doing. I mean, 
people are trying. It is just a question of there are barriers 
to being as successful as it could be.
    Senator Cardin. Are those barriers statutory or is it the 
way it is being administered?
    Mr. Palmer. There are several. There is clearly a 
mismanagement problem and a hostility in the functioning of the 
program. I do not say that lightly and I do not say that 
without evidence. I have got a book in front of me where you 
can document that.
    But I think there is also, for the risk aversion of the 
program, as far as the ability to make sure that it has zero 
subsidy, also really minimizes risk. And so as you minimize 
risk, it takes it away from some of the earlier stage side. And 
I think it is time to really look more aggressively, what can 
we be doing to make that valley of death smaller, to allow for 
more equity, more patient capital, more manufacturing, some 
earlier stage businesses that are not quite as good.
    There are a number of things we need to be looking at to 
figure out some new tools to make sure we can do that.
    Senator Cardin. So was the early stage capital sabotaged to 
not work? Because it seems to me early stage capital would deal 
with some of the issues that we have all been talking about, 
and it was started and stopped.
    Mr. Palmer. Well, there is several different versions of 
early stage that they have done. There was an Early Stage 
program that was done around 2012 or thereabouts that actually 
worked. They only licensed five funds.
    The biggest problem they had with it is that you could only 
get licensed once a year. So you were in, and if they had a 
question you were out. And so you had to go back and forth a 
little bit. You have to wait another year. And private sector 
will not wait a year to raise a fund.
    So that could be popped up tomorrow with the regulations 
reactivated and all they have to do is go to a rolling 
licensure. That would work and that operates at zero taxpayer 
subsidy.
    The participating securities program was a program that ran 
from 1994 to 2004, that was extraordinarily good at creating 
early stage capital investment, it was $21 billion. But it also 
lost about $1 billion or $1.5 billion because of the cockamamie 
payback structure.
    The SBA has internal models of what they could have done to 
fix that and that really could have been fixed and reformed 
with some very modest changes. That could work again, but you 
would have to make those changes because if you do not protect 
the taxpayer you have a problem.
    But that was why that changed.
    Senator Cardin. And it could have been changed----
    Mr. Palmer. It absolutely could have.
    Senator Cardin [continuing]. By the SBA?
    Mr. Palmer. That could have been changed--this is going 
back to the mid-2000s, before my time so I was there post. But 
I believe some of that could have been done by the 
administration, which I was in, full disclosure. But some of it 
would have required some congressional changes, if I recall.
    Senator Cardin. So it appears like, what I have heard from 
today's hearing, it is not so much the fundamental law that has 
been passed by Congress, but the way the law is being 
implemented?
    Mr. Palmer. Yes.
    Senator Cardin. It is not reaching its full potential. It 
is working but it is not working as well as it could work.
    Mr. Palmer. Right. And I think one of the things--you heard 
a lot about risk from the first witness. What you never heard 
was reward. Reward is a critical element to risk. We have to 
take risk. We are trying to facilitate risk. We are trying to 
facilitate the private sector to take risks that they might not 
otherwise have taken that are not irrational risks but that are 
properly incentivized without subsidy.
    And we have to be not paralyzed by risk but actually figure 
out how to do that.
    Senator Cardin. No question, small businesses always 
present a risk. We know that.
    Mr. Palmer. Right.
    Senator Cardin. So we recognize if you do not take risks, 
you are not going to make progress.
    The Chairman mentioned, I thought, a very good point on 
minority participation--professor, I want to get you engaged in 
this--about the fund managers and the experience of the fund 
managers, and that can be used to as a way to prevent outreach 
in underserved communities if you set up such high standards 
that communities do not have representation in the funds 
themselves, in the investors themselves.
    Are there other recommendations that you would make so that 
we can get more participation from women, from minorities in 
underserved communities?
    Ms. Ozkazanc-Pan. Absolutely. And I would be happy to work 
with respective staffs for solutions, given some of my research 
and some of the findings around best practices.
    One of the things we have seen work are fellowships or 
apprenticeships that are funded. Sometimes they are matched, 
sometimes they are fully funded. But this allows women and 
minorities who may not have the financial background to enter 
into the fund manager position, to gain that experience and 
exposure.
    There is a venture fellows program at a new venture capital 
firm that has placed their first fellow into another VC firm. 
So there are examples across the board of firms doing things 
right.
    And lastly, just as a followup, at the VC Inclusion Lab, we 
are actually following up with each of the 40-plus firms that 
signed the National Venture Capital Association diversity 
pledge in 2014, to see what they have done and what changes 
they have seen. So I would be able to give you more concrete 
information hopefully in a few months when we have contacted 
and gotten information from each of those firms.
    Senator Cardin. As I encouraged from the last witness, 
please give us your suggestions because you see there is a lot 
of frustration here and we really do want this program to be at 
its full--meet its full potential. And it is not doing that 
today.
    So one of the areas is what you are talking about on 
participation from groups that we just do not have the numbers. 
These numbers are pathetic. They are not even in the ballpark 
of where they need to be.
    So we have taken looks at other areas of SBA programs that 
have not reached, we think, full potential and we have taken 
steps to correct that.
    So your recommendations there, I think, can help us in 
trying to meet those goals.
    Mr. Palmer. And one thing I would add to that is, you know, 
it is a particular risk to step out and try to raise a private 
equity fund. You have no salary, you take a year to two years. 
And it is a particularly risk for women and minorities to take 
that risk. It is a bigger leap.
    And so if you are trying to get more diverse fund managers 
in the SBIC program--which we certainly want to do, and I 
actually have some ideas in my testimony that I do think help 
move the needle there--just look at the new funds. You heard 
from the first witness that we have so many new funds coming 
in. Total new pipeline is down 45 percent year over year. It is 
not new funds coming in. They are being actively scared off.
    And if you cannot keep the funds that you have because they 
think they are being mistreated and paralyzed, then how are you 
supposed to get people to take that entrepreneurial risk to 
form a new fund that is a woman or a minority? It is really 
hard.
    Senator Cardin. It is just hard to understand why we have 
not done better in creating new funds in minority and women 
communities. It is a logical step for the SBIC program to have 
achieved and it does require an attitude of SBA to do this.
    Mr. Palmer. I have had 10 chairs of the board over my 
terms. Four have been women. So that is not 50 percent, but 
that is good. We actually have a lot of women in leadership. 
Actually, our northeast president next year is going to be a 
woman from your state.
    We have a lot--we have tried a lot of women and we are 
making progress there. It does take time. And I do think, part 
of the problem to get an SBIC fund is you have to come from 
private equity. So you are recycling from the same pool. We are 
far more diverse than the rest of the private equity and 
venture industry but you are not going to really have a 
breakout until you can broaden that pool out a little bit.
    And so actually, I have some proposals in here about how to 
do that that I think work and could happen very quickly, that 
we could see the next generation of minority and women fund 
managers in a way that is constructive and without subsidy.
    So there is a lot we can do there but the program really is 
being--has major management problems right now. They do not 
have staff in senior positions. You are missing more than one 
senior staffer. You are missing the top career staffer, the 
Deputy Associate Administrator. You are missing the Director of 
Licensing and Program Development. They have three what are 
called area chiefs, that are in charge of managing the teams 
that manage the funds day-to-day. There are three of those. Two 
of them are vacant.
    You have a lot of--and some of these are positions that 
have been open for over two years. And the Program Development 
Office, whose job it is to recruit new funds and to help 
license funds in underserved states and underserved 
communities, consistent with Senator Rubio's bill, has gone 
from four FTEs to one. There is only a director left with zero 
employees, and I do not think he has got a budget since last 
December.
    So I am not sure the private sector is seeing the program 
being managed in the same way that the person running the 
program is seeing it. We see it from a very different lens that 
is very concerning. And I think the numbers and data back this 
up.
    The private sector is not saying okay, we do not want to do 
SBICs or small business investment because there is an 
opportunity. But we are looking at that and going oh my gosh, 
are you kidding me? Am I going to walk into that buzz saw? Am I 
going to put my investors and my professional career on that 
line? And that is a problem.
    Senator Cardin. Look, I think Senator Kennedy's point about 
we look at action rather than words, it was disappointing that 
we did not have an acknowledgment as to numbers being 
unacceptable.
    I thank you, Mr. Chairman.
    Chairman Rubio. Before turning to Senator Duckworth, just 
one observation on your point. It is hard to attract new people 
when one of the requirements is that you cannot be new.
    Mr. Palmer. Mm-hmm.
    Chairman Rubio. In essence, what we are saying, you have to 
have two fund managers with previous experience in order to be 
an applicant, you are basically saying the only people that can 
apply are the people that have done it before. Well that, by 
definition, knocks out everybody who is new and wants to come 
in.
    Mr. Palmer. That is right. You have to basically have been 
recruited somewhere else in the private equity industry and 
then you can spin out to form an SBIC. And that is why one of 
my proposals is you can form bank-owned non-levered SBIC funds. 
That is a big mouthful. But banks can do that and they have 
done that. They exist across the country.
    And banks have something that SBICs do not have, which is 
scale. Some SBICs are as few as two people. Banks have really 
good recruiting programs. They have gotten good at that in the 
past couple of years. And so if they form bank-owned non-
levered--one, they can help fill the equity gap, that is long-
term patient capital. Two, they can broaden the footprint. And 
three, they can seed the next generation of private equity fund 
managers. That would be helpful.
    That is not the only solution. This has got to be a multi-
step process. But there are a number of things that we can do.
    Chairman Rubio. That may be a great idea, but it is not 
going to work unless you find a shorter term, a shorter word to 
describe it.
    [Laughter.]
    Mr. Palmer. Yes, sorry, wonking out.
    Chairman Rubio. We have got to come up with something 
fancy.
    Senator Duckworth.
    Senator Duckworth. Thank you, Mr. Chairman.
    Actually, Mr. Palmer, I am glad you brought up banks 
because I think another component of the challenges that we are 
facing with SBIC, especially for providing long-term loans to 
growing small businesses is that smaller banks find it very 
difficult to invest in SBICs.
    Mr. Palmer. Mm-hmm.
    Senator Duckworth. And when you talk about women and 
minority communities, you know, that is the realm of the 
smaller banks, right?
    Mr. Palmer. Mm-hmm.
    Senator Duckworth. They are the ones that tend to be, you 
know, you have black-owned banks, women-owned banks. Those tend 
to be smaller. And I think that they are at a disadvantage to 
larger banks who have greater access to this program.
    This week Senator Young and I introduced the Investing in 
Main Street Act that would allow financial institutions to 
invest a greater portion of their surplus and capital into 
SBICs.
    Could you describe how this legislation or this idea might 
help small businesses better access capital without 
jeopardizing the safety and soundness of these financial 
institutions?
    Mr. Palmer. Sure, absolutely. I think it is a great idea. 
This is a provision that has already passed the House 
unanimously. It has broad bipartisan support and I appreciate 
your taking it up.
    Basically, there is a timing issue, when banking law was 
written at a different time than the Small Business Investment 
Act. And so banks are allowed to invest more in small 
businesses via SBICs but the SBICs are not allowed to accept 
the money from the banks to invest in small businesses from the 
banks.
    It is an accident of history. And this bill would fix that. 
And what that would do is get more capital flowing into SBICs. 
And one of the things that banks do, is banks have this big 
footprint, to your point. And they have more interactions. And 
a lot of times a small business will go to a bank and say I 
need a loan. Well, that is not the type of stuff we do. You 
need equity. You need unitranche. You need some complicated 
structure, subordinated debt. You are not cash-flowing enough, 
whatever it may be.
    But they can turn around and hand that and say hey look, 
SBIC, here is a great opportunity. We know this client. They 
are in an underserved area. That is important to us from a 
bank, from a CRA perspective. Can you take a look and see if 
this works. And often they do.
    There are between 500 and 600 banks that are currently 
invested in Small Business Investment Companies. They get very 
good returns. But they also get community reinvestment 
assessment saying hey, is this serving these underserved 
communities? Because many times they are.
    So yes, I think it would be very helpful. I think it does 
not reduce any bank protections. It would still require the 
approval of the bank regulators to rise above that. But it 
would increase small business access to capital and broaden the 
footprint of small businesses that are exposed to it.
    Senator Duckworth. Thank you so much.
    Professor Ozkazanc-Pan, you mentioned in your testimony 
women and minority-led VC firms have increased over time but a 
lot of work remains to be done. In 2016, SBA joined several 
organizations to launch the ONBOARD Initiative, designed to 
give SBICs more options to hire diverse talent and assume board 
leadership positions.
    Unfortunately, it appears that SBA has done little to 
promote the initiative since its creation, I think missing a 
real opportunity to help SBICs hire qualified, diverse 
candidates for their management teams.
    Can you discuss why initiatives like this are so important 
to the investment community and what Congress and the SBA can 
do to improve diversity on VC management firms?
    Ms. Ozkazanc-Pan. Yes, absolutely. I think these kinds of 
initiatives are profoundly important because they signal one, 
interest and opportunity for women and minorities that they may 
not otherwise see themselves in taking on these roles. But they 
also communicate information and opportunities both in terms of 
signaling to people that these are things available to them 
that is not generally something that they see them for 
themselves.
    I would say that if we continue with the program that is 
not discontinued, that would be a step in the right direction.
    In terms of VC firms, the reason we are seeing the 
emergence of women or minority or minority women-only focused 
firms is because the VC, as a whole, is not moving fast enough. 
So these are actually smaller firms that are trying to fill in 
the gaps.
    And I believe that there could be potentially dedicated 
funds that might also work in a similar fashion at the SBIC or 
the SBA level.
    Senator Duckworth. Thank you.
    Did you want to add something, Mr. Muro?
    Mr. Muro. My overarching point is simply that all of these 
are much more the technical questions. They really are about 
overall American well-being and competitiveness, you know. So 
to make sure that we are unveiling every great entrepreneurial 
opportunity, you know we are missing Einsteins and missing 
entrepreneurs.
    So it is important that the systems works if we are going 
to push back against the challenge from China and elsewhere.
    Senator Duckworth. Thank you.
    Mr. Palmer. And licensing more women fund managers and 
keeping the fund managers you have that are women. There are a 
number of women that run funds right now that are pulling their 
hair out and deciding whether or not they want to do this. And 
so keeping them in, and getting more women fund managers, I 
think is very helpful.
    The Library of Congress studied this and they found 
basically that like is more likely to invest in like. Women are 
more likely to invest in other women and women-owned 
businesses. And the same thing is true for minority. When you 
have minorities on your private equity team, you tend to invest 
more in minority-run businesses.
    And so we just need to add more people into the program.
    Senator Duckworth. You spoke, Mr. Palmer, about these empty 
positions. The other thing that I am concerned about is the 
fact that there is no timeframe on application status updates 
and approvals or disapprovals as people are moving applications 
through the approval process.
    Senator Risch and I, along with several members of this 
Committee, introduced the Small Business Investment Improvement 
Act of 2019 that would actually set the timeframes in which SBA 
must give status updates to SBIC applicants and set deadlines.
    Can you speak a little bit about the importance of that 
portion of it, in terms of the need for timeframes and 
deadlines?
    Mr. Palmer. Sure. The way the SBICs work, they have to 
raise private capital. If you cannot pass a private filter, you 
have no business going and getting a license. So you have to be 
responsive to those private investors. You have to be able to 
manage their expectations. I think I can get a license in X 
period of time. And this is a multi-step process with lots of 
stages.
    And every step of every licensing process, since the new 
management of the Office of Investment has taken over, has 
become gummed up and unpredictable. It is regulatory roulette.
    And so we just do not know whether it is going to take--it 
used to take two weeks. Now it takes 13 months, in some cases, 
to get a green light letter for a repeat fund with a clean 
examinations. That is nuts.
    Meanwhile, your investors, who are waiting on this money, 
the pensions, the universities, the endowments who want to 
deploy this capital to small business, they need to get a 
return. They cannot be sitting on millions of dollars doing 
nothing while you wait around for the SBA to get to license 
you. Managing expectations is critical.
    So having a process where it is clear, it is consistent, it 
is fair--if it is no, give me a quick no. But be fair about it. 
And dragging these things out where it is step after step after 
step, it makes no sense.
    You heard the first witness talk about examinations, he has 
done such a good job. SBIC funds have zero control over the 
examinations. The SBA does those. The SBA controls the time. 
They control the results. It takes months to get them 
scheduled. It takes a month for them to do it. And it might 
take 6 months or longer to get the results back.
    And during that time period, you cannot advance the 
licensing period. You cannot reserve leverage. You cannot do a 
lot of your basic stuff you need to do unless your window 
happens to come up at the same time their exam clock is going, 
of which you have no control.
    So bragging about having a tightened credit standard for 
examinations, where now 69 percent of the SBIC funds meet my 
credit standard, they are compliant. Well, that means that the 
SBA is failing 30-plus percent of the SBICs being able to 
operate fully. And that does not work for licensing, it does 
not work for any of it.
    And so having timelines and holding the accountable, I 
think, is critical because this is the type of mundane stuff, 
administrative stuff, that is paralyzing and is completely 
unnecessary.
    Senator Duckworth. Thank you.
    Mr. Palmer. It is baffling. So it would be very helpful and 
we welcome it. Thank you.
    Senator Duckworth. And it is a bipartisan bill.
    Thank you. I yield back.
    Chairman Rubio. Thank you.
    I want to thank you all for being here. We were delayed 
with the votes and so forth, but just to kind of sum it up, if 
you look at the need for innovation, innovation, by definition, 
is risky because it has never been done before. That is why it 
is innovative.
    And to do that takes money, right. And so people with money 
or entities with money are doing less of it than ever before. 
The banks do not want to lend. They are kind of frozen in some 
way. They are just not in the business of doing that anymore.
    And private equity has moved further and further away from 
that. They want to do less risky. They want a higher yield at a 
shorter or mid-term period of time and there is no taste for 
that. So that is why programs like this exist in the small 
business space.
    In the big space, you are a multi-billionaire, you want to 
invest in a rocket company, you can do that and they have done 
it. But if you are a small business person with a great idea, 
you need access to capital. The banks will not give it to you. 
The venture capital community does not like ideas like that. It 
is too risky. And so that is where this program comes into 
play.
    So it is concerning when we see the numbers flatline and 
begin to decline at a time of great need. And I do not think we 
have run out of ideas in this country, or people with them.
    And it is most concerning when you start to hear that we 
are going to be applying new criteria to the program and the 
buzz words I am hearing are by the way, it is the same criteria 
of the funds and the banks that are not lending money now. So 
in essence, we are going to turn the SBIC program into a 
similar criteria to the ones that created the need for it in 
the first place.
    And all of it happening, by the way, at a time which our 
Nation desperately needs innovation. We need to come up with a 
response to Chinese industrial policy that threatens to 
displace us in industry after industry after industry around 
the world. Very aggressive and we have not had an answer for 
it. And clearly, the current market conditions are not meeting 
that demand.
    So other than that, I think it is going well.
    [Laughter.]
    Chairman Rubio. No, it was a very insightful hearing and 
that is why I am so glad we are doing reauthorization because 
we are not just having people come in and talk to us. We are 
going through the lines and the details at a granular level of 
the entire agency and the programs that it has and trying to 
align them to national priorities in a way that I hope can 
actually avoid some of the partisan fights that are going on.
    This is stuff that should be unifying and I think can and 
has a chance to be.
    So we are grateful to all of you for your patience and the 
time you have given us today.
    The hearing record for this hearing is going to remain open 
for two weeks. If there is any statements or questions for the 
record, they should be submitted by Wednesday, July 10th, at 5 
p.m.
    And with that, the hearing is adjourned.
    [Whereupon, at 5:04 p.m., the Committee was adjourned.]

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