[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 25, 2013
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 113-033
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. David Schweikert............................................ 1
Hon. Yvette Clarke............................................... 1
WITNESSES
Pravina Raghavan, Acting Associate Administrator for Investment,
United States Small Business Administration, Washington, DC.... 3
Steven Brown, President, Trinity Capital Investment, Chandler,
AZ, testifying on behalf of The Small Business Investor
Alliance....................................................... 4
John Sherman, Founder, Director and Former CEO, Inergy, LP,
Kansas City, MO................................................ 6
Philip Alexander, CEO, Brandmuscle, Cleveland, Ohio, testifying
on behalf of the U.S. Chamber of Commerce...................... 8
David T. Robinson, Ph.D., Professor of Finance, Fuqua School of
Business, Duke University, Chapel Hill, NC..................... 10
APPENDIX
Prepared Statements:
Pravina Raghavan, Acting Associate Administrator for
Investment, United States Small Business Administration,
Washington, DC............................................. 21
Steven Brown, President, Trinity Capital Investment,
Chandler, AZ, testifying on behalf of The Small Business
Investor Alliance.......................................... 24
John Sherman, Founder, Director and Former CEO, Inergy, LP,
Kansas City, MO............................................ 35
Philip Alexander, CEO, Brandmuscle, Cleveland, Ohio,
testifying on behalf of the U.S. Chamber of Commerce....... 37
David T. Robinson, Ph.D., Professor of Finance, Fuqua School
of Business, Duke University, Chapel Hill, NC.............. 44
Question and Answer for the Record:
Question Submitted by Hon. Sam Graves to Mr. Raghavan........ 46
Additional Material for the Record:
Jose E. Fernandez-Bjerg, Chairman and CEO, Omega Overseas
Investment Corp............................................ 47
EXAMINING THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM
----------
THURSDAY, JULY 25, 2013
House of Representatives,
Committee on Small Business,
Subcommittee on Investigations, Oversight and
Regulations,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
Room 2360, Rayburn Office Building, Hon. David Schweikert
[chairman of the Subcommittee], presiding.
Present: Representatives Schweikert, Chabot, Collins, Rice,
Clarke, Velazquez, and Kuster.
Chairman Schweikert. Good morning. The hearing comes to
order. This is actually one that I have been personally looking
forward to today.
Today we take a look at a program that actually is
fascinating. It started back in 1958, which was quite an
education for me in how long. The founding principle of the
Small Business Investment Company program that we are going to
be speaking to today are based around something very simple:
access to capital, and how do we help that.
In Fiscal Year 2012 alone, $1.92 billion in capital
commitments were made to licensed SBICs with a $3.13 billion
investment in 937 small business enterprises that were
ultimately capitalized by the SBIC.
As the program grows in both size and dollars, it is
necessary for us to guarantee that it continues to fulfill its
mission.
For today's hearing, what I am going to ask each of you, we
appreciate the written testimony. A couple of things: help
educate us on what is working in the program, the reforms that
have been made in the last couple of years, and also,
systematically, we would love it if you have a moment within
the time of your testimony, share with us what you see would
make it work better because the ultimate goal here is capital
formation and creation of jobs for our country.
Ranking Member?
Ms. Clarke. Thank you very much, Mr. Chairman. Without
being lambasted for stating the obvious, we all know that
capital is the lifeblood for every small business. And without
it, most firms simply would not survive.
In 1958, Congress recognized the need for long-term funding
for growth-oriented small businesses and created the Small
Business Investment Company, or SBIC Program. SBICs are
privately owned and managed investment funds, licensed by the
SBA, that use their own capital plus SBA guaranteed funds to
make investments in qualifying small businesses.
Since its inception, the SBIC Program has provided more
than $64 billion of long-term debt equity capital to more than
165,000 small firms in Fiscal Year '12 alone. Investments from
SBICs helped create or retain 69,000 jobs.
While we know it takes capital to run a business and
continued investment to grow, the current economic environment
presents significant obstacles to startup and early stage
businesses seeking funding. Though there have been steady
improvements and the Federal Reserve has reported that credit
markets remain historically tight, unfortunately, as a result,
many firms are unable to access traditional debt financing. For
these reasons, the alternatives offered by the SBICs to small
businesses, including simple equity as well as hybrid equity
and debt financing, is critical, and will only play a more
important role in job creation moving forward.
Although SBICs have helped bridge the gap between the need
for capital demanded by entrepreneurs and the amount of funding
available in the private market, there is room for improvement.
SBA has estimated that the total unmet need for early stage
equity financing for small businesses is approximately $60
billion each year. Specifically, investments in low income,
underserved minority communities fall well short of the rest of
the country. According to SBA data, the percentage of SBIC
investments to women and minorities and veteran owned
businesses, as well as LMI areas, declined 17 percent last
year, and is on pace for another decline in 2013.
Clearly, changes at SBA, including new investment
strategies, will be required to make a significant impact on
the unmet capital needs of startups and businesses in
traditionally underserved communities.
In the best of times, capital access can be something of an
ordeal. Today that task has become especially challenging, and
not just for businesses seeking traditional funding. During
today's hearing, we will take the pulse of the SBIC Program,
examine areas ripe for improvement, and hear from witnesses on
the front lines helping today's main street businesses become
tomorrow's Fortune 500 companies.
I would like to thank our witnesses and look forward to
hearing their testimony on how to facilitate investment in our
Nation's entrepreneurs and small businesses.
With that, Mr. Chairman, I thank you, and I yield back.
Chairman Schweikert. Thank you, Ms. Clarke.
As a reminder, we have 5 minutes. You will see the system
of lights. As you get to the yellow light, it means there is 1
minute, and that just basically means talk faster.
Ms. Raghavan?
Ms. Raghavan. Yes.
Chairman Schweikert. Did I get close? I have been
practicing. Is the acting associate administrator for
investment at the SBA. You have 5 minutes. Please share with
us.
STATEMENTS OF PRAVINA RAGHAVAN, ACTING ASSOCIATE ADMINISTRATOR
FOR INVESTMENT, UNITED STATES SMALL BUSINESS ADMINISTRATION,
WASHINGTON, D.C.; STEVEN BROWN, PRESIDENT, TRINITY CAPITAL
INVESTMENT, CHANDLER, ARIZONA; JOHN SHERMAN, FOUNDER, DIRECTOR,
AND FORMER CEO, INERGY, LP, KANSAS CITY, MISSOURI; PHILIP
ALEXANDER, CEO, BRANDMUSCLE, CLEVELAND, OHIO; AND DAVID T.
ROBINSON, PH.D., PROFESSOR OF FINANCE, FUQUA SCHOOL OF
BUSINESS, DUKE UNIVERSITY, CHAPEL HILL, NORTH CAROLINA
STATEMENT OF PRAVINA RAGHAVAN
Ms. Raghavan. Chairman Schweikert, Ranking Member Clarke,
and members of the Subcommittee, I am pleased to testify before
you today to discuss the Small Business Investment Company
Program. As many of you here today know, SBICs are part of a
unique program at the SBA that puts long-term patient
investment capital into America's small businesses, allowing
them to grow and create jobs. Today, the SBIC Program serves as
a model of a successful public-private partnership.
The program, which began in 1958, is market driven. We do
not make the investment decisions. Experienced private fund
managers do. The program oversees 295 operating funds with over
$19.2 billion in private and SBA guaranteed capital and
commitments.
SBICs invest in a wide variety of small businesses, such as
R360 Environmental Services, which provides environmental
solutions to the some of the world's leading oil and gas
producers and providers. Although headquartered in Texas, the
company has 26 facilities located across Louisiana, New Mexico,
North Dakota, Oklahoma, Texas, and Wyoming, providing high-
paying jobs to hundreds of new employees in rural areas.
Last year, the SBIC Debenture Program had its third
consecutive record-breaking year in licensing and SBA
commitments. In Fiscal Year 2012, SBA has licensed over 30
SBICs with almost $974 million in private capital, and approved
over $1.9 billion in debenture commitments.
More importantly, debenture SBICs provide over $2.9 billion
in financing to 795 small businesses across the country, more
than twice the amount provided by debenture SBICs in Fiscal
Year 2009. If you consider that SBICs issued only $1.4 billion
in SBA guaranteed debentures, this means for every one dollar
in debentures issued last year, small businesses received over
two dollars in financing.
In Fiscal Year 2013, debenture SBICs are on track to exceed
Fiscal Year 2012, having already provided $2.6 billion to 671
small businesses through June. SBA accomplished this while
keeping the debenture program at a zero subsidy cost to the
taxpayer.
Much of our credit for keeping the program at zero cost is
our licensing process. A licensing process consists of three
basic steps, which is initial review, capital raising, and
final licensing. In determining whether to grant a license to
an applicant, SBA considers the factors identified in our
statutes and regulations, which include management
qualifications, track record, investment strategy, and fund
economics.
Even though a lot of work goes into evaluating the
applicants, SBA has improved licensing processes and times over
the past 4 years, reducing the average time from 15 months to
less than 6 months. As a result, SBA expects to exceed last
year's licensing numbers.
To help new licensees navigate our program, SBIC's Office
of SBIC Operations initiated new webcasts on various aspects of
the program. SBA also cut in half the average turnaround time
on key decisions and operations from 60 days in Fiscal Year
2010 to 28 days in Fiscal Year 2012.
Obviously with rapid growth, SBA is concerned about program
risk. Key to managing program risk is good reporting. SBA
recently implemented a new web-based system to help improve
communications and reporting. In addition, this Fiscal Year,
SBA published its annual report in order to improve
transparency and accountability.
With its processes and reporting in place, SBA believes it
is poised to handle continued growth. We believe that a
legislative change currently under consideration would allow
this program to reach even more small businesses. The change
would increase the SBIC Debenture Program authorization from $3
billion to $4 billion. While SBA has never hit the $3 billion
annual authorization over a 3-year period, SBA more than
doubled the debenture commitments approvals from $788 million
in Fiscal Year 2009 to over $1.9 billion in Fiscal Year 2012.
SBA expects to exceed the $2 billion this Fiscal Year. With
continued growth, SBA will outpace its current authorization
level.
We believe this modest change will allow the program to
continue to grow, while keeping this program at a zero subsidy.
In closing, the SBIC Program is well positioned to finance
small businesses across the country, and I look forward to
working with you on the policies to help us achieve this goal.
Thank you, and I am more than happy to answer any questions
you may have.
Chairman Schweikert. Thank you, Ms. Raghavan.
Our next witness is Steve Brown, who I am very pleased is
from Arizona. Mr. Brown is the general partner of Trinity
Capital Fund II, LP. Did we get that right? All right.
Mr. Brown, 5 minutes.
STATEMENT OF STEVEN BROWN
Mr. Brown. Good morning, Chairman Schweikert, Ranking
Member Clarke, and the other distinguished members of the Small
Business Committee. I want to thank you for holding this
oversight hearing today and examining the Small Business
Investment Company Program. And I am here today on behalf of
the Small Business Investor Alliance, which is a premiere
organization of lower middle market private equity funds and
investors.
As the chairman said, I am the managing member and the
general partner of Trinity Capital Fund II. We are based in
Phoenix, and we actually became licensed last year in September
of 2012. And with our capital, currently the leverage that we
have access to through the program, we are a little over $70
million in capital available for the market. So we are very
excited about that.
Trinity focuses on equipment and fixed asset leasing and
financing to both early stage and emerging growth small
businesses, primarily backed by venture capital and/or other
institutions. We often and sometimes do fund just privately-
owned companies as well.
The industries that we fund most end up in the
telecommunications arena, the manufacturing arena, and in
technology. Our primary market focus is in the southwest and
the west, but we will and have done deals throughout the United
States.
I personally have been in the business of privately funding
companies for over 20 years, and specifically in this
particular debt market. I have been doing this for 10 years,
and, again, was introduced to the program a few years ago. I am
very excited to be a licensee in the program.
I have firsthand experience seeing these early stage and
emerging growth companies struggle for capital. As the ranking
member mentioned, it is a difficult market and has been for a
number of years to find capital, and this program does meet
that need. It is a long way between equity and solid debt
financing that many of the banks offer, and this program fills
that gap in many respects.
At Trinity, we have and are funding manufacturing companies
in the technology space, the energy space, the recycling space,
all things that are important to the government and to the
economy. Companies that we have funded to date in our fund
include a solar cell manufacture that has strong revenue, has
survived the solar manufacturing difficulties in the market,
and we are proud to be a part of that. We have provided
equipment to help them grow. A manufacturer of LED lighting,
which is a new and efficient way of lighting, and we have
provided financing for manufacturing equipment there. We have
also provided financing for a California-based manufacturer of
chips for fiber optic in the telecommunications space.
We are currently working with a company in funding,
literally as we speak in the next day or two, a tire recycler
that has a great program of recycling tires and getting it back
into that market and many other markets, including not just the
tire industry, but plastics as well. So, we are excited about
the portfolio of companies that we are funding.
I would like to just take a second on the SBIC Program. As
mentioned, it started in 1958 and has done wonderful things,
funding many, many companies along the way, including icons
like Apple, and Intel, and others. It is important to note that
most of my referrals in this business come from banks--banks
that cannot or are unwilling to fund these companies, which,
again, shows a reason for the need for the program.
Relative to the program, it is difficult to become a
licensee, and that is good. We went through a very rigorous
process to get licensed, and those that get licensed, I
believe, having gone through the process, deserve to be able to
manage this money. And I think that should continue.
There are some important things, as has been mentioned.
Congressman Steve Chabot, I believe is the name, introduced and
sponsored the SBIC Modernization Act, H.R. 1106, which will
increase the family of funds from $225 to $350. We think that
is important for this program. We believe leadership is
important. There are some leadership positions that we need to
be filled, and we think that is very important that that
happens soon.
Technology is used in the marketplace and is available, and
we think maybe some technology improvements could be made
relative to us working, you know, with the Agency. And then the
licensing process, it is a good and a stringent process. We
think maybe some efficiencies can be handled there.
In closing, I just want to reiterate the success, the
strength, and my support of this SBIC Program. The Agency is
licensing qualified candidates through a stringent and thorough
due diligence process, which creates a high standard for
licensees to meet before becoming licensed, and having success.
On behalf of all SBICs, we applaud the efforts of the
Agency and its employees, while encouraging continued
improvements and efficiencies, as referenced herein, and in
streamlining the process of licensing and communication with
its candidates and licensees, and doing that without lowering
the important high standard that has been set.
So, we are glad to be a licensee and really proud to be
here today.
Chairman Schweikert. Thank you, Mr. Brown.
Our next witness is John Sherman, founding director and
former CEO of, is it----
Mr. Sherman. Inergy.
Chairman Schweikert. Okay. So you are going around playing
with us.
[Laughter.]
So, Inergy Limited Partnership, and was it out of Kansas
City, Missouri?
Mr. Sherman. Yes.
Chairman Schweikert. You have 5 minutes, Mr. Sherman.
STATEMENT OF JOHN SHERMAN
Mr. Sherman. Thank you, Mr. Chairman. Thank you, Ranking
Member Clarke and other members of the Subcommittee. My name is
John Sherman, and I am from Kansas City, Missouri, near the
congressional district of full Committee Chairman, Sam Graves.
I appreciate the opportunity to be here today.
I am an entrepreneur who has been fortunate enough to
launch and successfully grow and develop two companies from
scratch. I am here today because I have been asked to share
with you my experience with the SBIC Program while building
Inergy. Today, the company is publicly traded on the New York
Stock Exchange.
Three partners and I launched Inergy in 1998. We were
seasoned professionals in the propane industry, and through our
experience, we thought we could build a successful enterprise
in the sector. The industry was fragmented with approximately
5,000 independent operators across the United States. We
believed we could build a scalable enterprise.
Our strategy was simple: acquire local and regional propane
operators with excellent customer service and safety records,
grow the business rapidly both through acquisition, business
improvement, and organic expansion, access the public capital
markets to ensure our ability to continue to grow, and
ultimately diversify under the broader energy sector.
We funded the startup with $600,000 of our own money and
raised $900,000 of equity from the seller of our original
acquisition prospect. We went to several banks that turned us
down for additional capital, but eventually obtained a $4 and a
half million dollar acquisition loan. The bank loan was with a
Kansas City bank. It had strict covenants and was personally
guaranteed by us and our spouses. We were all in, so to speak.
With the goal of ultimately going public, we knew that we
would need outside equity to serve as a bridge to an eventual
IPO. We recognized in addition to raising capital, we needed
the financial expertise that comes with institutional capital.
We were business operators, not financial professionals, and we
needed access to expertise to help us get to that next level.
We talked with a number of private equity and mezzanine
financing firms. We ultimately connected with an SBIC, Kansas
City Equity Partners, or KCEP, and on December 31st, 1999, we
signed an agreement with KCEP for Inergy's first private
investment. KCEP purchased a $2 million preferred interest in
our fledgling company.
It is important to point out that they did their homework
and took the time to get to know us. They recognized we had
deep expertise in our industry. Our business plan was solid,
and the founders were at risk. Plus, they were flexible as to
the financial structure, and they were not asking for control,
which was important to us.
We used that initial $2 million investment to acquire a
number of small, independent propane operations over the
ensuing months. We also benefited from the partnership with
this SBIC, as they helped us to focus on what it would take to
access public capital markets.
By early 2001, we identified a significant potential
transaction, Hoosier Propane, located in Indiana that would
provide the critical mass necessary to take Inergy public. We
secured bank financing and obtained $7.4 million in equity from
the sellers, and they also carried back a $5 million loan, but
that left a $16 and a half million gap. I think, as Mr. Brown
referred to, you know, that is the most challenging part of the
financing. A group of private investors, led by Kansas City
Equity Partners, purchased a $16 and a half million preferred
interest in Inergy as the anchor investment. All members of the
group were qualified as SBICs.
That $16 and a half million investment was the key piece of
capital that allowed us to make this strategic acquisition.
Very shortly after we closed that transaction, we filed the
paperwork for our IPO process. Seven months later, in July
2001, Inergy went public. We grew the company dramatically
after that, completing more than 75 retail propane
acquisitions, becoming the third largest propane company in the
country, employing nearly 3,000 people.
Over the years, we diversified into the midstream energy
sector, and today the company is recognized as a major
developer and operator of U.S. energy infrastructure, including
storage, pipelines, and logistics assets.
In May, we announced a merger with Crestwood Midstream
Partners, which would create a $7 and a half billion midstream
energy company that is extremely well positioned to leverage
the growing importance of the emerging shale plays around the
country. The combined company will continue to create jobs and
invest large amounts of capital in energy infrastructure across
the United States.
We could not have done any of this, in my view, without the
initial investment we received from these SBICs. We have raised
literally billions of dollars of capital over the years, but
nothing more critical as that early stage capital that the SBIC
provided us. And that served as a platform for our long-term
success.
Thank you, again, for the opportunity to be here today.
Chairman Schweikert. Thank you, Mr. Sherman.
Our next witness is Philip Alexander, president and CEO of
Brandmuscle, and also speaking on behalf of the U.S. Chamber of
Commerce.
Mr. Alexander, 5 minutes.
STATEMENT OF PHILIP ALEXANDER
Mr. Alexander. Chairman Schweikert, Ranking Member Clarke,
and distinguished members of the Subcommittee, thank you for
inviting me to testify today on the SBA's SBIC Program that
helps entrepreneurs and U.S. businesses to compete in the
marketplace.
As the chairman said, I am Phil Alexander, CEO of
Brandmuscle, a recently SBIC-funded small business with offices
in Chicago, Cleveland, Austin, and Los Angeles. I am here to
speak with you today not only as CEO of Brandmuscle, but also
as a member of the U.S. Chamber of Commerce.
I came to the United States over 30 years ago to get an MBA
from Case Western Reserve University. I pursued a career in
marketing, and rapidly ascended to senior management positions
both with national and international and local retailers, most
recently as vice president of brand management at Pearl Vision,
and prior to that, as Vice President of marketing for Western
Auto, a subsidiary of Sears, Roebuck, and Company.
In 2000, I left the safety and security of the company, and
Brandmuscle was born. The company sought a solution to a common
problem that was seen in marketing, actually something that has
similarities in politics. I think as former U.S. House Speaker
Tip O'Neill said, ``All politics are local.'' Well, we have the
same issue in advertising. Our success is dependent on our
understanding of what is needed, the issues of the local
constituents and communities.
Brandmuscle was launched to provide just such a solution
for Fortune 500 companies who needed to respond to marketplace
conditions and provide tools and a suite of services so that
the local distributors, and local franchises, local dealers,
could develop programs that were appropriate at the local
level. Today, Brandmuscle has 550 full-time, well-paid
professionals in the United States.
Our early stage funding came from a variety of sources:
initially, personal savings, and eventually an angel fund.
Several successive infusions of venture capital allowed us to
grow. We grew to about 150 employees, but reached a point at
which even though we had the growth opportunity, we could not
add any more than three to four employees because of our debt
equity structure. Clearly, we had to do something different.
Our initial investors needed to be taken out. The fund
timing was over, but we needed cash to position us for
expansion. We were too small to go public. Additional venture
capital was too expensive. And unfortunately, since most of our
assets were intangible property, typical debt financing was not
available to us. Obviously, I think a challenge for us as a
Nation as we move to more of a knowledge-based economy,
companies like ours without intangible assets cannot find the
financing.
The SBA's SBIC program was unique in its ability to provide
Brandmuscle with the resources for our next phase. This Federal
government program at zero cost to the taxpayer allowed an SBIC
fund manager to leverage up to twice the amount of their
private capital in order to provide a company like Brandmuscle
with cost effective mezzanine debt financing.
In February of 2012, the Riverside Company, equipped with
assets from their recently SBIC-backed fund, Riverside Micro-
Cap Fund II, signed a purchase agreement to fully acquire
Brandmuscle, utilizing a mezzanine restructuring debt
agreement. The Riverside Company that you may familiar with was
recently named M&A's private equity firm of the year with over
$3.5 billion of assets under management, acquired over 300
companies, and have 200 employees worldwide. Brandmuscle had
instant access to their managerial talent and the financial
backing of a company like Riverside, thanks to the SBIC-backed
fund.
Riverside's SBIC-backed fund had also allowed the company
to acquire two other companies that we were quickly integrated
with. One was Centiv Services, a Chicago-based portfolio
marketing automation company, and TradeOne, an Austin-based
Texas promotion company. As a result, we were able to
strengthen our position in the market and acquire vertical
integration. The company grew to 550 employees, and we not only
grew the business and earnings. We also have added 42 employees
in the last 12 months.
Chairman Schweikert and Ranking Member Clarke, without the
SBA's SBIC Program, a company with the talent and resources of
Riverside would not have looked at a company the size of
Brandmuscle. I am convinced that it was the incentives that
were afforded to Riverside by the SBIC Program which made us an
attractive candidate for their consideration.
In conclusion, from the day that I conceived Brandmuscle to
the present, obtaining sufficient capital has always been a
challenge. I know firsthand that in order for a company to be
successful and grow, it needs the right capital at the right
time. At no expense to the taxpayer, the SBA's SBIC Program
fills a void.
On behalf of the U.S. Chamber of Commerce Small Business
Membership and myself, I strongly recommend that you retain,
enhance, and strengthen this critical source of funding and
capital for small businesses. To that end, I urge you to pass
bill H.R. 1106, the Small Business Investment Company
Modernization Act of 2013, into law.
I thank you for inviting me to testify, and I look forward
to answering any questions.
Chairman Schweikert. Thank you, Mr. Alexander.
Ranking Member Clarke?
Ms. Clarke. Thank you, Mr. Chairman. It is now my honor to
introduce Dr. David Robinson. Dr. David Robinson is a professor
of finance and the William and Sue Gross Distinguish Research
Fellow at Duke University's Fuqua School of Business, and a
research associate at the National Bureau of Economic Research.
He is one of the country's leading academic experts in the
field of entrepreneurial finance, venture capital, and private
equity. His work has appeared in the leading finance and
academic journals and has been featured in the New York Times
and the Wall Street Journal.
As the vice chair of the World Economic Forum's Global
Agenda Council on Finance and Capital, Dr. Robinson is involved
in international efforts to strengthen our understanding of the
importance of financial markets for promoting entrepreneurship.
He also advises a number of technology startups in the Research
Triangle Park area.
He has earned his Ph.D. and MBA degrees at the University
of Chicago, a master of science from the London School of
Economics, and a bachelor of arts from the University of North
Carolina at Chapel Hill.
Thank you for being here today, Professor Robinson, and we
look forward to your testimony.
Chairman Schweikert. Professor Robinson, 5 minutes.
STATEMENT OF DAVID T. ROBINSON
Mr. Robinson. Ranking Member Clarke, thank you for that
introduction. Chairman Schweikert, members of the Committee,
thank you for inviting me to testify before you today.
Economic policy in the U.S. tends to focus on small
business, but I think it is important to draw a distinction
when we think about economic policy between supporting small
business and supporting job creation. The best available
economic data indicate that young businesses, not small ones,
are the ones that are responsible for the lion's share of
economic growth in our country, especially if we measure growth
in terms of jobs.
The confusion is understandable because almost all young
businesses are, by their very nature, small, but most small
businesses are not young. Small businesses are, without
question, an essential and important part of the fabric of
American life, but most are not important engines of job
creation. If they were, they would not continue to be small.
They would grow and become large organizations.
Young businesses are a different story. Many fail, but the
ones that succeed create jobs and, more generally, increase our
country's economic dynamism. In this regard, the early stage
SBIC initiatives are, in my view, laudable both in terms of
their objective and in terms of their creativity. I think it is
important that we think carefully about stimulating access to
capital, not just for small firms, but for young firms.
I would like, however, to draw your attention to three
facts about early stage business activity that I think, taken
together, should temper our expectations of policies that
attempt to stimulate early stage business activity by extending
leverage to equity investors in the market.
First, my work with Alicia Robb at the Kauffman Foundation
shows that debt, not equity, is the primary source of capital
for new businesses. We have long understood that debt is
critical for small businesses. Small businesses rely very
heavily on debt financing, but it is kind of a surprise that
new businesses rely so extensively on the banking sector for
access to startup capital. This is true across a wide range of
startups. Even venture-backed startups rely very heavily on
access to bank capital in their very earliest years of life.
As you have heard from Mr. Sherman's testimony, personal
assets are critical in securing bank loans most of the time
because home equity is such an important source of collateral
for most individuals at the prime age for starting new
businesses, which is typically in sort of the 35-year to 45-
year range. What this means is that the collapse of the housing
market, it was as much a crisis for entrepreneurship as it was
a crisis for the banking system.
I think one of the things this tells us is that efforts to
increase bank lending to this sector are incredibly important.
And, you know, I think Administrator Raghavan's comments about
the SBIC Debenture Program bear special consideration in light
of the importance of that for startup activity.
The second fact is that early stage investing is extremely
risky. For every Google out there, there are literally hundreds
of ideas that never make it out of an inventor's garage. There
is a very understandable need to curb behavior that would
result in excessive risk taking and discourage bad investment
activity in the early stage SBICs. But I think it is important
to acknowledge that some of the CIP provisions and the payback
rules that are in place are going to inhibit investment in some
of the most desirable areas of the economy where we would like
to see investment. Those are kind of the speculative
investments that are often associated with some of the most
disruptive technological innovations.
The third fact that I think we should bear in mind is that
the gestation periods for early stage investments are
prohibitively lengthy for many investors. It takes too long
from the time of first investment to that IPO or M&A event for
many early stage funds to earn a return. I think some of the
most interesting features of the JOBS Act were those features
that stimulated the development of the intermediate liquidity
opportunities for early stage investors.
So I think these three facts together conspire to make your
job a difficult one. We are simply swimming against the current
when we try to stimulate early stage investment activity by
leveraging existing equity. And so, in light of that, what will
be the underlying economic mechanism that will be responsible
for success when we see it? In my view, it is this: early stage
investors without sufficiently deep pockets are often
discouraged from making speculative early stage investments
because they are worried that their early investments will
become diluted by later stage equity. It is not that they need
more capital now. They need more capital to be available later
so that they can make the follow-on investments.
In my view, the success of this program will hinge on
providing that capital to those early stage investors. Thank
you.
Chairman Schweikert. Thank you, Professor.
As you heard the bell, we have a vote series that is about
to be called. But we still have a few minutes or so. I thought
we would move to the lightning round of questions.
[Laughter.]
And, Mr. Rice?
Mr. Rice. I can go 5 minutes.
Chairman Schweikert. No, no, no, no, we will shoot for the
one. Lightning round. Mr. Rice?
Mr. Rice. Professor, I am a tax lawyer and CPA by trade,
and I have certainly seen the troubles that small businesses
have with access to capital, and totally agree with you their
primary source is the banks, and particularly small banks.
Now, you know, coming out of the financial crisis, we had a
flurry of laws designed to prevent banks from taking too much
risk, but on the other hand, you have this conundrum that you
are saying we need them to take risk if we are going to create
these jobs and create this small business economy. So, we
created a plethora of laws to avoid this risk, like Dodd-Frank,
for example.
In your opinion, does that stifle this small business job
creation? Does that stifle this risk taking? I hear from my
small bank friends and former clients that it is a real
problem. Tell me your opinion.
Mr. Robinson. Sir, thank you for the question. You know, in
some ways you have expressed the dilemma perfectly. We want to
put in responsible curbs against bad behavior, but at the same
time, by curtailing risk taking, we are starving capital,
preventing it from flowing to the very areas of the economy
where we need it most. So I think there is no question that
removing the regulations or lessening regulations around bank
lending would help small business activity.
Perhaps to say it a little more differently, I think that
we need to move away from sort of a one-size-fits-all approach
towards banking regulation to something that allows smaller
banks that serve the small business sector more maneuverability
than is currently afforded.
Chairman Schweikert. Mr. Collins?
Mr. Collins. Oh, thank you.
Chairman Schweikert. Do you want to take the----
Mr. Collins. Sure.
Chairman Schweikert. Actually, can I do this, just because
we are doing the lightning round? Ms. Clarke?
Ms. Clarke. Mr. Chairman, I would like to yield to the
ranking member of the Committee, Ms. Velazquez of New York.
Ms. Velazquez. Thank you, Ms. Clarke, and thank you, Mr.
Chairman, for this important hearing.
Let me just say, Professor Robinson, I do not know how many
times we hear about how Dodd-Frank is hindering the flow of
capital to small businesses. But the fact of the matter is that
the distinction is made by Dodd-Frank in the sense that the
one-size-fits-all approach does not work. And, indeed, that is
what Dodd-Frank does in the sense that if I ask any business
who is lending to them, community banks, are not the big banks,
are the community banks, are the independent banks.
Dodd-Frank exempted the community banks from those
regulations. They do not have assets of more than $10 billion.
So, I just want for the record to reflect that. I am a member
of the Financial Services Committee, as well as some of the
members here, and they know that.
I would like to ask the acting associate, Ms. Raghavan, and
welcome to the capitol. You did a very good job in New York,
and I hope that you continue to do a better job here. But I
want to help you. I want for you to succeed. And this is a very
important program as a tool of promoting economic development.
And my questions are based in the new reality that the
small business face is changing in America. It is more women.
It is more blacks. It is more Latinos. And we need to make sure
that the programs that are in place will benefit everyone.
So, only 20 percent of businesses receiving financing in
the SBIC Program are located, only 20 percent in LMI areas.
This suggests that we need more SBICs licensed to make
investment in these areas. Even though the statute in Section
301(c)(3) of the Small Business Investment Act provides general
guidance on that appropriate experience, the SBA has
established rigid rules. While we want high standards, the SBA
should be considering other types of experiences that clearly
demonstrate qualifications for the SBIC Program.
Will the SBA consider these alternative types of
experiences in evaluating SBIC applications, especially to
target more minority licensees and low income areas?
Ms. Raghavan. Thank you for the question. We do agree that
LMI areas, especially women and minorities, are very important
to the program. In fact, with our new licensees of applicants
of funds, we have had more women and more minority funds join.
And we continue to actually press out and do a bigger marketing
campaign, including using our district offices in the actual
country to work with the fund managers to get to through the
program.
We are actually putting through clearance on our new
licensing SOP, which is looking at the alternative ways of
licensing applicants. And one of the things we are taking into
consideration is different types of track records to ensure
that we do have more investment funds that are looking into
those hard impact areas.
We so far have the impact funds. We have two of them. One
is in Michigan looking at that economic development there, and
we look to encourage more of those funds, including States as
well as mayors' offices, to join the pension funds to be able
to encourage more growth in LMI areas.
Ms. Velazquez. Okay. Thank you very much, and I will be
working on reaching out to you so that we make sure that
changes are made.
Mr. Chairman, I would like to ask unanimous consent to
submit for the record the testimony of Jose Fernandez. He is
the chairman and CEO of Omega Overseas Investment Corporation.
Chairman Schweikert. You have unanimous consent.
[The information follows:]
Ms. Velazquez. Thank you, and I yield back.
Chairman Schweikert. Thank you, Ms. Velazquez.
As we are running, Mr. Collins had a question.
Mr. Collins. Yeah. Thank you, Mr. Chairman. I would be
quick, but, Mr. Brown, I am especially interested in the
dynamic. As Mr. Alexander said earlier, the cost of venture
capital was just too much. We all know the Golden Rule, ``He
who has the gold makes the rule.'' And I am assuming, Mr.
Alexander, you are talking about dilution. They would come in
and say, sure, we will lend you some money; we are taking 80
percent of your company, and for an entrepreneur who has put
their heart and soul in it.
Now, Mr. Brown, I guess my question is, being an SBIC and
having government funding multiply your private investment,
would you say that that allows you to be a little fairer, if
you will, with companies like Mr. Alexander's so the dilution
would otherwise be much worse for the investor if you did not
have the leverage of the SBIC?
Mr. Brown. The answer to that question is yes, and that is
one of the benefits of the program. You know, dilution is a big
issue for small businesses, for growing businesses. Equity is
critical to get that done. We see that over and over again. And
whether it is venture capital, private equity, or even private
groups that come together to provide equity can be very
dilutive to the founders, the people who are the heart and soul
of the company that put it together.
So, this program affords the opportunity to come in and
provide debt with an equity kicker occasionally in the form of
a warrant that provides much less dilution than might otherwise
be had with equity. And so, it really is one of the unique and
beneficial parts of the program that can save dilution for
ownership and still, you know, provide some upside for
licensees making----
Mr. Collins. Yeah. One quick follow up. Does that also help
you get private investors, the investors that come into your
fund and you say we are going to be an SBIC, and I am going to
leverage your money two to one, three to one. Therefore, we can
be more fair, if you will, with the company.
Mr. Brown. It does. It provides the opportunity for
investors to receive a good return on their investment. And
because of the leverage and the access to the capital at the
cost that we have access to, it allows us to be competitive in
the marketplace, and provide competitive offerings to those
that really need it as opposed to some of the dilutive options.
Mr. Collins. Thank you, Mr. Chairman. Thank you.
Chairman Schweikert. Okay. Thank you, Mr. Collins.
Mr. Chabot, it is nice having you here. I am not going to
ask, but we were talking about your legislation a moment ago.
Mr. Chabot. Thank you. I just want to put in a plug for it.
Thank you, Mr. Chairman.
Chairman Schweikert. And for our witnesses, how is your
timing? We have a vote series. I think it is going to be about
50 minutes is my best estimate. In your lives, are you able to
come back?
Mr. Robinson. Yes.
Mr. Alexander. Yes.
Mr. Sherman. Yes.
Mr. Brown. Yes.
Ms. Raghavan. Yes.
Chairman Schweikert. All right. With that, then we are
going to have votes on the floor of the House, so we are going
to adjourn for about 50 minutes. And we will reconvene at the
end of votes for another series of questions.
And with that, we are at recess.
[Recess.]
Chairman Schweikert. Reconstitute the Subcommittee. Are we
back on the record?
Ranking Member, do you mind if I jump in with a couple of
questions?
Ms. Clarke. Please go ahead.
Chairman Schweikert. Mr. Brown, you and I had a
conversation yesterday, and I want to better understand because
I partially also want to put this on the record not only from
your testimony, but from our conversation. The mechanics you
went through to basically be certified to be one of the funds
that actually can put the money into Mr. Alexander's, you know,
type of businesses, and where you thought it worked, and where
you thought there might be some bottlenecks.
It is okay. We were not talking about you behind your back,
I promise. And where you thought that whether electronic
pothole or maybe certain levels of review may be overkill. Mr.
Brown?
Mr. Brown. Yeah. So, our experience, you know, we are
encouraged to and sought out a law firm. We actually used the
firm of McGuireWoods in Chicago, and I found out that there are
few that specialize in this. And we submitted a, you know,
brief summary that was reviewed by the SBIC and had discussions
with an analyst, and was essentially, as I recall, invited to
move forward in what is called the MAQ process. It is a
management assessment questionnaire. And we did that.
We submitted our MAQ. It is a management assessment
questionnaire. It is a very thorough questionnaire about who we
are, our background, our track record, et cetera, for the team.
And we went into what is called a MAQ phase or the pre-
licensing phase, I think it is called.
Very good process. The analytical support or connection
that we had there at the SBIC was good. Very smart folks that
we dealt with. Really took time to understand our business,
which was great.
Chairman Schweikert. But my great hope is more just the
steps you had to go through----
Mr. Brown. Okay.
Chairman Schweikert.--the costs you had. I am hunting for
if there is anything, if I can turn to the acting administrator
and say, hey, have you thought of this pothole? How do we make
it faster, save money, and still have the same type of core
costs?
Mr. Brown. Okay. So, I will consolidate. Thanks.
MAQ phase, we went to a meeting with the committee, and we
got what is called a green light letter, which kind of got us
through the MAQ phase, and then the opportunity then to
formally apply for the license. And then, we went through a
licensing phase where there was some of the same work that was
done. There was also some additional work, but there was some
of the same work that was done there.
Chairman Schweikert. And share with me the timeline.
Mr. Brown. So, we had a little different story, and let me
just say that. We actually went from start to finish, from our
application through, I am going to call it our first go round,
was about 12 to 15 months. We actually had a change of
personnel. We had to go back in, and we ended up with about 2
years in the program.
But had we not made the change of personnel, it would have
been about a 12- to 15-month process, which we were
anticipating going in. So, there was the MAQ phase, then there
was the licensing phase, and then, as I recall, there was a
second committee that we went and visited with at the licensing
phase, and we were approved at that. And then, there was an
additional committee that we did not need that ultimately
voted. So, I believe that was basically the process.
Timeline, as I shared, you know, sort of had it gone
exactly the way we intended, it would have been about 12 to 15
months. And then, the cost was, you know, for us was in the
$200,000 to $250,000 range, and that is everything all in,
legal, you know, just doing everything that we had to do to get
to the finish line.
Chairman Schweikert. Okay, Administrator Raghavan. I am
going to get it just right. And I know for fairness, you have
only been there how long?
Ms. Raghavan. This is my third week.
Chairman Schweikert. Okay. So, that final review, so it is
sort of like a third committee at the very end that is here, we
will say, at the Federal level?
Ms. Raghavan. Yes.
Chairman Schweikert. What can you tell me about that, and
what can you tell me about what value you think that ultimately
adds, because the hopeful participant does not actually really
appear in front of that committee.
Ms. Raghavan. Correct.
Chairman Schweikert. So what does that one accomplish?
Ms. Raghavan. Sure. So technically, it is the Agency
committee, which is the committee he is talking about, the
third committee, which has a group of all senior officials in
the SBA: our associate administrator of CAP access, our
associate administrator of investment, as well as our CFO. It
is the actual committee that actually issues the license.
The first two, the investment and the division committee,
are actually committees that make recommendations, so they are
working with the applicants. That is why we do the interviews
to go through the process. And then, it is the agency committee
that makes the final decision because the administrator signs
off on the license.
It is similar to what is in the private sector. They have
several reviews of different portfolios that come in when they
do funds to funds. So we mimic that process on purpose so that
it is very similar. That committee works very well. They all
have financial backgrounds, and they understand what we are
looking for, and they have been looking at these. They get the
entire briefing book that these gentlemen have put together,
which includes their background history, their management fund,
the organization structure, and where they plan to get the
funds.
Chairman Schweikert. Thank you.
Ms. Clarke?
Ms. Clarke. On the issue of the licensing, I wanted to
circle back to, I think it was the ranking member, Ms.
Velazquez, had talked a little bit about the licensing of the
SBIC Impact Investment Programs in economically distressed
communities. And I think you mentioned there are two licensees
that have been approved specifically for the program.
And my question is, why have more impact investment SBICs
not been licensed by the SBA? The process, is it not having
enough capital to really meet the criteria? What is it that you
are finding?
Ms. Raghavan. So the Impact Investment Fund is actually
new. It is only in its second year, so that is one of the
reasons, I think, everything that is new people do not
understand, which is why we have an aggressive marketing plan
to work with actually States and local governments to get the
word out because it is really looking at the areas across the
country.
We have two that have gone through the program. We actually
have six funds all together in our traditional SBIC Program
that do impact investing. So all together, we have eight in the
program.
One of the reasons I think the Impact Investment Program is
a different hurdle is the percentage that we ask. We are asking
at least 50 percent to be in low/moderate income areas on the
impact investing versus the normal SBIC fund. They can do 10,
15 as they wish.
But I think as we go around marketing and explaining the
program, we should be getting more, which is the reason why we
revamped even the limit to go up to $250 million as opposed to
the $180 when it was started.
Ms. Clarke. And is it that there is a certain assumption
around the amount of risks that are involved with making
investments in those impact areas that people do not want to
take on, or have you gotten any feedback? Other than the fact
that it is a new program, is there anything that you anticipate
that makes people hesitant or companies hesitant to engage this
particular----
Ms. Raghavan. I think it is a new area for companies to go
ahead and actually invest in. And so, we are trying to broaden
to show them that they will get the same returns or similar
returns that they get in other programs. And that is part of
the education process that we at the SBA are doing.
And I think the Michigan Fund is a perfect, sterling
example of looking a big time pension fund to invest in impact
areas, and we have a second fund in California doing the same.
And as they get more press and people understand more about it,
I think we can get some more funds in there. I think it is more
about knowing that the risk involved is similar to any other
type of risk that is taken in the market.
Ms. Clarke. Very well. And, Mr. Brown, I just wanted to do
a follow up because in your opening statement, you spoke to the
virtues of the SBIC Program that you have embraced. But you
also mentioned about licensing efficiencies was sort of like--I
had a question about, you know, whether it is a lacking of
efficiency. And I think you talked a little bit about the
process and some redundancy and paperwork, or administrative
activities. But was there something specific in the licensing
that you found to be inefficient?
Mr. Brown. I would maybe point to--sorry. Thank you. I
would maybe point to sort of the technology or lack thereof.
And, in fact, the program is now bringing online some of our
opportunities to transfer documents, to file forms--468, I
believe--and others. So, there is progress being made. But what
we do not often do when we are transacting business is send
lots of sort of hard paper files. And so, that happened during
this process.
So, I think the use of existing technologies in the
marketplace, which I know the Agency is working on, will make
the process more efficient. That would be a prime example of
what I was talking about.
Ms. Clarke. Okay, very well. Do you anticipate a full-
throated technological revolution with this process? Are we on
our way?
Ms. Raghavan. Well, as you know, we have been under
sequestration and also continuing resolutions, which has made
it a bit difficult to invest in technology. So, even though
under those circumstances we were able to make our 468, which
is an application online, and we just launched the web system,
we are trying. In fact, one of our initiatives is to make sure
it could go paperless. We are doing that in several initiatives
across the Agency. But for the SBICs, it is very important.
Naturally they work in an e-environment, and we are trying to
make sure that we can also do that.
But we put in plans for more budget for technology, so as
the technology can be upgraded, we can serve their needs
better.
Ms. Clarke. And you fed right into my next question, and
that was, how has sequestration affected the SBA's ability to
provide effective oversight over your portfolio?
Ms. Raghavan. It has definitely affected the travel cap. We
have to do examinations of all the SBICs, so with the current
travel cap, we were unable to do as many as we would like, just
because we do not have the dollars to go. As well as we would
like to do some more outreach and marketing, and part of that
is going to conferences and making sure people understand the
Impact Investing Fund, and working with the fund managers, and
understanding our program. So, the travel has been very
difficult. And obviously on the technology front, we have not
been able to invest as much as we would like to to ensure
On the program operations side, it has not been affected.
We still continue to make sure our licensing times are down. We
still continue to work with them remotely. But those are the
effects we have had.
Chairman Schweikert. And once again, I want to apologize to
all of you for the nature of the chaos of today. It is just
sort of the way this day will work.
Is there anything you think that would be important for us
to hear to put onto the record that we have not asked, that we
have not pursued here? And it is always dangerous when you ask
an open-ended question that you actually do not know the
answer.
In that case, I am going to move to a closing here. I am
going to, and I did not see it in the normal script here. But
is this a one-month Committee or one-week Committee being
submitted to the record?
Voice. Five legislative days.
Chairman Schweikert. Okay. You each are going to have 5
legislative days if you have other documents you would like to
submit. You may also receive questions from those of us here.
And actually, my ranking member does have another question.
Ms. Clarke?
Ms. Clarke. Thank you, Mr. Chairman. Thank you for the
indulgence.
Dr. Robinson, I had one final question for you, and that
is, finding the right balance for government-backed investment
programs can be challenging. If it permits too much risk,
taxpayers can end up on the hook. If it does not take enough,
the program will not spur economic activity in the areas unable
to secure financing.
What is your view on the current risk appetite for the SBIC
Program, and is it too much, or too little, or just right?
Mr. Robinson. Thank you for the question, Ms. Clarke. I
think it is a delicate balance that we have to strike, and I
understand both sides of the equation, both the need to make
sure that we curb excessive risk taking and bad behavior, but
also the very great need to spur risky investment.
I think that we have to be very clear about what we want
the objectives of the program to be and what we are trying to
accomplish. I think if what we wish to do is promote
innovation, you know, truly promote risk taking investment,
then I think we probably need to scale back some of the
oversight--well, I should not say ``oversight''--scale back
some of the restrictions on investment.
I think that if the objective is to, you know, provide more
capital to the small business economy, then you probably have
the balance about right. But, you know, the way I would look at
it is, again, I would go back to what I said in my opening
testimony. I think we need to draw a distinction between the
small business economy and the entrepreneurial economy. And I
think that if the objective of the program is spur
entrepreneurship, then we need to do, in my view, dial the
meter more towards risk taking.
Chairman Schweikert. Thank you, Ms. Clarke.
And a couple of other quick things here. Professor, I am
going to actually hunt for some writings you have done, and if
you can send me some. You actually said something that, in
reflection, is brilliant: the difference between the small
business and the growing, you know, the very young growth
business, and how, you know, we often say ``small business,''
but these are very different than, like, our family business
that may have been around 40 years that has just stayed some of
the size. So, I would like to understand more about that
because that may have a different risk appetite in what we have
to do.
Obviously, as members of Congress, there is this constant
fear of do we wake up tomorrow and have a black swan type of
event, something that was out in the tail. And we wake up the
next day and we are Fannie or Freddie, or something of that
nature. At the same time, if you have managed your exposure to
certain consequences out there, have you, you know, done it in
a robust enough fashion where we are actually meeting our
mission.
And with that, I ask for unanimous consent that members
have 5 legislative days to submit statements and supporting
materials for the record. And without objection--I always wait
for someone to give me an objection one day--so ordered.
Chairman Schweikert. And with that, the hearing now is
adjourned.
[Whereupon, at 12:02 p.m., the Subcommittee was adjourned.]
A P P E N D I X
U.S. SMALL BUSINESS ADMINISTRATION
WASHINGTON, D.C. 20416
TESTIMONY OF
PRAVINA RAGHAVAN
ACTING ASSOCIATE ADMINISTRATOR FOR INVESTMENT
AND INNOVATION
U.S. SMALL BUSINESS ADMINISTRATION
BEFORE THE U.S. HOUSE SMALL BUSINESS
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS
JULY 25, 2013
Chairman Schweikert, Ranking Member Clarke and members of
the Subcommittee. I'm pleased to testify before you today to
discuss the Small Business Investment Company (SBIC) program. I
want to thank you for calling this hearing, and for your strong
support of the Small Business Administration (SBA) and your
commitment to providing growth capital to small businesses.
As many here today know, the SBICs are part of a unique
program at SBA that puts long-term patient investment capital
into America's small businesses, allowing them to grow and
create jobs. Today, the SBIC program serves as a model of a
successful public-private partnership. The program, which began
in 1958, is market-driven. We don't make the investment
decisions; experienced private fund managers do.
The program oversees 295 operating funds with over $19.2
billion in private and SBA guaranteed capital and commitments.
These SBICs invest in a wide variety of small businesses, such
as JSI Store Fixtures in Milo, Maine, which manufactures
specialty fixtures and displays for the supermarket industry.
The company more than doubled its workforce from 80 to 200
employees after receiving an SBIC investment in 2006. The
company won an award last year from the Small Business Investor
Alliance at the SBIC portfolio company of the year. Another
great example is R360 Environmental Services which provides
environmental solutions to some of the world's leading oil and
gas producers to ensure environmental performance and
compliance. Though headquartered in Houston, Texas, the company
has 26 facilities located across Louisiana, New Mexico, North
Dakota, Oklahoma, Texas, and Wyoming, providing high paying
jobs to hundreds of new employees in rural areas. While the
company has recently been acquired, R360 increased jobs by 40%
after its SBIC investment.
I am proud to tell you that last fiscal year (FY) the SBIC
Debenture program had its third consecutive record-breaking
year in terms of the number of SBICs licensed, new private
capital, and SBA-guaranteed leverage commitments. In FY 2012,
SBA licensed 30 SBICs with $973.9 million in private capital
and approved over $1.9 billion in Debenture commitments.
More importantly, in FY 2012 Debenture SBICs provided over
$2.9 billion in financings to 795 small businesses located
across the country, more than twice the amount provided by
Debenture SBICs in FY 2009. If you consider that SBICs issued
only $1.4 billion in SBA-guaranteed Debentures to support these
financings, this means that for every $1 in Debentures issued
last year, small businesses received at least $2 in financing.
Over the past 5 years, SBIC debenture investment dollars were
dispersed across a broad spectrum of industries, including 18%
going to small U.S. manufacturing firms. In FY 2013, Debenture
SBICs are on track to exceed FY 2012 financing dollars, having
already provided almost $2.6 billion in financing to 671 small
businesses through June 2013. SBA accomplished this while
keeping the Debenture program at zero subsidy costs to the
taxpayer.
Much of the credit for keeping the program at zero subsidy
cost is our licensing process. The licensing process consists
of 3 basic steps: (1) Initial Review by SBA; (2) Capital
Raising; and (3) Final Licensing. In the first step, SBA
reviews the applicant's track record and performs initial due
diligence, leading to a decision by SBA's Investment Committee
as to whether to give the applicant a ``green light letter''.
Once an applicant receives a green light letter, the managers
have up to 18 months to raise the minimum private capital and
submit a license application. After receiving the application,
SBA reviews all legal documents and updated track records and
performs further analysis and due diligence before
consideration by the Investment Division Licensing Committee
and then the Agency Licensing Committee, which is composed of
the AA for Investment and senior SBA officials. SBA's
Administrator then approves and issues the SBIC license. In
determining whether to grant a license to an applicant, SBA
considers the factors identified in its regulations (13 CFR
Sec. 107.305), which include among other things: management
qualifications; track record; proposed investment strategy; and
fund economics. As a result of this process, only 1 of the 157
Debenture SBICs licensed since 2002 has been transferred to the
Office of Liquidation to date.
Even though a lot of work goes into evaluating applicants,
SBA improved licensing times over the past four years. It used
to take almost 15 months on average to get a new SBIC fund
licensed. That average is now less than 6 months. As a result,
SBA is on track to exceed its FY 2012 licensing numbers, having
already licensed 26 SBICs with almost $1 billion in private
capital and approved over $1.5 billion in Debenture commitments
in FY 2013 to date.
To help this large group of new licensees navigate our
program, SBA's Office of SBIC Operations has initiated webcasts
on various aspects of the program. SBA also has reduced average
turnaround times on key decisions in Operations by over 50%,
from 60 days in FY 2010 to 28 days in FY 2012. This improvement
helps SBICs get critical financings to small businesses in a
timely manner.
Obviously with rapid growth, SBA is concerned about program
risk. Key to managing program risk is good reporting. SBA
implemented a new web-based reporting system in FY 2013 to help
improve communications and reporting from program participants.
In addition, in the first quarter of this fiscal year SBA
published its most recent annual report in order to improve
transparency of the program and provide accountability.
With its processes and reporting in place, SBA believes it
is poised to handle continued growth. And we believe that one
legislative change currently under consideration would allow
this program to reach even more high growth small businesses.
Specifically, the proposal would increase the SBIC Debenture
program authorization from $3 billion to $4 billion. While SBA
has never hit the $3 billion annual authorization limit, we
have grown the program significantly in recent years. Over a 3
year period, SBA more than doubled the amount of Debenture
commitments approved, from $788 million in FY 2009 to over $1.9
billion in FY 2012. SBA expects to exceed $2 billion in FY
2013. With continued growth, SBA will outpace its current
authorization level.
We believe this modest change will allow the program to
continue to grow without any significant additional risk to the
taxpayer, allowing us to keep this program at zero subsidy.
In closing, the SBIC program is well positioned to finance
small businesses across the country. I look forward to working
with you on policies that will help us achieve this goal. Thank
you and I am happy to answer any questions you may have.
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Good morning Chairman Schweikert, Ranking Member Clarke,
and Members of the House Small Business Subcommittee on
Investigations, Oversight, and Regulations.
Thank you for holding this oversight hearing today to
examine the Small Business Investment Company (SBIC) program. I
am here today on behalf of the Small Business Investor
Alliance, the premier organization of lower middle market
private equity funds and investors.
My name is Steven Brown and I am the Managing Member of the
General Partner of Trinity Capital Fund II, LP, based out of
Phoenix, Arizona. Trinity Capital became a licensed SBIC in
September of 2012, with a current investment capacity of $76
million, assuming two tier SBA leverage. Trinity focuses on
equipment and fixed asset leasing and financing to both earlier
staged and emerging growth small businesses primarily backed by
Venture Capital and/or other institutional investment. The
industries we fund most are telecommunications, manufacturing
and technology, with our primary market focused in the
southwest and west, however we will fund deals in other US
markets.
Since our fund was only recently licensed, I can only speak
to our direct experiences during the relatively brief period we
have been in the program. However, because this hearing is
performing oversight of the entire SBIC program, I am attaching
a letter from our trade association that highlights the broader
perspective they have seen across the industry over a longer
period of time.
Background
What was true in 1958 is still true today. It is very
inefficient and difficult for large financial institutions to
provide capital to small businesses, even if the small business
is profitable and trying to grow. To address this reality
Congress and the Eisenhower Administration applied market
principals as they created the SBIC credit facility that uses
leverage to augment private investment in the small business
market. Because of the way the program is structured, this
leverage must be provided with a zero subsidy rate--meaning no
cost to the taxpayer. The SBIC debenture program continues to
successfully operate at its statutorily required zero subsidy
rate. The SBIC debenture program has consistently run at a
surplus of several hundred million dollars and the President's
budget estimates that this surplus will grow next year. Since
the creation of the SBIC program, SBICs have invested more than
$58 billion in over 100,000 domestic small businesses. Some of
these small businesses have since grown into icons of American
free enterprise including: Apple, Intel, Outback Steakhouse,
Callaway Golf, and many others. There are also thousands of
other fantastic SBIC-backed businesses that are lesser known,
but that are mainstays of local economies.
SBICs are highly regulated private equity funds that invest
exclusively in domestic small businesses. Debenture SBICs raise
private capital, pass a rigorous licensing process, and then
are able to increase the amount of capital available for
investment by accessing leverage through an SBA-backed credit
facility. These funds then invest in a portfolio of U.S. small
businesses, creating jobs, fostering innovation, and fueling
economic growth.
The SBIC debenture program fills a critical need by
providing growth and transition capital to small businesses.
During the financial crisis SBICs scaled up to provide critical
capital that saved many businesses and many jobs. The SBIC
debenture program continued to operate at a zero subsidy rate
throughout the financial crisis. Private capital of operating
SBICs doubled over the past four years, growing from $3.4
billion at the end of fiscal year 2009 to $6.8 billion today.
This growth came at no additional cost to the taxpayer, a
remarkable feat for a public-private partnership. This program
is good public policy because it fills a critical market need
that otherwise would largely go unmet while simultaneously
providing real taxpayer protections. This is a rare alignment
of market forces with thoughtful public policy.
Trinity Capital is an example of how an SBIC Fund can
provide critical capital to businesses that will now continue
to grow long after the SBIC has exited the investment. Trinity
Capital to date has funded equipment purchases for the growth
of a manufacturing line with Suniva, a manufacturer of solar
cells based in Atlanta, Georgia. Suniva has experienced strong
revenue, has survived the solar manufacturing down market and
is a strong US based manufacturer supplying the residential
supply market. Our capital has helped grow capacity at the
Suniva plant. We have also funded manufacturing equipment for
Soraa, a US based manufacturer of LED lighting, an emerging
technology that is replacing much of the existing lighting in
the marketplace with more efficient and cost effective energy
lighting. Soraa is experiencing growing revenues and has state
of the art technology in this space. We have also funded
Clariphy, a California based manufacturer of chips for fiber
optic communications. Clariphy's product produces a much more
efficient use of fiber optic networks resulting in more
bandwidth and speed. Trinity financed test equipment for
Clariphy, a company who is experiencing strong and growing
revenue. We are currently funding a tire recycling company that
takes tire manufacturing waste and grinds it into a product
that is used for production back into the tire industry.
Trinity is currently funding and plans to fund innovative US
based companies that are providing both technology and know how
to make existing processes more efficient and more profitable.
Additionally we have already demonstrated a desire and ability
to work with companies that are coming up with better and more
efficient energy solutions and alternatives.
Let me start out by highlighting how Congress can act right
away to increase capital flowing to small businesses.
Congressman Steve Chabot (OH-1) introduced the SBIC
Modernization Act (H.R. 1106) earlier this year which increases
a critical cap on the amount that successful SBICs can access
through the SBA credit facility.
In fact, thanks to the bipartisan work by this committee at
the end of last year, the same legislation passed through the
House of Representatives on December 17, 2012, with a very
strong bipartisan vote of 359-36; however given the time
constraints at the end of the year, the Senate did not act on
the bill. Congressman Chabot reintroduced the bill this year
with bipartisan support from nine of his colleagues. It is
worth noting that a Senate version of the bill, backed by
Senators Landrieu (D-LA) and Risch (R-ID), passed out of the
Senate Committee with broad bipartisan support.
It is important to note that H.R. 1106 does not increase
federal spending or require new appropriations. H.R. 1106
adjusts the maximum amount of leverage available to multiple
SBICs to a limit of $350 million. The only funds that can
access the higher limits are funds that have successfully
operated an SBIC and have gone through the licensing process at
least twice. Increasing this limit will keep proven small
business investors in the program and increase the amount of
capital flowing to small businesses. It is a logical to keep
the best small business investors investing domestically. This
increase has bipartisan, bicameral, and Administration support.
We encourage its passage.
Now let me turn the focus of my testimony to discuss issues
that should be relevant as part of an oversight hearing. It is
important to put on the record the very significant
improvements to the SBIC program that have been implemented
over the past several years. Licensing times have been reduced
from a waiting period of nearly two years to about six months.
The number of licenses issued per year has increased from fewer
than 10 per year to 30 per year. This increase in licensing was
achieved while maintaining, if not raising, the standards for
licensure. Thanks to legislative improvements, the number of
regulatory hurdles to normal fund operations has been reduced
and has allowed SBA resources to be better allocated to address
more pressing needs. These improvements are important and
should not be overlooked.
These reforms attracted more private sector investment and
allowed SBICs to operate closer to the speed of business to
back thousands of successful entrepreneurs. Despite the many
improvements, there are still areas that require meaningful
changes to maximize the program's ability to get capital in the
hands of small businesses.
SBA Leadership
The biggest short term challenge that must be addressed is
the departure of many key personnel at the SBA. The SBIC
program has benefitted greatly by the quality of the people
appointed to lead the SBA and the attention they paid to the
SBIC program. SBA Administrator Karen Mills is expected to
leave her post by the end of August and there is no word yet on
who her replacement will be. There are also vacancies for the
positions of the Deputy Administrator, the Associate
Administrator for SBA's Office of Investment, which administers
the SBIC program. These are all important positions at SBA that
should be filled as soon as possible. The Senate confirmation
process takes a long time, and without any new appointments by
the President, this process will be ongoing through the fall.
We do not want to see programs in charge of regulating and
overseeing billions of dollars lacking strong leadership. There
are significant questions about how licensing and certain
operational decisions will be made when there is no
Administrator. It is not clear who will be acting as
Administrator when this position is vacated in August.
Technology
There are a number of major technological and information
systems challenges that make it very difficult for SBA staff to
administer the SBIC program effectively. We encourage a
meaningful review and improvement in both the technological
tools and the policies around them.
One of the major problems for SBIC funds is the ability of
the SBA to accept documents electronically. The SBA still
requires SBICs to send hard copies for most documentation
requests. The email system at SBA is unable to send or receive
many documents. It is common that critical documents are
delayed or lost in the mail room. The SBA needs to be able to
communicate electronically. Further, it has been over a decade
since laws were changed to require the acceptance of digital
signatures, but the SBA requires paper copies, often with
multiple copies. The SBA needs to modernize its documentation
collection process to allow SBICs to communication and submit
documents electronically.
SBA has attempted to update some of their data collections
into an electronic format. The SBICs applaud them for their
efforts, but the execution can be improved. The new Form 468
electronic system was delayed in coming on line and has been
taken down to fix bugs. Once the system is complete and
functional, it will provide great efficiency to SBA and to SBIC
funds, but we are not there yet.
SBA staff have important regulatory duties and need the
tools to perform those duties well. We would encourage the
Committee to review the technical capabilities of the SBA and
consider outsourcing operations or services that require
technologies that SBA is not able to provide their employees
themselves.
Licensing Process
The process of applying for a license and becoming a
licensed SBIC varies from fund to fund. In our experience, the
process took longer than we expected, but we had a change of
personnel along the way so we understood and it was successful
in the end. The SBA could be more transparent with applicants
after the submission of the Management Assessment Questionnaire
(MAQ). The time frame between the MAQ and licensing could be
reduced if the SBA establishes a consistent work flow process
that is transparent to the fund applying for a license. This
workflow process could be improved by allowing information
sharing and establishing consistent communication between the
SBA and the fund. It would also benefit the fund if there was a
structure in place to see the estimated time remaining to
become licensed.
Dodd-Frank
The last section of my testimony focuses on the threat of
double regulation (in three potential situations) as a result
of the Dodd-Frank Act. While the statute provides a limited
exemption from SEC registration for SBICs that ``solely''
advises one or more licensed Small Business Investment Company,
clarification is needed to prevent cases of double regulation.
The first issue involves ``SBIC capital'' counting towards
the $150 million threshold. If an adviser advises SBICs and any
other private funds (and the total assets under management
exceed the $150 million registration threshold), then the
threshold for full registration is triggered. The SEC has taken
the position that registration is triggered if an adviser to an
SBIC has absolutely any capital in any non-SBIC, no matter how
small. Therefore, many SBIC advisers are forced to register
with the SEC in spite of the SBIC exemption.
A second issue deals with fund managers that manage a
licensed SBIC and a non-related Venture Capital fund. Both
SBICs and Venture Capital Funds are excluded from SEC
registration, but only if the manager ``solely'' manages these
funds, and not another non-related fund. The SEC has taken the
position that a manager of a Venture Capital Fund and an SBIC
fund must register with the SEC if their assets under
management exceeds $150 million. On their own they are exempt,
but jointly they are captured in the regulatory regime.
The third issue involves the regulation of SBICs by the
states. There is no explicit language in the Dodd-Frank Act
that excludes SBICs from state registration. Therefore,
federally licensed and regulated SBIC funds must register with
multiple states and territories. A technical correction is
needed to remove this unintended double regulation, leaving
SBICs fully regulated by their licensing and reporting entity,
the SBA. SBICs would continue to be closely regulated by the
SBA, as they have for 55 years.
In closing I want to reiterate the success, the strength
and my support of the SBIC program. The Agency is licensing
qualified candidates through a stringent and thorough due
diligence process which creates a high standard for licensees
to meet before become licensed and having access to SBA
leverage and thus becoming a valuable funding source to Small
Business concerns and the economy at large. On behalf of all
SBIC's we applaud the efforts of the agency and its employees,
while encouraging continued improvements and efficiencies as
referenced herein that can streamline the process of licensing
and the communication with its candidates and licensees,
without lowering the important and high standard that had been
set by the Agency to award an SBIC License.
Thank you for giving me the chance to share both my
experience and the perspective of the SBIC industry. Please see
the accompanying letter below from SBIA President Brett Palmer.
Steven Brown, President TCI and Managing General Partner
Trinity Capital Fund II (TCF)
Biography - Steve Brown brings 28 years of lending,
investment and leasing experience to TCF. Prior to starting
TCF, he was a General Partner with Point Financial Capital
Partners, which managed a Venture Leasing Fund and he led both
originations and lease financing efforts for all early stage
lease finance at Point. Prior to Point he served as the
President and CFO of InvestLinc Financial Services, which was
an early-stage Private Equity Fund Manager and Business
Consulting Firm. Prior to InvestLinc, he was a partner in
Cornerstone Equity Partners, a private equity fund manager, and
was co-founder/manager of Cornerstone Fund I, a private equity
fund based in Phoenix, Arizona. In addition, Steve has worked
with private investment companies and banking institutions in
both real estate and commercial lending and investment roles.
He has served on the board of directors of numerous operating
companies. Mr. Brown holds a B.S. degree from McNeese State
University in Business Administration and Marketing.
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Testimony of John J. Sherman
Founder, Director and Former CEO, Inergy, L.P.
Before the United States House of Representatives
House Committee on Small Business
July 25, 2013
Good morning. My name is John Sherman and I am from Kansas
City, Missouri, near the congressional district of full
committee Chairman Sam Graves. I am an entrepreneur who has
been fortunate enough to launch and successfully grow and
develop two companies from scratch. I am here today because I
have been asked to share with you my experience with the SBIC
program while building Inergy, L.P., an energy infrastructure
company.
Three partners and I launched Inergy in 1998. We were
seasoned professionals in the propane industry; and through our
experience, we thought that we could build a successful
enterprise in the sector. There were approximately 5,000
independent propane retailers across the U.S. Many of the
owners of these businesses were at or nearing retirement age,
often without family members prepared to take over the
business. We believed we could build a scalable business.
Our strategy was simple:
acquire local and regional propane operators
with excellent customer service and safety records;
grow the business rapidly, both through
acquisition and organic expansion;
access the public capital markets using a
Master Limited Partnership (MLP structure) to ensure
our ability to grow; and
ultimately diversify into the broader energy
sector.
We funded the start-up with $600,000 of our own money and
raised $900,000 of equity from the seller of our original
acquisition prospect. We went to several banks that turned us
down for additional funds but eventually obtained an additional
$4.5 million acquisition loan. The bank loan was with a local
Kansas City bank, had strict covenants, and was personally
guaranteed by us and our spouses.
With a goal of ultimately going public, we recognized that
we would need private equity to serve as a bridge to an
eventual IPO. We also recognized that--in addition to gaining
capital--we needed the expertise that comes with institutional
capital and the business discipline that must go along with it.
We were business operators, not financial professionals; and we
recognized that we needed access to expertise to help us get to
that next level. So we talked with a number of private equity
and mezzanine financing firms.
We ultimately connected with an SBIC, Kansas City Equity
Partners (KCEP); and on December 31, 1999, we signed an
agreement with KCEP for Inergy's first private equity
investment, KCEP purchased a $2 million preferred interest in
our fledgling company.
It is important to point out that KCEP took the time to get
to know us. They recognized that we had deep expertise in the
propane industry, our business plan was solid, and the founders
were at risk. Plus, KCEP was flexible as to our financial
structure; and they were not asking for control, which was
important to us.
We used that initial $2 million investment to acquire a
number of small, independent propane operations over the
ensuing months. We also benefitted from the partnership with
this SBIC as they helped us zero in on what it would take to
access public capital markets.
By January 2001, we had identified a significant potential
transaction--Hoosier Propane located in Indiana--that would
provide the critical mass necessary for us to take Inergy
public. We secured bank financing and obtained $7.4 million in
equity from the sellers. The sellers also carried back a $5
million loan, but that left a gap of $16.5 million.
A group of private equity investors led by Kansas City
Equity Partners purchased a $16.5 million preferred interest in
Inergy as the anchor investment. All members of the group were
qualified as Small Business Investment Companies (SBICs). The
other SBICs included Mid States Capital, Invest America, Kansas
Venture Partners, Rocky Mountain Capital, Diamond States
Capital, and Southwest Partners.
That $16.5 million was the key piece of capital that
allowed us to make a strategic acquisition. Very shortly after
we closed that transaction, we filed the paperwork for the IPO
process. Just seven months later, in July 2001, Inergy went
public. We continued to grow the company dramatically after
that, completing more than 75 retail propane acquisitions,
becoming the third largest propane company in the country, and
employing nearly 3,000 people.
Over the years, we diversified Inergy into the midstream
energy sector; and today the company is recognized as a major
developer and operator of U.S. energy infrastructure including
storage, pipelines, and logistics assets. In May, we announced
a merger with Crestwood Midstream Partners, which will create a
$7.5 billion midstream energy company that is extremely well
positioned to leverage the growing importance of the emerging
shale plays around the country. The combined company will
continue to create even more jobs and invest large amounts of
capital in energy infrastructure across the United States.
We could not have done any of that without the initial
investments we received from the SBICs. Although we have raised
billions in capital over the years, no investment was more
valuable to us than the SBIC capital we raised that allowed us
to reach critical mass and take Inergy public.
Thank you for the opportunity to share the Inergy story.
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The U.S. Chamber of Commerce is the world's largest
business federation representing the interests of more than 3
million businesses of all sizes, sectors, and regions, as well
as state and local chambers and industry associations. The
Chamber is dedicated to promoting, protecting, and defending
America's free enterprise system.
More than 96% of Chamber member companies have fewer than
100 employees, and many of the nation's largest companies are
also active members. We are therefore cognizant not only of the
challenges facing smaller businesses, but also those facing the
business community at large.
Besides representing a cross-section of the American
business community with respect to the number of employees,
major classifications of American business--e.g.,
manufacturing, retailing, services, construction, wholesalers,
and finance--are represented. The Chamber has membership in all
50 states.
The Chamber's international reach is substantial as well.
We believe that global interdependence provides opportunities,
not threats. In addition to the American Chambers of Commerce
abroad, an increasing number of our members engage in the
export and import of both goods and services and have ongoing
investment activities. The Chamber favors strengthened
international competitiveness and opposes artificial U.S. and
foreign barriers to international business.
Positions on issues are developed by Chamber members
serving on committees, subcommittees, councils, and task
forces. Nearly 1,900 businesspeople participate in this
process.
Statement on
``Examining the Small Business Investment Company Program''
Submitted to
THE HOUSE COMMITTEE ON SMALL BUSINESS
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND
REGULATIONS
on behalf of the
U.S. CHAMBER OF COMMERCE
By
Philip Alexander, CEO of Brandmuscle
Cleveland, Ohio
July 25, 2013
Chairman Schweikert, Ranking Member Clarke and
distinguished members of the Subcommittee, thank you for
inviting me to testify before you today on the Small Business
Administration's (SBA) Small Business Investment Company (SBIC)
program and its impact on the ability of U.S. businesses and
entrepreneurs to compete, innovate and create jobs. I commend
your efforts in holding this important hearing to better
understand the SBIC program and the critical role it has played
in the success and growth of my business.
I am Philip Alexander, President and CEO of Brandmuscle, a
recently SBIC funded small business that is currently
headquartered in Chicago, with offices in Cleveland, Austin and
Los Angeles. I am here to speak with you today, not only as CEO
of Brandmuscle, but also on behalf of the U.S. Chamber of
Commerce.
The U.S. Chamber of Commerce is the world's largest
business federation, representing the interests of more than
three million businesses and organizations of every size,
sector, and region. More than 96 percent of the Chamber's
members are small business with 100 or fewer employees, 70
percent of which have 10 or fewer employees. Yet, virtually all
of the nation's largest companies are also active members.
Therefore, the Chamber is particularly cognizant of the
problems of smaller businesses, as well as the issues facing
the business community at large.
I came to the United States over thirty years ago with
little more than the determination to obtain a first class
education. After obtaining an MBA degree at Case Western
Reserve University, in Cleveland, Ohio, I pursued a career in
marketing and quickly ascended to senior positions with
national and international retailers, serving as vice president
of brand management for Pearle Vision as well as vice president
of marketing for Western Auto, a subsidiary of Sears, Roebuck
and Co.
Although very successful within the corporate world, I
always knew my entrepreneurial spirit would lead me to even
greater opportunities should I strike out on my own. In 2000, I
left the comfort and security of my company job and Brandmuscle
was born. It was a solution to a common problem within the
marketing industry that had challenged me for y ears; how do
you roll out a national marketing campaign relevant to
potential consumers within local markets and diverse
communities? For a national company, building consistent brand
equity across all markets is extremely important, yet many
local perceptions influenced the purchasing decision.
There are close similarities in politics that parallel this
marketing dilemma. Former Speaker of the U.S. House Tip O'Neill
coined the phrase, ``All politics is local.'' This axiom
encapsulates the principle that your success is directly tied
to your ability to understand and influence the issues of local
constituents or communities. As you know only too clearly,
attempting to communicate to the varying interests within a
congressional district is a challenge, and trying to broaden a
message and outreach nationally can be extremely daunting,
especially when control of that message is distributed to many
well-intentioned supporters throughout the country.
Brandmuscle was launched as a powerful solution to unleash
a company's brand where the buying decisions are made--in the
local marketplace. Our local marketing software enables
companies to empower their network of local distributors,
dealers, franchisees and salespeople with everything they need
to deliver brand-approved marketing tactics customized to local
needs, tastes and other relevant differences that can affect
the sale.
Today, Brandmuscle, has reinvested the local market place
and evolved into a world class suite of marketing services and
solutions. We are proud to have as clients some of the most
well-known corporate Fortune 500 companies. Some of our current
products and services include the following:
1. BrandBuilder allows a company to customize and
execute local marketing campaigns with legally
compliant advertising for virtually any type of media
on our local marketing platform and ad builder.
2. Design Tracker allows a company to efficiently
manage local marketing and in-house graphics activity.
A large percentage of on-and-off premise marketing
materials are designed and produced locally by
distributors or branches. This business workflow
typically has a lack of cost controls, minimal
compliance with branding guidelines, and inferior
production capability.
3. Display TrackerTM a web-based solution
that allows distributors to create customized Point-of-
Sale (POS) materials at the retail level. The
application uses Variable Data Print technology to add
personal messages and account names to POS material
that is kitted for retailer distribution. This provides
a dramatic reduction in per unit pricing of POS
material to more closely assimilate long run print
pricing.
Since its launch, Brandmuscle has been honored to receive
numerous awards in recognition of our involvement with the
community and our business integrity:
2012 Medical Mutual Pillar Share Award,
Community Service
2012 Crain's Cleveland Business Leading EDGE
Award, Entrepreneurs EDGE
2011 Best Internship Program Award Finalist,
Northeast Ohio Software Association
2011 Richard Shatten Civic Distinction
Award, Entrepreneurs EDGE
2010 Weatherhead 100 Award, Council of
Smaller Enterprises (COSE)
2010 Crain's Leading EDGE Award,
Entrepreneurs EDGE
2009 Crain's Cleveland Business Leading EDGE
Award, Entrepreneurs EDGE
2002 Innovation in Business Award, Smart
Business Network Magazine
2002 Philip Alexander named ``Visionary'',
4th Annual SBN Innovation in Business Conference
Today, Brandmuscle employs over 550 well-paid professionals
in the United States, many of whom are still located in
downtown Cleveland, Ohio, where the company was started. Given
Brandmuscle's quick rise to success, it is easy to overlook
important factors that brought the company to this level. Like
many small business owners across the nation with a great idea
and limited resources, `pulling yourself up by your own
bootstraps' is the primary way I began my journey to achieve
the American dream.
With limited resources and no staff, convincing my first
corporate client to purchase services from my fledgling company
required almost as much innovation and marketing skills as it
did to develop the product. Even though it was a memorable
event when the first dollar arrived, there was little time to
celebrate. Delivering on your commitments during the early
stages of business development requires hiring capable
employees and developing internal procedures that exceed the
client's expectations. It takes extraordinary amounts of both
human and financial capital to build a business. While I had
confidence in my business and marketing expertise, acquiring
enough resources to foster the accelerated growth needed to
propel Brandmuscle to its current level of market dominance
took an incredible amount of time and energy.
There is one commonly misunderstood fact; for a fast-
growing, job-generating company like Brandmuscle to thrive,
many diverse avenues of funding are essential. Irrespective of
a company's profits, the inability to access a robust supply of
external capital during critical times in the growth cycle can
severely impact revenues, profit, jobs, and even the ability to
survive.
For Brandmuscle, early stage funding came from savings and
an early Angel. Not long afterwards, several successive
infusions of ``venture funds'' provided the foundation to drive
revenue growth to a level that would support a payroll of
approximately one-hundred and fifty jobs. Under that business
debt/equity structure, Brandmuscle had reached a point in which
the growth rate could only comfortably add another three or
four jobs a year. We had not yet reached our full potential;
our existing capital structure would limit our progress.
While ``angel'' and ``venture capital'' funding had served
the purpose in filling the gap between start-up financing and
our current level of market maturity, different funding sources
were needed to cash-out original investors and reposition us
for further expansion. Brandmuscle was too small and did not
have the resources to go public. Additional liquidity through
venture capital funding from additional private equity
placement was an expensive way to recapitalize, given our
proven history of success. And we needed to do more than just
recapitalize to grow--we needed additional capital, products
and people.
Commercial bank debt financing is typically not available
to companies with the level of investment risk required that
Brandmuscle had in 2012. Since most of our assets were
intangible property, convincing banks to lend based on
collateralizing those assets, was not practical.
The SBAs SBIC program was unique in its ability to provide
Brandmuscle with the resources for our next phase of innovation
and aggressive growth within the distributed marketing
landscape. This federal government program, which has zero cost
to the taxpayers, allows for a SBIC fund manager to leverage up
to twice the amount of their private capital in order to
provide a company like Brandmuscle cost-effective, mezzanine
debt financing in order to recapitalize and position us to
foster more job growth.
In February of 2012, The Riverside Company, equipped with
assets from their recently SBIC backed Riverside Micro-Cap Fund
II, signed a purchase agreement to fully acquire Brandmuscle
through a mezzanine debt restructuring arrangement. Brandmuscle
had instant access to the extraordinary managerial talents and
financial backing of the Riverside team, a well-respected
leader in PE management.
Riverside's SBIC fund provided financial backing for the
acquisition and merger of several other companies within their
portfolio family providing us added opportunities. Brandmuscle
was immediately able to integrate with Riverside's platform
Centiv Services, a Chicago Illinois-based provider of marketing
automation technology and digital print fulfillment services
and TradeOne Marketing, an Austin, Texas-based trade promotion
management company, to build out our distributed marketing
platform. As a result of Riversides funding and counsel, in
just over a year, Brandmuscle's newly acquired market strength
and vertical alignment had dramatically increased income and
earnings. This was not done at the expense of cutting jobs; we
not only sustained our combined level of employment, but
created an additional forty-two jobs.
The Riverside Company is one of the largest and oldest
global private equity firms in the nation with over $3.5
billion in assets under management. With more than twenty-five
years in business, they have completed over three-hundred
acquisitions and have over two-hundred people worldwide. It was
welcome news when Brandmuscle was able to obtain the cost-
effective, capital needed to make it to the next level. Just as
important as the funding, was Riverside's commitment to nurture
Brandmuscle with the goal of building it into a more effective
enterprise through time-tested management techniques, organic
growth and add-on acquisitions.
Chairman Schweikert and Ranking Member Clarke, without the
SBAs SBIC program, a company with the talent and resources of
Riverside would unlikely seen value in engaging with an
enterprise the size of Brandmuscle. Their SBIC baked Micro-Cap
funds represents only a fraction of their massive portfolio. I
am convinced that it was the incentives that were afforded to
Riverside by the SBIC program which made us an attractive
candidate for their consideration.
In conclusion, from the day that I conceived the idea of
Brandmuscle, to the present, obtaining sufficient capital has
always been a challenge. I know firsthand that in order for a
company to successfully grow, expand and create jobs, it
requires the right type of capital at the right time. Seed
money, start-up capital and different stages of growth capital
all come at different costs, maturities and expectations. All
sources of capital play a distinct and vital role in bringing a
company to the next level as a business progresses through its
life-cycle.
At no expense to the taxpayer, the SBAs SBIC program fills
a void by providing access to capital, especially mezzanine
structured debt, for fueling the growth of small businesses
where alternative funding is not available in the private
sector. On behalf of the U.S. Chamber of Commerce's small
business membership, and myself, I strongly recommend that you
retain, enhance and strengthen this critical source of capital
for small businesses. To that end, I urge you to pass the bi-
partisan bill, H.R. 1106, the `Small Business Investment
Company Modernization Act of 2013' into law.
I thank you for inviting me to testify and look forward to
answering any questions.
Congressional Testimony of Professor David T. Robinson, PhD
before the Committee on Small Business Subcommittee o n
Investigations, Oversight and Regulations
Ladies and Gentlemen of the Committee: Thank you for the
opportunity to testify before you today. Spurring startup
activity in the US is central for promoting economic growth
more broadly and I am grateful for the opportunity to speak
before you on this important topic.
Although economic policy in the United States tends to
focus on small businesses, the best available economic data
indicate that young businesses, not small ones, are responsible
for the lion's share of economic growth in our country.\1\ The
confusion is understandable: almost all young businesses are by
their very nature small, but most small businesses are not
young. While small businesses are undoubtedly an essential part
of the fabric of American life, most are not important engines
of job creation. (If they were, they would not continue to stay
small.) Young businesses are a different story: most fail, but
the ones that succeed create jobs and increase our country's
economic dynamism.
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\1\ See John Haltiwanger, Ron Jarmin and Javier Miranda (2010)
``Who Creates Jobs? Small vs. Large vs. Young,'' NBER Working Paper
16300, or Ronnie Chatterji ``Why Washington Has it Wrong on Small
Business,'' Wall Street Journal, November 12, 2012.
In this regard, the early-stage SBIC initiative is laudable
both in terms of its objective and in terms of its creativity.
I would like, however, to draw your attention to three facts
about early stage business activity that, taken together,
should temper our expectations of policies that attempt to
stimulate early-stage business activity by extending leverage
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to equity investors in this market.
First, my work with Alicia Robb of the Kauffman Foundation
shows that debt, not equity, is the primary source of capital
for new businesses.\2\ While we have long understood that
credit markets were important for small business, it is
surprising that NEW businesses rely so heavily on the banking
sector for access to capital.\3\ This is true for a wide range
of startups: even high-tech, Venture Capital-backed firms rely
heavily on access to bank debt through credit lines, personal
and business bank loans.
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\2\ Alicia Robb and David T. Robinson (2013) ``The Capital
Structure Decisions of Startup Firms,'' Review of Financial Studies.
\3\ See also Alan Berger and Greg Udell (1998) ``The Economics of
Small Business Finance: The Roles of Private Equity and Debt Markets in
the Financial Growth Cycle,'' Journal of Banking and Finance 22:613-73.
Because home equity is such an important source of
collateral for most individuals at the prime age for starting
new businesses, this means that the collapse of the housing
market was as much a crisis in entrepreneurship as it was a
crisis for the banking system.\4\
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\4\ Evidence connecting home equity to startup activity can be
found in Manuel Adelino, Antoinette Schoar and Felipe Severino (2013)
``Housing Prices, Collateral and Self-Employment,'' working paper, Duke
University.
The second fact is that early stage investing is extremely
risky. Failure occurs often. Successes are rare, but are highly
rewarded. For every Goggle or Apple, there are thousands of bad
ideas that never make it out of the inventor's garage. There is
an understandable need to create curbs inhibiting excessive
risk-taking and discouraging bad investment performance, such
as the provisions that are included in the early-stage SBIC
guidelines. We must nevertheless be aware of the fact that
these provisions are likely to discourage some of the most
desirable investments from being undertaken: these are the
speculative investments that are sometimes associated with the
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most disruptive technological innovations.
The third fact that bears consideration is that the
gestation periods for many early stage investments are
prohibitively lengthy for many investors. Increasing the flow
of capital into the sector will not change the waiting time
between the first investment and the acquisition or IPO that
will provide the return to the early-stage investor. The
primary remedy here is increased liquidity in later-stage
investment markets. Some of the most interesting features of
the JOBS Act passed last spring are those features that
stimulate the development of intermediate liquidity
opportunities for early stage investors.
These three facts conspire to make your job a difficult
one. To put it simply, we are swimming against the current when
we attempt to stimulate early stage investment activity by
leveraging existing equity in the sector.
Given these facts, what is the underlying economic
mechanism that will likely be responsible for the successes
that we do see?
In my view, it is this:
Investors without sufficiently deep pockets are often
discouraged from making speculative early-stage investments
because they are worried that their early investments will
become diluted by later-stage investors. It's not that they
need capital to make more investments now; they need more
capital later to be used when follow-on investments occur. In
my view, the key to this program's success will lie in its
ability to amplify the amount of ``dry powder'' that early
stage investors have on hand to participate in later-stage
funding rounds as successful investments grow to fruition.
Giving early-stage investors the confidence that they will have
access to sufficient capital to take their investments across
the finish line will be the hallmark of this program's success.
Thank you.
House Committee on Small Business
Subcommittee on Investigations, Oversight and Regulations
Hearing July 25, 2013
``Examining the Small Business Investment Company Program''
Questions for the Record
Question: During your testimony, you mentioned that a
Standard Operating Procedure (SOP) which looks at alternative
ways of licensing applicants is currently in the agency's
clearance process. This SOP is considered an interpretive
regulation of a broader regulation, and as such, is covered
under the agency's responsibility to perform a retrospective
review pursuant to Executive Order (E.O.) 13563. Did SBA comply
with E.O. 13563 and reach out to the small business community
in its review of the licensing process? If so, what feedback
did the agency receive? If not, why wasn't this process
followed?
SBA Response
SOP 10 04 provides internal guidance to personnel engaged
in the processing of SBIC license applications to ensure that
those processes are consistent with statutory and regulatory
requirements. The draft SOP 10 04 is the result of an ongoing
effort by SBA's Office of Investment and Innovation (OII) to
improve SBIC licensing procedures. It memorializes OII's
streamlined processes and reflects current operational
practices as well as input received over the past several
years.
In compliance with Executive Order (E.O.) 13563, since FY
2009, OII has reviewed industry best practices and worked with
applicants and stakeholders to identify improvements to our
licensing procedures. The SBIC industry provided valuable
feedback regarding processing times, ``green light letter''
expiration, and electronic-based licensing. As a result, we
have decreased average licensing times by 54 percent and
extended the green light letter expiration period from 12 to 18
months. As I indicated at the hearing, OII is actively pursuing
technological improvements for SBIC reporting as well as its
other processes, subject to budget constraints. It is important
to note that SOP 10 04 will not preclude the adoption of
technology as it becomes available.
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON SMALL BUSINESS
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS
HEARING:
EXAMINING THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM
TESTIMONY:
JOSE E. FERNANDEZ-BJERG
CHAIRMAN AND CEO, OMEGA OVERSEAS INVESTMENT CORP.
JULY 25, 2013
Dear Chairman Schweikert, Ranking Member Clarke and
subcommittee members, thank you for allowing me to provide
testimony on the Small Business Administration's Small Business
Investment Company Program (``SBIC''), particularly on whether
the SBIC program is meeting the capital needs of small business
owners.
My name is Jose Enrique Fernandez-Bjerg. I am the Chief
Executive Officer of Omega Overseas Investment Corp., a private
international banking institution. I am also a member of the
Board of Directors of the Government Development Bank for the
Commonwealth of Puerto Rico, and have served as a member of the
Board of Directors of the Federal Home Loan Bank of New York.
During my 40-year career in banking and finance, I have
been involved in thousands of financial transactions, including
managing the operations of Prudential Bache, Paribas, AG Becker
and Drexel Burnham Lambert. From 1988 to 2004, I led Oriental
Bank & Trust which evolved into Oriental Financial Group (NYSE:
OFG), a firm that manages over $10 billion in assets; currently
the second largest local bank in Puerto Rico. In 2005, I
founded Omega as the first multi-sector institutional
investment firm on the island. Omega's largest asset class is
private equity and our international firm manages investments
in the United States and over 50 countries. My 25 years of
private equity experience includes my participation, since
1994, as a member of the Investment Committee of the University
of Notre Dame. As a Trustee of the University, we oversee $8
billion of assets under management and over $2.5 billion in
private equity holdings. The portfolio we have managed has been
ranked among the top 10-performing portfolios in the country
for the last two decades.
I testify before this honorable subcommittee today to share
my concern for the state of the investment ecosystem in several
Low and Moderate Income jurisdictions of the United States,
which lack adequate access to capital vehicles for small
business owners. I would also like to share recommendations on
how that ecosystem could be improved.
Background on SBICs in Low and Moderate Income markets
As stated by the SBA, the SBIC mission statement is ``...to
improve and stimulate the national economy and small businesses
by stimulating and supplementing the flow of private equity
capital and long term loan funds for the sound financing,
growth, expansion and modernization of small business
operations while insuring the maximum participation of private
financing sources.''
The SBIC has historically being instrumental in achieving
that mission. Nonetheless, that mission has been concentrated
in certain parts of the Nation, such as New York, California,
Chicago and Massachusetts \1\, while other parts of the country
still face immense shortages of private equity capital. For
instance, while the number of SBIC licenses has increased
slightly (from 299 in 2011 to 301 in 2012), during that same
period businesses located in Low and Moderate Income areas
financed by SBICs has dropped by over 38% (from 321 in 2011 to
216 in 2012) \2\.
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\1\ See SBIC Annual Report, Fiscal Year 2012, page 17.
\2\ Please note that this dramatic drop might be partially
explained by the number of participating securities SBICs.
While the causes for such a discrepancy may be multiple, it
seems indisputable that the current licensees are not focusing
on growing their portfolio of investments in Low and Moderate
Income markets. That fact exacerbates and perpetuates a vicious
cycle by which small businesses located in Low and Moderate
Income markets are not able to grow due to limited capital
options, and therefore stay at a size below their potential, or
in the more unfortunate cases, fail when they lack capital to
expand and compete with better financed competitors. That is
precisely the type of system failure that a program such as the
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SBIC is intended to address, and that we hope it can remedy.
This testimony will summarize our analysis of the SBIC
program's current limitations. The conclusion of our yearlong
study is that investors in many Low and Moderate Income regions
have little chance of receiving an SBIC license under the
current program structure. However, we believe that there is an
opportunity to correct this imbalance and implement program
changes that can have a dramatic impact on the economic
development of economically disadvantaged zones.
Evolution of the Private Equity Ecosystem & the SBIC
Program
During the 70's the United States pioneered the private
equity industry, with its geographic concentration near major
financial centers or technological centers. In these regions
the evolution of the private ecosystems is usually world class
and self-funded from private sources. Thanks to the SBIC
program, in the 90's the private equity industry was able to
expand to less-developed surrounding cities/states, and the
SBIC program provided much needed capital to the next
generation of fund managers.
By the turn of the century the SBIC program continued to
evolve and began to implement more professional private equity
industry practices, which began to outpace the economic
development of disadvantage zones. At a recent SBIC conference
we heard from a successful fund manager that under the new
regulations ``I would have never received the license that I
was awarded in 1999.''
The most recent financial crisis caused the SBIC to
increase restrictions based on private equity performance best
practices. While necessary, the unintended consequence of those
new restrictions was that it is not almost impossible to find a
universe of managers that fit the SBIC licensing specifications
in many Low and Moderate Income markets.
Our task force has met with SBIC experts in Washington DC
to discuss this issue. They concur with our conclusion that
obtaining a license in Low and Moderate Income markets that
lack a PE ecosystem is extremely difficult. The key reason is
that Low and Moderate Income regions do not have developed
private equity industries or professionals with enough direct
experience to qualify for a license.
SBA's Actions to address capital shortages in Low and
Moderate Income markets
The SBA recognizes that small businesses in Low and
Moderate Income markets suffer from inadequate access to
capital, and has taken recent steps towards remedying that
deficiency. In particular, as part of the Start-up America
initiative, the SBA created the Impact Investment SBIC program
(hereinafter, the ``Impact Program''), for the purpose of
providing access to capital to small businesses located in
rural areas or employing residents of Low and Moderate Income
or economically distressed areas.
Based on the most recent Annual Report from the Office of
Investments \3\ only two Impact licenses had been issued. While
part of the limited number of Impact licensees may be due to
its relatively recent creation, we have analyzed its
requirements and believe the way the licensing process is been
implemented may be putting insurmountable obstacles to its
long-term success. For instance, per the SBA, ``Impact
Investment SBIC applicants must submit the same documents,
follow the same process, and meet the same high standards as
any applicant to the SBIC program'' \4\ In fact, based on our
analysis of the application process, the Impact License has
very few advantages over the regular license, while it imposes
more restrictions. Paraphrasing a senior SBA manager, applying
for an Impact License ``may save you a couple of months in the
evaluation process, but it won't be evaluated any differently
than a regular license''.
---------------------------------------------------------------------------
\3\ Ibid., page 19.
\4\ SBA's Memorandum on ``Start-Up America Impact Investment SBIC
Initiative Policy Update'' Dated September 26, 2012. https://
docs.google.com/viewer?url=http://www.sba.gov/sites/default/files/
files/External%25201mpact%2520Memo%25202012-09-26%2520final.pdf
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SOP limitations to an expanded Impact License Program
For an applicant in a LMI area, some SBA requirements make
the approval of an SBIC license quite difficult. For instance,
the track record requirement, as stated by the SBIC program,
includes the following:
``The track record contains investments that
are analogous to the types of investments that are
proposed for the SBIC with regard to size, stage,
structure, sector, or any other key variables.
The track record contains a meaningful
number of full, positive realizations that have been
achieved within the past ten years.
The overall performance of the track record
is strong on an absolute and relative basis across
multiple investment cycles. (Emphasis added.)'' \5\
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\5\ SBIC pre-screening instructions: http://www.sba.gov/content/
pre-screening-instructions
If there is no, or a very limited, PE ecosystem in a LMI
market, meeting those requirements of a ten year record, and
multiple investment cycles becomes quite difficult. In addition
to track record, SBA considers the broader qualifications of
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the applicant's fund management team, including:
``At least two team members have track
records that meet the requirements discussed above.
The team members have a history of working
together and form a cohesive unit. (Emphasis added.)''
\6\
---------------------------------------------------------------------------
\6\ Ibid.
While in New York City, San Francisco or Boston, there is a
much higher probability of applying as a team that has a
history of working together, in LMI markets where deals are few
and far apart, that requirement could be very difficult to
attain. In essence, LMI markets are in the proverbial chicken-
and-egg situation, since there are very few PE firms with a
long history, and track record working together, the ability to
benefit from programs such as the Impact SBIC is quite limited.
But it is precisely programs such as the Impact SBIC that could
---------------------------------------------------------------------------
allow for those funds to be created and flourish.
Finally, I would like to bring to your attention the role
of the banking industry in LMI regions like Puerto Rico. Puerto
Rico's local banks also have to meet the FDIC's community
reinvestment regulations (CRA). In larger markets banks work
and invest in SBIC funds, which in turn help them comply with
CRA requirements. Unfortunately, in Puerto Rico and other LMI
areas banks meet their CRA requirements through basic mortgage
lending and thus feel no need to work, invest, or establish
SBIC funds.
Recommendations
Our task force respectfully recommends four courses of
action to address the imbalance in disadvantaged regions:
1) Conduct an investigation on the reasons why the
SBIC licensing process has not been as successful in
economically disadvantage zones. The analysis should
have a specific focus on understanding zones that lack
a private equity ecosystem. The report should provide
solutions to correct this imbalance and promote small
businesses and private equity fund market development.
2) Conduct a thorough review of the SOP, with the
intent of easing certain SBIC Impact License
requirements in economically underdeveloped regions,
including:
a. Ease the need to demonstrate a significant
and prolonged track record in LMIs where the
existing PE ecosystem is fairly underdeveloped.
b. Ease the team requirements to allow
partnerships to be created, even if they might
not have worked directly in the past
3) Promote the creation of more SBICs in LMI areas
by:
a. Assigning a portion of the Impact
allocation, possibly via an RFP, to fund SBICs
in selected underserved regions within the next
18 months.
b. Establishing a mentoring system for SBIC
Impact License applicants, including training
and education programs, which would allow for
the creation of SBICs in underserved regions
within the next 18 months.
4) The SBA should work with the FDIC to promote that
local banks in places like Puerto Rico and other LMI
areas invest in SBIC funds, by revising the CRA
requirements in a way that would provide incentives to
go beyond their current practice of solely investing in
mortgages to comply.
Conclusion
While the creation of the SBIC Impact License is a step in
the right direction, we respectfully suggest that its licensing
process be modified to allow for the development of investment
ecosystems in areas that have not benefitted from adequate
access to capital. Certainly, these modifications should be
developed while safeguarding the resources of the agency and of
taxpayers. Nevertheless, we are confident that the current
Impact License requirements could be eased to allow for the
creation of new and successful SBICs with safeguards that are
better suited to markets with limited PE ecosystems.
Thank you very much.