[House Hearing, 116 Congress] [From the U.S. Government Publishing Office] SBA MANAGEMENT REVIEW: SMALL BUSINESS INVESTMENT COMPANY PROGRAM ======================================================================= HEARING BEFORE THE COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION __________ HEARING HELD SEPTEMBER 26, 2019 __________ [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 116-047 Available via the GPO Website: www.govinfo.gov __________ U.S. GOVERNMENT PUBLISHING OFFICE 37-757 WASHINGTON : 2019 -------------------------------------------------------------------------------------- HOUSE COMMITTEE ON SMALL BUSINESS NYDIA VELAZQUEZ, New York, Chairwoman ABBY FINKENAUER, Iowa JARED GOLDEN, Maine ANDY KIM, New Jersey JASON CROW, Colorado SHARICE DAVIDS, Kansas JUDY CHU, California MARC VEASEY, Texas DWIGHT EVANS, Pennsylvania BRAD SCHNEIDER, Illinois ADRIANO ESPAILLAT, New York ANTONIO DELGADO, New York CHRISSY HOULAHAN, Pennsylvania ANGIE CRAIG, Minnesota STEVE CHABOT, Ohio, Ranking Member AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member TRENT KELLY, Mississippi TROY BALDERSON, Ohio KEVIN HERN, Oklahoma JIM HAGEDORN, Minnesota PETE STAUBER, Minnesota TIM BURCHETT, Tennessee ROSS SPANO, Florida JOHN JOYCE, Pennsylvania Adam Minehardt, Majority Staff Director Melissa Jung, Majority Deputy Staff Director and Chief Counsel Kevin Fitzpatrick, Staff Director C O N T E N T S OPENING STATEMENTS Page Hon. Nydia Velazquez............................................. 1 Hon. Steve Chabot................................................ 2 WITNESSES Mr. Joseph Shepard, Associate Administrator, Office of Investment and Innovation, United States Small Business Administration, Washington, DC................................................. 4 Mr. Brett Palmer, President, Small Business Investor Alliance, Washington, DC................................................. 21 Mr. John Paglia, Professor of Finance, Graziadio Business School - Pepperdine University, Malibu, CA............................ 23 Ms. Ronda Penn, Chief Financial Officer, Plexus Capital, Raleigh, NC............................................................. 25 Mr. Walt Rodgers, Chief Executive Officer, Family RV, Cincinnati, OH............................................................. 26 APPENDIX Prepared Statements: Mr. Joseph Shepard, Associate Administrator, Office of Investment and Innovation, United States Small Business Administration, Washington, DC............................. 36 Mr. Brett Palmer, President, Small Business Investor Alliance, Washington, DC................................... 39 Mr. John Paglia, Professor of Finance, Graziadio Business School - Pepperdine University, Malibu, CA................. 102 Ms. Ronda Penn, Chief Financial Officer, Plexus Capital, Raleigh, NC................................................ 117 Mr. Walt Rodgers, Chief Executive Officer, Family RV, Cincinnati, OH............................................. 122 Questions and Answers for the Record: Questions from Hon. Velazquez to Mr. Joseph Shepard and Answers from Mr. Joseph Shepard............................ 125 Questions from Hon. Velazquez to Mr. Brett Palmer and Answers from Mr. Brett Palmer...................................... 127 Additional Material for the Record: Brian Lueger, Principal, Konza Valley Capital, Inc........... 128 SBA MANAGEMENT REVIEW: SMALL BUSINESS INVESTMENT COMPANY PROGRAM ---------- THURSDAY, SEPTEMBER 26, 2019 House of Representatives, Committee on Small Business, Washington, DC. The committee met, pursuant to call, at 11:35 a.m., in Room 2360, Rayburn House Office Building. Hon. Nydia Velazquez [chairwoman of the Committee] presiding. Present: Representatives Velazquez, Finkenauer, Kim, Davids, Chu, Schneider, Veasey, Delgado, Craig, Chabot, Balderson, Hern, Hagedorn, Stauber, Burchett, and Joyce. Also Present: Representative Bishop. Chairwoman VELAZQUEZ. The committee will come to order. I thank everyone for joining us this morning, and I want to especially thank the witnesses who have traveled from across the country to be here with us today. Since 1958, the Small Business Investment Company program has been an integral part of the SBA's mission to provide small businesses with affordable capital and helping them create good paying jobs. The specific goal of the SBIC program is to fill the gap between the availability of venture capital and the needs of ``high growth potential'' small businesses in startups and early stage situations. It achieves this purpose by partnering private and public investments in early stage and startup businesses. We need to look no further than companies like Apple, Tesla, and FedEx. They have all achieved what we hope for every small business-- extraordinary growth and success. They each received early stage financing from SBICs. One of the SBIC program's greatest strengths is its hands- off approach, giving fund managers the autonomy and flexibility to invest in almost any business sector they choose, from apparel to cutting edge technology. This freedom, coupled with sound investment strategies, has led to the program's bipartisan popularity and success. In fiscal year 2018, SBA committed to guarantee $2.5 billion in SBIC investments, and SBICs invested another $3 billion from private capital for a total of $5.5 billion in financing for 1,151 small businesses. Though the SBIC program has helped increase the flow of affordable capital to worthy small companies, access to capital remains the number one priority for small firms across America. Congress can and should do more to ensure the program and its participants can meet growing demand. This includes periodically conducting oversight to ensure the program is being administered as efficiently as possible. Earlier this year, led by Ms. Chu, the House passed H.R. 116, which will strengthen the SBIC program by allowing banks and Federal savings associations to invest up to 15 percent of their holdings into SBICs. This increase in capital available to small businesses, at no cost to taxpayers, will provide entrepreneurs with enhanced opportunities to grow and expand their businesses and create good paying American job in the process. However, we know that much more work needs to be done to fully optimize the rules governing the program. Over the past 2 years, I have heard consistent complaints from SBIC funds and other industry stakeholders about serious delays in licensing approvals. Reports in the press indicate that approvals that used to take 6 months are now taking a year to complete, or even longer. These delays are costing would-be participants to look outside the SBIC program for opportunities to deploy capital to small private equity space. It is simply unacceptable for a federal government program to be operated so poorly that it becomes unattractive to potential participants. Another priority is to ensure that venture capital and private equity in the SBIC is reflective of the diversity that exists across the nation in terms of demographics and geography. That includes having women and minorities in leadership positions as SBIC fund managers and making sure that women and minority-owned businesses, as well as businesses located in rural areas, are receiving the investments from SBICs. On the first panel, I look forward to hearing from the Associate Administrator about how he has worked to address this concern and his plans to permanently fix these problems. I also look forward to hearing from the second panel of industry participants and insiders about other challenges and ideas to continue optimizing the program and increasing participation. Again, I want to thank the witnesses for being here, and I now yield to the Ranking Member, Mr. Chabot, for his opening statement. Mr. CHABOT. Thank you, Madam Chair. And before I begin my statement I wanted to quickly note that I unfortunately have to step away relatively early in this hearing because I have several other commitments that I have to address. I do apologize for that. I know this is a very important topic, and I fully support the chair in delving into these things, and I have full confidence that my colleagues on both sides of the aisle will ask the important and sometimes tough questions that are necessary. Traditionally, small businesses, entrepreneurs, and startups are extremely flexible organizations. They adapt and bend as the market moves. They see opportunity and jump at the chance to capitalize. However, they are moving quicker and in a more nimble fashion than ever before. With the advancement of technology racing forward, innovators are sprinting to create the next great American product and service. Yet, this Committee continues to hear that access to capital remains a top challenge for our Nation's smallest firms. Not only is it a challenge for the Nation's job creators, but often, it is also a roadblock that sometimes can't be bypassed. With options limited, Main Street businesses regularly turn to the SBA for financing assistance. From my state of Ohio down to Florida, and from coast to coast, small businesses are participating in the SBA's programs to build, grow, and create jobs for our nation. One option within the capital access toolbox at the SBA is the Small Business Investment Company Program, also known as the SBIC program. This program helps bridge the equity gap for small businesses by combining investment funds with small businesses. The SBIC program is a public-private partnership that has delivered results for America's small businesses and has helped launch some of the Nation's most prominent companies. The SBA runs potential funds through an extensive licensing process to ensure that they are prepared to participate and work with small businesses. Over the years, this Committee has worked in a bipartisan manner to study the program and develop legislation to ensure that the program reaches small businesses that require its assistance. Just last Congress, we passed legislation to increase the individual leverage limit within the program and to prioritize under licensed SBIC areas. Studying the program remains paramount and program performance will help Congress determine the next steps. Just as Congress measure the efficiency and effectiveness of the program, the SBA must implement efficient and effective rules and regulations for program participants to follow. If program timelines diverge or if performance waivers further, examination is required to ensure the integrity of the program. According to the SBA statistics, over 5,000 businesses have received SBIC funds in the last 5 years, all while operating on a zero-cost subsidy to the American taxpayer. In fiscal year 2019, the SBA similarly did not request a subsidy as the fees that were built into the program were projected to cover its cost. We are eagerly awaiting end of fiscal year 2019 performance results as third quarter results have been mixed with the number of new licensees approved by the SBA on a downtrend and the dollar amount of the debenture leveraged commitments down significantly. This hearing will allow members to learn more from the SBA about the program's performance metrics during the first panel, and how the program is impacting communities and neighborhoods from the participants that are testifying during the second panel. As with any capital access program that includes government participation, comprehensive oversight is required to safeguard American taxpayer dollars. Although the witnesses will be formally introduced shortly, I wanted to quickly thank all of them for participating, especially Mr. Walt Rodgers from Family RV. Family RV's operations are in Colerain Township in Hamilton County, Ohio. For those of you who do not know, Colerain is in my district, and approximately 30 minutes by car or RV from downtown Cincinnati. They are a great business, and we welcome them here today. And I know this hearing will generate a great conversation. One final point I would make, Madam Chair, I would ask unanimous consent that our newest member who will be here shortly, I believe, Dan Bishop of North Carolina, will be able to join our dais. It is my understanding that it will be confirmed on the floor that he will be on our Committee, a member of our Committee. I would ask unanimous consent that he would be able to sit with us. Chairwoman VELAZQUEZ. With no objection, so ordered. Mr. CHABOT. Thank you very much. And I will just mention a couple of quick things. Dan Bishop won a very closely watched election just recently down in North Carolina's Ninth District. It was a relatively close race. He has been a member of the North Carolina Senate, the North Carolina House of Representatives. Like myself, he was a county commissioner. I was a county commissioner in Hamilton County that Cincinnati is located in. He was a Hamilton County commissioner in Mecklenburg County in the Charlotte, North Carolina area. Where my mom is from Charlotte, by the way. He is going to be a valuable addition to our Committee. He is also going to be serving on the Homeland Security Committee. So I think he is going to be a great addition to this Committee. And at this time I yield back, Madam Chair. Chairwoman VELAZQUEZ. The gentleman yields back. And if committee members have an opening statement, we ask that they be submitted for the record. I would like to take a minute to explain the timing rules. Each witness gets 5 minutes to testify and members get 5 minutes for questioning. There is a lighting system to assist you. The green light comes on when you begin, and the yellow light means there is 1 minute remaining. The red light comes on when you are out of time, and we ask that you stay within that timeframe to the best of your ability. I would now like to introduce our only witness on today's first panel. Our first witness is Mr. Joseph Shepard, the Associate Administrator for SBA's Office of Investment and Innovation. In this role, he is responsible for managing the SBIC program, as well as the Small Business Innovation Research and Small Business Technology Transfer programs. He has been in this role since his appointment in 2017. He previously held a position in the office during the George W. Bush administration. Mr. Shepard, you are now recognized for 5 minutes. STATEMENT OF JOSEPH SHEPARD, ASSOCIATE ADMINISTRATOR, OFFICE OF INVESTMENT AND INNOVATION, UNITED STATES SMALL BUSINESS ADMINISTRATION Mr. SHEPARD. Thank you, Chairwoman Velazquez, Ranking Member Chabot, and members of the Committee. Thank you for inviting me to testify today. I appreciate the opportunity to talk about the SBA Small Business Investment Company program and the work of the Agency's Office of Investment, which has oversight responsibilities for the SBIC program. The office was created by Congress in 1958 at a time when no private equity industry existed in the United States. The office was established to supplement private equity capital and long-term loan funds that are not available in adequate supply to small businesses. Today, it has grown to a $30 billion program with $14.2 billion of that representing the SBA guaranteed portion. So how is SBA managing that growth? Since my arrival in 2017, we have focused on operational improvements in two significant areas--improving the Agency's examinations process and improving our information technology systems. I have done this even as we have reduced processing times related to new license applications and reduced the number of denials relative to license applications. We have been focused on improving the examination process and improving IT systems because those improvements will better position the Agency to advance the SBIC mandate into the future. At the beginning of 2017, almost half of the licensed SBICs had not received a mandatory 2-year compliance examination as required by law. I am pleased to say that in just over a year we were able to get 100 percent compliance. We are now in the process of hiring and adding a new senior examiner position to maintain our progress. With respect to IT, the infrastructure that supports our SBIC program is outdated and is in need of improvement. SBICs would certainly attest to the challenges of the current legacy system, that it is difficult and slow when required information is uploaded. We are now hiring an IT project manager, a position that the program has never had before. Working with our Agency's CIO, we have made great strides to modernize and improve our technology by taking steps to update the legacy system with a new software platform. This will better protect and secure the program's financial data, as well as improve data entry, processing times associated with SBIC WEB data collection portal. Another area of activity has been program outreach. Over the last 3 years, we have participated in close to 50 external engagements. Last month, I traveled to Arkansas and Oklahoma to promote the SBIC program in rural areas. The trip included meeting with Native American leadership, a first for the program. Next, let me give you a snapshot of the SBIC program through numbers. There are just over 300 SBICs currently licensed by the SBA. Over the last 4 fiscal years, the program has been above 300 with a high of 315 in 2017. License approvals had been on a downward trend from 2013 through 2017, but significantly increased last year in 2018. With regard to licensing times, the process has taken anywhere from 5 to 8 months over the last 5 years and is typically dependent on those seeking a new license versus a subsequent license. In comparison, similar private sector activity can take up to 24 months. Something that our program office will continue to watch is liquidation numbers, which unfortunately increased from 2018 to 2019 with four SBIC licensees transferring to liquidation. When reviewing SBIC program participation and investment, we are frequently asked for demographic information on SBICs and the small businesses that SBICs invest in. While the mission of the program is to supplement capital where it is not in adequate supply, the SBA and the SBIC program do not make decisions about which small businesses receive capital from SBICs. SBA provides a license and provides a government guarantee on investment dollars, but it is the SBIC that decides where and how those dollars will be invested. Over the years, I know some in Congress have discussed providing statutory direction on where those investments should occur. That is a discussion we would look forward to having with you, your staff, and program participants to determine how better to supply capital in those areas in our Nation that do not have an adequate supply. Let me also advise the Committee on implementation of legislation regarding licensing in under-licensed states, the Spurring Business and Communities Act. Recently, our office published guidance for potential applicants and the guidance is available on the SBA website. I am proud of the SBIC program and the SBA team that works diligently to facilitate investment in America's small businesses, and I look forward to working with the Committee. And I want to thank you again for the opportunity to testify today. Chairwoman VELAZQUEZ. Thank you, Mr. Shepard. I have consistently heard that the Office of Investment and Innovation is severely understaffed, and in your testimony before the Senate Small Business Committee you stated your office may need more people. Specifically, I am concerned with reports of needlessly long delays in approving licenses. Who currently heads the Office of Licensing, and how does the number of employees in that office compare to when you took over in early 2017? Mr. SHEPARD. I actually added two employees to the licensing office. Chairwoman VELAZQUEZ. When? Mr. SHEPARD. After I took over. After I took over in 2017. So I have added---- Chairwoman VELAZQUEZ. Who currently heads the Office of Licensing? Mr. SHEPARD. We have an acting director in that capacity. Chairwoman VELAZQUEZ. How many employees did the Office of Investment and Innovation have when you first took office in early 2017, and how many are there now? Mr. SHEPARD. Well, I can tell you that we are currently 91 percent staffed. Chairwoman VELAZQUEZ. Can you tell me how many were in the office in 2017 and how that number has changed? Mr. SHEPARD. I would have to look at that number. I do not have that information. Chairwoman VELAZQUEZ. Will you please send this Committee the response to that question in writing? Mr. SHEPARD. We have 76 now allocated. Chairwoman VELAZQUEZ. Okay. I just want to know---- Mr. SHEPARD. Seven that we are hiring. Chairwoman VELAZQUEZ.--how does that compare to. Mr. SHEPARD. Very good. Chairwoman VELAZQUEZ. I am holding an organizational chart here for your office and it shows that there are 69 full-time employees in your office, 5 vacancies, and 2 new positions. For the vacancies, how long have each of them been vacant? Mr. SHEPARD. I would have to get that information. Chairwoman VELAZQUEZ. And you will get back to us? Mr. SHEPARD. Absolutely. Chairwoman VELAZQUEZ. Just yesterday I looked on USAJobs myself to see how many job postings you have for your office and I found zero. How do you explain this after you testified before the Senate in June that you need more people? Why are those positions not on USAJobs? Mr. SHEPARD. I am not sure about why. I can tell you of the 76 that we have allocated to the program, that we are in the process of interviewing seven. Chairwoman VELAZQUEZ. Do you intend to fill the vacancies? Mr. SHEPARD. We are in the process. We are in the process of interviewing now and hope to fill those in the next 60 to 90 days. Absolutely. We are in the process now. Chairwoman VELAZQUEZ. Those vacancies have been vacant since when? Mr. SHEPARD. That information I will have to get to the Committee. Chairwoman VELAZQUEZ. How can we, as members of Congress, be assured that you are doing everything you can to have the appropriate staff when the positions are not even being posted publicly? Mr. SHEPARD. Well, we, again, have 91 percent of the office is staffed. Chairwoman VELAZQUEZ. I am not talking about the 91. I am talking about the fact that you went before the Senate Committee and you testified that you were in need, that you were understaffed. Since then, we checked online and you have no postings. Mr. SHEPARD. I believe what may have happened is they were posted, the postings closed. I know that we vetted the resumes. Chairwoman VELAZQUEZ. Okay. Mr. SHEPARD. The certifications. Chairwoman VELAZQUEZ. I only have 5 minutes. Mr. SHEPARD. Now we are in the process---- Chairwoman VELAZQUEZ. Will you get back to us? Mr. SHEPARD. Yes. Chairwoman VELAZQUEZ. Mr. Shepard, in SBA's Congressional Budget justification for fiscal year 2020, it says that the SBA will complete an evaluation to determine how the SBIC examination process can be streamlined. Until 2017, SBIC license approvals commonly took 1 to 2 weeks. That was in 2017. In fiscal year 2017, they took on average 3 months, and some took 6 months to a year for approval. In fact, from 2010 to 2016, 26 licenses were approved per year, but from 2017 to 2019, only 16 were approved each year. Why the delay? Mr. SHEPARD. I am not sure about those numbers and look forward to visiting with your staff more about them. I can tell you that when we looked at 2017 to 2019, in terms of average approval time, it was 7.03 months average for approvals. When we go back and look at 2014 through 2016, that number is actually higher. It is 7.2. Downward trend since 2013, but in 2018, we had 25 licenses. Chairwoman VELAZQUEZ. Let me ask you one last question because my time has expired. I would like to stay on the topic of licensing. Is it true that your office is contracting out a large amount of that examination work instead of doing the work yourself? Mr. SHEPARD. In licensing, we do not contract anything out other than FBI background checks with an interagency agreement. And we are seeking to---- Chairwoman VELAZQUEZ. Are you not contracting out examination work? Mr. SHEPARD. With examinations and the Examination Office, which is a different office than the licensing, we do contract work out. Chairwoman VELAZQUEZ. Will that explain the delays? Mr. SHEPARD. When I arrived, as I mentioned in my opening testimony, a little over half of the SBICs had been examined, half had not been. And so we needed to surge to get to 100 percent statutory compliance. We required contracting to do that because we did not have the staff to do it. Chairwoman VELAZQUEZ. My time has expired. I now recognize the Ranking Member, Mr. Balderson, for 5 minutes. Mr. Hagedorn is recognized for 5 minutes. Thank you. Mr. HAGEDORN. Thank you, Madam Chair. I appreciate it. Mr. Shepard, good to see you today. So yeah, very important program, part of the SBA. I mean, you have these businesses, great business models, ideas. They want to expand. Just need a little bit of help with the capital. And so we appreciate the intent of the program, and all the people who are trying to get behind it and do the job. I have heard similar things that the Chair brought up, that maybe there is some slow walking here or maybe not as much emphasis to our small businesses as they would like to see. I guess today they will have a chance to explain or talk a lot about that. But just in a general sense, how long does it take for these licenses to come about, and from a process of a small business to receive any capital enhancements, generally when they start the process, how does it work and how long does it take? Mr. SHEPARD. Well, the SBICs actually determine the investing to the small businesses. So how quickly that occurs is something between the SBIC and the small business concerned that receives the money. Mr. HAGEDORN. There is no kind of historical data to kind of give some indication as to generally how long it takes, or just every situation is so different you cannot track it? Is that what you are telling me? Mr. SHEPARD. I think there are differences about the due diligence required by an SBIC on a small business concern. Some are going to take longer than others. We will look into that information and be glad to sit down with you and share that. Mr. HAGEDORN. I actually represent a rural district in Southern Minnesota, 21 counties, and the largest city, Rochester, home to the Mayo Clinic is 115,000, and from there, you know, lots of small communities. But great small businesses ideas, and folks are expanding in our rural communities every day. And I know some of them could use the assistance of the SBA and this program. And I think last year the President signed a bill. Actually, the Spurring Business and Communities Act, which if I understand, a good chunk of that is supposed to be devoted or directed to small business opportunity in the rural areas. Do you have any update on how we are doing there? Have you seen an increase in small business activity that you contribute to in the rural areas? Mr. SHEPARD. Absolutely. We have been very focused because of last year's memorandum of understanding between former Administrator McMahon and Sunny Perdue, the secretary of Agriculture. We began taking on conferences and having conferences, talking about rural investing. We have had several outreach events, some of them I mentioned in my testimony, where we have community development workshops where we talk about rural investing, the need for rural investing. We have done a couple of those in Oklahoma, Arkansas, North Carolina, Maine. We also bring in the other Federal agencies. We do that in partnership with USDA, talk about their Rural Business Investment Company program, in conjunction with the SBIC program. Talk about Community Reinvestment Act credits. We often in those workshops have the FDIC, the Federal Reserve, and the comptroller of the currency there, to talk about that activity and how the financial institutions that are in those areas can invest in small business companies, Small Business Investment Companies; that is a way to channel, deploy their capital into a Small Business Investment Company that can then invest in those demographic areas that are rural. Mr. HAGEDORN. So in your opinion, the implementation of that act is on schedule or it is going well? I mean---- Mr. SHEPARD. Well, in terms of---- Mr. HAGEDORN. If I have had people tell me that they thought there was, again, a little bit of foot dragging, how would you respond to that? Mr. SHEPARD. The act, obviously, has been passed and the guidance is on our website. And we have not received any applications for that but it is on the website, and the guidance is there and the applicants can---- Mr. HAGEDORN. Should we a little bit more proactive rather than waiting for them to come to you? I mean, is it not part of your job to go out there and make sure that folks understand what is available? And maybe me, too. I should get more involved and understand the law better so I can help our small businesses when we speak. But perhaps that is something I can gain from you or your organization down the road if that would be okay. Mr. SHEPARD. Yes. And we bring that up every time we have a community development workshop. We talk about that. Mr. HAGEDORN. Okay. Thank you. I yield back. Chairwoman VELAZQUEZ. Thank you. The gentleman yields back. Now we recognize the gentlelady from Iowa, Abby Finkenauer, Chair of the Subcommittee on Rural Development, Agriculture, Trade, and Entrepreneurship. Ms. FINKENAUER. Thank you, Madam Chairwoman. And thank you, Mr. Shepard, for being here today. We know that Small Business Investment Companies, SBICs program started in 1958. SBICs we know have invested billions across our country creating jobs and creating opportunity all over the country. And one of those SBICs known today actually as AAVIN, a private equity, has operated in my district in Cedar Rapids, Iowa, since the beginning of the program. Partnering with SBA has allowed AAVIN to make decades worth of investments that have strengthened our local and our national economy. The company has grown jobs in my district, whether by giving a boost to Happy Joe's Pizza, which I think most people in Eastern Iowa are very happy that they did, or supporting the development of local telecomm firms. The SBIC program has done a lot for places like Northeast Iowa. But its continued success depends on how well SBA runs the program. And current management is exactly what I am concerned about here today. Let's take licensing, for example. SBA needs to efficiently issue licenses to investment companies so they can participate in the program, lend, and then also help our small businesses grow, obviously. But for the first 4 months of this fiscal year, the SBA did not issue a single license. I do not want the good work of SBICs and all that they do to actually be threatened simply because SBA seems to be asleep at the wheel in this regard. I understand your office has actually failed to simply even provide reasons for why an application has been denied, and I am wondering today, what is one of the more common reasons of why these applications are denied and these licenses are denied, and then why have applicants not been given reasons in the first place? Mr. SHEPARD. Thank you for the question. I do want to correct the assertion that applicants are not given reasons, because they are. And they always are. And not only might they be given a reason by phone or by email about why a denial occurred, we also give them an opportunity to perhaps re-do their investment plan so they can get an SBA license to operate an SBIC, because that is the intent of the program. Ms. FINKENAUER. So what is a common reason? Mr. SHEPARD. A common reason why a denial may occur? It could be maybe the investment plan is outside the regulations or the statute of what an SBIC should be investing in. So real estate, for example, the program does not do that. It does not do project management. So that could be an example of a reason. Ms. FINKENAUER. Would this be why SBA for the first 4 months did not issue a single license? Did they all fall under that reason, or what is the reason that SBA has not issued a single license in the first 4 months of this year? Mr. SHEPARD. Well, I can tell you that last year we issued 25. This year we are at 14. And we are continuing to work, before Monday, to do more. Ms. FINKENAUER. So what is your plan to reduce--I am glad to hear before Monday you are planning to do more, but do you have a plan moving forward here to reduce these delays in licensing approval? Mr. SHEPARD. Well, as we look at the approval process as I mentioned in my testimony, 2017 through 2019, we are showing 7.03 average, better than the 2014 to 2016 average. And always want to be more efficient, more effective, and process as quickly as possible, balancing our stewardship responsibility in terms of risk, but always trying to improve and do better. One of the reasons why I added two more people to licensing was just for that reason, to license, to speed that up if possible. Ms. FINKENAUER. Great. Well, it is very clear today but there are some tweaking that still needs to be done, making sure that folks are getting what they deserve and what they need to make these investments in our communities across the country and how important this program is. You know, we have a lot of work to do here and I want to make sure that we all take it very seriously and make sure again that folks get what they need and SBA is doing its job. So thank you, Mr. Shepard, for being here today. And my time is expired. Chairwoman VELAZQUEZ. Well, we have 21 seconds, and I would like for you to yield to me. Ms. FINKENAUER. I would love to yield to Madam Chair. Chairwoman VELAZQUEZ. The 7.3 is what? Is it per year? Is-- -- Mr. SHEPARD. 7.03 is an average from 2017 through 2019. Chairwoman VELAZQUEZ. The gentlelady yields back. Now we recognize Dr. John Joyce from Pennsylvania, Ranking Member of the Subcommittee on Rural Development, Agriculture, Entrepreneurship, and Trade. Mr. JOYCE. Mr. Shepard, thank you for being here. Madam Chair, thank you for hosting this very important meeting. Small businesses are the backbone to American industry. And in my home state of Pennsylvania, small businesses account for more than 99 percent of all the businesses. They have allowed us to achieve the sixth largest economy in the Nation, worth more than $700 billion annually. However, in the underserved and rural communities, like those that I am proud to represent in South Central Pennsylvania, obtaining capital remains a common barrier to growth. By leveraging private dollars with Federal dollars, SBA's SBIC program increases the availability of long-term capital to small businesses which may not be as attractive to the traditional lenders. Since 2019, SBICs have invested more than $1.8 billion in 393 businesses across Pennsylvania, with over $130 million invested in fiscal year 2018 alone. Pennsylvania's businesses have received financing from SBICs in 2016 that supported over 5,000 employees, and that number hopefully continues to grow today. But I have concerns. This program demonstrates that, yes, there is public policy that can succeed when it aligns with the power in the private market. But I am concerned, as other members have addressed this as well today, Mr. Shepard, about the apparent delays in the licensing process that have been noted in SBA's management review. Our Chair and our Ranking Member, Mr. Chabot, discussed the downturn in the number of approvals of licenses, and obviously, the number of dollars that go with them. It is not clear that we can justify why these numbers have decreased, and it is not an understanding that is something that is clear to me at this point from the dialogue and from the questioning from our Chair and from previous members. Now, you did testify in the Senate Small Business, and they obviously asked you these same questions in their hearing with you in February. Were you able to follow up and provide them with the answers to these questions: (a) why we are seeing a decreased number of license approvals; and (b) what is your plan? How do we move forward? We, as members of the Small Business Committee, who take this challenge so seriously, what is the message that you were able to provide to the Senate subsequent to that hearing, please? Mr. SHEPARD. We are in the process of getting answers back to the Senate, to answer your first question. Chairwoman VELAZQUEZ. That was in June? Mr. SHEPARD. Yes, ma'am. Chairwoman VELAZQUEZ. How long is it going to take? Mr. SHEPARD. I will have to check with our team and see where we are. Chairwoman VELAZQUEZ. No, you are in charge. Mr. SHEPARD. Yes, ma'am. Chairwoman VELAZQUEZ. You are in charge of the program. It is your responsibility. You knew that you were coming before this committee, and you also knew that we were paying attention to your appearance before the Senate Committee. How could you come here and not be prepared to answer? I am sorry; I will give you more time. Mr. JOYCE. Madam Chair, we are on the same page here. No apology is necessary. We take this charge quite seriously. And this Committee shares those concerns. Now, just for clarification, the Committee that you appeared for in the Senate was in February; correct? Mr. SHEPARD. June. Mr. JOYCE. In June, okay. So that meeting, and you are still preparing to answer those questions at this point in time? And we do not have any kind of ability to take this message of why there are so many delays in the licensing? Mr. SHEPARD. The answers will be forthcoming. But I want to correct the assertion about the licenses. I had mentioned in my opening testimony that there had been a downward trend from 2013, and that last year we had 25. So we had a good year last year, an upward tic. I mentioned that we are at 14 this year and aspiring to do more before the end of the fiscal year. In terms of the comment about rural, we would welcome the opportunity to visit with Committee to talk about how we might be able to channel and get direction from the Committee through statute to put more money in rural areas. Chairwoman VELAZQUEZ. Dr. Joyce, would you yield for a second? Mr. JOYCE. Yes, ma'am. Chairwoman VELAZQUEZ. Of the 25, how many were repeat applicants? Mr. SHEPARD. About half. Chairwoman VELAZQUEZ. Okay. Mr. JOYCE. Madam Chair---- Chairwoman VELAZQUEZ. Thank you for yielding. Mr. JOYCE. Of course. Madam Chair, if I might just continue. I think the message that I am going to ask you to take with you is that these loans, these licenses for rural, South Central Pennsylvania, for small businesses that cannot go and reach to traditional lenders, these are important. These are important for the growth of the people that we represent. This charge is taken quite seriously. I look forward to you to returning to us with those answers. And at this point, Madam Chair, I yield. Chairwoman VELAZQUEZ. The gentleman yields back. Thank you. I now recognize the gentlelady, Ms. Davids, from Kansas, for 5 minutes. Ms. DAVIDS. Thank you, Chairwoman. Mr. Shepard, my hope was to talk with you about the diversity issues that we are seeing in women and minority-owned businesses' investments and how the SBIC program impacts those. I think I can just make a blanket statement that when investments are not being made, it disproportionately affects marginalized communities. And after the line of questioning that we have heard so far, a number of concerns have come up that I think I would like to just follow on. One is when you testified before the Senate Committee and indicated that you were not sufficiently staffed, my question is if you are not advertising on USAJobs, how are you finding people? You said you are in the process of going through applicants. What is the other mechanism that you are using to find applicants? Mr. SHEPARD. If I may, we did post on USAJobs. Those postings have closed and we are interviewing for those seven positions now. So it went on, came off, and now we are going through the interview process. USAJobs is the primary location that our Human Resources Department uses to advertise. Ms. DAVIDS. Okay. That would have been a good response to the question about the USAJobs earlier. So to follow on one of the lines of questioning from Ms. Finkenauer, the 4 months that you did not issue any licenses, have you evaluated what the impact of the failure of the program to issue licenses has had on the investments that would have taken place? And what the low number as compared to last year, what the impact of that is? Because the program is supposed to be helping spur investment and innovation, and if you are at half the number of licenses as you were last year, just over half, then how are you looking at the delta between last year and this year? Mr. SHEPARD. Well, again, we did issue 25 last year. We are at 14 now, and we have more that we are processing currently this week. Ms. DAVIDS. So we are in September. Mr. SHEPARD. Right. Ms. DAVIDS. How many more months are left in the timeframe that you are talking about? Is this the fiscal year or is this the calendar---- Mr. SHEPARD. Fiscal year is what I am talking about. Ms. DAVIDS. So are you going to issue nine more licenses in the next 2 days? Mr. SHEPARD. We are not going to issue nine more licenses in the next 2 days. Ms. DAVIDS. Not nine? Mr. SHEPARD. Maybe four, we hope. Ms. DAVIDS. Okay. So are you planning on evaluating the negative impact on investments that, I mean, this body has allocated and started a program that has been successful and has helped a lot of businesses thrive. Have you looked at the negative impact that the failure to issue licenses is going to have? And if not, do you plan to? Mr. SHEPARD. We issue licenses as quickly as possible. I mentioned the downward trend. I mentioned about what we did last year. Our licensing times are in a good place when you look at 2017 to 2019, and so we are doing---- Ms. DAVIDS. Can you explain to me what ``in a good place'' means? Mr. SHEPARD. Well, when we compare 2017 to 2019 with the 7.03 average license time compared to the 3 year period prior, 2014 and 2016, we have beat that. So from a processing standpoint, we have done a better job than from 2014 through 2016. Ms. DAVIDS. You have done a better job of processing but not actually licensing? Mr. SHEPARD. Those are actually---- Ms. DAVIDS. You have done a better job of denying licenses? Mr. SHEPARD. No. Actually, our denials are better. We have done fewer denials in that 2017 to 2019 period. But to clarify my point, we have actually licensed quicker. So applicants that have come in received an SBA license to operate an SBIC, that is what I am referring to when I mentioned the 7.3 number. Ms. DAVIDS. Okay. So I have another question I am going to submit in writing. But can you tell me what the consequence is? I saw that you have previously had leadership positions in venture capital, investment banking, private equity, investment fund management. Can you tell me what happens usually in the private sector when you fail to perform at the same level that was previously performed at in terms of investments? Mr. SHEPARD. Well---- Ms. DAVIDS. What would happen if you showed up and talked to your private equity investors and said we normally invest in 25 companies but this year we only did 14? Mr. SHEPARD. I think it would be a good idea to visit with the staff about capital formation, which we do not control. We can only process the applicants that come in to the program. So that is part of what I am trying to convey is that we do not control capital formation. We do not control the formation of the SBICs. We can encourage it, but ultimately, they have to raise the capital and they have to come in. And they do come in. Ms. DAVIDS. Okay. I have gone over my time but that is the second time that you have put the onus of responsibility for this solely on your staff. And that to me is questionable leadership. And we will follow up with additional questions in writing. I yield back. Mr. SHEPARD. And if I may, the staff is doing a wonderful job. I am really talking about capital formation that takes place in the marketplace that is beyond the SBA's control. Chairwoman VELAZQUEZ. Time has expired. The gentlelady yields back. Now we recognize Mr. Balderson, from Ohio, Ranking Member of the Subcommittee on Innovation and Workforce Development for 5 minutes. Mr. BALDERSON. Thank you, Madam Chair. Good morning, Mr. Shepard. Overall, how is the performance of the program today compared to 5 years ago? Mr. SHEPARD. We have had the challenges that I have mentioned with technology, which we have improved. We had the challenges with the examinations, which we have taken to 100 percent. Five years ago we were not examining at the level that we are now with 100 percent compliance. So we have improved in the areas of technology. We have improved in the areas of--I have mentioned licensing approval time several times. Our denials are down. We deny fewer. So IT improvements, licensing improvements, and with our modernization efforts, and especially examinations, it has improved drastically from not examining, which is a statutory requirement in the Small Business Investment Act. What I inherited was about half had not been. Now we are at 100 percent, much better there. Mr. BALDERSON. Is there more risk today than there was 5 years ago? Mr. SHEPARD. In terms of size, there is more, certainly more capital at risk, $4.2 billion of SBA guarantees. So if you look at the amount of capital that is in the marketplace with the program with the guarantee, that could be one argument that there is more risk. Mr. BALDERSON. So if the performance is good, then why the downturn? I mean, some of the performances you have stated and you answered one of the questions I have asked. If it is good, what is the downturn? Mr. SHEPARD. In terms of licensing activity? Mr. BALDERSON. Yes. Yes. Mr. SHEPARD. The 2013 through 2017, sometimes explaining what happened in 2013, to 2014, to 2015, to 2016, constriction in the private equity industry, fewer people coming in. Again, we can only process applications that come in to the SBA. Why there were fewer from 2013 and why that downward trend occurred, we do not know the answer to that. Again, we can only process those applications that come in to the SBA. Mr. BALDERSON. So now, are the applicants up or down? Mr. SHEPARD. Well, last year we had 25. The previous year had been the downward trend. Mr. BALDERSON. Okay. Mr. SHEPARD. So up when comparing that downward trend to last year. Mr. BALDERSON. Okay. In your testimony, you discussed many of the challenges faced by small business investors. You go on and talk about the risk that creates for the American taxpayer. All right. Second panel. All right. So I am going off what the Ranking Member had here. Madam Chair, I yield back my remaining time. Chairwoman VELAZQUEZ. Okay. The gentleman yields back. The gentlelady from California, Ms. Chu, Chairwoman of the Subcommittee on Investigations, Oversight, and Regulations, is recognized for 5 minutes. Ms. CHU. Mr. Shepard, I want to recognize the success of the SBIC program, which is amongst the oldest at SBA. This program would help countless small businesses to secure capital and financing that they otherwise could not access through traditional private equity firms and is responsible for millions of new and sustained jobs at minimal cost to the government, and it is a priority for both Democrats and Republicans in Congress because it is so successful. That is why I have a bill, H.R. 116, which would increase capital for SBICs, and it was passed at the House at the beginning of the Congress and is currently waiting consideration in the Senate which would allow banks to invest up to 15 percent of their capital and surplus into one or more SBICs subject to the approval of the appropriate Federal bank regulators. And that is an increase from the current allowed percentage of 5 percent. However, I believe that the SBA is not taking this program seriously. And one reason for the downturn in approvals could be the lack of outreach to potential SBIC applicants. The Small Business Investment Alliance has criticized your department for failing to effectively conduct outreach to prospective SBIC applicants. For example, they cite that at a recent event in New York, you attracted only one audience member. And in May 2019, they reported that you held an outreach event in Maine and disinvited the state's only licensed SBIC from attending. So I would like to ask you, Mr. Shepard, about why there is this lack of outreach to potential applicants. I mean, we know that the SBA struggled to attract more women and minority-led SBICs, but we know that SBICs make more investments in minority and women-owned small businesses than their counterparts. Why this lack of outreach, and what are you going to do about it? Mr. SHEPARD. Well, I had mentioned in my opening testimony that the last 3 years we have actually had 50 engagements, external engagements. We talk about women and minorities. We talk about rural. We talk about the SBIC program. We talk about the need for the program. Ms. CHU. Mr. Shepard, you said 50. Do you have the attendance figures for them? Because we talk about one person attending. Mr. SHEPARD. I can get those for the Committee in terms of attendance. Ms. CHU. I mean, you can hold all these events but there could be no actual outreach to people. So nobody is attending. Mr. SHEPARD. Well, the intent is to outreach, is to inform, is to educate, and that is the intent of having these engagements, the close to 50 we have had the last 3 years. Ms. CHU. Well, I would like to follow up with other lack of classes that you are supposed to be holding. SBA's standard operating procedures require SBIC licensees to attend an SBIC regulations class but your office has reportedly not held or scheduled any in-person regulation classes since November 2019. The SBA website, however, still states that this training takes place several times per year in Washington, D.C. Why has there not been an in-person training session held in nearly a year? Mr. SHEPARD. Well, let me first say that no one has been held back or denied leverage or a license because of that. That provision is being waived currently by the program office. We are discussing a new model and a new way to do it, an online certification. We do not think it makes a lot of sense of the staff to have to have a 1-day training seminar and have people come in to Washington, D.C. to do that. So going into fiscal year 2020, the intent is to and will be to have an online certification for that and revise the provision accordingly. Ms. CHU. Well, you should make it clear in your standard operating procedures if that is what you are doing. I would like to address another issue, which is that you have voiced some concern that SBIC programs have grown too quickly and left the taxpayer overexposed with $14.2 billion in capital guaranteed by the SBA. But actually, SBA leverage is provided to SBICs at a zero subsidy rate and is eventually paid back in full to the government. And in fact, if an SBIC's portfolio loses money, private investors' capital must be completely exhausted before the SBA guaranteed capital is impacted. And so while the SBA can guarantee up to $175 million per SBIC, the program actually operates at zero subsidy and does not require any congressional appropriations. In fact, the program even managed to maintain its zero subsidy rate throughout the Great Recession. My time has run out, but let me say that it is false to say that the SBIC program has grown too quickly and is leaving the taxpayer overexposed. Mr. SHEPARD. May I respond? The context in which that statement may have been made may have been in regard to the subsidy model. And in 1992, a subsidy model was put in place to oversee the SBIC program it had $900 million in SBA guarantees. My comments were it has been 27 years. We are using the same subsidy model. It has grown from $900 million to $14.2 billion in SBA guarantees. The Federal Credit Reform Act came out in 1992. Again, using the same model, let's revise the model to make sure that taxpayer losses do not occur. So that is the intent. Chairwoman VELAZQUEZ. Time has expired. The gentlelady yields back. Now we recognize Mr. Hern, from Oklahoma, Ranking Member of the Subcommittee on Economic Growth, Tax, and Capital Access, for 5 minutes. Mr. HERN. Thank you, Madam Chairwoman. It is really good to be here today as a small business owner and business man, job creator for over 34 years. This is near and dear to my heart. As the Chairwoman said, I also Chair the Subcommittee, Ranking Member on the Subcommittee on Growth, Tax, and Capital Access. Access and capital is very important. And so for that I am very supportive of what hoe SBIC is and what it is about but I am also very concerned about the lack of utilization. The Chairwoman mentioned and asked you the question of how many of the 25 were new applicants and you said about half for last year. So of the 14, let's get clarity on that. Of the 14, how many of those are new for this year? Mr. SHEPARD. I do not have the exact statistics on that but can get it to the Committee. Mr. HERN. So let me ask a question you might know. So what is your office budget? How much is the budget that supports you and your office, your staff? Mr. SHEPARD. $1.8 million. Mr. HERN. So you have got a $1.8 million budget and you cannot know the makeup of only 14 applications that 70 something people are processing this year. And like my colleague from Kansas said, asked you the question, you are going to try to hit that number this fiscal year which closes on Monday, try to make up the difference between 25 and 14? Mr. SHEPARD. On the 14 number, Congressman, four are first- time applicants and 10 are subsequent applicants. Mr. HERN. So I would say with 70 office folks working, analysts or whatever they care called, folks in your office, you processed four new applications this year? Mr. SHEPARD. Actually, 14. Mr. HERN. Of the 14? Mr. SHEPARD. That is where we are currently today. Mr. HERN. Right, but 10 of those are repeats. Mr. SHEPARD. Ten are repeats. Mr. HERN. So it is pretty easy to figure out if they are performing or not, so I would think that process is not the same as somebody that is coming in brand new that you are trying to do the examination on. So only four had a complete examination done, I would assume because you are monitoring these performances along the way; is that correct? Mr. SHEPARD. It is. And we are staying within that 5 to 8 month application licensing process time that I mentioned earlier. Mr. HERN. So I am going to borrow some data from the Senate Small Business hearing that said that the normal approval rate is roughly 20 percent but now it is 11 percent. Do those numbers mean anything to you? Mr. SHEPARD. I would have to check those numbers. I am not sure about those figures. Mr. HERN. I would have thought that after the Senate Small Business Committee that you would probably be really tuned up to really defend yourself when you came here but it does not appear that. We are kind of getting the same responses that the Senate got. So I guess for once, we are all being treated equally and we are getting the same information as the Senate and the House together. Mr. SHEPARD. And Congressman, if I may. Mr. HERN. Sure. Mr. SHEPARD. In terms of annual, the denials that have occurred in 2017 through 2019, we only had 5.28 denials per year on average. The previous 3-year period it was a larger number. From 2014 through 2016 it was 8.96 denials per year. So I am not sure if that is what we are getting at, but I am certainly happy to get with your staff and with this Committee and provide that information for more clarity. Mr. HERN. So let me ask this question. How do you attribute, or what do you attribute to the reason for the lack of utilization of this program? You said it is not your people and I appreciate that. So if it is not your people, the program is the same, the economy is growing, is it lack of leadership? I mean, what is it exactly? Mr. SHEPARD. Well, you are asking about---- Mr. HERN. I mean, I am not asking you to self-incriminate, but there is not a whole lot in business. Things kind of stop at the top. Mr. SHEPARD. Thank you for that question. You are asking about the decline from 2013 through 2017 that occurred. We would like to study that more. We have got in our budget to do to study. Mr. HERN. Can I stop you? Because I am going to run out of time here. But going from 25 to 14, you do not have to go back very far to see that you are performing at about a 50 percent rate from one year over the next. Does that not concern you at all? Mr. SHEPARD. Well, we can only process the applicants that are in the licensing queue. We cannot control the number of applicants that---- Mr. HERN. Does it not concern you that if you have got zero, so you just, I mean, we are okay with just spending taxpayer money? I mean, that is why people dislike Washington, D.C. There is zero accountability, and that is what we are trying to do is provide oversight. What the Senate asked you to do is provide information back. We are asking almost identical questions that the Senate asked in June, you know, some 3 months ago. I cannot imagine if you are not doing any applications really what you are doing a whole lot of, so I would think that you could respond very quickly. And here we are. We are getting the same responses they go. And so I guess we will wait in perpetuity for the answers, but I know the Chairwoman is pretty passionate about this, and I doubt that she is going to let you go very long. Mr. SHEPARD. Well---- Mr. HERN. My time is expired, Madam Chairwoman. Chairwoman VELAZQUEZ. The gentleman yields back. Thank you. Mr. SHEPARD. If I may? Chairwoman VELAZQUEZ. No, the time has expired. I now recognize Mr. Stauber, from Minnesota, Ranking Member of the Subcommittee on Contracting and Infrastructure for 5 minutes. Mr. STAUBER. Thank you very much, Madam Chair. And I really appreciate the opportunity to speak and you holding this. Mr. Shepard, I am not going to pile on but I will tell you that I, too, am a business owner for 30 years. If the success rate my brothers and I had in our small sporting goods store in Duluth, Minnesota, if we operated at your efficiency, we would have been out of business a long time ago. So I will tell you this. I think you know that small business is the engine of our economy. And when you do not support them the way we have asked you to, it is a detriment to Main Street America and Main Street Minnesota. The economy is going good. We have people, we have in particular women that want to get into small business. It is an opportunity to live the American dream. And I am just going to say that this member of Congress is extremely disappointed in what is happening in this program, and it needs to be fixed. And I do not think you have a lot of time to fix it. Thank you, Madam Chair. Chairwoman VELAZQUEZ. The gentleman yields back. Let me take this opportunity to welcome Mr. Bishop, from North Carolina, to the Committee. Mr. BISHOP. Thank you, Madam Chairman. I am delighted to be with you and I am learning already. Chairwoman VELAZQUEZ. Okay. Thank you. Mr. Shepard, thank you very much for taking time to walk us through our many questions. You know that you have to get back to us---- Mr. SHEPARD. Correct. Chairwoman VELAZQUEZ.--with some of the responses that you were unable to provide today. And I hope you will get back to us by end of business next Friday. I am sure we will stay in touch on this issue in the coming months, and you are now excused. We will now take a moment while we get our next panel settled. Thank you. Mr. SHEPARD. Thank you. And always welcome the opportunity to come before you and your staff and program participants. Thank you. [Recess] Chairwoman VELAZQUEZ. Welcome to our witnesses on today's second panel. I will take a minute to introduce each of you before you give your testimony. Our first witness today is Mr. Brett Palmer, President of the Small Business Investor Alliance. In this role he works to foster a healthy environment for small business investing and a strong and profitable lower middle market. Mr. Palmer served in the executive branch as a presidential appointee in the Commerce Deparmtent as Assistant Secretary for Legislative Affairs and as the previous Deputy Assistant Secretary for Trade Legislation. He holds a history degree from Davidson College. Welcome. Our second witness is Dr. John Paglia. Mr. Paglia is the Senior Associate Dean of Academic Affairs and a professor of finance at Pepperdine University. A recognized expert on the topic of small business financing, Dr. Paglia has delivered over 50 presentations, including over a dozen keynote addresses. He was awarded in 2016 with a consultancy contract with the Library of Congress Federal Research Division as a private equity and venture capital expert to conduct research on the economic impacts of the SBA's SBIC program. Welcome, sir. Our next witness is Ms. Ronda Penn, the Chief Financial Officer of Plexus Capital, located in Raleigh, North Carolina. She has 17 years of experience in public accounting with Dixon Hughes Goodman, LLP, where she served as an audit partner with a primary focus on private equity funds. Ms. Penn also has specialized knowledge with private equity funds, which include regulatory reporting and investment accounting related to small business investment companies. She is a graduate of the University of North Carolina at Greensboro, where she earned a Master of Science in Accounting. Welcome. Our next witness is Mr. Walt Rodgers, who was supposed to be introduced by the Ranking Member but I believe he is now in the Judiciary Committee. Mr. Rodgers is Chief Executive Officer of the Family RV Group, with multiple locations throughout southwestern Ohio and across five states. Family RV opened its doors in 1968 as Corian RV. Today, Family RV is a wide- encompassing dealership that also sells parts and accessories. Mr. Rodgers joined the company this past February but has a long history of leadership roles with numerous companies. You are welcome, sir. And now, Mr. Palmer, you are recognized for 5 minutes. STATEMENTS OF BRETT PALMER, PRESIDENT, SMALL BUSINESS INVESTOR ALLIANCE; JOHN PAGLIA, PROFESSOR OF FINANCE, GRAZIADIO BUSINESS SCHOOL-PEPPERDINE UNIVERSITY; RONDA PENN, CHIEF FINANCIAL OFFICER, PLEXUS CAPITAL; WALT RODGERS, CHIEF EXECUTIVE OFFICER, FAMILY RV STATEMENT OF BRETT PALMER Mr. PALMER. Thank you very much, Madam Chairwoman. Chairman Velazquez, members of the Committee, thank you very much for holding this hearing. My name is Brett Palmer. I am president of the Small Business Investor Alliance, the trade association that represents small business investors and Small Business Investment Companies in particular. We appreciate you having this hearing. Small Business Investment Companies, commonly called SBICs, are highly regulated, private equity and venture capital funds that invest exclusively in domestic small businesses. They invest across the country to states and places that are often passed by or passed over. They provide long-term capital and cannot be used to offshore jobs. The debenture leverage that the SBICs can access has maintained a zero subsidy for decades, including through the financial crisis and the Great Recession. And these are not just my assertions, they are the law. They come from SBA data, and they have been documented by independent research. One of the researchers is to my right and a former teacher of mine. I think everyone can agree that the following facts and findings by those independent researchers are pretty impressive, that SBIC-backed businesses created over 3 million net new jobs. That is a lot of jobs. The cost to the taxpayer to create these job was about $35 for each new job created. That is a fantastic return on investment. SBIC capital is spread much more evenly across the United States and is not concentrated in the money hubs of Silicon Valley or Wall Street. SBICs get money to where it is needed. The majority of SBIC funds invest in traditionally undeserved regions of the United States, particularly Kansas, Minnesota, Nebraska, North Dakota, South Dakota, the Upper Midwest, Alabama, Kentucky, Mississippi, Tennessee. These are not the bastions of capital but there are a lot of Americans there and there are a lot of small businesses. It is a great opportunity. And it has been touched only a very little, but manufacturing matters. And SBICs invest heavily in manufacturing. SBICs have been found to invest in all seven major industrial sectors. This is a national program with national benefits. I think if you asked everyone on this Committee, and I think you have heard some of that day, every member and every member of Congress, and every one of your constituents, they would all agree that we need more small business investment and not less. And the Trump administration Congress clearly want more small businesses growing, particularly manufacturing and particularly in ways that keep jobs here in the United States and not offshored. Now, the second part of my testimony makes me distinctly uncomfortable because I do not like having to say this but the truth is what is going on is a bit bizarre, that the only person who we are not sure supports these goals is the person paid by the taxpayer to promote small business investment. His actions and record run completely counter to the statutory mandate of the program and to the small business agenda. His management model could be summarized as linger, languish, and fester. This does not benefit anyone, particularly small businesses. The testimony given by the SBA this morning, which is all of a page and a half, half of which is hello, how are you, and not a lot of substance, compared to--it is kind of pathetic--compared to our testimony which is kind of a catalogue of incompetence. I mean, you do not normally see congressional testimony the size of a small phone book. But we have to document it because the record is clear and the record is true and the record is not pretty. The licensing for new small business funds is down 46 percent for the first 3 quarters of this year. Leverage reserved, a leading indicator for future small business investments, is down 39 percent and it is on pace to be down 50 percent for the year. That represents billions of dollars of small business investment that just will not happen. You heard some statistics today, they are a little bit odd, from the previous witness, about how in 2018 they licensed 25 funds. Well, that is true because the previous year he stopped licensing. So if you suddenly jam up the pipe and then suddenly you get a pop at the end, hey, are you not doing great? Not so much. In 2017, for example, there were 15 funds licensed. I think the number of 11 of those were licensed before he got there on January 20th. The remaining four were from the following 8-1/2 months. And so the idea that it popped up to 25, we are doing great, that is not so great. Fourteen licenses with 2 or 3 days left in the fiscal year is not an impressive number. He has spent significant funds, maybe wasted, we do not know, on contractors, while refusing to hire mission-critical positions and managers. And frankly, I think you heard some misleading testimony earlier. Yes, there were two people added to the licensing team, but they were taken from the program development team. The program development team is in charge of recruiting new funds, particularly women and minorities. So you take away from one, you move it to the other and you say you added two. And by the way, in the process you undercut the ability of bringing in new funds to undeserved areas and undeserved people. That to me is not a recipe for success. He also touched on all the efforts and time spent on IT. Yes, the SBA's IT is in need of improvement and we have been for a long time advocating for updating that. But a lot of money has been spent, there has been no progress made, and instead of things getting better, earlier this summer the entire SBA regulatory reporting system collapsed. And in that collapse they lost a whole lot of regulatory data. SBIC funds had to go reenter the data once it was opened, and once it was opened they could do it but that was thousands of man-hours and a lot of money. That is just not how a financial regulatory system should work. So if you spent all the last 2-1/2 years trying to upgrade your IT and spending taxpayer money to do it, should it not be getting better? The mismanagement is creating unnecessary risk to the taxpayer while harming capital access. That is not the way it is supposed to go. Further, the associate administrator repeatedly blocked congressional requests from Republicans and Democrats, House and Senate, for a taxpayer funded study on the impact of the SBIC program. Why was Congress and the public denied access to the report for over 2 years? Was it because the Library of Congress said the study is working and living up to the statutory mandate? The report he hid from you was released only when we used the Freedom of Information Act to pry it loose. This is another example that this is not just mismanagement, it is hostility. And there is a lot more I can say and a lot more I will. I welcome your questions and your comments but we are begging you to get the leadership of this office to allow the program to work. So thank you very much. Chairwoman VELAZQUEZ. Thank you, Mr. Palmer. Mr. Paglia, you are recognized for 5 minutes. STATEMENT OF JOHN PAGLIA Mr. PAGLIA. Dear Chairwoman Velazquez, Ranking Member, and members of the Committee on Small Business. My name is John Paglia. Thank you for the opportunity to testify before you today. Sound deployment of capital in the U.S. is central for promoting economic growth, and I am grateful for the opportunity to speak to you on this important topic. I grew up in a household where my parents owned and operated small businesses, so this topic is very personal. I also worked closely with small businesses as a CPA, business appraiser, consultant, advisor and corporate director. At Pepperdine University, where I am a professor of Finance and senior associate dean at the Graziadio School of Business, I co- founded our Pepperdine Private Capital Markets Project in 2007, which provides lenders, investors, and the businesses that depend on them with critical data to make optimal investment and financing decisions. As part of this research, I also co- led the launch of our Pepperdine Private Capital Access Index, a quarterly economic indicator designed to measure the demand for, activity, and health of the private capital markets. I would like to share three key observations revealed in our most recent Pepperdine Private Capital Access Index Survey based on data collected from July 18, 2019 to August 2, 2019. First, 56 percent of small business owners surveyed indicated it is difficult to raise new equity financing. Fifty- nine percent indicated it is difficult to raise new debt financing. Second, 60 percent of small business owners say the current business financing environment is restricting growth opportunities for their businesses. Fifty-four percent indicated it is restricting their ability to hire new employees. Third, 39 percent of businesses are planning to raise funding in the next 6 months. If unsuccessful, 68 percent cite slower business growth, and 46 percent indicate they would have to reduce their number of employees. So the consequences of small businesses not obtaining capital and financing timely are potentially severe and detrimental to overall economic health. One such program that has demonstrated success providing much needed small business funding is the Small Business Administration's SBIC program. Fairly recently, during 2015 to 2017, I had the honor and privilege of working with co-author professor David Robinson at Duke University and the Federal Research Division of the Library of Congress to produce three research papers studying the SBIC program. Our research addressed the general topics of diversity and inclusion, job creation, and SBIC's fit into the broader financing landscape. Based on our analysis, we concluded that the SBIC program has demonstrated relative strength with respect to diversity and inclusion, success on the job creation front, SBIC-backed companies created nearly 3 million jobs from 1995 to 2014, and a more balanced funding distribution in the small business financing landscape across company sizes, industries, and geographies. But there remains work to be done. Small businesses could benefit by having more capital available, as well as expedited access to funding, especially as needs arise and their capital structures change. Finding ways to achieve faster and more efficient capital deployment would increase their chances of success and serve to further job creation and economic growth. Small business financing and capital formation would also benefit greatly with increased transparency and robust educational programming. Small businesses have at best a moderate understanding of how to efficiently and effectively navigate the financing and capital markets to get the money they need. Accordingly, when small businesses need financing and capital, some freeze and choose not to pursue, or spend lots of time chasing opportunities that are not a good fit. If they do pursue funding, their mindset is do I qualify for funding versus a larger company mindset of what is the price of funding? In summary, despite the successes of various programs, including the SBIC program, small businesses continue to struggle to find the financing and capital they need to grow and hire new employees. Reducing frictions in the system, increasing transparency and educational opportunities, and increasing the amount of capital available would serve to further strengthen the foundation for economic growth. Thank you again for the opportunity to share these points. I am happy to answer any questions and address comments. Thank you. Chairwoman VELAZQUEZ. Thank you. Ms. Penn, you are now recognized for 5 minutes. STATEMENT OF RONDA PENN Ms. PENN. Madam Chair and members of the Committee, thank you for holding this hearing, and thank you for asking me to testify. I am Rhonda Penn, and I am the chief financial officer for Plexus Capital. Plexus Capital is a small, North Carolina-based company, and we are helping small businesses in the United States do big things. I am excited to talk to you about the program today that has allowed our team to stay focused on supporting perpetually undeserved small businesses. My team at Plexus has managed SBICs for 22 years and witnessed the success of the program. I have personally worked with multiple SBICs and the SBA staff for more than 24 years. The sole purpose of the SBIC program is to provide capital to small businesses. Plexus invests in Main Street America small businesses across all industries. We are currently operating our fourth SBIC fund. It is a $400 million fund, and we are over 80 percent invested at this time. We have a good working relationship with our analyst, Raoul Rodriguez at the SBA. We speak often. He genuinely cares about the program and he works hard. He offers advice on how we can improve, and I am happy to do the favor and give it back to him. Together with the SBA, Plexus has invested $1 billion in 108 small businesses. We consider the SBA our partner and our largest investor. Our profit capital investors include banks, individuals, family offices, and institutions. We have raised $475 million of private capital. And this is key as to why this program is unlike any other public-private partnership as far as I know. In other programs, public money is put at risk alongside private money or ahead. But the SBIC program is unique in that it operates at a zero cost to taxpayers, and we, along with our partners, put our capital at risk first. But the real story of the SBIC program is about people, jobs, and communities behind the businesses that we support. Often we are measured based on financial metrics, but the driver behind every return we generate includes real people with families impacting their communities like the 26 employees at Plexus capital and the thousands of employees at the 108 small businesses that we support. I will share with you just a few stats about the investments at Plexus. More than 80 percent of Plexus investments are in smaller concerns. The SBA defines a smaller concern as a business that has less than $6 million in net worth and less than $2 million in average 2 years of net income. More than 20 percent of Plexus investments have been in low to moderate income zones. More than 40 percent of Plexus investments are businesses owned by minorities and veterans. Overall, revenue growth for all Plexus investments has increased by more than 30 percent over the life of the investments, and jobs have grown by almost 30 percent during that time. So I have talked about the importance of the program, how it impacts people and communities. I just want to speak briefly about the future of the SBIC program. There are approximately 100,000 small businesses with sales between $10 and $100 million. Roughly 50 percent are owned by baby boomers. The continuity of these businesses and the millions of jobs in these businesses are dependent upon the successful transition of the estimated $2 trillion of ownership to the next generation of owner-operators. These small businesses need the SBIC program. To conclude, the SBIC program is a vital source of capital to small businesses. It is a prime example of how the Federal Government and private sector can work together to grow the economy and create jobs. I am thankful to this Committee for your support of the program. Plexus stands committed to pursue opportunities to strengthen the program with you. Thank you. Chairwoman VELAZQUEZ. Thank you, Ms. Penn. Mr. Rodgers, you are now recognized for 5 minutes. STATEMENT OF WALT RODGERS Mr. RODGERS. Madam Chair, congressmen and congresswomen, it is an honor to be here today testifying in front of the Committee. My name is Walt Rodgers. I am the CEO of Family RV Group, formerly Colerain RV. Founded in 1968 by the Jung family, Colerain RV started as a small, family-owned RV dealership in Cincinnati, Ohio, with little more than 10 campers for inventory. Today, just over 50 years from those humble roots, the company has expanded to include dealerships throughout Ohio, Kentucky, Indiana, Tennessee, and Georgia. Given the unique nature of our business, the patient and flexible capital from our SBIC partners Northcreek, Spring, and Resolute, has been instrumental in facilitating and expediting this growth. Before proceeding about the impact of the SBIC program, I would like to provide a little bit more detail about the history of the Family RV Group. In the late 1960s, Charles and Lolly Jung decided to undertake the challenge of opening an RV dealership. With only a few campers on a lot and a sign on a small home, Colerain RV was born in a northern suburb of Cincinnati. The bootstrap effort instilled a focus on family and customer service and still remains a core value of our company today. By 1975, Colerain expanded to nearly 100 vehicle operations with brands including Mallard, Thunderbird, and StarCraft trailers. Over the next 20-plus years, not only did the company's stock expand, so, too, did the impact and influence of the Jung family. In 1988, Chuck Jung joined the family business to help his parents operate and grow operations. Shortly thereafter, Chuck was followed by his brother Steve and the two siblings led the company through another period of growth and success. The company relocated to its current 12-acre Cincinnati facility in 1996, and given the rapid growth, brought on Wade Stepp, an operating partner and owner with extensive industry knowledge in the early 2000s. Wade, Chuck, and Steve made the decision of the next decade to focus on geographic expansion, acquiring single store locations in Dayton, Columbus, and Indianapolis, Indiana. By 2015, the company started looking for the next growth avenue. The addition of three new facilities began to strain the infrastructure, and rather than continue growing slowly in location by location, management realized the need to acquire not only additional talent and resources to support these operations, but also the opportunity to expedite growth through larger and more frequent acquisition activities. This impasse led to the transaction that involved Northcreek, Spring, and Resolute in January of 2016. Kidd and Company, a Connecticut-based private equity firm led the transaction providing and arranging capital to recapitalize the business, refinance Colerain's existing debt, increase cash needed for working capital, and acquire assets of Northside RV in Lexington, Kentucky. Given the many uses of capital and overall need, debt was required to properly finance the company while maintaining the flexibility needed to pursue growth opportunities beyond Northside. However, as an RV dealership, the main source of bank financing is floorplan debt, which allows companies like ours and automobile dealerships to pursue the expensive inventory essential for our stores and showroom. It can often be difficult to find other lenders that are willing to provide additional debt alongside or below such a facility. Despite the uniqueness of our situation, our SBIC partners were able to get comfortable with the transaction structure and business in general to provide the capital we needed. I truly believe that the distinct characteristics of the mezzanine debt provided by Northcreek, Spring, and Resolute, specifically the lack of amortization and willingness to be subordinated to the senior floor plan, provided the perfect solution for our needs and not only gave Colerain the necessary growth capital and flexibility, but allowed us to secure the initial floor plan facility and larger ones thereafter that may not have been possible with other capital providers. That transaction in 2016 immediately impacted the growth of the company with the acquisition of Northside. The addition of this platform and its assets created the Family RV Group and immediately increased revenue to nearly $120 million, while expanding the company's workforce from 130 to 180. With that acquisition, the group has completed another transaction, Dunlap RV, under the Family RV Group with locations in Nashville; Knoxville; Ringgold, Georgia; and Bowling Green, Kentucky. Though no direct capital was provided by our SBIC investors in this instance, the lack of amortization on their debt facilities allowed us to build cash on the balance sheet. By the time the Dunlap transaction needed to be financed, we had accumulated enough cash to fund the acquisition ourselves. Not only did this flexibility allow us to add Dunlap but also position and capitalize Family RV for further growth. Today, Family RV is an over $180 million business. It is continually looking to grow, improve, and support communities in which we operate. As I mentioned before, our business now employs some 300 American workers, more than twice that were employed in 2015. When the Jungs opened their single location mom and pop shop in Cincinnati, they never---- Chairwoman VELAZQUEZ. Mr. Rodgers---- Mr. RODGERS.--I am sure they never envisioned that. Chairwoman VELAZQUEZ. During the question and answer period you may be able to finish or add something that you feel strongly about. Thank you to all of you for being here today. Now I recognize myself for 5 minutes. Mr. Palmer, since you have been at SBA for so many years, can you please discuss anything that you find that you need to say or react to Mr. Shepard's information provided to the committee regarding licensing delays and approval rates? Mr. PALMER. It is regulatory roulette. I mean, you never know what you are going to get. They can move quickly when they feel like it. There was a fund that submitted their green light application in July, which is the early start of the process. My understanding is they were approved for license last week. It was about 40 days. Hey, that is great. The question earlier, if you are a repeat license, you should be able to move quickly. That is light speed. We have other repeat funds that are in good standing that have put their green light letter in which is the first start before you are even allowed to submit your license application that have had to wait over a year. I think some of the statistics are going down since 2013, well, 2013 was a spike year after the financial crisis because we were filling gaps. I mean, look at the overall trend. And there is going to be a normal fluctuation, a little up and down. I get that. But you cannot do all your homework the night before and expect to do it well. I mean, businesses have to have some consistency. So the idea that you have got 14 licenses through 363 days of the fiscal year and then in the last 2 days suddenly you are going to wake up and get it all done, that is not fair. I think on the personnel side, there are mission critical positions. Regulation matters. Regulation is a taxpayer protection. You have three area chiefs that are managers and oversee the actual regulators. Two of those three are vacant and they have been vacant for a very long time. There are all these contractors being hired, all these studies are being done. To the best of my knowledge no one has ever seen the results of any of those studies, but no one is getting filled. I think the last employee to be added to the Office of Investment was in February of 2018. And that just does not work. That is creating risk where there is no need for it. The money has been appropriated. The FTEs are there. And I think, and I think this might be a question for the Committee, that a number of those FTEs have been actually ceded back to other parts of the agency. So I think if we want to get more diversity and more geography we have got to get the program working. I think the underlying core is right but just the management is not. Chairwoman VELAZQUEZ. Thank you. Dr. Paglia, we know that the SBIC program has historically struggled with attracting and licensing women-led and minority- led SBIC funds. Your report noted SBICs have better racial and gender diversity in leadership positions compared to the broader private equity community, and these diverse SBICs are more likely to invest in low to moderate income regions of the country. Did you look at whether diverse fund managers have better investment returns than nondiverse managers? And if not, why? Mr. PAGLIA. Yes, that is a good question. And so we did take a look at that question. We wanted to understand if there were any discernable return differences between diverse and nondiverse fund manager teams. And by looking at the years of 1995 to 2015, we examined that very question. We concluded that there was no statistically significant difference between fund returns among those two groups. Chairwoman VELAZQUEZ. Okay. Thank you. Ms. Penn, in your written testimony you talk about financing small businesses owned by baby boomers who might be wishing to retire soon but want to preserve their independence as small businesses. How many of those financings have gone to small businesses that have converted to a co-op or other employee-owned business models? Ms. PENN. Our fund does not work those types of transactions. We mostly are working with transactions moving to a strategic buyer. But Mr. Palmer may be able to speak on SBIC's others. Mr. PALMER. Sure. I mean, there is a broad range of investing types. I do not know of any co-ops, but I can look into that. But ESOP transactions, which are related transactions, certainly a number of SBICs have done those. And I think there might be one or two that are even forming to specialize in that. But I need to look some more into the co-op action. Chairwoman VELAZQUEZ. As a general matter, do you think SBA's capital access and investment programs should be more accessible to ESOP co-ops and employee-owned businesses? Mr. PALMER. I think they should be more accessible to more small businesses and to reflect the diversity of structure and geography and industry sector as much as possible. Chairwoman VELAZQUEZ. Mr. Rodgers, thank you. I am interested in hearing about how your business found its way to an SBIC fund, and how did you find the SBIC fund that made the investment in your business? Mr. RODGERS. Sure. Thank you. Well, originally, as I understand, the SBIC fund was referred to us through our PE firm, Kidd and Company. And it is probably important to talk about the fit and the impact of the fund. So in the space in which Family RV operates---- Chairwoman VELAZQUEZ. If you could be brief because my time has expired. Mr. RODGERS. Certainly. So it is all about access to capital versus traditional banks. And banks are not comfortable with the floor plan arrangement typically in our industry, and there is more flexibility within the fund. And lastly, the bank loan mechanism with amortization is not as friendly to companies like Family RV as the fund is. Chairwoman VELAZQUEZ. Thank you. Mr. RODGERS. Certainly. Chairwoman VELAZQUEZ. Now, we recognize the gentleman from North Carolina, Mr. Bishop, for 5 minutes. Mr. BISHOP. Thank you, Madam Chair. I appreciate the opportunity before I officially joined your Committee, but I certain wanted to remain. I noticed that as I sat down that we had a witness from North Carolina. Thank you, Ms. Penn, for being here and learning about Plexus, which I was happy to do. I was curious. I think I heard, I believe, during your testimony that you spoke highly about the relationship that you had with the reviewer at SBA that you work with. But I have also heard some disturbing things today, which are new to me. And I wondered if you had any insight about the approval issues that we are hearing about and delays. Is that something that Plexus experiences? And if not, do you have any ideas about why not? Ms. PENN. I was speaking specifically about our relationship with our analyst who has worked with us for about 5 or 6 years. We have experienced more delays in recent years and we are working with the SBA to improve that. We have not been through the licensing process in recent years but we are now submitting a request for our fund five. And the procedure that Mr. Palmer spoke about earlier regarding there is a time period where you are requesting to submit an application. And we have been in that process for about 5 months right now, but Mr. Palmer may have more to add to that. Mr. PALMER. Sure. So the relationship between the SBIC fund managers and the SBA is excellent among the career staff and in the senior leadership of the SBA. That is not the problem. It is not perfect but, hey, that is how regulators work, and we do the best we can. The political leadership of the Office of Investment is just incompetent, and frankly, hostile to the successful operation of the program. And I do not say that lightly or with any comfort from me. But on the licensing side, you do have these massive delays that are unnecessary, and some of them were I think misrepresented by the previous witness. Yes, it takes time to raise private capital. We are about to host a large private equity connection between fund managers, small business investors who are raising funds and institutional investors. There is massive interest in investing in the private into small businesses, you have SBICs. The problem that the institutional investors are having--banks, pension funds, endowments--is that there are not enough SBICs to put money into. That they are moving so slowly they have to go back to their own investment committees and say, hey, I have tried to put money into this but they have been sitting in the SBA's inbox or on somebody's desk for extended periods of time so I need to go back and get permission. They are actually cutting back on their allocations into small business because they cannot get it through the SBA. That is not what I think the goal of this Committee or the goal of the program is. Mr. BISHOP. Thank you, sir. And Ms. Penn, one follow up to that. Are you finding that in the North Carolina market that there is a great deal of additional potential for SBICs to be involved and that they are not forming because of these regulatory roadblocks? Ms. PENN. So we, in addition to being in North Carolina, we work with and invest all across the country. It seems that demand for capital is higher than ever and investors are seeking ways to invest their money. So right now I believe demand is as high as it has ever been. Mr. PALMER. And one thing I would add to that is that North Carolina has an exceptionally healthy and robust SBIC market. There is certainly more to be formed but they are in Greensboro, they are in Raleigh, they are in Charlotte. There is one forming in Wilmington. You have got them all over the place. And frankly, the more, the better. And frankly, we would like to get more of them in other parts of the country as well, more in North Carolina, but also undeserved states. Mr. BISHOP. The final question, if I may, again, for Ms. Penn, Mr. Shepard referred to a rural investing workshop in Carolina. Is that something that your company was aware of and participated in? Is that the sort of thing you would do? And if not, do you have any ideas about how that might be more effective for attracting folks in North Carolina and giving them ideas on how to proceed? Ms. PENN. I was not and did not attend. I do believe that more education and more communication about the program would help it significantly. I am constantly surprised at how little people know about this program and what a great program it is. Mr. BISHOP. Thank you, Madam Chair. Mr. PALMER. Can I add one piece to that? Mr. BISHOP. Yes, sir. Mr. PALMER. That event was actually in North Carolina, I believe at UNC. It was attended, but it was so poorly attended because it was held the day after the National Conference of SBIC funds that was 700 miles away. And it is not something that the SBA did not know about. He was actually invited to be a speaker at that event. So to have it 700 miles away after you have just been in a big conference really minimizes the effectiveness of it. That is consistent. Mr. BISHOP. Thank you, Madam Chair. Chairwoman VELAZQUEZ. The gentleman's time has expired. Now we recognize Ms. Davids from Kansas for 5 minutes. Ms. DAVIDS. Thank you, Chairwoman. So in light of the previous panel's testimony I am going to very briefly as one unanimous consent to submit testimony from Konza Valley Capital in Overland Park, which is in my district- based SBIC. Chairwoman VELAZQUEZ. Without objection, so ordered. Ms. DAVIDS. And second would just like to say I am going to follow up with written questions, at least one written question to Mr. Palmer and then others if they would like to chime in related to leverageable capital. So Konza Valley Capital uses the Evergreen Fund structure which is maybe less used. So I want to delve in with the experts here about the reinvesting and that sort of thing. And I will do that with written questions to you all. So I want to go off of the testimony we heard earlier from Mr. Shepard and then Mr. Palmer, some of the statements that you made earlier. I am really curious about the current waiver of classes related to regulations and compliance that SBICs have and that there have not been classes offered. Can you tell me a bit about--in his words he said that no one has been held back. I am less worried about--I am worried about all of it, but I am less worried in this moment about folks feeling held back and more about if this is going to cause problems for SBICs in the future because if this is the mechanism by which they learn to comply with the law and then if they potentially run afoul of that later, then whose fault is it really? So if you could speak to that. And Ms. Penn, as an SBIC who maybe is familiar with those classes, would love your input, too. Mr. PALMER. Sure. It is a very complicated program. Complicated law, complicated regulations, complicated financing. And those classes have been held at least about once a quarter every year for decades. And we have helped organize them. They are incredibly helpful because you get to talk to the regulators who really understand it because this is complicated. These are very smart people, very educated people, but you want to get it right because if you do not you are breaking the law. It is very helpful. They just stopped, sort of went into the abyss last year. We have not been able to get any response from them. He mentioned that they are going to use taxpayer money to create an online regs class. We did that. We took the exact content that they have. We have built an online regs class. They know it. It is set to go live I think this week or next that does the exact same thing because they did not. So if they are going to do an online regs class and use taxpayer money to do it, stop. I actually wrote a letter to the CFO to let them know that, to make sure that that was getting up there. It is very effective. It is very helpful. If we want to use new technology, hey, that is great, but do not reinvent the wheel with the taxpayer dime. Ms. PENN. These regulation courses are instrumental to helping us know how to manage the SBICs. You can read the regs. They are complicated and hard to follow so these courses really help you understand so that you do not make decisions where you are breaking the law. Ms. DAVIDS. Thank you. And then the only thing I want to, the last thing I want to say is that I, as a first-term member of Congress, I wanted to be on this Committee because in the Kansas City Metro area and the Third District in Kansas where I have the honor of representing, the entrepreneurship is baked into the DNA of the place. So many of the programs that we hear about in this Committee are instrumental in small business growth and entrepreneurship in my community. And what I heard today was very alarming. And I also want to say that all the other times that I have been in here, the SBA programs are supported across the board, Republicans, Democrats, it does not matter. People know that small business is really important and that there are plenty of other programs in the SBA that I know are functioning well. And I have not up to this point heard anything that is a red flag or alarming like I did today. And I will just ask that all of you be open to me reaching out, our office reaching out to you to do follow up questions and do more insight into what is going on with this specific program. Thank you. I yield back. Chairwoman VELAZQUEZ. The gentlelady yields back. Now the gentleman from Illinois, Mr. Schneider, is recognized for 5 minutes. Mr. SCHNEIDER. Thank you, Madam Chairman. I want to thank the witnesses. And after the comments from my colleague from Kansas, you know, we should be here today celebrating the SBIC program. We should be honoring those small business entrepreneurs who take an idea and develop a business model, seek to get the capital to take that model to market, look to hire people to create the jobs that grow our economies. And having spent my career as a consultant working with family businesses, the clients and investments you all make, I understand the values these businesses bring. And I understand the power that a well-functioning SBIC program could actually provide in these communities. And the fact that we are falling short is a misuse of taxpayer money because we are not living up to the potential. But it is also hurting the growth of our economy. Mr. Palmer, I want to turn to you first. I hear your frustration. I share your frustration. Two questions. How new is this phenomenon you are explaining or describing? And what would be the things that could most quickly change it and turn it in the other direction? Mr. PALMER. Excellent questions one and all. Thank you very much. There is always going to be frustration with regulations. That is normal. There is a normal level that is a reasonable level, and then we try to push and minimize but that is this. This really has been for 2-1/2 years been a mess. It started with day one of the political appointee taking over the program. I will mention that he ran the program at the end of the Bush administration when I was in the Bush administration, too. Not overlapping. But it was a disaster then but the clock ran out because he was only there for about 13 months. And if you look at the hearings from 2009, you see that documented. There was no reason for it then. It took years to undo the damage of that. It will take some time here, too. I think you need to change the management. I do not think you need to change the focus from the administration because they do care about small business. I do not think you need a change in Congress. They care about small business. They just need to be allowed to work. I think they need to hire some key people that they have not been allowed to hire in key management positions that they have money for. But I think you just need someone who is willing to let the staff do their job and do the regulation that they need. And we can disagree on different things at time but we are not trying to get someone to do their job. Mr. SCHNEIDER. Ms. Penn, I am going to turn to you. You are on your fourth fund. Ms. PENN. Yes, sir. Mr. SCHNEIDER. You have been investing, I think you said, 108 investments focusing on the $10 to $100 million segment of the market. How critical to the growth of the communities you are investing in, the companies you were investing in to the communities that these operate in is speed of this access to capital, the ability to process, to review a proposal, process it quickly, and get the capital of these companies quickly, how important is speed on that? Ms. PENN. Very. We are on our fourth fund. It is a $400 million fund. It is over 80 percent invested. We need a fifth fund. Mr. SCHNEIDER. Great. Thank you. And Mr. Paglia, as you look at it, and you come at it from an academic standpoint. I know you are a CPA. I am the son of a CPA, so I have some appreciation by osmosis. But these companies are looking, they need people, they need funds. They need the ability to do that to grow. We can help that by investing in workforce development. We can help that by investing in programs like the SBIC program that is a public- private partnership. What do you see as the impact? What do you see as the opportunity? Mr. PAGLIA. Well, I think there is a real opportunity in the early stage investment side of things. One of the reasons why this capital penetrates smaller segments of the marketplace is because of this public-private partnership, the leverage it has created for the funds. And so I think this sort of a model would work fairly well with younger companies that create a significant number of jobs. I also think that as you look at the dispersion of capital around the country, there are some geographic areas where the number of businesses per capital event is significantly higher than others. And that suggests there are some additional opportunities to deploy capital, to grow jobs, create healthier economies, and engage more of a diversity and inclusion application as well. Mr. SCHNEIDER. All right. And thank you. I am running out of time, but Mr. Rodgers, I do not want to leave you out. Family RV you described is a growing business, going into new markets. I know from experience that many of the RV dealers across our country are family-owned businesses. Started out with a similar story to your company. How many people do you employ now, today? Mr. RODGERS. Today, just over 300. Mr. SCHNEIDER. Okay. Starting from two people selling RVs on their lot. Mr. RODGERS. That is right. Mr. SCHNEIDER. That is the kind of example of companies that we are looking to invest in. And whether it is an RV business or a new technology business, a service business or a manufacturing business, we have the ability to grow our economy. Small businesses drive our economy. They create the jobs new. They strengthen our communities. Madam Chairman, thank you for having this hearing. Thanks again to the witnesses for being here. We have got to get this right. Chairwoman VELAZQUEZ. Thank you. The gentleman yields back. I have one more question. Mr. Paglia, since you have conducted research on the SBIC space and given the fact that this is a very important program, specifically a private-public partnership, what recommendations or suggestions can you suggest to make it better? Mr. PAGLIA. Yes. Thanks for the opportunity to weigh in on that. I do think that any time you can make programs run more efficiently and send the capital out, deploy the capital to those businesses that need it in a faster fashion, it is going to allow the economy to work and grow at a much faster rate. So I would just suggest that you take a very hard look at this program and the opportunities to extract efficiencies out of the current operating model and structure and then also supplement with some increased capital. Chairwoman VELAZQUEZ. Thank you. Mr. PAGLIA. You are welcome. Chairwoman VELAZQUEZ. We want to thank all of the witnesses for taking time out of their schedule to be here with us today. We have now heard about one of the federal government's most popular public-private partnership programs. It is an engine of small business job creation and has contributed to the growth of countless small businesses, some of whom have become the largest and most powerful companies in our economy. However, if we intend to continue enhancing access to affordable capital for small businesses, it is clear we must take a hard look at the SBIC program, especially the way it is currently being administered. We owe it to the entrepreneurs, as well as to the taxpayers at large, to ensure that these federally-backed finance programs are being run efficiently. I look forward to working with my colleagues on both sides of the aisle to come up with bipartisan solutions to this issue. I would ask unanimous consent that members have 5 legislative days to submit statements and supporting materials for the record. Without objection, so ordered. If there is no further business to come before the committee, we are adjourned. Thank you. [Whereupon, at 1:26 p.m., the Committee was adjourned.] A P P E N D I X [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]