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27–466 2018

INVESTING IN SMALL BUSINESSES: THE SBIC 

PROGRAM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON AGRICULTURE, 

ENERGY, AND TRADE 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

NOVEMBER 7, 2017 

Small Business Committee Document Number 115–046 

Available via the GPO Website: www.fdsys.gov 

SBREP-219A with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

TRENT KELLY, Mississippi 

ROD BLUM, Iowa 

JAMES COMER, Kentucky 

JENNIFFER GONZA ́ LEZ-COLO ́ N, Puerto Rico 

DON BACON, Nebraska 

BRIAN FITZPATRICK, Pennsylvania 

ROGER MARSHALL, Kansas 

RALPH NORMAN, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

DWIGHT EVANS, Pennsylvania 

STEPHANIE MURPHY, Florida 

AL LAWSON, JR., Florida 

YVETTE CLARK, New York 

JUDY CHU, California 

ALMA ADAMS, North Carolina 

ADRIANO ESPAILLAT, New York 

BRAD SCHNEIDER, Illinois 

VACANT 

KEVIN FITZPATRICK, Majority Staff Director 

JAN OLIVER, Majority Deputy Staff Director and Chief Counsel 

ADAM MINEHARDT, Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Rod Blum ......................................................................................................... 1 

Hon. Brad Schneider ............................................................................................... 2 

WITNESSES 

Mr. Brett Palmer, President, Small Business Investor Alliance, Washington, 

DC .......................................................................................................................... 4 

Mr. Thies Kolln, Partner, Aavin Private Equity, Cedar Rapids, IA .................... 5 

Mr. Michael Painter, Managing Partner, Plexus Capital, Raleigh, NC .............. 7 

Mr. Mark L. Walsh, Managing Director, Ruxton Ventures, Chevy Chase, 

MD ......................................................................................................................... 9 

APPENDIX 

Prepared Statements: 

Mr. Brett Palmer, President, Small Business Investor Alliance, Washington, DC ..................................................................................................... 27 

Mr. Thies Kolln, Partner, Aavin Private Equity, Cedar Rapids, IA ............ 76 

Mr. Michael Painter, Managing Partner, Plexus Capital, Raleigh, NC ....... 82 

Mr. Mark L. Walsh, Managing Director, Ruxton Ventures, Chevy Chase, 

MD .................................................................................................................. 87 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

None. 

SBREP-219A with DISTILLER

SBREP-219A with DISTILLER

(1) 

INVESTING IN SMALL BUSINESSES: THE SBIC 

PROGRAM 

TUESDAY, NOVEMBER 7, 2017 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON AGRICULTURE, ENERGY, AND TRADE, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:03 a.m., in Room 

2360, Rayburn House Office Building, Hon. Rod Blum [chairman of 

the Subcommittee] presiding. 

Present: Representatives Blum, Chabot, Luetkemeyer, Comer, 

Bacon, Schneider, and Lawson. 

Chairman BLUM. Good morning. Thank you all for being here 

with us today. I call this hearing to order. 

Despite a downward trending unemployment rate and increasing 

signs of business optimism, small firms continue to face a rigid 

lending environment. Capital for the nation’s small businesses, entrepreneurs, and startups is the difference between a Main Street 

company in my home State of Iowa turning on their lights or closing up operations for good. It could be the difference between making payroll and letting a great employee go. And I have been there 

and had to do that, so truer words cannot be spoken. 

While large companies finance their projects through debt and 

equity markets, small companies regularly utilize traditional bank 

lending to finance their endeavors. As a way to inject more equity 

into the small business ecosystem to address the gap in long-term 

financing, the SBA created the Small Business Investment Company program, also known as the SBIC program, in 1958. 

SBICs are for-profit entities that manage investment funds, but 

are licensed and regulated by the SBA. Through this unique structure, investors apply to receive an SBIC license which provides the 

ability to leverage private dollars with federal dollars for investments in high-growth small businesses. 

This program is what we are here to talk about today. 

This Committee has actively been studying the SBIC program for 

years. We examined two SBIC bills in the spring, one looking at 

the individual leverage limit and a second that looked at the 

threshold level in which a financial institution can invest in the 

SBIC. This program continues to be a topic of interest for this 

Committee. 

Today, we will hear from SBIC participants that can share with 

us how this program is operating on the ground and how it impacts 

communities around the nation. 

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2 

I am looking forward to hearing more about the role SBA plays 

in this program as well. From the issuance of leverage to the licensing process, it is important to know how SBA interacts with 

the SBICs. 

Like many of SBA’s financial programs, where the federal government has a role, robust and thorough Congressional oversight 

is required to ensure taxpayer money is safeguarded and protected. 

This Committee strives to create an environment where small businesses can flourish, and this program fits into that formula. 

I appreciate all of the witnesses being here today. I look forward 

to your testimony. 

And I now yield to Ranking Member Schneider for his opening 

remarks. 

Mr. SCHNEIDER. Thank you, Chairman Blum. Thank you for 

calling this hearing. And I want to thank the witnesses for joining 

us today. 

Access to capital is essential for every business, but especially for 

smaller ones. Without it, most firms cannot make improvements, 

expand, or hire qualified works that they need to succeed. 

In 1958, Congress recognized the gap in the financial markets for 

long-term funding for growth-oriented small businesses and created 

the Small Business Investment Company Program. SBICs are privately owned and managed investment funds, licensed by the SBA, 

that use their own capital plus SBA guaranteed funds to make investments in small businesses. 

The SBIC program helps fill the gap in the capital markets for 

businesses that have outgrown the SBA’s flagship 7(a) loan guarantee program but remain too small or high risk for the private equity industry. 

The key to the program’s success is leveraging federal funds to 

expand the amount of private capital invested in promising small 

firms. 

SBA provides funding to qualified SBICs with expertise in certain sectors of the economy. SBICs then use their own funds and 

leverage from SBA to invest in these small businesses. Their actions have facilitated over 3 million jobs total and nearly $6 billion 

per year of investment in domestic small employers. To date, small 

business investment companies have assisted thousands of highgrowth businesses, providing over $100 billion in capital. 

In this Congress, the House passed two pieces of legislation from 

this Committee that expand the SBIC program. The Small Business Investment Opportunity Act of 2017 increases the cap for the 

SBIC that manages just one company from $150 million to $175 

million. And the Investing in Main Street Act of 2017 increases the 

percentage of capital and surplus banks and federal and savings 

associations can invest in an SBIC. Both measures seek to increase 

the flow of much-needed capital to small businesses. 

Despite these efforts, more work needs to be done, in particular 

to diversify the program. Greater access for women and minorityowned funds would, in turn, increase the dollars flowing to women 

and minority-owned small businesses. Similarly, additional efforts 

to invest in rural small businesses could spur economic growth in 

these areas. 

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During today’s hearing, I look forward to hearing from our witnesses on how we facilitate investment in our nation’s entrepreneurs and small businesses. And I thank them in advance for 

their testimony. 

Thank you, and I yield back. 

Chairman BLUM. Thank you, Mr. Schneider. 

I would like to explain the timing. You may all be aware of how 

the lights work, but if not, I would like to take a second to explain 

that. 

You will have 5 minutes to deliver your testimony. The light will 

start out as green. When you have 1 minute remaining, the light 

will turn yellow. Finally, at the end of 5 minutes, it will turn red. 

And I ask that you try to adhere to that time limit. 

Also, if Committee members have an opening statement prepared, I ask that they be submitted for the record. 

And now I would like to introduce our distinguished panelists 

there. 

Our first witness is Brett Palmer. Mr. Palmer is the President 

of the Small Businesses Investor Alliance, also known as SBIA, an 

association that has a focus on the SBIC programs. 

We need a few more acronyms here, don’t we? 

With over 9 years at SBIA, Mr. Palmer is well-versed in the intricacies of the program. His previous experience includes time on 

Capitol Hill and at the U.S. Department of Commerce. 

I appreciate you being here with us today. 

Our next witness is Thies Kolln. Mr. Kolln is a Partner at 

AAVIN Private Equity in my home district of Cedar Rapids, Iowa. 

Go Hawks. 

Mr. Kolln has spent approximately 15 years at AAVIN, which focuses on late-stage and expansion-stage financing. Prior to AAVIN, 

Mr. Kolln spent time working for the Boston Consulting Group in 

Chicago and on the startup management team at Orbitz. He has 

also practiced corporate law at Kirkland & Ellis in Chicago. 

Thank you for joining us today. It is always great to hear the 

perspective of a fellow Iowan. 

Our next witness is Michael Painter. Mr. Painter is Cofounder 

and the Managing Partner at Plexus Capital in Raleigh, North 

Carolina, where they focus on middle market business. Prior to cofounding Plexus Capital, he worked for RBC Bank and investment 

firms in both New York and North Carolina. 

It is a pleasure to have you with us today, Mr. Painter. 

And I yield now to Ranking Member Schneider to introduce the 

remaining witness. 

Mr. SCHNEIDER. Thank you. 

It is my honor to introduce Mr. Mark Walsh, the Managing Director of Ruxton Ventures here in Washington, a Washington-based 

private equity firm that invests in technology, media, and education companies. 

Prior to this position, Mr. Walsh served as SBA Associate Administrator for the Office of Investment and Innovation. In this role, 

he oversaw all SBIC, SBIR, Accelerator, Incubator, and other 

growth activities at SBA and was appointed to key committees at 

the Securities and Exchange Commission and Department of the 

Treasury. 

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4 

Before his government service, he had a 30-year career in technology, media, venture capital, and angel investing. Mr. Walsh is 

a graduate of Union College and received his MBA from Harvard. 

Welcome, Mr. Walsh. 

Chairman BLUM. Thank you, Mr. Schneider. 

I appreciate all of our witnesses being here today. 

Mr. Palmer, you are recognized for 5 minutes. You may begin. 

STATEMENTS OF MR. BRETT PALMER, PRESIDENT, SMALL 

BUSINESS INVESTOR ALLIANCE, WASHINGTON, DC; MR. 

THIES KOLLN, PARTNER, AAVIN PRIVATE EQUITY, CEDAR 

RAPIDS, IA; MR. MICHAEL PAINTER, MANAGING PARTNER, 

PLEXUS CAPITAL, RALEIGH, NC; AND MR. MARK L. WALSH, 

MANAGING DIRECTOR, RUXTON VENTURES, CHEVY CHASE, 

MD 

STATEMENT OF BRETT PALMER 

Mr. PALMER. Thank you. 

My name is Brett Palmer. I am president of the Small Business 

Investor Alliance. I would like to thank the chairman, Ranking 

Member Schneider, and Congressman Lawson for being here today, 

and the rest of the members of the Subcommittee and the staff. 

Thank you for giving us the opportunity to share what we know 

about the SBIC program and small business investing and to answer your questions about it. 

The SBIA is a trade association of small business investors that 

includes the SBIC industry. The goal of the SBIA is to promote a 

healthy ecosystem system for small business investing, one that 

benefits both small businesses and their investors and thereby promoting economic growth and job creation. 

Small business investment companies have been around since 

1958, and what was true in the 1950s will always be true: Small 

businesses need external, patient capital to grow and thrive and it 

is really hard to access that type of capital. 

Debenture and non-levered SBICs have increased the amount of 

small business investment capital, with almost $6 billion invested 

in fiscal year 2016, the last year of which we have full data. All 

SBIC investments must be used for domestic small businesses with 

at least 25 percent going to even smaller enterprises. 

SBICs invest across a broad range of industries and across a 

broad range of geographies. And actually I think Congressman 

Lawson’s district runs from the northern part of Florida, and Mr. 

Kolln here actually, I think, is looking at an investment that would 

connect that corridor from Tallahassee to Jacksonville. 

I will let you talk about that. 

It is common to see investments in manufacturing in low and 

moderate income areas via SBICs. And this industry and geographic spread is important, because SBICs are often the first institutional capital into small businesses, which benefit from their 

capital but also from their professional help in scaling up their 

business, professionalizing themselves, and building up boards. 

The program is having the best and lowest loss rate in its 59- 

year history, which is important, because taxpayer protection is the 

highest priority for the SBIC industry. There is currently unpreceSBREP-219A with DISTILLER

5 

dented private sector interest in getting capital into small businesses via SBIC funds, and the private sector is the leading critical 

component to making the program work effectively. It is a marketdriven program. 

A recent Library of Congress study found that SBIC-backed businesses created 3 million new jobs over the course of their study and 

6.5 million jobs. That is a period that included the Great Recession 

and the tech bubble busting. 

The study was performed with researchers from Duke’s and 

Pepperdine’s business school and they found that debenture-backed 

SBICs created, on average, about 125 new jobs and non-levered, 

more equity-oriented SBIC investors created over 530 new jobs per 

small business receiving investment, which is pretty big numbers. 

Those are not uniform across every small business but the average. 

Between these two types of investments, over 7 percent of net 

new jobs in the United States came from SBIC-backed businesses. 

That is an extraordinary number for a little known program, but 

that is what the program is supposed to do. 

These quiet successes were achieved while the debenture program was one of the only major SBA programs that was able to 

maintain a zero subsidy rate, which matters. Again, this covers the 

period of the Great Recession and the tech bubble bursting for the 

debenture program. And with the help of Congress and the SBA, 

there has been significant operation reforms made over the past 8 

years or so and have been producing the positive results that you 

have sought. 

With this program having a great track record, there are always 

areas for improvement that could be made both by the private sector, on our side, as well from the government, because there are 

many more communities that would benefit from having access to 

this type of capital. With private capital investment at record 

highs, we would like to see that spread across more of the country, 

to more communities, to more businesses, across more sectors, because there has been good stuff that has occurred, but more certainly can and should be done. 

And with that, I would like to take a moment to thank the Committee for passing those two bills that were mentioned before. They 

are simple, commonsense bills that will help get more capital out 

there to these worthy small businesses. 

And with that, thank you for your time. 

Chairman BLUM. Thank you, Mr. Palmer. 

Mr. Kolln, you are recognized for 5 minutes. 

STATEMENT OF THIES KOLLN 

Mr. KOLLN. Thank you. Thank you, Chairman Blum, Ranking 

Member Schneider, and Member Lawson, for the opportunity to 

testify here today and for holding this hearing. 

Access to capital is a tremendously important issue for small 

businesses across the country, and the SBIC program effectively 

helps to resolve that issue. I am eager to provide you with my perspective as an SBIC fund manager and also a past member of the 

SBIA board. 

My name is Thies Kolln, and I am a partner of AAVIN Private 

Equity, a private equity firm based in the heart of the Midwest. 

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Our central office is in Cedar Rapids, Iowa. We have, at the time, 

two regional offices, in Madison, Wisconsin, and in Kansas City, 

and cover our Midwest footprint through those. I joined AAVIN in 

2002, so I have been there for 15 years now, and it was a return 

to my home city of Cedar Rapids. 

At AAVIN we stay true to our roots by focusing on helping small 

regionally based businesses grow. We specialize in late-stage and 

expansion-stage financings, and we partner with strong management teams that seek long-term business growth. Our focus is on 

smaller investment opportunities, and they are concentrated mostly 

in the upper Midwest States, such as Iowa and surrounding States, 

although we do invest nationally. 

And as Brett mentioned, we have one company now that we invested in about a year ago THAT is based in Jacksonville and recently acquired another company to help it expand into Tallahassee. So we are covering the northern Florida market with that. It 

is a company that does precast concrete for road expansions and 

culverts and wastewater management mainly. 

We have extensive private equity experience. There are seven 

members of our investment team. We have made investments in 

over 300 companies throughout our careers. Through our firm’s history, just in Iowa, we have helped deploy $34 million in capital 

that helped create or sustain over 6,000 jobs. Those numbers may 

not mean a lot in a place like Manhattan, but they do for Iowa. 

These investments produce great growth for small businesses, as 

well as returns for our investment partners, which includes repayment in full to SBA and the American taxpayer. 

I have got some more detail in my written testimony, but I will 

outline a little bit about the SBIC program. It has a rigorous licensing process for prospective funds, which ensures taxpayer protection and safeguards the program’s reputation. One requirement 

for licensing is that management teams have extensive prior investment experience and good investment track records. 

We meet that demand. Our firm’s experience dates back to the 

start of the SBIC program in 1959, and we have basically over 40 

years of continuous SBIC management experience in our firm. 

Repeat licensing like this is a good thing as it demonstrates to 

prospective small business partners our previous fund successes, 

our commitment to serving this undercapitalized market, and demonstrates to the taxpayer that we are good stewards of tax dollars. 

We have a history of on-time payments to SBA and overall compliance, with clean examinations without findings. 

We strongly support the SBIC program because it provides the 

opportunities to supplement our capital with up to two times more 

capital to deploy to small businesses to support their growth. 

Given the increase in concentration of capital among large funds 

and institutions, it is difficult to find capital with a dedicated strategy of investing in small businesses and in small funds. And it is 

questionable whether many of the small funds like AAVIN could 

even continue to fund small businesses if it were not for the SBIC 

program. 

We are often the first providers of institutional capital into small 

businesses. We help professionalize small businesses and make 

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sure they have fundamentally solid operations and partner with 

strong management teams to do so. 

I will give a little bit of a history or a little bit of some stories 

about some of our investments. We have made over 26 investments 

in Iowa. Our most recent was just completed last month in Happy 

Joe’s Pizza & Ice Cream. 

I am sure you are familiar with that, Mr. Blum. 

Chairman BLUM. Absolutely. 

Mr. KOLLN. It is a family-run pizza parlor chain that was 

founded in 1972. It has 54 locations across Iowa and other Midwestern States. We have already hired additional people to help it 

on a growth strategy and are right now looking at additional locations to grow out the operations. 

Chairman BLUM. [Inaudible] 

Mr. KOLLN. He is still involved in it, yes. He is part of the management team now. Well, Joe is retired. His son Larry is still involved. 

So that is just an example of our investing in Iowa. And without 

the SBIC program we would not have had our successful history 

of deploying growth capital to American small business. The SBIC 

program has effectively helped us leverage our private capital that 

we are able to raise and invest in small businesses. 

Thank you for holding this hearing. And I encourage the Committee and this Congress to continue to fully support the program 

so it may expand, support more domestic small businesses, and create even more American jobs. I look forward to answering any 

questions you may have. 

Chairman BLUM. Thank you, Mr. Kolln. Let the record reflect 

that Happy Joe’s Pizza has some pretty darn good taco pizza. Love 

it. 

Mr. Painter, you are now recognized for 5 minutes. 

STATEMENT OF MICHAEL PAINTER 

Mr. PAINTER. Thank you, Chairman Blum, Ranking Member 

Schneider, and Mr. Lawson for having us here today. 

So I have been involved in the SBIC program for over 20 years. 

My partners and I used to work at a small regional bank in North 

Carolina called Centura Bank, and we had a fund that served to 

provide the growth capital that went beyond what the traditional 

bank could provide. And in 2004 we have been out on our own and 

formed our first independent SBIC, and we have now invested in 

87 companies that employ collectively thousands of people. 

So we have made a big impact, and we are one example of many 

SBIC managers across the country who are making similar impacts. 

My message today is really about three things. One, this is the 

most impactful and best example of a public-private partnership 

that I know of. Second, it is a program that supports a perpetually 

underserved area of the market. And third, it is impacting real 

lives. It is easy to talk about our program and our business in 

numbers and returns. It is ultimately about real people, real companies, real communities, and impacting lives and families. 

As far as a program, public-private partnership that makes 

sense, I think the key here that I know you all understand, but I 

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hope more people on the Committee and in Congress understand, 

is that all of the dollars that we raise from the private markets are 

at risk first, ahead of any Federal guarantees. That is a critical 

part of the program and why it has been so successful. 

So in our case, we have 56 banks, 130 individuals, 18 family of- fices, and 9 institutions that have invested $475 million with us. 

That all is there protecting Federal guarantees. So our dollars 

would be lost first, before the Federal guarantees would be hit. So 

that is a big differentiator in the public-private partnership world. 

I also think you have a staff that has been there for a long time 

that is driven by the purpose of the program. They are motivated 

by the purpose and the impact of the program, which is measurable 

and meaningful. And we have 50 years-plus of success in this program. So I don’t know of any other public-private partnership that 

has had that level of success. 

We also support a perpetually underserved area of the market. 

There are over 100,000 small businesses in the United States that 

have $10-$100 million in sales. Roughly half of those are owned by 

somebody over the age of 40. So you have this big portion of the market, roughly $2 trillion of 

value, that has to transition to the next generation of owner-operators. Public companies have ready access to the public markets to 

effect those transitions each and every day. The private markets 

don’t have that luxury, particularly at the small end of the market. 

I have been in this market for 20-plus years. It is perpetually underserved. You have fund managers that come into our market, 

they have success, and they go up market, because it is easier to 

do 10 deals and grow by doing 10 bigger deals than it is to do 10 

deals, then 20 deals. It takes a lot of fixed cost. We look at 100 opportunities to invest in 1. 

So to really provide capital to small businesses, you have to be 

committed to building a real business and putting infrastructure in 

place, and that is not possible without the SBA program. 

And back to the real driver of this. We do impact real lives. And 

I think telling stories about those lives is a good way to visualize 

it for me. We have got a company, design shop, in Orlando, Florida. 

This is Doug and Sherri Hughes, husband and wife, started this 

company in 2000, and they serve the trade show market. So they 

help companies prepare the materials they need for trade shows 

and they now employ 50 people. 

So husband and wife, 2000, start a business that now employs 

50 people, impacting their families, not just those 50 people, and 

their community. 

Another example is Huseby in Charlotte, started by Scott 

Huseby. He is a third-generation court reporter, comes from a long 

line of court reporters. Saw a need to professionalize this industry. 

He now employees 50 people at Huseby, and, more importantly, he 

engages with over 1,800 court reporters across the country to provide a steadier flow of business to people all over the country. 

So I look forward to taking questions about the program. I care 

a lot about the program and about the purpose. It is an impactful 

program. And I think the more stories that get out there about the 

people behind it, the more support there will be for it. 

Thank you for having us. 

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Chairman BLUM. Thank you, Mr. Painter. 

I now recognize Mr. Walsh, a former venture capitalist, for 5 

minutes. 

STATEMENT OF MARK L. WALSH 

Mr. WALSH. Thank you. 

Good morning. My name is Mark Walsh. And from late 2015 

until January 19 of this year, I ran the Office of Investment and 

Innovation, OII, or as we call it, Oy, at the SBA here in Washington, D.C. My area oversaw, as was said, all SBIC, SBIR, and Incubator, Accelerator programs. It was my first job in government. 

Before that, for 35 years or more, I had a career in technology, 

the internet, and media with senior or C-Suite positions at a wide 

variety of companies, including America Online, GE, HBO, 

VerticalNet, and more. 

For the last 17 years, I have been an active angel investor and 

venture investor for a wide variety of startups and have served on 

the board of directors for many of those companies and other highgrowth venture-backed entities. I have also served as chairman of 

the Bipartisan Policy Center here in Washington, D.C., the best 

think tank in town, in my personal opinion. 

The SBIC program is one of the most innovative, financially successful, and well-structured government programs in existence, period, close quote. But I left the program almost 10 months ago, and 

some recollections and remembrances are dimmed by time. Also, 

my opinions are my own and are not meant to reflect anyone else’s 

or any other agenda. 

As was said, the SBIC program takes low-interest debt and provides it to professionally managed domestic venture capital and 

private equity funds. These funds need an SBIC license to get the 

investment. 

The license application and approval process is super rigorous 

and helps avoid mismanaged or ill-targeted funds from receiving 

taxpayer dollars. 

Further, a licensee reports all significant investment activities to 

the OII on a regular quarterly basis, and there are annual on-site 

inspections by OII trained teammates. 

In short, OII is as vigilant an investor as any in the private market, if not more so. However, as we all know, investment entails 

risk, so OII also has a trained team of workout experts who help 

funds that ran array of financial health and, in some cases, assumed ownership and control of failed funds and disposed of the 

assets at admirable salvage valuations. But make no mistake: The 

amount of unrecoverable investment was minuscule and was the 

envy of the private sector. 

The SBIC program is a fabulous example of a public-private partnership, as was mentioned by my colleagues. My colleagues in the 

organization and teammates were as motivated, talented, and professional as any I have worked with in my private sector career. 

Some of them are here today. And I enjoyed my all-too-short stint 

immensely. 

But I was asked here to address some ways to improve the SBIC 

program. Nothing is perfect, and there are a few areas I would like 

to address if I were still in charge. 

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Number one, outreach. We made extraordinary progress during 

my time in discovering new funds and new types of funds and in 

meeting and engaging more diverse fund managers—gender, demographic, geographic, and market-focused diversity—more than prior 

efforts. This happened because my teammates and I made it a priority, and I would encourage the Committee to make sure the program pursues that with vigor. 

Second, promote and award certain types of funds. Impact funds, 

which are aimed at social, environmental, educational, or institutional improvement, as opposed to pure profit, are important. The 

program should be more able to encourage impact funds with lower 

interest rates, more attractive payback options, or even faster application processing. 

And speaking of that, number three, streamlining the license 

process. I am sure you guys would agree that. The amount of paperwork expected of a license applicant and license holder is heavy. 

OII and the program should continue their efforts to use available 

technologies to streamline these processes. 

Fourth, equity ownership. OII should have the ability to receive 

a small amount of equity in the companies its capital invest in. 

SBICs have held debt stakes in many iconic companies. For instance, an SBIC in 1977 held over 4 percent ownership in a small 

technology company called Apple. Imagine if we had that 4 percent 

ownership stake today. OII should continue efforts to create ownership upside for American taxpayers through this program with equity ownership. 

Fifth, more private sector partnerships. During my stint, teammates and I created a wonderful board diversity initiative called 

ONBoard, the Open Network for Board Diversity, with a partner, 

LinkedIn, the professional social network. There are many innovative private sector companies who would be partners in new opportunities that OII should be freer to pursue. 

And, lastly, networking opportunities between funds and companies. OII is a natural clearinghouse for a wide variety of data it collects about its funds and the companies that it invests in, as you 

heard from my colleagues to my left. It should have, in my opinion, 

more open access to the data for industry observers, companies, 

funds, and analysts. 

To conclude, there are improvements and opportunities that I 

could detail beyond that, but these are some that I saw that had 

great potential when I was at the agency. 

And lastly, let me also mention the SBIA, or Small Business Investor Alliance. They are the industry association focused on the 

SBIC marketplace, as you heard Brett Palmer, their CEO, testify 

a moment ago. Their staff, management, members, and board were 

very helpful to me as I learned the program, and they were great 

partners for our initiatives. I can’t thank them enough for their 

productive role in the ongoing success of the SBIC program. 

Thank you for inviting me today. And now I and my colleagues 

are ready to help with any questions and comments you may have. 

Chairman BLUM. Thank you, Mr. Walsh. 

Due to Ranking Member Schneider’s tight time schedule, I will 

reserve my time until the end. And I will now recognize Mr. 

Schneider for 5 minutes of questions. 

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11 

Mr. SCHNEIDER. Thank you. 

And, again, I want to thank all of the witnesses for being here 

and sharing your experience and your perspectives on a program 

that clearly is making a difference in communities across the country, in particular in the heartland, and we need to continue to do 

that. 

I just want to take the opportunity to touch on one issue. I think 

one added value of the SBIC program is the leverage it provides, 

the ability to work with public-private partnership. But I know 

from experience, I know from your submitted testimony, that there 

are many other added-value aspects to this. For example, the involvement of the SBIC lenders with the portfolio companies. I 

would like to open it up and have you touch on some of those additional benefits that are provided to your portfolio companies. 

Mr. PALMER. Let me start. 

It is important, because this isn’t just money. You are getting actual expertise. And I hear it all time from our members. We actually have recently partnered with Ohio State, their business school. 

There is something called the National Center for the Middle Market that GE Capital funded to train their portfolio companies. Well, 

GE Capital got broken up and went six ways to Sunday around the 

world. It got complicated. But they still had this training platform 

there. 

We have now partnered with Ohio State, and actually today one 

of these trainings sessions is going on, where portfolio companies 

of SBICs are able to attend, and it is a platform for training them 

how to scale up their business, how to attract talent, how to retain 

talent, how to really grow their business and scale up in a professional, organized way. And that is something that we are doing and 

in a really concise, organized, dedicated feature just for SBICbacked businesses. And that is going well. That is one example of 

one of the things that we are doing. 

Mr. PAINTER. I think that is a really important example. The 

small businesses we invest in, they don’t need to invent new strategy. I mean, they know how to run their business, they know how 

to manufacture their product or deliver their service. 

What they haven’t done before is scale that business. So they 

need tools to learn how to do that. It is basic stuff, basic blocking 

and tackling. We actually have four of our operating company professionals at the Ohio State event this week, and we have two of 

our internal people there so that we can help learn ourselves better 

how to train our other companies. 

And that is one thing we are focused on, is we have right now 

one full-time operating partner, so somebody who has run a small 

business that is now working with four of our companies to help 

them with their growth and putting in the frameworks that are 

needed to help grow a business. And we are committed to growing 

that platform. 

That is a key point, that it is not money. The money is important. That is the driver of us coming in. But we also have to provide more value than just dollars to make an impact. 

Mr. SCHNEIDER. Mr. Kolln. 

Mr. KOLLN. And we are, as a small fund, and even by SBIC 

standards a small fund, we are almost always the first institutional 

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12 

capital, the first, other than family money, that has been in the 

businesses that we invest in. Sometimes they have never even had 

a bank loan before. 

So it really is the first kind of outside capital, outside advisors, 

outside board members that they take on in these businesses, and 

it is a big step toward professionalizing them. And one of the key 

things we do is help them add the management talent and complete the management team that is there to help run and grow the 

business. 

Mr. SCHNEIDER. Mr. Walsh, as you go, as you give your answer, also touch on how to try to expand the outreach to more minorities and women-owned businesses. 

Mr. WALSH. Fair enough. If I just might say, if you read the 

press, it seems like all this money is going to, like, hip companies 

in Silicon Valley and for the next Snapchat or whatever. But, in 

fact, the gentlemen to my left and the men and women who work 

with them are on the front line of entrepreneurship. These are 

first-time investors in the lunch bucket companies that make this 

Nation great. These are companies that aren’t that sexy in many 

cases, but they are the people and the places that employ people 

sustainably. So that is my answer to the first part. 

To the second part of your question, it really ended up being just 

going out there and shaking the tin cup. I mean, my colleagues and 

I, during my stint, literally went to every conference, every gathering, ads in newsletters, met folks like the men to my left and 

other men and women, and just tried to reach out to gender and 

racially diverse fund management. And more importantly, tried to 

exhort and encourage those funds to find companies that were 

owned and operated by diverse management teams. 

And a final point. This ONBoard initiative that I mentioned was 

a way to get diverse directors into those private companies, because 

a lot of times these companies had a board of directors that all the 

last name, because they are a family-owned company. So when 

they were trying to expand the expertise of their board of directors, 

we would tell them to search our area on LinkedIn for the resumes 

of domain expertise people with diverse backgrounds and gender 

diverse and racially diverse elements to bring those people on the 

boards of directors. 

Mr. SCHNEIDER. I think that is important. Oftentimes, these 

companies have their board meetings when they shave. And so it 

is important to expand that. 

Mr. PALMER. Actually, one thing I would like to add to that, 

Mr. Schneider, if it is all right, is we have tried very hard to do 

that, and there is more to be done. Over the course of 9 years, our 

chair of the board, four of our nine chairs of the board, are women. 

In the private equity industry that is unheard of. That is not 50 

percent, but it is progress. There is some more to be done. 

And Mark, who did a fantastic job when he was running the program, did push that, and more can be done. I think one of the barriers, too, as far as the fund manager side is new funds coming in, 

it is a risk to go through this regulatory process that really is the 

size of a telephone book with hundreds of thousands of dollars of 

expense. You want to make sure you can get through it. 

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13 

And so it is reputational risk, it is personal financial risk. Having some clarity as far as what that is and getting that streamlined 

would really benefit getting a broader range of gender, race, and 

geography from where we don’t have it now. 

Mr. SCHNEIDER. Great. Thank you. And my time has long expired, but thank you for your answers. 

I yield back. 

Chairman BLUM. Thank you, Mr. Schneider. 

I will now recognize myself for 5 minutes. 

Mr. Walsh, I did the mental math. I think 4 percent of Apple today would be about $40 billion that we would have. 

Mr. WALSH. I think a tad less, but it is a heck of a lot of money, 

Mr. Chairman. 

Chairman BLUM. I will take a tad of 40 billion. 

Mr. Palmer, I think you mentioned in your testimony that we are 

experiencing our best loss rates ever. What are those loss rates? I 

was on a billion-dollar bank board for 15 years and I was Chairman of the Director’s Credit Committee. So if our loan loss ratio 

ever got really low, sometimes we would ask: Are we taking enough 

risk or taking enough chances in loaning money? 

Could you address both? 

Mr. PALMER. That is an excellent question. 

The losses are the lowest, and the program has run at zero subsidy for a long time, and that is good, ever since Congress reformed 

that back in the 1990s. It is a mark of industry pride that has been 

able to maintain that zero subsidy, we want to take that case. 

The measure that shows up as far as the losses is annual charge. 

The SBA charges a fee on the leverage as a calculation to offset 

what they think the loss history has been. It is now down to 22 

basis points on top of the leverage. 

Frankly, there is a little bit of industry concern that that maybe 

is too low, one, from a loss side; but, two, also making sure—look, 

everyone likes low fees, but we want to make sure we are maintaining that zero subsidy rate. 

And so that 22 basis points which is calculated is low, and that 

is fine, but that is assuming that things are going to keep going 

the way they are now, which is great guns. So maybe we want to 

take a look at relooking at that fee and maybe setting a floor on 

that fee so that there is always enough of a cushion in the future 

to maintain a zero subsidy rate. 

But the investments themselves, because of the private capital 

being the first loss position, you have to lose all your own money 

first before the taxpayer money is exposed, which is different from 

7(a) and 504. It really does align things in a good way as far as 

making good decisions and makes it hard to lose money. It is not 

that it is not possible. You can do it. People have risen to that challenge. 

Chairman BLUM. Including the federal government. 

Mr. PALMER. Including the Federal Government. 

Quite, frankly, this is a case study in the Federal Government 

working. And that doesn’t get much attention too often. But this 

really—it really is. 

And so the loss rates are very low. They could do more risk, 

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14 

ing program to minimize risk in 2008—2009, 2010, really, which 

was really helpful in filling this massive capital void that existed 

back then. 

But at the same time, we ought to be taking a look smaller 

funds. It is harder to get a big fund in a smaller State, Rocky 

Mountain West and others, and the smaller funds are riskier. So 

maybe the program does need to look at allowing some smaller 

funds to more rural areas, smaller cities, to facilitate their market 

where a $200 million fund might be too big. 

But having funds in Boise or in Portland or in Colorado, there 

are no SBIC funds in Colorado. I mean, that is a pretty big State. 

There are investments there. But we need to get more smaller 

funds out to some of these smaller cities and smaller towns across 

the country. 

Chairman BLUM. Thank you. 

Mr. Kolln, a lot of Members on this Committee represent rural 

areas. I am one of them. You are from my district. Can you talk 

to me a little bit about the challenges, if there are unique challenges, I assume so, in rural district, rural lending, rural startups 

versus urban areas? 

Mr. KOLLN. The biggest challenges in rural areas are just that 

you don’t have the concentration of companies. You don’t have as 

many companies. You don’t have as many managers to hire to start 

companies and to help grow companies. So it is really the challenges are finding businesses, finding enough businesses to make 

a fund work. 

And that is why, as Mr. Palmer mentioned, we run a smaller 

fund. And I think you have to be willing to run smaller funds. And 

the SBIC program is a great way to do that to be able to invest 

in these smaller areas. 

But the challenges are finding the businesses and finding talent 

and to help the companies grow. 

Chairman BLUM. Thank you. My time is about expired. I have 

more questions, so I will do it in a second round of questioning. 

I would now like to recognize the Ranking Member of the Subcommittee on Health and Technology, my colleague from Florida, 

Mr. Lawson, for 5 minutes. 

Mr. LAWSON. Thank you very much, Mr. Chairman. 

And thank you all for being here. 

And I am real happy to see the collaboration between Tallahassee and Jacksonville. It is quite interesting. Districts separated by 

200 miles. 

But recently, in the last couple of months, we have had womenowned businesses before the Committee, and minorities, women before the Committee. And the staff has told us that women-owned 

businesses are the fastest growing businesses in America. But each 

one of those groups came in, and they complained about access to 

capital. 

And I was wondering, just listening to the testimony this morning, it would appear that there must be some other factors involved 

other than the business people coming in saying they need access 

to capital, how they had to go to uncles, aunt, grandparents, and 

so forth. I thought maybe you could share some light on why this 

exists. 

SBREP-219A with DISTILLER

15 

And I will tell you the reason why. In 1978, when I left coaching 

at Florida State, and I spent some time in Iowa, University of 

Iowa, needing just $10,000, and going from place to place trying to 

get those $10,000 to go into business. That was 39 years ago. 

Today, I don’t think that should be an issue for most people, even 

though I was able to eventually get it. 

And so what is going on? I don’t want to talk too much because 

I got some other questions to ask. But what is going on about access to capital for women and minorities today, Mr. Palmer? 

Mr. PALMER. There are challenges for all small businesses. 

They are particularly acute for women and minorities, no question 

about it. And if you look at the numbers, that bears it out. 

It varies on a number of ways. The SBA, I am not an expert in all of SBA’s program, but you are talking about $10,000-type sizes, 

they have a micro loan program that serves that. That is sort of 

below the scale of where the SBICs are. Most of the SBICs are generally investing in businesses with a million dollars or more. So, I 

mean, every small business would love a million dollars or more. 

But some of them can’t absorb it yet. 

I think some of it is not knowing who to reach out to, sort of the 

human circles associated with this. And this goes to Mark’s comment about reaching out. Reaching out to a broader array of small 

businesses in communities. The SBA needs to get out there. The 

fund managers need to get out there and do more. 

There was actually a hearing on the Senate side on this issue a 

couple weeks ago, and one of the things they mentioned, which is 

a true problem, which is if a small business is women owned or minority owned, in many cases they can lose that classification if they 

get institutional investment into them, which doesn’t help them. 

Many of them are accessing government contracts and things, and 

most of the investments aren’t in government-contract related businesses. 

But that is an unintended consequence for accepting outside capital that is designed to help them to fulfill a capital access gap, and 

now they are being sort of hurt by it. So there is some tweaks that 

could be made to address some issues like that. 

Does that change the underlying issue? No. I think the biggest 

thing is just getting out there and beating the bushes, more to 

Mark’s statement. And Mark has really been committed to this, to 

do more of it. 

The chair of our board, her fund, by design, invests more than 

half of her fund, it is called Ironwood Capital in Connecticut, in 

women and minority and low income areas. So it can be and is 

done, but it isn’t done universally. 

Mr. LAWSON. And Mr. Walsh, you stated that in Washington, 

D.C., you say that this is one of the best advocates for businesses 

and stuff, than anyplace else. 

How did this compare with—and I know I don’t have much 

time—but minority and women-owned business access to capital 

that you observe on the research that you all are involved in? 

Mr. WALSH. Well, it is one of these questions that is always 

worth pursuing as vigorously as possible, because it is not only a 

question, it is a mandate. It is a proven fact that corporations that 

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16 

form better, their stock price performs better than companies that 

don’t. So to not have a diverse board of directors and a diverse outlook is actually hurting your shareholders. 

But to get to access to capital, investors look at risk. They look 

at the risk of where they are going to put their dollars and what 

the outcome will be. And the challenge that we saw in SBIC, to 

some extent, but also the SBA, for these women-owned businesses 

and minority-owned businesses, is that they needed to be better, 

bluntly, at describing their risk and their ability to scale up. Because an investor wants to see a company that will scale up and 

increase in size, have more employees, grow revenue. 

So the SBA has done a good job, but I think we can never rest 

on any laurels in helping those companies build their business 

plan, describe what they do, and help make the case to investors 

that they can grow and scale, because otherwise why would they 

would take investment and why would an investor write a check? 

So there are some women-owned venture capital firms, there are 

some minority-aimed venture capital firms that chase deals that 

are—companies that are run by minorities or women management 

teams. I think we can never have enough of those, and I think the 

SBIC program actually encourages more of those than currently 

exist, and that is why the public-public partnership element is so 

key. 

Mr. LAWSON. Okay. With that, Mr. Chairman, I yield back. 

Chairman BLUM. Thank you, Mr. Lawson. 

What kind of a year is Florida State basketball going to have this 

year? 

Mr. LAWSON. They should be great. We didn’t do well right now 

in football, but I am looking forward to them doing better this year. 

Chairman BLUM. Thank you very much. 

I would now like to recognize my colleague from Kentucky, Mr. 

Comer, for 5 minutes. 

Mr. COMER. Well, thank you, Mr. Chairman. 

My first question is for Mr. Painter. Are the regulations that 

SBA has in place to oversee the SBIC program working? And are 

they sufficient for the size of the program? 

Mr. PAINTER. So I think if you go back to 2009, there were 

roughly 315 SBICs. Today there are roughly 315 SBICs. And there 

has been a shift in terms of the number of debenture SBICs. 

I do think there is adequate oversight. I think there are some 

fixes that can be made with us working with SBA on some just 

practical changes in the licensing process and oversight process 

where you have some well-intentioned standard operating procedures that have unintended impacts. 

As an example, we close roughly one new investment per month. 

And just because of the way licensing is set up, we would have 

been in perpetual standstill and not able to get licensed if we didn’t 

get a special waiver in the licensing process, because when you 

make a new investment, you have to refile your application. So by 

definition, we would have just been perpetually filing every month. 

Some I think there are some commonsense changes that can be 

made within the standard operating procedures that can really 

help improve the efficiency and oversight. 

Mr. COMER. Okay. 

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17 

Mr. Walsh, you described the licensing process and the amount 

of paperwork as being heavy. Are there improvements that can be 

made in the program to address the concern and the bureaucracy? 

Mr. WALSH. So as I mentioned in my testimony, it was my first 

job in government, and I was shocked, shocked, I tell you, to find 

that there is a lot of paperwork in government. 

Mr. COMER. Me too. 

Mr. WALSH. So it is said. 

I think the organization has made progress in allowing these documents to be digital so that the access is able to be granted to specific sets of the applicant and other parts of the SBIC team. So 

digitizing all the documents actually is step A. 

Step B is making those documents standardized across various 

elements. I mean, you just heard an example where a fund is asked 

to start the cycle over every single time. 

So I know this sounds maybe too simplistic, but having what 

they call data rooms, where digital access to the types of data and 

having the actual forms that you fill out be digitized, so you can 

fill them out online, track them online, you the applicant, and then 

the folks at the SBIC program, that, I think, would go a long, long 

way to shrinking the amount of time and effort and paperwork to 

getting approved. 

Mr. COMER. So how does the SBA interact with the SBICs with 

respect to the licensing process? Beyond licensing, how do they 

work together? 

Mr. WALSH. Well, the licensing process can take anywhere from 

3 to more than 3 months. It is typically around 8 or 9 months, I 

think, was the average when I was there, to get approved. Then 

the fund has access to our capital. Every month or, as was mentioned, every quarter, they put a full report out of what they have 

done. And then at least once every 2 years, typically every year, we 

have an on-site visit by one of our analysts, physically visit the offices and make sure they are for real. 

I think our oversight is about as good as anybody in the private 

sector. You heard earlier, I am not sure if you were in the room, 

about the loss ratio being so low. I think that the teammates that 

I had when I was there were about as careful as I have ever seen, 

and I spent a lot of time in the private sector. 

So I am not sure it needs a lot of tweaking. In fact, I think we 

might even see gearing back a little bit because the loss ratio is 

so low. 

Mr. COMER. Okay. Thank you. 

Mr. Chairman, I yield back. 

Chairman BLUM. Thank you, Mr. Comer. 

I now like to recognize the Vice Chairman of the full Committee, 

my colleague from Missouri, Mr. Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Great to be 

with you. 

I am just kind of curious. I am kind of familiar with SBICs, but 

I was reading here in some of the information about it that SBIC 

invests in established businesses using a debenture SBIC to fund 

expansion. 

Can you explain that, how that works? 

Mr. PALMER. Sure. 

SBREP-219A with DISTILLER

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Mr. LUETKEMEYER. Debenture is not a loan. It is more like a 

security. 

Mr. PALMER. Yeah. Well, the way the program works, the leverage is at the fund level. So the SBIC raises, say, just make the 

numbers easy, $50 million. It goes through a licensing process. It 

then can access this credit facility through the Federal Home Loan 

Bank of Chicago, a temporary basis. And then every 6 months they 

take all of this credit facility, all the money, all the obligations that 

have made to the credit facility, they get pulled together, 

securitized, and sold into a trust, and the government guarantees 

that. And that is where those debenture are. 

The form the capital goes to the actual small business can go in 

several—can come in several different varieties. It can be straight 

equity, it can be debt, it can be convertible debt, it can be all sorts 

of all different structures in there, some of which are recourse, 

some of which are not. But that is the basic gist of the debenture. 

Mr. LUETKEMEYER. Because you are taking, really, a first dollar in in a lot of risky investments here, what kind of loss ratio do 

you experience with SBICs? 

Mr. PALMER. The way it is structured, unlike the 7(a) and the 

504 program where there is a loss sharing in the first dollar loss, 

all the private capital is lost before the taxpayer money is exposed, 

and there is ongoing review of the portfolio both on a quarterly 

basis as well as on an every investment basis as well as on an annual basis to make sure that if the fund is going sideways the SBA 

does have the capacity to cut off further access to leverage or if 

there is regulatory noncompliance. 

So the losses are very, very minimal. And actually the program 

is actually run to zero subsidiary because of the fees associated 

with the program since the late 1990s when Congress reformed all 

the SBA programs. It is actually the lowest loss ratio they have 

had in the 59-year history of the program. 

And there is an annual charge that they add to the SBA charges 

on the leverage that is now only down to 22 basis points. The historical low on that was 28 basis points, and the historical norm is 

closer to 70 basis points. So it is really, really low, maybe even too 

low of a loss rate. 

Mr. LUETKEMEYER. Well, that was going to be my next question, is I see here with Mr. Kolln, he says something about AAVIN 

received between 500 and 1,000 inquiries a year, yet only finances 

roughly four to six small businesses a year. So if we don’t experience any losses, are we really taking any chances? And we only 

have four out of six of 1,000 inquiries that are financed. 

Can you explain that to me? 

Mr. KOLLN. Well, I think that is due to two things. One is we 

get a lot of inquiries. A lot of them are not necessarily ones that 

match what we are trying to do. 

Mr. LUETKEMEYER. What are you trying to do? 

Mr. KOLLN. Or what we can do. They may be looking for a lot 

more money than we can provide. Or they may be—there are some 

businesses, if they are looking for not enough, too small an amount 

of money, it becomes difficult for us to do. Or the company doesn’t 

have the growth prospects that we are looking for. 

SBREP-219A with DISTILLER

19 

So we can’t invest in every business that comes our way, and we 

physically only have so many partners and so much time. And once 

we get involved in the businesses, we are very involved with the 

management teams and counseling them and working with them. 

So we are just limited in the amount of businesses that we can invest in. 

Mr. PALMER. And just so I was clear on that, I was talking 

about the loss to the taxpayer. That doesn’t mean, necessarily, it 

is private sector losses. I mean, there are losses, too, where businesses are invested in and there is private capital that is lost. 

So, yes, that does happen and it is common. It is not pervasive, 

obviously, but it certainly does happen regularly. 

Mr. PAINTER. Well, the average loss rate at the fund level 

would be you are going to lose on roughly 5 to 10 percent of what 

you invest in. So not lose all of it, but on 5 to 10 percent of what 

you invest in, you will have some amount of loss on that. 

Mr. KOLLN. And that is consistent with our experience as well. 

Mr. LUETKEMEYER. Mr. Kolln, you are advancing funds here. 

Are you taking an active management role in these countries or an 

equity part in these companies, or are you just like a bank, just 

loaning money to them and kind of watching them from the sidelines? 

Mr. KOLLN. It is typically a combination of debt and equity. And 

we are always involved at kind of an active board level with the 

companies. So we are not day-to-day operators. We back and partner with management teams. But we are active board members 

helping them with strategy, financing, treasury functions, and kind 

of overall—— 

Mr. LUETKEMEYER. You are like a venture capitalist where 

you will have somebody on the board? 

Mr. KOLLN. Yes. 

Mr. LUETKEMEYER. Okay. Very good. 

I see my time has expired. Thank you, Mr. Chairman. 

Chairman BLUM. Thank you, Mr. Luetkemeyer. 

The Chairman of our full Committee just arrived. 

Would the Chairman like to question? I can give you a couple 

minutes if you will like. 

Mr. CHABOT. I will see. 

Chairman BLUM. We will begin now our second round of questioning, and I would like to recognize my colleague from Florida, 

Mr. Lawson. 

Mr. LAWSON. Okay. Thank you, Mr. Chairman. 

I don’t have any data in front of me, as a former business person, 

but if I were to guess, I would think that the financing rate for minority-owned firms is low because of the application process and a 

lack of technical assistance that is provided to these firms. 

Can you all provide your thoughts on the assessment and if there 

is a need for technical assistance, not only in the application process, but throughout the entire process of becoming an SBIC? 

Mr. PALMER. There are two different issues there. One is getting minority fund managers. And one of the challenges with getting more minority fund managers, and this applies to women too, 

is to get an SBIC license, you have to have basically been in a private equity fund before, and so you are sort of cycling from the 

SBREP-219A with DISTILLER

20 

same pool. And to get beyond and a more diverse range of fund 

managers, it is tough with the way that it is set up right now. 

So technical assistance isn’t necessarily going to help that. It will 

help a little bit as far as that there is greater surety in getting to 

the licensing process, but you are still drawing from a fairly small 

pool, as opposed to doing some things to recognize professional experience people have, either on the banking side or on the investment banking side, to get more fund managers in that are diverse. 

On the actual businesses accessing the capital, that is a little bit 

all over the place. Some technical assistance there, getting them 

steered to the right places, whether it be a conventional bank loan, 

a micro loan, whether they need equity investment and other matters. 

A number of years ago, I was doing one of these sort of Shark 

Tank-type things and helping small businesses. And there was a 

minority-owned business there that was looking for a couple million dollars. It was a third-generation business. And people were 

saying, ‘‘Oh, I would take this amount of your business,’’ and that 

sort of thing. 

And I went to the guy afterwards and said, ‘‘Don’t give up a dime 

of your business. You don’t need to give up a single drop of equity 

to get what you need to do. Don’t lose control of your business. 

Here are 5 or 6 people you can talk to that can give you the capital 

you are needing for looking at your loan, that you need.’’ 

That is what that person needed. And frankly, it would have 

been bad had it been—he would have been taken to the cleaners 

if he had just gone with what people were sort of throwing out. 

Now, that is not how the actual transactions get done. 

But, yes, there is more education needed and more understanding of how to access the right type of capital at the right time 

of your business’ development. And we try to do more of that, and 

we probably can do more. 

Mr. PAINTER. And it is a complex issue that I don’t have the 

answer for. But I know for me personally, I have three daughters, 

and I know my oldest daughter asked me 3 years ago, we were 

talking about work, and I said, ‘‘Well, would you ever want to come 

into my industry?’’ And she said, ‘‘Well, I didn’t know that was possible,’’ because all she sees are men, and mostly white men, in my 

industry. 

So I think for that what we have struggled at Plexus is when we 

are doing hiring process is to get diverse pools of candidates that 

we can interview. And we are now working on education programs 

with colleges so that people know that it is an opportunity. 

I think another really important point is there is a treasure trove 

of data at SBA. And there is a group of really smart people in the 

education arena that would love to analyze that for public policy 

purposes and they can dig into issues like that. It is such a complex issue that without getting the best brains around the world to 

focus on it, I don’t know that we can solve it. 

So I would really encourage consideration of figuring out a way 

to unlock that data and allow people from the educational world 

and policy world to analyze the data so we can solve problems like 

that. And the data is there. It is just a matter of somehow 

unlocking it and having access to it. 

SBREP-219A with DISTILLER

21 

Mr. LAWSON. Okay. And I have less than a minute, but I want 

to ask you a question because it is a big issue. 

How does tax reform help small businesses? 

Mr. PALMER. It helps a lot. I mean, the more small businesses 

can understand a tax code, use it efficiently, the more money they 

can keep to reinvest in their businesses, the better off they are. 

The bill was just released last week, everyone is still going 

through the details, but our current tax system is Byzantine and 

antigrowth. And a reform that gets to a lower tax rate, that is simpler and pro-growth would be, I think, universally accepted and 

supported. 

Mr. PAINTER. I think it is important, too, just the certainty 

around it. Again, taking it to the human level, when we go to board 

meetings and we are sitting in Orlando, Florida, with Design Shop, 

and you have people there that have real money, real parts of their 

lives at risk and they are being asked to make decisions about future spending, it is very difficult to do that with uncertainty about 

where taxes are headed. And if you give them clarity on a reduction in taxes, then they become more comfortable spending that 

money for growth. 

Mr. LAWSON. Okay. Mr. Chairman, I yield back. 

Chairman BLUM. That was a great question. Thank you, Mr. 

Lawson. 

I now recognize myself for 5 minutes. 

Mr. Walsh, I am intrigued by your background. I am a private 

sector guy myself. And this is my first gig, if you will, in government. And you are a private sector guy, served a couple years in 

government. Why did you serve in government? 

Mr. WALSH. I knew my two predecessors in this job, knew them 

well from the private sector. In fact, I hired and worked with my 

direct predecessor. He told me this is the greatest hidden secret in 

the Federal Government. This was effectively the venture capital 

firm—or sometimes called the vulture capital firm—the venture 

capital firm of the U.S. Government. It was an incredible program. 

It was exciting to meet the type of people involved. And in fact, at 

the end you actually saw real impact in real people’s lives with investment that made a difference in companies that matter to our 

Nation. 

So not to get out the flag and salute it, but I thought if there 

was ever a place in the Federal Government where it would map 

against my background, and I could hopefully add some value, and 

I would see the outcomes being so fruitful, this was the place. 

Final point. I told any lovely spouse that in the job everything 

I was hoping to see in government I saw times 10, and everything 

I was hoping not to see in government I saw times 10. So it was 

very, very eye opening to see all the great things that were happening. 

And sometimes, as we have heard some of the testimony today, 

reflecting some of the grinding wheels of Government made it a little tougher than it would have been. But overall, it was aimed— 

I did it because it mapped against my background, to your point, 

I saw the outcomes being so positive. And, again, I wouldn’t trade 

any minute in that job. I loved every single bit of it. 

SBREP-219A with DISTILLER

22 

Chairman BLUM. As a private sector person, what kind of a 

grade would you give the SBA overall? 

Mr. WALSH. The SBA or the SBIC program? 

Chairman BLUM. Well, both. 

Mr. WALSH. Okay. 

Chairman BLUM. Both. 

Mr. WALSH. I give the SBIC program an A minus. I think it 

needs some improvement. 

The SBA program—boy, am I going to regret this, but thank you 

for putting me on the spot, sir—I think the SBA program is a B 

minus. And mean no disrespect to my professional colleagues at it. 

I think the SBA program, the other parts that we talk about, I 

think they need some improvement and some outcome improvements. 

I think the SBIC is the shining—and I am biased—I think the 

SBIC, SBIR, and Accelerator programs are the shining jewel in the 

SBA family. 

Chairman BLUM. Thank you. Do you grade on a curve? 

Mr. WALSH. What is the best answer to give you, Mr. Chairman, to that? 

Chairman BLUM. Thank you for being frank. 

Mr. Palmer, I looked in your testimony, the distribution of SBIC, 

financing dollars by industry. Number one was manufacturing. 

Good to see. Good to see. We can use more of that in this country. 

I was surprised by healthcare was one of the lower percentages 

as far as industry segment that is invested in. Can you talk about 

that? I mean, healthcare is a very dynamic and growing part of our 

economy, and I am just a little surprised. 

Mr. PALMER. It is. And I was surprised by that, too. The numbers are what the numbers are. 

We just gave an award for portfolio company of the year to a 

company in Tennessee. It was healthcare company that provided 

urgent care centers throughout Tennessee and I think in a couple 

in Kentucky, too, this little entity that went from 7 employees to 

500 employees providing medical care where there wasn’t any before. 

So we certainly have some, and some great ones. But it is relatively low, and I don’t fully know why that is. But a lot of it on 

the manufacturing side is generational transfer, where the founders are retiring and their management team is buying out the 

owner and reinventing the business. That is why there is a large 

number of manufacturing and applying new technologies. But on 

healthcare, I think Thies has something to add there, but I don’t 

know. 

Chairman BLUM. Mr. Kolln? 

Mr. KOLLN. I think part of it is looking at the companies and 

the size of companies that SBICs are investing in, and we are investing in smaller companies. Healthcare is such a large industry 

that has huge, huge companies in it, and those companies, there 

aren’t as many small businesses necessarily involved in it. And 

there are a lot of—there are just, pure numbers-wise, I think a lot 

more small manufacturing and service businesses out there. So the 

businesses that we as SBICs tend to focus on and invest in skew 

differently maybe than the economy as a whole. 

SBREP-219A with DISTILLER

23 

Mr. PAINTER. Right. It is a much more developed industry on 

the medical side. It is a much more developed system for access to 

capital relative to manufacturing and service. 

Chairman BLUM. I have got quite a few questions, so I guess 

your answers to this one would have to be brief. But I would like 

to hear from each one of you. 

Give me what you think is the state of small business in America 

today. What is the health, the healthiness of small business in this 

country today? 

We understand, to tag on to Mr. Lawson’s great question, we understand that tax reform is going to help. We understand regulatory relief helps. We understand reducing uncertainty helps. We 

also understand a robust and growing economy helps. I get that. 

But what is the state of small business today? Try to be somewhat brief. 

Mr. PALMER. Sure, I will be quick. I think, summed up in a 

word, I think there is optimism. I mean, I think there really is a 

lot of hope that the government is actually working with them and 

some of the shackles are going to come off on regulatory and tax. 

So when I am traveling the country and talking to folks, what 

I am hearing is a lot of optimism. There is always a certain level 

of business uncertainty. Business uncertainty business people can 

deal with. Political and regulatory uncertainty, they can’t. So I 

think optimism is what I hear the most. 

Chairman BLUM. Mr. Kolln. 

Mr. KOLLN. I would second that, too. You stole my word, Brett. 

I think on the whole there is optimism. It is always tempered 

with caution. But I think we see businesses more eager to invest 

and grow now than they have been for a number of years, I think. 

Chairman BLUM. Mr. Painter. 

Mr. PAINTER. There is undoubtedly no better place to start and 

own a small business than the United States of America. That is 

why I love doing what I do. I don’t know what the future looks like, 

but I know that you have resilient people focused on growing small 

businesses with an employee base that is a meaningful percentage 

of our economy. And we have plenty of things we can work on and 

get better with SBA and on our own, at individual funds, but it is 

healthy and it is thriving like it always has and like it always will. 

Chairman BLUM. Mr. Walsh. 

Mr. WALSH. People are pumped up. It is cheaper to start a business today because of technology and other tactics and tools than 

ever before. And you can start businesses cheaper in places that 

normally didn’t used to have businesses. 

So I think we have had sort of from cautious optimism, on the 

other end of the scale. I think people are really, really maximally 

pumped up. This is the place, it is cheaper to do, and there are 

tools and tactics and money available to help you grow. 

Chairman BLUM. If I can just follow up on that. I find it interesting. Uncertainty, I agree, is one of the biggest impediments to 

expanding a business. You know what the rules of the game are 

going to be tomorrow, how you prepare for it, correct? What has 

changed as far as uncertainty to cause this optimism? What has 

changed to cause the optimism? 

SBREP-219A with DISTILLER

24 

I mean, healthcare, I guess one could say, is probably we are 

more uncertain than ever on what is going to happen as far as 

healthcare goes. I am just curious—— 

Mr. WALSH. Yeah. If I can toss a thought out. In the last couple 

of decades, back in the day, if you left a large company which used 

to have a pension and a very secure environment, the old days of 

corporate environment, if you left to start a business and it failed, 

your record, your career was besmirched, right? 

Today, in fact, failure is not a sign of a negative tint or hue of 

your career. In fact, failure for many investors is a sign of education. You learn a lot from failing. 

So I think there is an element of risk that today’s workers are 

able to have a higher appetite for, because it doesn’t take as much 

money to start a business and you are not kind of ruining your career arch by trying it and having it not work out. 

So the uncertainty of the capital structure, the uncertainty of 

your cost structure, the uncertainty of your tax structure, I think 

those are slowly getting better. But the uncertainty about your career is also something that has kind of, I think, been taken care 

of and made more positive. 

Chairman BLUM. Anyone else on that? 

Mr. PAINTER. I just think there is always going to be uncertainty. There is always risk in small business. So just simplifying 

the Tax Code so that people know the environment they are operating in, and the less complex we can make it so you don’t have 

to hire teams of tax attorneys to help you figure out how you need 

to operate, the better. 

Mr. KOLLN. And part of it is just the spirit of small business 

owners. Small business owners are optimists by nature. You don’t 

start a small business and look to grow a small business if you are 

not optimistic about yourself and about your company in the future. So that is what is great about our industry and who we get 

to work with, is that there is a natural optimism there, and I think 

people in small business tend to try to see the future is bright. 

Chairman BLUM. Speaking of not having as much of a fear of 

failure, I think it was Mr. Painter, in someone’s testimony they 

mentioned out of 100 companies looked at, 1 qualifies for financing. 

Tell me about the other 99. In general, I know each one is 

unique, but why don’t they qualify? What are the problems with 

the other 99? 

Mr. PAINTER. Right. So I think the best way to describe it 

would be is, if you think about the very mature market where public companies have access to all types of capital, you have hundreds 

of suppliers of capital that all have a different focus. They find 

their niches and they focus on it and they dominate it. 

At the small end of the market, there are so many gaps. So when 

I go in to meet with a company I don’t understand—there is probably 50 percent of them where we just don’t understand enough 

about what they do to be able to take that risk. So I can’t know 

everything about every industry. 

So that is one piece. We have to focus in certain areas so that 

we can ultimately protect taxpayer dollars and also deliver a return to our investors. 

SBREP-219A with DISTILLER

25 

Then you have companies that don’t have the proper accounting 

files, that we have issues that come up all the time around accounting and we will think we are looking at numbers of X, then 

we find out it is X times 50 percent. 

So there are just a lot of things that have to happen to close one 

transaction. 

Chairman BLUM. Anyone else on that? 

Mr. KOLLN. Yeah. I think of the 100 down to 1, I think the first 

80 of the 99, it is just not a fit. As Mr. Painter said, they are either 

looking for a different type of capital than we are able to provide, 

they are looking for much more capital, much less capital, they are 

looking for more risky capital than what we are providing, or they 

are looking for more like a bank loan type of capital. So it is not 

a fit. 

And then the other 20, it is either something peculiar to the company or just sometimes you just can’t come to a deal. And it is just 

making a deal and sometimes it works and sometimes it doesn’t. 

Mr. PALMER. And just to be clear. 

Chairman BLUM. Mr. Palmer? 

Mr. PALMER. It is not that those 99 don’t ever get funded. They 

might get funding from other sources. They just might be barking 

up the wrong tree and need to get to the right tree. So there is 

some of that, which also matters. 

But, again, the approach, the preparation that people have—and 

this goes to Congressman Lawson’s point earlier of the training— 

when you are approaching a professional firm for institutional investment, what is it you need to explain. You need to have a board, 

you need to have your books looked at internally, with a real hard 

look, you know, what is it you really want to do with your business. 

And that isn’t always sort of lined up coming in before they are 

approached. And so if you don’t have your ducks in a row going in, 

your chance of success coming out are lower. 

Chairman BLUM. When I am asked about—and this will be my 

last question—when I am asked about the health of small business, 

I often talk about a three-legged stool. 

And the legs being, one, the economy in general. I always say 

small businesses don’t worry about taxes if they are not making 

any money. So they need revenues and they need to make a profit, 

first and foremost. So an expanding, robust economy is so important to small businesses. 

Second is the regulatory relief, which we are seeing now, because 

regulations really hit small businesses to a greater extent than 

large businesses. 

And thirdly, tax, tax relief, if they do make a profit, so they can 

keep more of their business, capital in their business. 

Am I forgetting anything there? Is it a four-legged stool, fivelegged stool? What is also important? 

Mr. WALSH. I would add people. I think access to folks where 

your business is located that are trained, that are motivated, that 

you can motivate through your salary or your bonus or your equity 

structure, and retaining those people. 

I think something you have seen recently really pop up, certainly 

in Silicon Valley and some of the other sort of hotter places for 

startups, is the loyalty, that people are changing jobs rapidly. 

SBREP-219A with DISTILLER

26 

So discovering, recruiting, training, and keeping people. I think 

what I would add, what I would suggest is a fourth leg. 

Chairman BLUM. Anyone else? It is a good point. 

Does anyone else up here have any further questions? 

Mr. LAWSON. Mr. Chairman, I just want to state one thing, if 

I could. 

Chairman BLUM. Mr. Lawson, you are recognized. 

Mr. LAWSON. In Florida, they require the businesses to pay the 

intangible tax. But what I noticed, and I brought up to the legislature back then, it cost them more for the CPA than what the tax 

was, you know. 

And so I filed a bill, and some people didn’t quite understand, to up the amount, limit of the intangible tax beyond $25,000. Because 

I was doing it myself and I had to pay the CPA all this stuff, fill 

out all these papers, and so forth, and the fee was not as much as 

it was to pay the CPA, you know. 

So I can understand exactly what you are saying, Mr. Walsh. But 

it was incredible what you have to pay the CPA just to do the intangible tax. 

That is all I want to say, Mr. Chairman. 

Chairman BLUM. Thank you, Mr. Lawson. 

Once again I would like to thank everyone, especially our panelists, for being here today. I believe it is extremely important to 

hear from those working on the ground, on the front lines with 

these programs that we care so deeply about. 

And as we continue to examine many of the SBA’s programs, 

your comments will be most helpful. You play an important role in 

the ability of small businesses to grow and create jobs, so I appreciate you all taking time out of your schedule to be here with us 

today. 

I ask unanimous consent that members have 5 legislative days 

to submit statements and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 11:18 a.m., the Subcommittee was adjourned.] 

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27 

A P P E N D I X 

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Statement for the Record 

By Brett Palmer 

President, Small Business Investor Alliance 

Hearing Entitled "Investing in Small Businesses: The SBIC Program" 

The House Committee on Small Business 

Subcommittee on Agriculture, Energy, and Trade 

November 7, 2017 

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Chairman Blum, Ranking Member Schneider, and Members of the Subcommittee, thank you for the 

opportunity to testify today and for holding this hearing, "Investing in Small Businesses: The SBIC 

Program." SBIA's members are proud of their role in creating small business jobs and are thankful to 

Congress and the Small Business Administration (SBA) for supporting American small businesses. 

The Small Business Investment Company (SBIC) Program, administered by the Small Business 

Administration {SBA), has broad support because the core features of the program address fundamental 

problems in the small business economy: 

• We need more small business investment; 

• We need to create more jobs here in the United States; 

• We need to support jobs domestically and not outsource and offshore our economic dynamism; 

• We need more investment in domestic manufacturing; 

• We need to be very frugal and wise with the taxpayers' money and trust; and 

• We need the government to serve Americans and their interests and not work against them. 

SBIA thanks the members of the Committee for supporting small business investment and job creation 

by unanimously voting through the Committee-and then unanimously through the full House-the 

Small Business Investment Opportunity Act and the Investing in Main Street Act. If we are able to get 

these bills through the Senate, then more small businesses will be able to access growth capital. 

My testimony is broken into three parts. The first section explains how the program works and why it 

has been so successful growing small businesses and creating American jobs. The second section covers 

common questions about the SBIC program. The concluding section covers some of the Issues that 

would benefit small businesses if improved. I have also attached a recent non-partisan Library of 

Congress study on the extraordinary record of SBIC job creation; a small sample set of small businesses 

that have received investment in districts represented by members of this committee; and a state-bystate table of SBIC investment from 2012-2016. 

The Small Business Investment Company Program Overview 

It seems that only bad news gets attention, which does not make it easy for SBICs to get attention 

because SBICs are an American success story. For example, in 2016 SBIC invested a record amount, 

nearly $6 billion, in American small businesses. The program is having the best (lowest) loss rates in its 

59-year history. There is currently unprecedented private sector interest in getting capital to small 

businesses via investment in SBIC funds. A recent Library of Congress study found that SBIC-backed 

businesses created 3 million new jobs and supported an additional6.5 million jobs from 1995-2014 (a 

period that included the Great Recession and the tech bubble recession). These quiet successes were 

achieved while being the only major SBA program that was able to maintain its zero-subsidy rate- even 

through the Great Recession and Financial Crisis. With the help of Congress and SBA, SBICs have seen 

significant operational reforms to the program that have been producing positive results for the 

American small business economy. 

SBICs are highly regulated private funds that invest exclusively in domestic small businesses. At least 

25% of an SBIC's investments must be made in "Smaller Enterprises." (Smaller Enterprise are smaller 

than the SBA's normal small business standards.) SBA currently licenses two types of SBICs: non-levered 

SBICs and Debenture (levered) SBICs. Both forms of SBICs invest in growing domestic small businesses, 

2 
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with non-levered SBICs tending to provide more equity capital and Debenture SBICs tending to provide 

more debt capital. 

SBIC leverage significantly increases the amount of money invested into the small business economy. 

The private capital forms the foundation of an SBIC fund. SBICs raise capital from accredited investors 

and institutional investors (pension funds, university endowments, banks, etc.). After the SBIC applicant 

raises private capital, the SBA applies a rigorous licensing regime. If the SBIC applicant meets the legal 

and performance criteria, then an SBIC license is issued. Once licensed, an SBIC is permitted to access a 

line of credit (SBIC debenture leverage) to increase the amount of capital available for investment. For 

example, an SBIC may raise $50m in private capital and then, after licensure, may access up to an 

additional $100 million line of credit, which combines for a total of $150 million. The leverage is 

provided at a zero-subsidy rate and is eventually paid back in full (plus interest and fees). All of this 

capital is to be invested in domestic small businesses and may not be used for "offshoring," relending, 

project, finance, or for purposes that are not in the public interest. Unlike many government programs, 

the private capital is in first-loss position, which means the private investors lose their money before the 

taxpayer is exposed to risk of loss. This is an important taxpayer safeguard and a key reason why the 

SBIC program has been able to maintain its zero-subsidy rate. The program is effective and distinct 

because the private sector leads with its capital and investment expertise and then SBIC leverage follows 

to augment the impact of the private investment. It is a mark of SBIC industry pride that the program 

continued to maintain its zero-subsidy throughout the Great Recession. 

Since 1958, SBICs have invested over $80 billion in hundreds of thousands of small businesses. 

In FY 2016, SBICs invested $5.99 billion in businesses that employ approximately 122,000 workers 

across the U.S. 

• For FY 2016, 313 SBICs were operating across the United States, which is a similar number as were 

operating 10 years ago. These SBICs managed $27.8 billion in committed capital resources. 

Of the 1,210 U.S. small businesses that received SBIC financing in FY2016, 28% were located in Lowto-Moderate Income (LMI) areas of the country. 

• The SBIC program has operated at a zero-subsidy rate since Congress mandated a zero subsidy in 

the late 1990s. 

• A 2017 study by the Library of Congress found that the average small business backed by a 

Debenture (leveraged) SBIC Fund created approximately 125 new jobs and non-levered funds 

created an additional530 new jobs. 

• Levered funds tend to provide more debt capital and non-levered funds tend to provide more equity 

capital. 

From 1995-2014 SBIC-backed small businesses created over 3 million new jobs and supported an 

additional 6.5 million jobs- all of which were in the United States. 

• Many icons of American industry were once small business that received critical growth capital from 

SBICs including: Apple Computer, Intel, Buffalo Wild Wings, Build-A-Bear Workshop, Callaway Golf, 

Costco, Federal Express, Gymboree, Jenny Craig, Restoration Hardware, and Staples. 

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SBIC Frequently Asked Questions 

How does the SBIC Program Help the Taxpayer and the American Public? 

The SBtC Program helps the taxpayer by providing capital to growing small businesses that in turn hire 

more employees, invest in capital improvements, and generally grow the economy. A 2017 study by the 

Library of Congress found that one new job was created for every 35 dollars of taxpayers' money spent 

administering the program. (The leverage operates at zero subsidy, but there are still some 

administrative costs.) Correlation is not causation, but there is no doubt that the ability of successful 

small businesses to access growth capital empowers them to grow and hire more employees. 

SBIC investments are made in areas of the country and in industry sectors that are commonly 

overlooked by conventional venture capital and private equity. The overwhelming percentage of 

venture capital is invested in Northern California and the New York to Boston corridor. While SBtCs do 

invest in those areas, SBICs invest most of their capital in places other than this investment footprint. 

For example, 28% of SBIC investments are in areas certified as Low-Moderate Income. Even SBICs that 

are primarily located in population centers regularly invest well outside of their local area so the SBIC 

program helps move capital to underserved areas- both urban and rural. 

SBIC investments are commonly made in industry sectors largely passed over by many conventional 

venture capital and private equity funds, including manufacturing and asset-light services businesses. 

Distribution of SBIC Financing Dollars by Industry 

FY 2010-2014 

Tret><rtnrtetirm and 

Wareh•Dus,in!!. 6% 

6% 

Iii Health Care 

Socia! Assistance1 

7% 

_,Numbers will not add to 100% due to rounding. 

mB information, 

4 

Ill Manufacturing, 

28% 

Professional, 

Scientific, and 

Technical Services, 

15% 
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Is the SBIC Program Effective? 

Yes. Multiple studies, including a 2017 Library of Congress study (attached) have found the SBIC 

program is very effective at supporting growing small businesses and creating jobs. 

• It could be even more effective with broader benefits to more communities with modest reforms. 

Is the SBIC Program an Efficient Use of Capital? 

Yes. It is one of the most efficient, job-creating programs within the government. According to a 

2017 Library of Congress study, only $35 in administrative government costs were associated with 

creating each new job. There were only $11 in administrative costs for each additional job 

supported. Further, the fact that the SBIC Program's leverage has successfully sustained its zero 

subsidy for so long is a testament to its operational effectiveness and efficient use of capital. 

Is SBIC Investing the Same as Bank Lending? 

No, SBIC investing and bank lending are very different. 

SBICs provide education, training, and professional guidance that banks generally do not provide. 

• Banks are often only able to provide conventional lending to a small business after an SBIC has 

invested in a small business. 

• SBICs provide long-term capital that empowers small businesses to survive and recover from the 

inevitable surprises that can happen in business. 

• SBIC capital can be in the form of debt, equity, or both. 

Banks and SBICs collaborate, but offer different types of capital so they do not compete. 

Does SBIC Investment Displace Conventional Bank Lending? 

• No. Banks are partners, not competitors. 

• Banks are often only able to provide capital after a business has received SBIC capital because the 

SBIC capital changes the capital structure of the business and thereby makes it more "bankable." 

Over 500 banks, ranging from small community banks to large banks, are investors in SBIC funds. 

• Some banks own non-levered SBIC funds and other banks are forming their own internal SBIC units 

to provide equity capital that the banks cannot otherwise provide. 

If small businesses could access this capital from banks, then they would get bank loans because 

there are thousands of banks and conventional bank lending is less expensive. 

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Bank SBIC 

Provide Debt Yes I Yes 

Provide Equity No Yes 

Provide Convertible Debt No Yes 

Provide Unitranche Capital No Yes 

Can revoke capital on 30 to 60 Generally, Yes No 

day notice in the event small 

business hits a snag or if there 

is a macroeconomic disruption? 

Are loans required to be fully Generally, Yes No 

collateralized? 

Cash Flow Lending Limited Yes 

Able to provide Capital to No Yes 

businesses that are not 

otherwise bankable 

Commonly has a Formal Role No Yes 

on the Board ofthe Small 

Business 

Provides Management No Yes 

Assistance to Help the Small 

Business Grow and Have Good 

Governance 

Does the Government Own Any Part of these Small Businesses? 

• No. The government does not invest in or own any portion of any small businesses. 

There was a time (1994-2004) when the government effectively participated in the ownership of 

some types of SBIC funds, and therefore the small businesses, but that program ceased licensing 

funds in 2004. 

Is the Government a "Limited Partner" in SBIC Funds or Does It Own a Part of the SBIC Fund? 

No. The government manages access to and guarantees a private sector credit facility, but is not a 

"Limited Partner." The government is in a more advantaged position than the private sector limited 

partners. 

The SBA does not own an interest in SBICs or their portfolio companies. 

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• The SBA stopped being a "fund of funds" and stopped being a "limited Partner" with the end of 

licensing funds where the government participated in the profits (and losses) in 2004. 

The SBA is a regulator and a guarantor of credit facility. 

Can the 7a and 504 programs do what the SBIC program is doing? 

SBA7a SBA504 SBASBIC 

Government Yes Yes No 

(Taxpayer) Guarantee 

on Each Investment 

Must the small Yes Yes No 

business have 

collateral or a personal 

guarantee to loan 

against? 

Does the Government Choose Which Small Businesses Receive Capital? 

All SBIC investments are made entirely by the private sector via investing professionals without the 

government's involvement. Investments are made for real economic reasons. SBICs invest in growing 

small businesses and then notify the SBA which small businesses received capital after the investment 

has been made. There are size standards and other basic requirements and taxpayer protections that 

must be adhered to, but government involvement stops there. The program is successful at creating 

jobs and growing small businesses because it allows the private sector to find the businesses with the 

greatest growth potential and direct capital to them. 

What Happens if an Investment Underperforms? 

A single SBIC will invest in many different small businesses. Unlike the 7a and 504 programs, when a 

single investment underperforms or loses money, only private capital is lost, not taxpayer guaranteed 

capital (leverage). The profits from the other investments cover the losses from the isolated 

underperforming investment(s). If the profits from the other investments are inadequate to cover all the 

losses, then the private investors' capital is lost before taxpayer money is at risk. There is generally a 

large private capital cushion that would need to be burned through before the taxpayer guarantees 

would be realized. Even ifthe guarantees would be used, SBIC funds pay an annual fee on their leverage 

that is designed to offset losses and maintain the statutorily-required zero subsidy rate. SBA can cut off 

SBICs from accessing additional leverage or trigger an orderly liquidation process run. Even if a fund is 

ordered into orderly liquidation, it does not necessarily lose private capital or realize losses for the 

taxpayer. 

What Built in Accountability Exists in the SBIC Program? 

There is extensive accountability built into the program. Private capital being in first-loss position is a 

very effective accountability tool because there is no "gambling with other people's money." Private 

capital being in first-loss position is an important, built-in taxpayer safeguard. The SBA has reporting 

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obligations that ensure the SBA is fully apprised of the health of the fund, and the funds receive 

independent audits plus SBA examinations. The SBA can cut off underperforming SBICs from further 

leverage and can even require disgorgement if an investment does not meet the SBA's statutory and 

regulatory requirements. SBA can require an orderly wind down of the SBIC and limit compensation. In 

extreme cases, SBA can remove the fund managers. 

Are Repeat Licensees a Good Thing? 

Repeat licensees are exceptionally good for the small businesses and the taxpayer. Repeat SBICs 

specialize in small business investing, which is good for small business, the SBA, and ultimately the 

taxpayer. SBICs are only able to receive an additional license iftheir previous fund was a success and the 

private sector was willing to commit its own money first. The private sector leads, and only then can a 

license be issued. The market speaks before the SBA licenses. Keeping successful fund managers in the 

program and culling poor performers is one of the reasons the program has been so good at growing 

businesses and has been able to sustain its zero-subsidy rate. Congress recognized the importance of 

repeat licensees by raising the "family of funds limit" to allow more successful managers to continue to 

invest more money into more growing small businesses. The GAO studied this issue in 2016 and found 

repeat licensees were far less likely to be put into an orderly wind down than first time funds. 

Is the SBIC Program Stress Tested and Sound? 

The Great Recession and Financial Crisis were a real-life stress test. Unlike other SBA programs, the SBIC 

Debenture program was able to maintain its zero-subsidy rate. Further, many small businesses were 

able to survive the Great Recession because they were backed by SBICs. Banks were forced by their 

regulators to pull lines of credit from thousands of small businesses, which then failed. SBIC-backed 

small businesses benefitted from the longer-term capital provided by SBICs and had a much better 

chance of surviving. 

Opportunities for Improvement 

Licensing 

licensing is down over 40% (year over year) and has slowed considerably since January. This drop off 

was not caused by lack of private market interest in investing in SBICs. To the contrary, there is record 

institutional interest in investing in domestic small businesses via SBICs. As many polls have pointed out, 

small business optimism has been inspired by this Administration. In the face of this licensing 

slowdown, licensing staff have been loaned to disaster loan processing, which will further slow licensing. 

Fund managers, even repeat SBICs, are uncertain as to what is required for licensure or how long it will 

take. This is particularly foreboding to smaller funds and funds that are not in financial centers for 

whom taking the risk to form an SBIC is a very big personal, professional, and financial risk. This lower 

licensing rate is likely a leading indicator of reduced future investments in small businesses. To quantify 

what this slow down and confusion means, there is currently nearly $1 billion of private investment for 

small businesses that is in licensing limbo, and some private institutions have pulled out of investing in 

new Small Business Investment Companies. 

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The licensing process for repeat licenses, which the GAO recently studied and found to be much less 

risky, should be clear and relatively fast because these fund managers are well known to SBA and have a 

history of performance and compliance. However, the licensing process for all funds, even repeat SBICs 

has slowed. For example, to pass the "Green light" phase of the licensing process used to take two 

weeks but now requires a 4-6-month advance notice before filing the application, and then it will take 

several more months to get a decision. These new built-in delays do not apply to new fund investors 

with whom the SBA has no direct experience and has never regulated before. To be clear, new funds are 

experiencing all sorts of new delays too, but they are different delays. SBICs would like a return to a 

clearer, faster process so they can increase small business investment, which would seem very much in 

line with President Trump's pro-jobs, pro-small business, pro-manufacturing, America-first economic 

agenda. 

Similarly, the Investment Division's committee process has become protracted for performing licensing 

interviews, licensing reviews, and approving leverage. The committee reviewing license applications 

used to meet regularly (often weekly), but now meets irregularly with meetings and interviews being 

rescheduled more often than occurring as scheduled. The committee chair has ceased the decades-long 

practice of actively participating and attending nearly all the interviews for licensure. Lack of consistent 

scheduling, attendance, and constructive engagement have added unnecessary delays. When the 

committees do meet, the agenda is commonly not followed and key decisions are regularly not made or 

repeatedly postponed. Additional delays have been caused by new internal policies that the committee 

performing interviews must now give a minimum of 28-day notice before internally scheduling a 

licensing interview, and the committee no longer is allowed to deliberate and decide immediately after 

the interview while the information is fresh in their minds. There is now a mandatory delay period 

before the matter can be discussed and decided, which runs counter to private sector best practices and 

creates more unnecessary delays. Even when licensed, actual documentation of being licensed is taking 

an additional several months. Scheduling delays are compounded by more and more scheduling delays. 

The industry has not seen delays of this magnitude since 2007-2008. 

Licensing Recommendations 

SBA should return to a more timely licensing process, particularly for repeat licensees whose tracks 

records are already very well-known and documented with the SBA. SBA should also return to having 

regularly scheduled meetings. Both the industry and the SBA would benefit from clearly articulated 

timelines and applicant feedback. 

Finally, SBA should provide a more complete picture of what is happening in the licensing process by 

regularly reporting data that recognizes the numbers and timeframes for applications and similar 

regulatory requests that have been "set aside" or otherwise sit in procedural limbo and may not be 

showing up in the system now. 

Examinations 

SBICs are regularly examined by private, independent auditors. In addition to these conventional audits, 

SBA performs additional regulatory examinations. Delays in these examinations have significantly 

increased this year, particularly recently. For example, the year-over-year number of exams performed 

is down 35% as ofSBA's most recent data release (June 30, 2017), and cycle times are up 33%. These 

numbers are worse for leveraged funds. From January 1, 2017 to June 30, 2017, examination cycle time 

for leveraged funds has increased from 10.8 months to 16.6 months. The delays in examinations do not 

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mean the SBIC has never been examined before (they likely have many times), or that the SBA does not 

have insights about what is going on in the SBIC, because SBICs still file reports after every investment 

and provide detailed quarterly and annual reports to the SBA. SBICs have no control over when 

examinations take place, and yet SBICs are being frozen in licensing or in securing leverage 

commitments because the SBA has not performed a recent enough examination. 

Examination Recommendations 

SBA deserves credit for having recently contracted out some of their examinations. SBA recently made 

another positive reform by allowing SBA examiners to perform multiyear exams instead of doing 

multiple single-year exams. SBIA would also suggest that for SBICs with multiple licensees that 

examiners should try to examine all licenses at the same time to reduce disruption to the SBIC's 

operations and to reduce wasting SBA's travel budget and human resources. We encourage Congress to 

support SBA's efforts to get caught up with the examinations, and we ask that this Committee maintain 

its oversight role to make sure the examinations backlog is improving. Finally, SBA should recognize that 

SBICs have no control over the timing of their examinations and should not penalize SBICs for matters 

that are solely under SBA's control. 

SBIC Program Transparency 

SBIC data has become less transparent and more outdated. The 504 and 7a programs release their data 

weekly, but the SBIC program releases its data quarterly, and then holds the data back for nearly two 

months before releasing it. This data used to be released monthly in the first few days of the new 

month. Further, SBIC program data and reports have been removed from the SBA website. 

SBIC Program Transparency Recommendations 

The SBICs do not need weekly data like the 7a and 504 programs, but the program data should be made 

available in a timely fashion. SBIA believes this data should be released no later than two weeks after 

the reporting period ends with the reporting period being no less than quarterly. SBA should return to 

posting the information on the SBA website. SBA also should release the 2016 SBIC Program Annual 

Report that was completed at the beginning of FY 2017 but is still unpublished. 

Informational Technology (IT) 

SBA staff cannot serve the public as effectively as the public deserves without the tools to do the job 

efficiently. SBA deserves credit for undertaking an effort to make IT improvements, and SBIA asks 

Congress to support their modernization efforts. 

Operations 

The Investment Division's Operations section is run by experienced managers and frontline staff who 

regularly engage directly with SBIC fund managers as their primary regulatory contact. Many of these 

SBIC-Regulator contacts have become less constructive because the SBA staff are no longer clear about 

what they are allowed to do and what are the current policies or interpretations. This is not because 

they are not competent but because policies and practices are changing without advance notice to the 

SBICs or the staff. Without formal communication to them or the industry it is very difficult to provide 

informed regulatory guidance. This is currently happening with the proposed Tech Note 7b, which has 

been proposed but not finalized. Despite not being finalized, it is being enforced much to the surprise of 

SBICs and some SBA staff. 

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Operations Recommendations 

The Investment Division should provide clear polices and guidance to both SBA staff and SBICs with 

realistic timelines for completing tasks. Communication of changes before they go into effect would also 

be very helpful to both the SBA and the private sector. Finally, applying the rules with a greater degree 

of consistency and clarity would benefit both SBA and SB!Cs. 

Conclusion 

Thank you for considering the views of the SBIC industry. We thank you for your consideration of these 

matters. We also thank the SBA for their time and effort in working with SBICs to grow the small 

business economy. Without the support ofthe Congress, the SBA, and the private sector, this program 

would not be able to provide such a positive impact for the taxpayers. 

I would welcome any question you may have for me. 

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SS!CProgram 

FlnanclngtoBuslnessesbyStata 

FlscaiYaar2012throughFlscaiYear2016 

prapamd:Novamber8,2016 

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Sample of Small Businesses Invested in by Small Business Investment Companies 

Member State District Small Business Business Description SBICFund 

Chairman Steve Chabot OH 1 Colerain RV Recreational vehicle retailer NorthCreek M

Exposition Services LLC (d/b/a Fern Exposition) Service contractor for events NorthCreek M

Rep. Steve King lA 4 NutriQuest Agricultural products producer and researcher Capital Alignm

Rep. Dave Brat VA 7 Home Care Delivered Medical supplies delivery Tecum 

eServicesLLC Natural gas logistics, trading, and marketing Plexus 

ncgCARE Behavioral healthcare provider NewSpring Ca

Rep. Steve Knight CA 25 Pharmaceutic Litho & Label Co. Pharmaceutical labeling Ironwood Cap

Rep. Trent Kelly MS 1 Winston Plywood & Veneer Plywood mill and products manufacturer GarMark Part

Rep. Rod Blum lA 1 RuffaloCODY Enrollment and fundraising management for higher education and nonprofits AAVIN 

Happy Joe's Pizza and Ice Cream Pizza parlor chain AAVIN 

Henderson Products, Inc. Municipal snow and ice control equipment manufacturer Eagle Private C

Rep. Jennifer Gonzalez-Colon PR EDICCollege For-profit higher education institution Renovus Capit

Rep. Don Bacon NE 2 PRIMUS Sterilizer Company, LLC Sterilizer equipment manufacturer Blue Sage Cap

Rep. Brian Fitzpatrick PA 8 Lynn Electronics Data and Telecommunications products manufacturer NewSpring Ca

Atlantic Diagnostic Labs Microbiology, chemistry, toxicology, immunology, and virology testing lab NewSpring Ca

MPD Holdings Chemical manufacturing Plexus Capital 

Rep. Roger Marshall KS 1 PRIMUS Sterilizer Company, LLC Sterilizer equipment manufacturer Blue Sage Cap

KBK Industries Fiberglass reinforced plastic tank supplier and oil recovery specialist Main Street C

Rep. Ralph Norman sc 5 Sunbelt Thread & Packaging Inc Packaging material and automated packaging provider Kian Capital 

Rep. Dwight Evans PA 2 City Tap house Restaurant chain Balance Point 

Saxbys Coffee Coffee chain Plexus Capital 

Cellucap Manufacturing Disposable, protective safety apparel manufacturer NewSpring 

Rep. Stephanie Murphy FL 7 Avant Healthcare Registered nurse staffing agency LFE capital 

American in-Home Care Senior home health care Kian Capital 

DesignShop Services Custom trade show exhibits and displays fabricator Plexus Capital 

Girard Environmental Services Commercial landscaping and maintenance NorthCreek M

Florida Autism Center Autism therapy and behavioral development centers Resolute Capi

Rep. AI Lawson FL 5 BP Express lntermodal transportation services Tecum Capita

Florachem Holdings Pine, citrus, and plant-based chemical goods producer Plexus Capital 

TrueNet Communications Telecommunications service provider Eagle Private 

Rep. Alma Adams NC 12 Reagents, Inc. Laboratory chemicals and chemical solution provider Tecum capita

SPATCO Energy Solutions Liquid energy handling equipment provider Kian Capital 

Agility Recovery Solutions, Inc. Business disaster recovery consultancy Plexus Capital 

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Rep. Brad Schneider IL 

Huseby Inc. 

TITAN Technology Partners 

Carolina Beverage Group 

10 Spire Hospitality 

Sayers Technology 

Global litigation support services 

Global cloud hosting and managed services 

Contract filler for national and international beverage brands 

Property management 

Technology solutions consultancy 

Plexus Capital Plexus capital 

Plexus capital Kian Capital 

Merion Partne
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Small Business Success Stories with the Help of Small Business Investment Companies 

NutriQuest, Mason City, lA 

NutriQuest, founded in 2007, is a manufacturer and researcher of nutritional and nonnutritional products, services, and technologies for the agriculture industry. NutriQuest's 

portfolio offers research-based feed additives, probiotics, protein technologies, nutritional 

quality and value monitoring services, water quality products, and humane euthanasia 

technology, among others that improve production performance for the agriculture industry at 

the best costs possible. 

In March 2015, Capital Alignment Partners, based out of Nashville, TN and Newport Beach, CA, 

invested in NutriQuest to finance the purchase of the company by NutriQuest's management 

team. When Capital Alignment Partners made the investment, NutriQuest had employees 

numbering in the low 30s. Today, the business employees over 50 people. 

NutriQuest has a customer base of over 4 million sows in the United States and is growing in 

the both the U.S. and international poultry and ruminant sectors. 

Happy Joe's Pizza and Ice Cream, Bettendorf, lA, with numerous locations 

Happy Joe's is a family-run chain pizza parlor that was founded in 1972 in the Village of East Davenport, 

lA, with a loan provided by the Small Business Administration. The company provides franchise 

opportunities and is philanthropically active in its communities with Happy Joe's Kids Foundation, which 

strives to meet the needs of children with development disabilities and delays and special needs. Today, 

in addition to a multitude of pizzas including their famous Taco Pizza, Happy Joe's offers pastas, 

sandwiches, salads, and ice cream, among a variety of other foods, all in a family-friendly setting. 

In October 2016, Cedar Rapids, Iowa-based private investment group AAVIN served as the financial 

investment partner for developing a new ownership model for Happy Joe's. This new ownership model 

will enable the company to expand their locations, create more jobs, and acquire other regional pizza 

chains to do the same. 

As of today, Happy Joe's has 50 stores across seven states, including Iowa, Missouri, Illinois, Wisconsin, 

Minnesota, North Dakota, and even Arizona. 

Henderson Products, Inc., Manchester, lA 

Henderson Products, Inc., was founded in 1946 in Cedar Rapids, lA as a manufacturer of agricultural 

attachments and spreading equipment. Later in 1958, Henderson moved to Manchester, lA. All of 

Henderson's products are manufactured in their 175,000 square foot facility in Manchester. 
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In 2009, Eagle Private Capital, based out of St. Louis, MO, made an investment in Henderson to facilitate 

further growth. When Eagle invested in Henderson, it was a leading manufacturer and up-fitter of 

heavy-duty truck equipment used by municipalities for snow removal and ice control. 

Eagle partnered with Cameron Holdings, a St. Louis-based family office investor focused on acquiring, 

building and operating middle-market manufacturing, industrial service and value-added distribution 

companies across a broad range of end markets, to grow Henderson. Cameron purchased Henderson, 

and Eagle made an investment of debt and equity. 

At the time of Eagle's investment, Henderson employed 225 people. Around the time of Eagle's exit in 

2013, Henderson created 95 jobs and grew its revenue by over 15%. 

Florachem, Jacksonville, Fl 

Florachem was founded in 1988 by Steve McAllister, who had spent more than 10 years working for a 

large chemical company. During his time at that company, McAllister established relationships to supply 

U.S-based small businesses with specialty chemicals used in manufacturing processes. These specialty 

chemicals include aroma chemicals and essential oils to provide fragrance and flavor. 

In the years following Florachem's founding, Plexus Capital, based out of Charlotte, NC and Raleigh, NC, 

made an investment to grow the company. At the time ofthe investment, Florachem had 16 employees 

that served more than 200 small manufacturing customers across the United States. Plexus exited 

Florachem in 2007 and today the company has more employees with additional locations now including 

Newark, NJ, Springfield, MO, and Mission, TX that serve distribution partners in over 20 countries. 

Spire Hospitality, Deerfield, ll 

Spire Hospitality is a full service third-party hospitality management company with more than 5,870 keys 

under management across 20 hotels operating under a variety of well-known domestic hotel brands. 

Spire began in 1980 as Lane Hospitality, and quickly gained prominence as outstanding owners and 

operators of quality hospitality real estate assets. This success and experience empowered the company 

to continue growing into the strong company it is today. In 2012, AWH Partners, aNY-based real estate 

investment firm with its own extensive background in the real estate and hospitality industries, acquired 

Lane Hospitality. This new company was then rebranded as Spire Hospitality. 

In December 2015, Kian Capital, based out of Charlotte, NC and Atlanta, GA, made an investment to 

finance recapitalization of the company and provide growth capital. This investment is continuing to 

spur the growth initiatives Spire strategized, including creating more jobs and expanding services. 
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LIBRARY OF 

CONGRESS 

Measuring the Role of the SBIC Program in 

Small Business Job Creation 

A Report Prepared by the Federal Research Division, 

Library of Congress 

under an Interagency Agreement with the 

Office of Investment and Innovation, 

U.S. Small Business Administration 

January 2017 

Authors: John Paglia, PhD 

David T Robinson, PhD 

Research Support: Seth Elan 

Wm. Noel lvey 

Project Manager: Malinda Goodrich 

Federal Research Division 

Library of Congress 

Washington, D.C. 20540-4840 

Tel: 202-707-3900 

Fax: 202-707-3920 

E-Mail: frds@loc.gov 

Homepage: http://www. loc.govlrrlfrdl 

* 69 Years of Service to the Federal Government * 

1948-2017 
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Library of Congress- Federal Research Division Measuring Small Business Job Creation 

PREFACE 

The U.S. Small Business Administration (SBA) oversees the Small Business Investment 

Company (SBIC) Program, which provides an alternative source of financing for small 

businesses lacking access to adequate capital from traditional sources, such as banks and credit 

unions. Since the program's inception in 1958 through December 2015, SBICs have deployed 

US$80.5 billion in capital (two-thirds from the private sector) into approximately 172,800 

financings. 1 

The goal of this report is to contribute to a deeper understanding of the role that the SBIC 

Program has played in creating and sustaining jobs in the small business sector using data 

collected exclusively by the SBA under the SBIC Program. The report addresses key questions 

concerning the number of jobs created and/or sustained by the program. 

The SBA's Office of Investment and Innovation (011) contracted with the Federal Research 

Division (FRD) of the Library of Congress for an independent evaluation of the SBIC Program. 

FRD provides customized research and analytical services on domestic and international topics 

to agencies of the U.S. government, the government of the District of Columbia, and authorized 

federal contractors on a cost-recovery basis. 

FRD enlisted the aid of two experienced scholars with particular expertise in financial markets to 

perform this research: 

Dr. John Paglia is a professor of finance at Pepperdine University's Graziadio School of 

Business and Management, and founding executive director of the Peate Institute for 

Entrepreneurship. Dr. Paglia also founded and directed the Pepperdine Private Capital 

Markets Project, which examines the demand for capital by and financing success rates 

for business owners. The project also examines investments by private equity groups, 

venture capital firms, and mezzanine funds (among more than a dozen other types of 

financing), including activity in the lower-middle market, which is defined as the market 

segment containing businesses with between US$5 million and US$1 00 million in annual 

revenues. 

1 U.S. Small Business Administration (SBA), Offering Circular: Guaranteed 2.507% Debenture Participation 

Certificate. Series SBIC 20 I 6-10 A, March 14, 2016, 7, https://www.sba.gov/sites/default/files/SBIC _ 2016-1 OAcusip-831641-FF7.pdf. 
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Library of Congress- Federal Research Division Measuring Small Business Job Creation 

- Dr. David T. Robinson, a professor of finance and the J. Rex Fuqua Distinguished 

Professor of International Management at Duke University and a research associate at the 

National Bureau of Economic Research. Dr. Robinson has published several papers in the 

fields of entrepreneurial finance, venture capital, and private equity, and has conducted a 

number of studies that analyze the conditions and performance of the financial sector 

serving young and small businesses, both on the equity side and on the debt side. 

The analysis in this report is based on 1995-2014 SBIC data from SBA Portfolio Financing 

Report (SBA Form I 031) filings, which are submitted by SBICs within 30 days of closing on a 

financing, and SBA Annual Financial Report (SBA Form 468) filings, which are audited and 

submitted by SB!Cs annually. The authors used personal interviews, surveys, and external data 

sources to augment and validate the data where possible to build the fullest picture possible of 

the investment behavior of SBIC funds. 

This report represents an independent analysis by FRD and the authors, who have sought to 

adhere to accepted standards of scholarly objectivity. It should not be construed as an expression 

of an official U.S. government position, policy, or decision. 

The SBA makes no representation as to the analysis or calculations performed by the Library of 

Congress or its employees or contractors and reported in this study. The SBA has not verified the 

analysis or calculations performed in this study. This study was conducted by third parties not 

affiliated with the SBA and is intended to be independent from the SBA. 

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Library of Congress- Federal Research Division Measuring Small Business Job Creation 

TABLE OF CONTENTS 

PREFACE ........................................................................................................................................ i 

OVERVIEW OF FINDINGS ......................................................................................................... I 

BACKGROUND ON THE SBIC PROGRAM .............................................................................. 4 

Description of SBICs .................................................................................................................. 4 

How SBICs Work ....................................................................................................................... 4 

Currently Active SB!Cs .............................................................................................................. 6 

Costs of the SBIC Program ......................................................................................................... 7 

Previous Findings on Job Creation by the SBIC Program .......................................................... 7 

MEASURING THE ROLE OF THE SBIC PROGRAM IN SMALL BUSINESS JOB 

CREATION .................................................................................................................................... 8 

Methodology ............................................................................................................................... 8 

Number of Portfolio Companies Used in This Analysis ............................................................ 9 

Measuring Job Creation ............................................................................................................ I 0 

Measuring Total Investment ..................................................................................................... II 

Measuring the Employment Impact oflnvestments ................................................................. II 

MEASURING THE EMPLOYMENT IMPACT OF THE SBIC PROGRAM ........................... 12 

Measuring Job Creation in SBIC-Funded Portfolio Companies ............................................... I2 

Measuring Total Investment in SBIC-Funded Portfolio Companies ........................................ 13 

Measuring the Employment Impact ofSBIC Funding ............................................................. 14 

MEASURING THE GOVERNMENT COST OF THE SBIC PROGRAM ................................ I6 

CONCLUSION ............................................................................................................................. l8 

APPENDIX I. GLOSSARY ......................................................................................................... 20 

APPENDIX II. SBIC LIFE CYCLE ............................................................................................. 24 

APPENDIX III. SBA PORTFOLIO FINANCING REPORT (SBA Form I03I) ....................... 25 

APPENDIX IV. SBA ANNUAL FINANCIAL REPORT (SBA Form 468, Schedule 8) ........... 27 

BIBLIOGRAPHY ......................................................................................................................... 28 

TABLE OF FIGURES 

Figure I. SBIC Public-Private Partnership ..................................................................................... 5 

Figure 2. SBIC Life Cycle ............................................................................................................ 24 

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Library of Congress Federal Research Division Measuring Small Business Job Creation 

TABLE OF TABLES 

Table I. Number of Portfolio Companies Receiving Funding from SBIC Funds ........................ 10 

Table 2. Total Job Creation in SBIC-Funded Portfolio Companies ............................................. 12 

Table 3. Jobs Created per SBIC-Funded Portfolio Company ....................................................... 13 

Table 4. Total Dollars Invested by Type of Fund and Security .................................................... 14 

Table 5. Ratio of SBIC Dollars Invested to Jobs Created and Jobs Created or Sustained by Type 

ofFund .............................................................................................................................. 15 

Table 6. Number of Portfolio Companies Receiving Funding from Active SBIC Licensees ...... 16 

Table 7. Ratio of Total SBIC Financings to Jobs Created and Jobs Created or Sustained by Type 

of Fund for Active SBICs ................................................................................................. 16 

Table 8. Breakdown ofSBIC Administrative Costs ..................................................................... 17 

Table 9. SBIC Administrative Costs per Job Created and Job Created or Sustained ................... 18 

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Library of Congress Federal Research Division Measuring Small Business Job Creation 

OVERVIEW OF FINDINGS 

One of the core missions of the U.S. Small Business Administration (SBA) is to help Americans 

start, grow, and build their own businesses. The SBA's Small Business Investment Company 

(SBJC) loan program assists in these efforts by harnessing "the talent of professional investment 

fund managers to identify and finance promising small businesses."2 These small businesses 

support jobs across a diverse set of industries, including manufacturing, transportation, and 

technology. For this reason, the SBA approached the Library of Congress's Federal Research 

Division (FRD) to assess the following about the jobs created and/or sustained by the SBJCs and 

portfolio companies participating in the program: 

- How many jobs have been created by companies that received funding from SBJCs? 

- How many jobs have been sustained by companies that received funding from SBICs? 

- How did the rates of job creation vary according to the type of SBJC that provided the 

funding? 

- How many jobs have been created or sustained per dollar of SBIC financing? 

- What have been the government administrative costs associated with the jobs created or 

sustained? 

Statistical analysis of the SBA's data concerning SB!Cs has yielded the following answers to 

these questions: 

- The SBIC-funded small businesses in the sample used in this report created almost 3 

million jobs during the sample period (October 1995-December 20 14). This figure is 

based on observations from 11,681 SBIC-funded firms. 

- The SBJC-funded small businesses in the sample used in this report created or sustained 

almost 9.5 million jobs during the sample period. Jobs created or sustained is an 

expanded scope of job creation that includes not just the jobs that were added after a firm 

received SBIC funding, but also those jobs that were maintained in these businesses 

during the time the companies received such funding. 

- Companies funded by non-leveraged SB!Cs (those that are licensed with the intent of 

never issuing leverage, which include bank-owned SB!Cs) created the most number of 

jobs during the sample period, at 530 jobs per firm on average. Businesses funded by 

SB!Cs in the SBA's participating securities program created the second highest, at 438 

2 SBA, The Small Business Investment Company (SBIC) Program Overview, last updated February 24, 2016, 

https://www .sba.gov/sites/default/files/files/SB IC _Program_ Executive_ Summary_ 20 !6.pdf. 
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Library of Congress Federal Research Division Measuring Small Business Job Creation 

jobs per finn. Debenture-funded companies created an average of 125 jobs per finn, 

while businesses financed through the specialized SBIC (SSBIC) created an average of 

22 jobs per firm. On average, employment in small businesses funded by these SBIC 

programs grew by 45.6 percent. 

On average, one new job was created for every US$14,458 of funding invested through 

the SBIC Program, while an average of one job was created or sustained for every 

US$4,525 invested. Restricting the analysis to only those firms financed through active 

licensees, the authors found that one new job was created for every US$16,340 invested, 

and one job was created or sustained for every US$4,603 ofSBIC funding. 

Between 1999 and 2015, the net government administrative case was about US$0.0024 

per dollar of funding deployed, or US$2,400 of government administrative cost for every 

US$1 million of capital deployed. This, in turn, means that the average administrative 

cost was approximately US$35 per job created, and about US$11 per job created or 

sustained. 

These findings indicate that SBIC-funded small businesses are a robust source of job creation in 

the U.S. economy. Yet, the averages reported above mask a tremendous amount of finn-level 

heterogeneity in job creation. 

While the findings in this report show that SBIC-funded small businesses are an important 

source of job creation, the authors must acknowledge several important caveats and inherent 

limitations in this analysis. Because the SBIC data only track finns during the time that they are 

receiving SBIC funding, it is possible that these businesses change their employment patterns 

after those funds go away. This could result in an over- or under-counting of the current 

employment numbers in these companies. The authors also do not know the total amount of 

capital that these businesses received from other sources-funding from banks and other capital 

providers could be important for many portfolio companies. The SBA only began tracking the 

size of the round or deal in which the SBI C participated as part of its financing fonn in 2013, so 

that they could better understand the contribution to the total financing by SBICs. Based on the 

analysis, the authors found that, on average, SB!Cs contributed around 40 percent of the total 

financing received in each financing round or deal since the SBA started tracking this figure. 

3 SBA provided administrative costs on the SBIC program from its program overviews. Administrative costs 

include the direct costs from the operating budget, including contracts, compensation and benefits, but may not 

include agency wide costs, such as rent and telecommunications and indirect costs. SBA also provided the 

administrative fees it collected to offset its administrative costs. The net government administrative cost was 

calculated by subtracting administrative fees from the administrative direct costs identified in its program overview. 

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A small number of SBIC-funded companies grow to become important job creators, but most do 

not. Indeed, this finding comports with broader patterns of employment in the small-business 

sector. A growing body of economics research has stressed that most small businesses do not 

create jobs; instead, most analysis suggests that a relatively small number of firms is responsible 

for a relatively large fraction of overall job growth.4 

Finally, at a conceptual level, it is difficult, if not impossible, to know what employment in these 

companies would have looked like in the absence ofSBIC funding. Thus, it is hard to attach a 

causal interpretation to the numbers presented here. The statistics on how many dollars were 

required to create a job should be interpreted with these caveats in mind. 

4 For example, see Erik Hurst and Benjamin Wild Pugsley, "What Do Small Businesses Do?" (NBER Working 

Paper 17041, National Bureau of Economic Research [NBER], Cambridge, MA, 2011 ), http://www.nber.org/ 

paperslwl7041.pdf; John C. Haltiwanger, Ron S. Jarmin, and Javier Miranda, "Who Creates Jobs? Small vs. Large 

vs. Young" (NBER Working Paper 16300, NBER, Cambridge, MA, 2012), http://www.nber.orglpaperslwl6300.pdf; 

and Manuel Adeline, Song Ma, and David T. Robinson, "Firm Age, Investment Opportunities and Job Creation" 

(NBER Working Paper 19845, NBER, Cambridge, MA, forthcoming). 

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BACKGROUND ON THE SBIC PROGRAM 

Description of SBICs 

The SBA was established in 1953 to promote the development of small businesses by providing 

"loans, loan guarantees, contracts, counseling sessions and other forms of assistance." The 

organization's authorizing legislation was the Small Business Act, which created the agency to 

"aid, counsel, assist and protect, insofar as possible, the interests of small business concerns." In 

1958, the Small Business Investment Act created the SBIC Program, under which the SBA 

"licensed, regulated and helped provide funds for privately owned and operated venture capital 

investment firms."5 The U.S. government designed the program to provide debt and equity 

financing to high-risk small businesses lacking access to adequate capital from traditional 

sources.6 Since the program's inception in 1958 through December 2015, SBICs have deployed 

US$80.5 billion in capital (two-thirds from the private sector) into approximately 172,800 

financings. 7 

How SBICs Work 

Fund managers submit applications to the SBA for licenses to operate SBICs, which typically 

combine equity investments from private investors-such as pensions, foundations, banks, and 

high-net-worth individuals-with government-guaranteed debt financing from the SBA. In the 

process, SB!Cs leverage their equity capital, resulting in a capital structure (debt-plus-equity 

financing) that reduces the weighted average cost of capital and boosts returns on equity. The 

U.S. Congress permits the SBA to guarantee leverage, known as debentures, which are issued to 

SB!Cs for up to three times the amount of private equity (although in most cases the limit is set 

at twice this amount). 

The SBIC, typically formed as a limited partnership, invests in a portfolio of small businesses. 

When formed as a limited partnership, an SBIC-itself a limited partnership--has a general 

partner that manages the operations of the fund and limited partners who are passive investors. 

As the investments play out and the SBIC winds down, it repays its debt to the SBA and shares 

'SBA, "History," accessed April7, 2016, https://www.sba.gov/about-sba/what-we-dolhistory. 6 SBA, The Small Business Investment Company (SBJC) Program Overview. 7 SBA, Offering Circular: Guaranteed 2.507% Debenture Participation Certificate, 7. 

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its profits with the investors (see fig. 1).8 See Appendix II for a full description of the SBIC life 

cycle. 

Figure 1. SBIC Public-Private Partnership 

Source: "Bridging the Capital Fonnation Gap: The Small Business Administration 

video, 57:07, from the Association for Corporate Growth, April 12, 2016, https://vimeo.com/162594659. 

SBICs enable SBA-guaranteed leverage up to two times the amount of private capital, subject to 

caps ofUS$150 million and US$350 million for, respectively, individual funds and families of 

funds. 9 As a result, SBIC business licensees are subject to various investment criteria. The most 

important criterion is that SB!Cs must invest in small businesses, which the SBA defines (solely 

for the purpose of the SBIC Program) as those having less than US$19.5 million in tangible net 

worth and an average net income for the preceding two years of less than US$6.5 million. The 

SBA also counts small businesses that comply with the agency's size standards in terms of the 

8 SBA, The Small Business Investment Company (SBIC) Program Overview. 9 SBA, The Small Business Investment Company (SBIC) Program Overview. 

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number of employees or average annual receipts, as calibrated according to industry. 10 These 

standards are set out in the North American Industry Classification System (NAICS). 11 

The SBIC Program is a particularly attractive investment target for the banking industry for two 

reasons. First, it is exempt from the Volcker Rule, a provision of the Dodd-Frank Wall Street 

Reform and Investor Protection Act that prohibits banks from owning hedge or private equity 

funds. 12 Second, investments in SB!Cs may qualify for Community Reinvestment Act credits 

since they are presumed to promote the economic development of all members of a community, 

including residents of low- and moderate-income neighborhoods. 13 Increased bank participation 

in the SBIC Program in recent years has steadied investment demand, according to American 

Banker magazine. 14 

Currently Active SBICs 

As of September 30, 2015-the end of the U.S. government fiscal year (FY)--there were 303 

licensed SB!Cs, of which: 

205 belonged to the ongoing debenture program (generally with a focus on later-stage, 

mezzanine, and buyout investments using primarily debt and hybrid financing), 15 

46 belonged to the discontinued participating securities program (with a high percentage 

of early-stage investments using equity financing), 

43 were non-leveraged (generally with a focus on early-stage and later-stage equity 

investments), and 

9 belonged to the discontinued SSBIC program (with a focus on minority-, women-, and 

veteran-owned businesses using primarily loans ). 16 

10 Compliance with Size Standards as a Condition of Assistance, 13 C.P.R.§ 107.700 (2009); What Size Standards 

are Applicable to Financial Assistance Programs?, 13 C.P.R.§ 121.301 (2016). 11 SBA, "Summary of Size Standards by Industry Standard," last updated February 26, 2016, https://www.sba.gov/ 

contracting/getting-started-contractor/make-sure-you-meet-sba-size-standards/summary-size-standards-industrysector. 

12 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge 

Funds and Private Equity Funds, 79 Fed. Reg. 5535 (January 31, 2014). 

" Federal Deposit Insurance Corporation, "Interagency Questions and Answers Regarding Community 

Reinvestment," last updated April 20, 2014, https://www.fdic.gov/regulationsllaws/rules/2000-6750.html. 14 Shane Kite, "SBIC Revival: Why Interest from Banks is Way Up, As the Volcker Rule Looms," American Banker, 

April 28, 20 14, http://www .americanbanker.com/magazine/124 _ 04/sbic-revival-why-interest-from-banks-is-wayup-as-the-volcker-rule-looms-1 066822-l.html. 15 Five SB!Cs in this group have an early-stage focus. 16 SBA, Small Business Investment Company (SBJC) Program Overview as of September 30, 20!5, accessed 

September 30, 2016, https:l/www .sba.gov/sitesldefaultlfiles/files/WebSBICProgramOverview _ September20 15 .pdf. 

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For a more detailed explanation of these SBIC programs, see the glossary in Appendix I. 

Costs of the SBI C Program 

Since the beginning of FY 2000 (October l, 1999), the SBA has operated the debenture SBIC 

Program at zero subsidy. The agency accomplishes this by charging SB!Cs 3 percent up-front 

fees and annual fees on the leverage balances. The SBA formulates these fees each year, 

spreading the costs of riskier strategies, such as early-stage investments, across the investment 

portfolio. As of September 30, 2015, the total amount of private capital and SBA capital at risk 

in the SBIC Program was approximately US$25.3 billion. 17 

Previous Findings on Job Creation by the SBIC Program 

The first of SBA's three strategic objectives, as outlined in its FY 2014-18 Strategic Plan, is 

Strategic Objective l: "Growing Businesses and Creating Jobs" 18 (The other two were meeting 

the needs of small businesses and serving as their voice). Given the primacy of job creation to 

the SBA, it is important to examine how well the agency is doing in this critical area. 

Underpinning the SBA's current claims regarding job creation is the 1999 Arizona Venture 

Capital Impact Study, which was conducted by the Zermatt Group. This study concluded that 

US$122.2 million of venture capital invested in Arizona businesses in 1997 would generate 

a company revenue total of about US$800 million through 2002. Therefore, every dollar of 

venture capital investment resulted in US$6.54 in revenue returns over a five-year period. In 

addition, the investment led to the creation of 3,400 jobs. 19 The ratio of investment (US$122.2 

million) to jobs (3,400) was US$36,000. 

Relying on the Arizona study, the SBA publishes estimates ofthe numbers of jobs created or 

sustained by the SBIC Program at the end of each fiscal year explicitly based on the assumption 

that "[one] job is created for every US$36,000 of ... investment (adjusted for inflation)." 

However, it is not advisable to extrapolate from this metric: It is dated, geographically limited to 

one state, and focused only on venture capital, which excludes the SBA's late-stage investment 

17 SBA, Small Business Investment Company (SBJC) Program Overview as of September 30. 2015. 18 SBA, "SBA Strategic Plan, Fiscal Years 2014-2018,", 

https://www.sba.gov/sites/defaultlfiles/aboutsbaarticle/SBA_FY _ 20 14_ -2018 _Strategic_ Plan-l.pdf. 19 Justin M. Cook and Sean M. Nevins, 1999 Arizona Venture Capital Impact Study (n. p.: Zermatt Group, 1999). 

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efforts. Nevertheless, as of the end ofFY 2015, the SBA claimed on this basis that the SBIC 

Program had created or was sustaining 129,749 jobs-a 15 percent improvement from the 

previous year.20 

In 2012, researchers affiliated with the U.S. Census Bureau's Center for Economic Studies and 

George Mason University published a study designed to establish whether "SBA loans create 

jobs."21 However, it should be noted that the study assessed the impact of other SBA loan 

programs-specifically, 7(a) loan programs for small businesses and 504 loans for certified 

development companies-than the SBIC program of interest here.22 The study examined 

matching samples of SBA loan recipients and all U.S. employers from 1976 to 2010 with similar 

"firm age, industry ... pre-loan size," and employment history characteristics. The resulting job 

creation metric was much more modest than the one for the 1999 Arizona Venture Capital 

Impact Study, although the two studies are not comparable. The researchers found "little or no 

impact of loan receipt [on jobs] per se, but an increase of about 5.4 jobs for each million dollars 

of loans."23 

This study is designed to explore the role that the SBIC Program plays in small business job 

creation based on the most recent data from the SBA's Office oflnvestment and Innovation 

(Oil). 

MEASURING THE ROLE OF THE SBIC PROGRAM IN SMALL BUSINESS JOB 

CREATION 

Methodology 

The SBA's Oil, which manages the SBIC Program, provided FRD with its data on SBIC fund 

managers and portfolio companies in which SBIC funds were invested. The authors restricted 

20 SBA, Small Business Investment Company (SBIC) Program Overview as of September 30, 2015. 21 J. David Brown and John S. Earle, "Do SBA Loans Create Jobs? Estimates from Universal Panel Data and 

Longitudinal Matching Methods" (CES Working Paper 12-27, Center for Economic Studies, U.S. Census Bureau, 

U.S. Department of Commerce, Washington, DC, 2012), http://www2.census.gov/ces/wp/2012/CES-WP-J2-27.pdf. 22 According to the SBA, "certified development companies (CDCs) are nonprofit corporations certified and 

regulated by the [agency], that work with participating lenders to provide financing to small businesses" ("CDC/504 

Loan Program: Find a CDC," accessed April29, 2016, https://www.sba.gov/loans-grants/see-what-sba-offers/sbaloan-programs/real-estate-equipment-loans-cdc-504/cdc-504-loan-program-find-cdc). However, the SBA has 

clarified that CDCs are generally, but not exclusively, nonprofit corporations. 23 Brown and Earle, "Do SBA Loans Create Jobs?," abstract, 14. 

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their attention to data from October 1995 through December 2014. This data was shared "AS IS" 

with FRD; that is, as it was reported by SBIC managers to the SBA. The SBA makes no 

representation or warranty, express or implied, with respect to the content, completeness, or 

accuracy of the information provided.Z4 

The SBIC data provided by Oil included information collected from SBA Portfolio Financing 

Report (SBA Form I 031) and SBA Annual Financial Report (SBA Form 468) filings. The onepage Portfolio Financing Report contains financial and demographic data on small businesses 

prior to their receipt of capital support through the SBIC Program. The 22-page Annual Financial 

Report contains annual financials for each SBIC, including employment data on the loans and 

investments for each year they participate in the program. Schedule 8 of the annual report 

contains employment and any other general data on the portfolio companies. Copies of both 

the Portfolio Financing Report and Schedule 8 of the Annual Financial Report are provided in 

Appendices III and IV. The complete forms can also be found online at: https://www.sba.gov/ 

sbic/sbic-resource-library/forms. 

Number of Portfolio Companies Used in This Analysis 

Oil uses the SBA Portfolio Financing Report (SBA Form 1031) to assess various characteristics 

of small businesses, including employment, before their financing events. It uses the SBA 

Annual Financial Report (SBA Form 468) to assess changes in those companies while they 

participate in the SBIC Program. 

To ensure that the analysis was based on the most accurate data possible, the authors excluded 

the data from portfolio companies that did not submit a Portfolio Financing Report, and only 

used data from October 1995 to December 2014. The authors also excluded financings that were 

related to the purchase of taxi medallions by excluding all portfolio companies in NAICS code 

48531-these taxi financings were performed primarily by two or three SB!Cs but skew the 

measurement of job creation. The resulting data include over 11,500 portfolio companies that 

received investments from the various funds participating in the SBIC Program (see table 1). 

24 FRD employees and contractors signed confidentiality agreements, which stipulated they would not "publish, 

divulge, disclose, or make known in any manner" SBIC data. 

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Table 1. Number of Portfolio Companies Receiving Funding from SBIC Funds 

Type of SBIC ~~<'und Number of Companies I 

Non-Leveraged 1,788 

Debenture 5,596 

l'arttctpatmg Securities 2,926 

Specialized 1,371 

Total 11,681 

Occasionally, some portfolio companies may receive funding from different types of SBIC 

funds. For example, a company may receive financing from both a non-leveraged SBIC and an 

SBIC licensed through the debenture program. In such instances, that firm would be counted 

twice--once under each SB!C fund category. However, such instances are extremely 

uncommon; the analysis presented here is unaffected by excluding such firms. 

Measuring Job Creation 

For each portfolio company, an initial employment figure was established by recording the 

earliest available employment number reported on either the SBA Portfolio Financing Report 

(SBA Form 1031) or the SBA Annual Financial Report (SBA Form 468). Similarly, the last 

available employment figure was recorded as the final headcount for each firm. 

If the employment data were missing from the first record of an individual portfolio company, 

the authors took the value from the next record, if available; otherwise, they set the initial 

headcount as equal to the final headcount in order to obtain a conservative measure of job 

creation. Similarly, if the final headcount was missing, they took the value from the penultimate 

record if it was available. These imputations expanded the available data but did not materially 

affect the calculations that were performed in the analysis. 

These calculations gave rise to two distinct measures of job creation: jobs created and jobs 

created or sustained. The latter-jobs created or sustained-was computed by recording the final 

headcount for each company. The former-jobs created-was obtained by taking the difference 

between the final and initial employment figures listed for each company. This is a conservative 

measure of job creation inasmuch as a great many firms reported maximum employment levels 

that exceeded the final employment tally that was recorded. In that sense, job growth that was 

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transient was not included in the calculation. Additionally, this figure does not account for jobs 

that were created or sustained indirectly. 

In tenns of interpretation, these two measures-jobs created and jobs created or sustained-are 

at the extreme ends of the job creation spectrum. On one end, jobs created is the appropriate 

measure of job creation under the assumption that the initial headcount for each portfolio 

company would have been sustained in the absence of SBIC funding: in that case, only the 

incremental employment reflects actual job creation. On the other end, if one were to assume that 

none of the jobs in the finn would have remained were it not for the SBIC funding that the finn 

received, then jobs created or sustained is a more appropriate measure of job creation because, in 

addition to the incremental employment, it also includes the jobs that were not shed over time. 

Accordingly, jobs created and jobs created or sustained can be interpreted as bounds on the 

amount of job creation that has occurred as a result of the SBIC Program. The facts at hand may 

place any specific case somewhere between these two poles, but they provide reasonable bounds 

on the amount of job creation that has occurred. 

Measuring Total Investment 

To arrive at a measure of the number of dollars invested per job created, this analysis also 

tracked the amount of SBIC funding that each portfolio company received. The SBA Portfolio 

Financing Report (SBA Fonn I 031) records the amount of debt, equity, and hybrid securities 

that each finn receives at each financing event. To construct the financing measures, the authors 

summed the total amounts of each type of funding that the individual companies received. 

Because this analysis did not attempt to compare individual SBICs with one another in tenns of 

how many jobs were created, the authors aggregated data across SBIC funds in instances where 

multiple funds invested in the same portfolio company. 

Measuring the Employment Impact oflnvestments 

The final step of the analysis measures the employment impact of the SBIC investments by 

computing the ratio of the total dollars invested by the number of jobs created. Because most 

finns start small and stay small, though some do add many jobs, the analysis is aggregated down 

to the level of each SBJC investment program. This allows for a comprehensive picture of the 

role the overall SBIC Program plays in small business job creation. 

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MEASURING THE EMPLOYMENT IMP ACT OF THE SBIC PROGRAM 

Measuring Job Creation in SBIC-Funded Portfolio Companies 

Table 2 reports the aggregated employment figures for SBIC-funded portfolio companies. The 

total initial employment in the sample was almost 6.5 million workers across 11,681 firms over a 

period of nearly 20 years. Summing up the last recorded employment count for all of the firms in 

the data yields a total of9,457,965 jobs, which implies that a total number of2,960, 177 jobs 

were created between October 1995 and December2014. 

Table 2. Total Job Creation in SBIC-Funded Portfolio Companies 

Total Employment 

Type ofSBIC Fund Number of Jobs 

Companies Initial Final Jobs Created or Created Sustained 

Non-Leveraged 1,788 2,465,657 948,433 2,465,657 

Debenture 5,596 3,748,951 699,590 3,748,951 

Participating Securities 2,926 1,281,316 3,142,195 

Specialized 

Total 

Breaking the employment data out across the different types of SBIC funds shows a tremendous 

amount of variation in the numbers of jobs created and jobs created or sustained. For example, 

the participating securities program was responsible for funding businesses with the highest 

number of total jobs created (I ,281,316), followed by non-leveraged funds (948,433), and then 

by debenture funds, whose portfolio companies created 699,590 jobs. Debenture-funded 

portfolio companies created or sustained the most number of jobs (over 3.7 million), with 

portfolio companies funded through the participating securities program coming in second at 

slightly over 3.1 million jobs. Non-leveraged SBIC funds created or sustained almost 2.5 million 

jobs during this period. Relative to the other SBIC programs, firms funded by the specialized 

program were associated with only modest aggregate employment. 

One reason why the total employment figures across the programs differ is that the average firm 

size varies across the program types. This can be seen in table 3. While an average of253 jobs 

were created and 810 jobs were created or sustained per firm, there was significant variation 

across the groups. Businesses financed by non-leveraged SBICs were the largest in terms of final 

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employment, with 1,379 jobs created or sustained on average. Firms financed by SBICs from the 

participating securities program were the second largest, at 1,074 jobs created or sustained on 

average. Companies financed through the debenture program were a little bigger than half this 

size, at 670 jobs created or sustained on average, while firms financed through the specialized 

program were small by comparison. 

Table 3. Jobs Created per SBIC-Funded Portfolio Company 

Number of 

Jobs per Company Job Creation Type of SBTC Fund Companies Created Created or Rate 

Sustained - Non-Leveraged !,788 530 1,379 0.63 

Debenture 5,596 125 670 0.23 

Participating Securities 2,926 438 1,074 0.69 

Specialized 1,371 22 74 0.44 

Total/ Average 11,681 253 810 0.46 

The programs also differ in terms of the average numbers of jobs created and created or 

sustained. The final column of table 3 divides the number of jobs created by the initial head 

count to report a job creation rate. The non-leveraged and participating securities programs 

created the most number of jobs per job sustained, at over 0.6 jobs created per initial job, while 

the average across the whole sample was about one-half job created per initial job. The reasons 

for the differences in job creation may be attributed to the type of financings provided by each of 

these different funds. The next section considers the types of financings provided by these 

different SBICs. 

Measuring Total Investment in SBIC-Funded Portfolio Companies 

Table 4 shows that the portfolio companies in the sample across all SBIC programs accounted 

for a financing total of almost US$43 billion from October 1995-December 2014. Slightly over 

US$17 billion ( 40 percent) of that funding came through the debenture program. SBICs in the 

non-leveraged and participating securities programs each accounted for around US$12 billion 

(30 percent) of financing. The specialized program was small in comparison-$774 million (1.8 

percent). 

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Table 4. Total Dollars Invested by Type of Fund and Security 

Total Invested Overall by Security Type 

Type ofSBIC Fund 

Participating Securities 

The fact that the amounts of debt and equity vary according to the type of fund is a reflection of 

the different investment strategies commonly used by funds in each program. Not surprisingly, 

for example, the vast majority of financing provided through the debenture program is either 

debt or a hybrid of debt and equity-for example, mezzanine debt with warrants attached. The 

numbers also reflect the fact that, occasionally, funds operating under different programs may 

invest in the same portfolio company. 

As shown in the table above, over 75 percent of the non-leveraged and participating securities 

financing dollars were in the form of equity, while Jess than 21 percent of the debenture and 

specialized financing dollars were through equity. These types ofSBICs also showed the highest 

job creation rates, which is a reflection of the natural tendency for equity investments to be more 

common among higher risk, higher growth companies, while debt investments are more common 

among lower risk, lower growth companies. 

Measuring the Employment Impact of SBIC Funding 

Table 5 provides a calculation of the ratio ofSBIC financings to jobs created and jobs created or 

sustained. The bottom row of the table shows that, across the board, SBIC programs invested a 

total of approximately US$14,500 per job created, while a little over US$4,500 was invested per 

job created or sustained. 

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Table 5. Ratio of SBIC Dollars Invested to Jobs Created and Jobs Created or Sustained by 

Type of Fund 

I Ratio: Total SBIC Financing per Job25 

Type of SBIC Fund Number of Companies .Jobs Created Jobs Created or 

Sustained 

Non-Leveraged 1,788 $13,112 $5,043 

Debenture 5,596 $24,559 $4,583 

Participating Securities 2,926 $9,684 $3,949 

Specialized 1,371 $25,108 $7,654 

Total/Average 11,681 $14,458 $4,525 

As with the earlier analyses, there is substantial variation in these dollars-per-job-created figures 

depending on the type of fund. Firms funded through the non-leveraged program, for example, 

created jobs at a rate of around US$13,000 in SBIC financing per job created, while companies 

funded through the debenture program created jobs at a rate of approximately US$25,000 of 

SBIC financing per job created. 

The programs also rank differently in terms of the dollars invested per job created or sustained, 

largely because the average firm size varies across the program types. For instance, portfolio 

companies financed through the non-leveraged program come in at an average of around 

US$5,000 in SBIC financing per job created or sustained, while businesses financed through the 

specialized program created or sustained jobs at a rate of over US$7,600 per job. 

As a final step, the authors investigated whether there have been important changes over time in 

the ratio of financing dollars per job created or sustained. To do this, they restricted attention to 

only those firms financed by active licensees. Limiting the sample in this way allowed them to 

consider whether the costs have changed over time. The sample breakdown for firms financed by 

active licensees is in table 6. 

25 This figure only represents SBIC financing dollars per job. As noted previously, the authors do not know the 

total amount of capital that these businesses received from other sources-funding from banks and other capital 

providers could be important for many portfolio companies. The SBA only began tracking the size of the round or 

deal in which the SBIC participated as part of its financing form in 2013, so that they could better understand the 

contribution to the total financing by SB!Cs. Based on analyzing this data, the authors found that, on average, SB!Cs 

contributed around 40 percent of the total financing received in each financing round since the SBA started tracking 

this figure. Using a 40 percent contribution, the total financing dollars from all sources per job would be $36,145 per 

job created and $11 ,313 per job created or sustained. 

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Table 6. Number of Portfolio Companies Receiving Funding from Active SBIC Licensees 

Type of SBIC Fund Numbero1 

Non~ Leveraged 390 

Debenture 2,041 

Participating Securities 548 

Specialized 199 

Total 3,178 

Lastly, table 7, which highlights the ratio of total SBIC financings to the numbers of jobs created 

and jobs created or sustained by fund type among active licensees, shows higher average 

financing dollars per job than the overall analysis. This is particularly the case among firms 

financed through the debenture program, which shows an average cost of just over US$33,000 

per job created and around US$5,200 per job created or sustained. It is important to recognize 

this because table 7 restricts attention to active licensees only, where there is a preponderance of 

newer investments, many of which may not have had sufficient time to grow. These numbers 

should be interpreted with that caveat in mind. 

Table 7. Ratio of Total SBIC Financings to Jobs Created and Jobs Created or Sustained by 

Type of Fund for Active SBICs 

Type ofSBIC Fond Number of Companies 

Ratio: Total Financing to Jobs 

Created I Created or Sustained 

Non-Leveraged 390 $11,214 $4,616 

Debenture 2,041 $33,646 $5,203 

Participating Securities 548 $5,801 $3,081 

Specialized 199 $661.03! $7,106 

T< 3,178 $16,340 $4,603 

MEASURING THE GOVERNMENT COST OF THE SBIC PROGRAM 

It is important to recognize that the calculations presented above relate program dollars invested 

to jobs created and jobs created or sustained, not the taxpayer costs associated with these jobs. 

The taxpayer costs of these jobs is the net administrative costs of the SBJC Program (the gross 

administrative costs less the licensing and examination fees) minus the incremental tax revenue 

generated by firms and individuals that would not have been generated in the absence of the 

program. 

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As table 8 demonstrates, the taxpayer costs associated with these programs is small relative to 

the amount of dollars deployed. Indeed, the SBA has operated the debenture SBIC Program at 

zero subsidy since FY 2000. Overall, the SBIC Program provided US$57.2 billion of financing 

dollars between 1999 and 2015 for a net administrative cost of approximately US$138 million, 

or roughly one penny of net administrative costs for every US$4 deployed. 

Table 8. Breakdown of SBIC Administrative Costs 

Item Amount 

Total SBJC Financing Dollars $57,229,853,052 

Total SBJC Administrative Expenses $] 85,080,017 

Minus Licensing and Exam Fees $46,727,000 

Net Administrative Costs $138,353,017 

Net Administrative Costs per Financing Dollar $0.0024 .. Source: SBA prov1ded admm1strat1ve costs on the SBJC program from 1ts program overv1ews. 

Administrative costs include the direct costs from the operating budget, including contracts, compensation 

and benefits, but may not include agency wide costs, such as rent and telecommunications and indirect 

costs. SBA also provided the administrative fees it collected to offset its administrative costs. The net 

government administrative cost was calculated by subtracting administrative fees from the administrative 

direct costs identified in its program overview. Financing dollars were based on Form 1031 data. 

Based on an average administrative cost of one cent per US$4 deployed, table 9 reports the 

administrative cost per job created and per job created or sustained. The taxpayer costs 

associated with these jobs is quite low?6 The calculation reported in table 9 does not account 

for the fact that taxes are paid by both employees and the companies. At some level, the 

administrative costs per job reported here are offset even further by the income taxes paid by 

employees who would not otherwise be working, by companies that would not otherwise be 

generating profits, and by investors who would not otherwise be earning returns. 

26 The administrative costs for the participating securities program are substantially higher if the subsidy costs of 

the government leverage issued are included in the calculation. The SBA 's fiscal year 2017 budget estimates these 

subsidy costs of government leverage at 26.3 cents per dollar, which implies a cost of 18.28 cents per dollar for the 

participating securities program. This raises the total administrative costs to US$1,771 per job created and US$771 

per job created or sustained through the participating securities program. These subsidies do not impact the costs 

associated with the other SBIC investment programs. 

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Table 9. SBIC Administrative Costs per Job Created and Job Created or Sustained 

Ratio: Total SBIC Financing Ratio: Administrative Cost 

TypeofslUC Number of per Job per Job 

.Fund Companies .Jobs Jobs Created or Jobs Jobs Created or 

Created Sustained Created sustained 

Non-Leveraged 1,788 $13,112 $5,043 $31.70 $12.19 

Debenture 5,596 $24,559 $4,583 $59.37 $11.08 

Participating 

Securities 2,926 $9,684 $3,949 $23.41 $9.55 

Specialized 1,371 $25,108 $7,654 $60.70 $18.50 

Total/Average 11,681 $14,458 $4,525 $34.95 $Hl.94 

CONCLUSION 

Congress created the SBA's SBIC Program in 1958 and since the program's inception through 

December 2015, SB!Cs have deployed US$80.5 billion in capital (two-thirds from the private 

sector) into approximately 172,800 financings. This study has assessed the job creation that 

resulted from this investment activity. 

The authors' analysis indicates that SBIC-funded small businesses created almost 3 million jobs 

during the sample period, which extended back to October 1995 and ran through December 

2014. In addition, these SBIC-funded small businesses created or sustained almost 9.5 million 

jobs during this time. 

Putting these jobs and financing figures together reveals that, on average, one new job was 

created for every US$14,458 of funding invested through the SBIC Program, while an average of 

one job was created or sustained for every US$4,525 invested. If attention is restricted to only 

those portfolio companies financed by active licensees, the ratios are one job created for every 

US$16,340 invested, and one job created or sustained for every US$4,603 invested. While these 

numbers are qualitatively similar, it is important to recognize that the time period covered by the 

active licensees is more heavily influenced by the Great Recession in the late 2000s than the 

overall sample. 

These findings indicate that SBIC-funded small businesses are a robust source of job creation in 

the U.S. economy. Nevertheless, it is important to point out the limitations that are inherent in 

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this type of analysis. Because the SBA's SBIC data only track firms during the time that they are 

receiving SBIC funding, it is possible that these businesses could grow or shrink after this 

funding ceases, which could result in job gains or losses that would go unmeasured by this 

analysis. In addition, the analysis presented here does not account for any potential funding that 

firms received from non-SBIC sources. 

A more important shortcoming stems from the inherent difficulty in establishing causal 

interpretations to the numbers presented here. Because it is practically impossible to know what 

employment in these businesses would have looked like in the absence of SBIC funding, it is 

difficult to take a stand on whether the SBIC funding caused the job creation, or whether similar 

levels of job creation could have been achieved through alternative means of financing. 

Ultimately, questions of this nature go far beyond the scope of the current analysis. 

These caveats notwithstanding, the analysis presented here, when compared to previous 

estimates for the private equity industry, suggests that the ratio of investments to jobs is at least 

as attractive in the SBIC Program as is found elsewhere in the private equity sector as a whole. 

Moreover, because the program operates at a relatively low administrative cost, the government 

costs per job created and per job created or sustained is easily outweighed by the tax revenues 

generated by the employment, profits, and returns of the firms that receive the investments. 

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APPENDIX I. GLOSSARY 

Community Reinvestment Act 

Enacted by Congress in 1977, the Community Reinvestment Act is intended to encourage 

depository institutions to help meet the credit needs of the communities in which they 

operate. 

Debenture 

A corporate finance term that refers to a medium- to long-term debt instrument used by 

large companies to borrow money at a fixed rate of interest. For the purposes of the Small 

Business Investment Company (SBIC) Program, while authorized under the Small 

Business Investment Act to have a maximum term of 15 years, substantially all SBIC 

debentures are issued for a 1 0-year term. 

Debt Financing 

Financing based on debt instruments, such as bond issues or long-term notes payable. 

Debt-Plus-Equity Financing 

Financing based on debt instruments, such as bond issues or long-term notes payable, and 

equity, such as common stocks, preferred stocks, or retained earnings. 

Dodd-Frank Wall Street Reform and Consumer Protection Act 

Signed into law by President Barack Obama on July 21, 20 I 0, this act is intended to 

promote the financial stability of the United States by improving accountability and 

transparency in the financial system, to protect American taxpayers by ending bailouts, 

and to protect consumers from abusive financial services practices, among other 

purposes. 

Equity Capital/Financing 

Money raised by a business in exchange for an ownership share of the company, by either 

owning shares of stock outright or having the right to convert other financial instruments 

into stock. Two key sources of equity capital for new and emerging businesses are angel 

investors and venture capital firms. 

Hybrid Financing 

Combined debt and equity financing. 

Leverage 

The ratio of a company's loan capital (debt) to the value of its common stock (equity). 

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Licensee 

A private investment fund licensed as an SBIC by the U.S. Small Business 

Administration (SBA). 

Limited Partnership 

A partnership consisting of a general partner, who manages the business and has 

unlimited personal liability for the business's debts and obligations, and a limited partner, 

who has limited liability but cannot participate in the management of the business. 

Lower-Middle Market 

The market segment containing businesses with between US$5 million and US$1 0 

million in annual revenues. 

Mezzanine Financing 

Mezzanine debt is used by companies that are cash-flow positive to fund further growth 

through expansion projects, acquisitions, recapitalizations, and management and 

leveraged buyouts. When mezzanine debt is used in conjunction with senior debt, it 

reduces the amount of equity required in the business. As equity is the most expensive 

form of capital, it is most cost effective to create a capital structure that secures the most 

funding, offers the lowest cost of capital, and maximizes return on equity. 

North American Industry Classification System (NAICS) 

The standard used by federal statistical agencies in classifying business establishments 

for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. 

economy. 

Office of Investment and Innovation (Oil) 

The office within the SBA that operates the SBIC Program. 

Portfolio Company 

An entity in which a venture capital firm, buyout firm, holding company, or other 

investment fund invests. All of the companies currently backed by a private equity firm 

can be referred to as the firm's portfolio. 

Private Equity/Capital 

An asset class consisting of equity securities and debt in operating companies that are not 

publicly traded on a stock exchange. A private equity investment will generally be made 

by a private equity firm, a venture capital firm, or an angel investor. 

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Private Equity Fund 

A collective investment scheme used to make investments in various equity (and, to a 

lesser extent, debt) securities according to one of the investment strategies associated 

with private equity. 

SBA Annual Financial Report (SBA Form 468) 

The 011 uses the Annual Financial Report to assess changes in SB!Cs while they 

participate in the program. SB!Cs submit them quarterly and they are audited annually. 

SBA Portfolio Financing Report (SBA Form 1031) 

The Oil uses the Portfolio Financing Report to assess various characteristics of small 

businesses before their financing events. SBICs submit the form within 30 days of the 

close of financing. This form contains portfolio concern financing and supplementary 

information that the SBA uses to evaluate an SBIC's investment activities and 

compliance with SBIC Program requirements. The agency also pools the information 

provided by individual SB!Cs on these forms to analyze the SBIC Program as a whole 

and the impact of SBIC financings on the growth of small businesses. 

SBIC Funds (by Type) 

Bank-owned: Bank-owned SBIC funds are typically non-leveraged financings. Banks 

sometimes prefer owning the SB!Cs themselves because doing so allows them to have 

more control over where the fund investments are made while avoiding the risks 

associated with leveraged financing. These SB!Cs generally focus on later-stage, 

mezzanine, and buyout investments using primarily debt and hybrid financing. 

Debenture: Debenture SB!Cs generally focus on later-stage, mezzanine, and buyout 

investments using primarily debt and hybrid financing 

Non-leveraged: Non-leveraged SBIC funds make up approximately 15 percent of the 

active SB!Cs. Generally focused on later-stage, mezzanine, and buyout iiwestments using 

primarily debt and hybrid financing, their private capital is not supplemented with SBAguaranteed debentures. 

Participating Securities: The SBIC Program's participating securities effort was the 

SBA's original attempt to infuse funding into the venture capital industry. It began in 

1994, in time to catch the dot-com wave, and was suspended in 2004, when the SBA 

stopped issuing new licenses. Under the program, the SBA matched up to twice the 

amount of private capital raised by a qualified firm. Some venture capital businesses, 

such as Triathlon, which raised its debut fund under the initial program, succeeded, 

but others foundered. 

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Specialized: The specialized SBIC program was authorized between 1969 and October 

1996 to target "disadvantaged" businesses, meaning those that were at least 50 percent 

owned, controlled, and managed on a day-to-day basis by a person or persons whose 

participation in the free· enterprise system was hampered because of social or economic 

disadvantages. 

Small Business 

A business with less than US$19.5 million in tangible net worth AND an average 

after-tax income for the preceding two years of less than US$6.5 million; OR, a business 

that qualifies as "small" under NAICS code standards (which are generally based on 

annual sales or the number of employees). 

Venture Capital 

Early-stage funding for startup companies that are high on risk but also high on potential. 

Venture capital is a type of equity financing that addresses the funding needs of 

entrepreneurial companies that-for reasons of size, assets, and stage of developmentcannot seek capital from more traditional sources, such as public markets and banks. 

Venture capital investments are generally made as cash in exchange for stock shares and 

an active role in the invested company. 

Volcker Rule 

A section of the Dodd-Frank Act, originally proposed by American economist and former 

Federal Reserve Chairman Paul Volcker to restrict U.S. banks from making certain kinds 

of speculative investments that do not benefit their customers. 

Note: These definitions were compiled from various sources, including websites and official 

documents of U.S. government organizations, such as the Federal Financial Institutions 

Examination Council, the U.S. Census Bureau, the U.S. Small Business Administration, and the 

White House; the websites of trade associations, such as the National Association oflnvestment 

Companies and the National Venture Capital Association; and trade platforms, such as Crunch 

Base and Investopedia. 

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APPENDIX II. SBIC LIFE CYCLE 

The SBIC life cycle begins with an extensive application process. Following an optional prescreening of applicants by telephone, the first required step in applying for an SBIC license is 

the submission of a management assessment questionnaire (MAQ). After the SBA's investment 

committee reviews the MAQ, the agency issues a green-light letter. It is only upon the receipt of 

this letter that an applicant may submit a formal license application. This application is subject to 

additional review by the SBA's Office of Licensing and Program Standards before an SBIC 

license is issued. Once licensed, and if eligible under SBA regulations, an SBIC may apply for 

a leverage commitment. The SBIC then goes through investment and harvest periods (where 

investments are later sold), each of which extends for approximately five years. When the 

leverage has been repaid, the SBIC winds down the fund and returns its license to SBA 

(see fig. 2). 

Figure 2. SBIC Life Cycle 

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APPENDIX III. SBA PORTFOLIO FINANCING REPORT (SBA Form 1031) 

U.S. SmaU Business Administration 

Portfolio Financing Report 

1.NameoiSmaHiluslness ___________ _ 

4 3.~~------------------------------------------------- City ________ 5. Sla!tl __ 6.ZIPCO<Ie ___ 7. County ________ _ 

B. Sinalllluslness FAX 9. Conlac1 Person lot fAX----------

10. DalelluslnessEstablished_l_l_ 11.Formolllusiness_ 1)CIJil)<lmtion 2)Partnefship 3)Proprlet<lr 4)llC 

12a. NAJCSCO<Ie lrklustl)l _____________ _ 

12b. E""'llY Saving Qual1lled Investment?_ II checf<ed.- E""'l1f Savlng-used to fl!ll!lleil invesllnent? --

13.~oiSinaiiC00cem(~any)OV!11edbY Ame<lcanln<ffanorAiasl<aNallve:_% ASian:_% 

Blat!< or Amcan Amerlcan:_% Hiapani<: or Laono: _% Native HaWaiian or O!her Padfie ls!OOdel: _% wtute:_% 

14a. ~ 01 Small COncern OV!11ed lljiWoman {if any) __ % 14b Pertefltlge OV!11ed byV&ll!f3!1S (ffany) __ % 

15. CEOorPr-(mayoelectooeormore): Woman:_ Ame<lcanlndianorAiaoi<aNai!Ye:_ ASian:_ 

Blad< or Aflican Amoncan: _ Hiapani<: or Lalino: _ Native Hawaiian or O!her P-c lslande<: _ White:_ 

Part B • Prel!nmc!M lnform!l!lon 

16. Prefinanc11QStatus:_(1)Newlnlormatiorl (2)PrevlooslySUimlftled (3)AcQuiredllusiness (4)NewBusltless 

17a. Stage o1 Company a! Fmanclnil: 17b. Teclvlology developed IM!h SBIRJSTTR forn!ing· _____ _ 

18. Sinai!Busmess COncern'• Pre-MoneyVatualioo: --------- 19 Fiscal Year Erkllmmediately Pnor Ia Date of Financlng {IOO!lth/Day/Year) ___ ; __ / __ 

20. Groos Revenue'"' Prlo! FIS<Iil Year$ 21. Mer-Tax Profit or (loss) for Pnor FIS<Ii!Year$. ___ _ 

22.1nromeTaxesforPiiorFIS<Ii!Year. Federal$ Stale$ Local$,__ ____ _ 

23. NeiWorth $ 24.-of Employees __ _ 

Part c . Financing Information 

25 a DaleoiFinancinO__I__f_ b Dateo!Disllursemen!_)_)_ 26. DidL!censeeleadforSl!M!Slmen!? __ 

27 Putposeo1Fmancif10~o1F-Iha!.wlbe"""'lo"""""'"""'""'-"- ~--lo100%.) 

a Wor1«119 Clll>itll or Inventory Purcoose I. Acquisition of Mach!MIY and Equipment 

b Plant -bon or Leasehold lll1llf'JV"ment g Land Acquisilloo or CMe!Ung Construction 

c. Acquisillon o1 All or Part at an Exlsling 6usineSS h. l\tll1<ebfl9 Acti'lltll!s 

d. Consolidalion of Obllgalioos or Non-SBIC Debt Refonding i. Researcll and~ 

e. New SU•Idif19 01 Plant Conslruc!ioo i Ol!ler 

28. Is tllis 1lle first FlnantinO ollllis Small Business bV 1lle l.lCei"IS!le? __ 

29. Fmncing lnslrumenls and ~ Amoonls (lor partic\pabons, include L-'s {.lOIUon only): 

~ ~ lni!!alln\eres! Rl!!e{S! % Ac!Ul!f OW!lefsl!ip 

lean Dnty $ ___ _ 

Debt- EQUity Features $ __ _ 

EQU!Iy0f11y $____ ----'*' Total U"""'""' flMncing $ ___ _ 

30. To!al Si2e ol FlffilrlCJrlg Round for Small Busmess COOcem: --------

31. Comments: 

Part 0 • Transm!nlon verifleatton Transtllisslon Dale --'--'--

SBA Form 1031 (3114) f'llwioos EditionS OllSOlete 

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U.S. SmaH Business Administration 

Portfolio Financing Report 

OMS No. 3245-0078 _.,., Q!le 1013112017 

Use of Information; SBA Form 1031 is to be completed only by smallbuslmss mveslment COil1I>3I1IOS (SB!Cs) licensed by tile 

Small Business Adminislr.llioo (SBA) This fOrm contains Portfoll<> Ci>r1cem finooCing am S\Jill)lemenlaly infoon . uses to evaluate an SBIC's 11'\veslment adMbeS am compliance >\lth SBIC IJI09f3lll requirements. SBA also pools 

provided by indMdual SBICs to analjiZe the SBIC pmgr.~m as a Whole 311<1 tile impact of SBIC tnancingS on tile growl!\ of 

bus ....... 

lnstruct!OM for Stlllmllllng Completed Form: SBA Form 1031 must be completed 311<1 filed ele<:lronically in tile SBIC 

system. SBIC-Web reQl1!1eS an SBA-approved uset aa:ooot. SUbmit your accooot request to sllicylell!ltJpsbj! oov. 

PLEASE NOTE: The e$limated bottl<!n for complellng !his form IS 12 minules per response. You \Mil ool be required to 11!$1l011dlo 

this informalloo collection d a valid OMB approval number is not tfiSillayed n you have questions or comments cooceming this estimate or other aspects of this informalloo collection, please contect the u.s. sman Business Admirnstrotlon. Chief, 

AdmlnlStratJVe lnfonnalion Branch, Wasttlngton, OC 20416 and/or SBA Desk Officer, Office of Management 311<1 Bl.ldge~ New Executive Office Buildlng, Room 10:102, Wasllinglor't, oc 20503 

~EASE 00 NOT SENO FORMS TO OMB. 

26 

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APPENDIX IV. SBA ANNUAL FINANCIAL REPORT (SBA Form 468, Schedule 8) 

SCHEDIJI£o ..... -· . - .... ·- llnaudited Portfolio Company tnfoonation 

AS Of 

OMS Approval No. 3145-00

Expiration Date 10/31/20

Portfof.o company Name -II) 

General Portfolio Company Information 

Bus:iness Description: NAICS' I J 

soybean farming. field and production j 

company name of original investment 

other Comments: 

UrenseNo. 

""""'i ,.v..;,r-c;;;t-;.,-... u.v-....Appfo.plf Total-edValu

"" ""I $0 $Ill 

Portfolio Company financial Information 

Period I 

"'""-

Basis Pf!riod Revenues $0 $0 

Gross Profit $0 $0 

EBfTDA $0 $0 

::nterest Charges $0 $0 

Netfneome $0 $0 

tashffow from Ops. $0 $0 

Burn Rate $0 $0 

cash Balance $0 $0 current Assets $0 $0 

Fixed Assets $0 $0 

Total Assets $0 $0 

OJnentUabtlitie-s $0 $0 

Debt $0 $0 Total Uabitltles $0 $0 

EOV Equtty Value (Market} $0 $0 

:EOV Enterprise Value $0 $0 

Full-t1me employees . -

Federal Taxe$ Paid : $0 State Taxes Pald : $0 

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BIBLIOGRAPHY 

Association for Corporate Growth. "Bridging the Capital Formation Gap: The Small Business 

Administration's SBIC Program." Vimeo video, 57:07. April 12,2016. https://vimeo. 

com/162594659. 

Brown, J. David, and John S. Earle. "Do SBA Loans Create Jobs? Estimates from Universal 

Panel Data and Longitudinal Matching Methods." CES Working Paper 12-27, Center for 

Economic Studies, U.S. Census Bureau, U.S. Department of Commerce, Washington, 

DC, 2012. http://www2.census.gov/ces/wp/20 12/CES-WP-12-27.pdf. 

Cook, Justin M., and Sean M. Nevins. 1999 Arizona Venture Capita/Impact Study. No Place: 

Zermatt Group, 1999. 

Kite, Shane. "SBIC Revival: Why Interest from Banks is Way Up, As the Volcker Rule Looms." 

American Banker, Apri128, 2014. http://www.americanbanker.com/magazine/124_04/ 

sbic-revival-why-interest-from-banks-is-way-up-as-the-volcker-rule-looms-1 066822-1. 

html. 

U.S. Federal Deposit Insurance Corporation. "Interagency Questions and Answers Regarding 

Community Reinvestment." last updated April20, 2014. https://www.fdic.gov/ 

regulations/laws/rules/2000-6750.html. 

U.S. Small Business Administration. The Small Business Investment Company (SBIC) Program 

Overview. Last updated February 24,2016. https://www.sba.gov/sites/default/files/files/ 

SBIC _Program_ Executive_ Summary _20 16.pdf. 

---.Small Business Investment Company (SBIC) Program Overview as of September 30, 

2015. Accessed September 30, 2016. https://www.sba.gov/sites/default/files/files/Web 

SBICProgram0verview_September2015.pdf. 

___ . Offering Circular: Guaranteed 2.507% Debenture Participation Certificate, Series 

SBJC 2016-10 A. March 14, 2016. https://www.sba.gov/sites/default/files/SBIC _ 2016-

1 OA-cusip-831641-FF7.pdf. 

In addition, the authors consulted relevant federal codes, laws, and regulations; U.S. government 

websites, such as those maintained by the Federal Deposit Insurance Corporation and the U.S. 

Small Business Administration; newspapers, such as the Guardian; and the websites of industry 

trade'organizations, such as the National Association of Investment Companies and the National 

Venture Capital Association. 

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AAVIN 

PRIVATE EQ!)ITY 

Statement for the Record 

By Thies Kolln 

Partner, AA VfN Private Equity 

Hearing Entitled "Investing in Small Businesses: The SBIC Program" 

The House Committee on Small Business 

Subcommittee on Agriculture, Energy, and Trade 

November 7, 2017 
77 

Chairman Blum, Ranking Member Schneider, and Members of 

the Subcommittee, thank you for the opportunity to testify today 

and for holding this hearing, ‘‘Investing in Small Business: The 

SBIC Program.’’ 

This hearing is important for highlighting the United States 

Small Business Administration’s (SBA) Small Business Investment 

Company (SBIC) Small Business Investment Company (SBIC) Program and the impact it is having on growing domestic small businesses and creating American jobs. Access to capital is a tremendous issue for small businesses across the country. This program 

effectively resolves that issue. I am eager to provide you my perspective as an SBIC fund manager and past member of the Small 

Business Investor Alliance board. 

My name is Thies Kolln. I am a partner of AAVIN Private Equity, a private equity firm based in the heart of the Midwest. Our 

central office is in Cedar Rapids, Iowa, but we also have regional 

offices in Kansas City, Missouri and Madison, Wisconsin. I joined 

AAVIN in 2002, and prior to joining the firm I practiced corporate 

law in Chicago, representing venture capital and private equity 

funds. 

At AAVIN, we stay true to our roots by focusing on helping 

small, regionally-based businesses grow. We specialize in late-stage 

and expansion-stage financings, and we partner with strong management teams that seek long-term business growth. Our focus is 

on smaller investment opportunities—small businesses seeking 

financings less than $10 million, with most needing less than $5 

million. Further, our activities are concentrated mostly in the 

upper Midwest, such as Iowa, which is an area of the country traditionally underserved by capital. We are also weighted toward 

small businesses in manufacturing and business services, but are 

diversified in other sectors such as healthcare, technology, and 

communications. 

AAVIN has extensive private equity investment experience. The 

seven members of our investment team have made investments in 

over 300 companies and have held multiple operating roles. 

Through our firm’s history, just in Iowa we have deployed $34 

million in capital that helped create our sustain over 6,000 jobs. 

Those numbers may not mean a whole lot for a place like Manhattan, but they do for Iowa. These investments produced great 

growth for small businesses as well as returns for our investment 

partners, which includes repayment in full to the SBA and American taxpayer. 

To provide technical insight into the SBIC Program, my testimony today will focus on three main areas: 1) AAVIN’s involvement in, and strong support for, the SBIC Program; 2) AAVIN’s investment process in small businesses through the SBIC Program; 

and 3) AAVIN’s impact on growing domestic small businesses and 

creating American jobs through the SBIC Program. 

SBIC Program Involvement 

SBREP-219A with DISTILLER

78 

AAVIN has substantial historical involvement with the SBIC 

Program. 

A hallmark of the SBIC Program is its rigorous licensing process 

for prospective SBIC funds, ensuring taxpayer protection and safeguarding the program’s reputation. One requirement for licensing 

is that management team applicants have extensive prior investment experience and good investment track records. AAVIN meets 

that demand. Our firm’s experience base dates back to the start of 

the SBIC Program in 1959. We have a long-term commitment to 

small business. 

In its present-day iteration, AAVIN is currently on its second Debenture SBIC fund, which became licensed in 2015; however, our 

seven principals have successfully managed five prior SBICs, with 

over 40 years of continuous Debenture SBIC management. We 

have over 120 cumulative years of lending and mezzanine investing 

experience. Such repeats of licensure as an SBIC is a good thing, 

as it demonstrates to prospective small business partners our previous funds’ successes; demonstrates our commitment to serving 

this undercapitalized market; and demonstrates to the taxpayer 

that we are good stewards of American tax dollars. Notably, we 

have a history of on-time payments to SBA and overall compliance, 

with clean examinations without findings. 

AAVIN strongly supports the SBIC Program because it provides 

the opportunity to supplement our private capital with up to two 

times more capital to deploy to small businesses to support their 

growth. This augmented growth capital helps small businesses 

grow even more than AAVIN’s private capital alone could. Given 

the increasing concentration of capital among large funds and institutions and the resulting difficulty in finding capital with a dedicated strategy of investing in small funds and small businesses, it 

is questionable whether many of the small funds like AAVIN could 

even continue to fund small businesses at all without the program. 

Importantly, our private capital—and any private capital of any 

other SBIC fund—is always in the first-loss position when making 

investments. So, despite being leveraged with capital other than 

our private capital, our interest is always in making sound investments knowing that our private capital, which includes significant 

personal investments by our management team, would be burned 

through by an underperforming investment before any taxpayer 

capital would lose even a dollar. 

SBICs like AAVIN are usually providers of the first institutional 

capital into a small business. Because of this, the program is helping to professionalize small businesses, as SBICs ensure the 

business’s operations are fundamentally solid along with their financials during the investment. This not only primes businesses 

for greater growth but also gives them greater long-term viability 

by strengthening their ability to response to changing economic cycles, management team transitions and other unforeseen events. 

AAVIN’s investment process works to that end. 

Investment Process 

SBREP-219A with DISTILLER

79 

While the SBIC Program makes available additional capital to 

augment private capital, the actual act of investing in small businesses itself is, and always will be, incumbent upon the SBIC fund. 

AAVIN’s investment process not only protects the interests of the 

American taxpayer and the firm’s own investment partners, but 

also that of the small businesses it partners with to grow. 

AAVIN receives over 500 to 1000 inquiries annually for small 

business financings. Approximately 50 to 100 of those inquiries we 

whittle down through our preliminary diligence, then even further 

from there, eventually landing at approximately 4 to 6 financings 

actually being conducted through the fund annually. 

Our deal flow is from significant proprietary sources that we 

have developed over 40 years by focusing on a consistent investment profile using our regional offices. Again, this informs our geographic investment preferences. Notable among those deal flow 

sources are local and regional banks, many of which are too small 

to be called on by other funds and which also cannot practically deploy their capital to small businesses without an SBIC. 

Our investment underwriting is rigorous and credit-based. Characteristics of small businesses that we look for before investing in 

are a positive cash flow; financial ratios, such as total funded debt 

to Earnings Before Interest, Taxes, Depreciation and Amortization 

(EBITDA); a complete management team with strong financial and 

operation leadership; a defensible market position; and ultimately 

a growth opportunity. 

This is all to say that the rigorous licensing process and continuous ongoing oversight of funds that the SBA applies to the SBIC 

Program likewise applies to our processes in financing small businesses. 

A typical transaction for AAVIN provides under $2 to 5 million 

in financing to a small business. This is mostly debt in the form 

of loans, but we usually take an equity stake in the small business 

in conjunction with the loan. We partner with the management 

teams and always make sure that management holds equity interests in the businesses they operate—active managers will usually 

own a greater stake in the business after our investment than before. 

Following the initial investment, AAVIN, as generally the first 

institutional investor, supports the small business for anywhere between three to eight years before. In that time, we are repaying the 

SBA and providing returns to our investors. 

We provide significant value over the life of our investments 

through active involvement with the respective small businesses. 

We provide assistance to our small business management teams in 

many areas including strategic planning, finance, marketing, recruiting, analyzing and closing acquisitions or divestitures, developing treasury strategies and assessing financial markets. These 

are the acts of professionalizing the small business I mentioned as 

a core outcome of the SBIC Program. To that end, we are truly 

partners with small businesses. 

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Impact on Small Businesses 

Through the SBIC Program, AAVIN helps small businesses solve 

their need for capital, along with operating assistance that aids 

professionalization. The upper Midwest is traditionally lacking in 

alternative sources of capital, particularly for smaller businesses. 

Unlike other fund managers, AAVIN has not moved up-market to 

manage ever larger funds that no longer focus on small business 

investing. We have been able to keep our focus and strategy because of the continued availability of the SBIC program. 

When it comes to securing growth capital, equity financing is 

often too expensive or unavailable for small businesses. To finance 

their continued growth through equity alone, small business owners would have to give up large amounts of control of their businesses, if they could even find such capital at all. Most private equity capital is focused either in specific regions and industries such 

as Silicon Valley IT or Boston area medical companies or in very 

large multibillion dollar funds that aren’t set up to make small investments. Small businesses are also limited in their ability to get 

traditional bank loans, which are often limited to a portion of the 

assets the business has as collateral or the owners can provide 

through personal guarantees. The SBIC Program fills this gap by 

enabling a these businesses to access a more flexible source of debt 

that is focused on meeting their capital needs. 

The small businesses AAVIN invests in through the SBIC Program may have many possible uses for capital, such as expansion 

by purchasing equipment or facilities, hiring additional employees 

to grow the business, acquiring other small businesses, or providing operating capital. 

Because of our location and our firm’s investing principles, we 

have a particular impact on small businesses in Iowa. In our firm’s 

history, we have made 26 investments in Iowa small businesses, 

one as recently as the end of October in Happy Joe’s Pizza & Ice 

Cream. 

Happy Joe’s is a family-run chain pizza parlor that was founded 

in 1972. The business also provides franchise opportunities and has 

54 locations across Iowa and other states in the Midwest. We have 

an ambitious growth plan for this company and have already made 

new hires into the organization to carry this out. Our management 

team is currently looking for more space for our expanded operations, which will enable them to make additional hires. Our involvement with the business will help it to create a larger geographic footprint, expand its product offerings, and—most importantly—create more jobs. 

Another example of our investment in small local businesses is 

RuffaloCODY, headquartered in Cedar Rapids, Iowa. RuffaloCODY 

provides fund raising, consulting, enrollment and donor based management services to non-profit organizations; primarily colleges and 

universities. The company manages on-campus fund raising campaigns and telefund campaigns, where RuffaloCODY hires students 

to perform the telemarketing process for its clients. RuffaloCODY 

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is the market leader in fund raising services for non-profit organizations. 

After an 8-year involvement that included a total investment of 

$3.25 million, AAVIN exited RuffaloCODY. AAVIN’s investment 

helped the company grow from just over 100 to more than 500 permanent employees, build out new facilities in Cedar Rapids and 

provide thousands of students across the country with part-time 

work raising money for their colleges and universities. In 2014, the 

business announced it acquired another business, forming Ruffalo 

Noel Levitz, to better partner with colleges and nonprofit organizations to help them enroll their classes, graduate their students, and 

engage their donors. Our involvement with the company helped establish a foundation for their growth into what the business is 

today. 

We are proud of these investments because of the impact the 

small businesses have on their communities by creating jobs and 

spurring the local economy, not least because we ourselves live in 

these communities. 

Conclusion 

But for the SBIC Program, AAVIN would not have its successful 

history of deploying growth capital to American small businesses, 

the backbone of our economy. The SBIC Program effectively helps 

us leverage the private capital we are able to raise for this purpose. 

Conversely, but for the SBIC Program, American small business 

access to capital would be worse. Without the program, an enormous capital access gap would exist for small businesses that traditionally lack alternative capital sources for growth. 

Thank you to the Subcommittee for holding this hearing on the 

SBA’s SBIC Program and how it enables access to capital for small 

businesses. I encourage the Committee and this Congress to continuing fully supporting the program so that it may expand, support more domestic small businesses, and create even more American jobs. I look forward to answering any questions you may have. 

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Statement for the Record 

By Michael Painter 

Managing Partner, Plexus Capital, Raleigh, NC 

Hearing Entitled, "Investing in Small Businesses: The SBIC Program" 

The House Committee on Small Business 

Subcommittee on Agriculture, Energy, and Trade 

November 7, 2017 

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Chairman Blum, Ranking Member Schneider, and Members of the Subcommittee, thank you 

for holding this important hearing and for inviting me to testify. 

My name is Michael Painter. I am Managing Partner of Plexus Capital-a North Carolina 

small business focused on supporting the growth of other small businesses throughout the 

United States. I am excited to talk about the Small Business Investment Company (SBIC) 

program, which has allowed our team to stay focused on supporting perpetually 

underserved small businesses since 1996. 

Since graduating from the University of North Carolina at Chapel Hill in 1995, I have spent 

my career focused on providing capital to US-based businesses. My career began with a 

regional bank in North Carolina, Centura Bank, where our team received its first SBlC 

license in 1996 as part of a commitment to better support the capital needs of the bank's 

clients. From Centura Bank I went to Donaldson, Lufkin & Jenrette in New York and 

eventually made my way back to North Carolina to re-join my colleagues at Centura 

supporting small businesses through the bank's SBIC fund. The bank eventually sold to 

RBC Bank in 2000 and in 2004 our team joined together again to form Plexus Capital and 

successfully closed our first independent SBIC in 2005. 

For over 20 years, members of our firm have managed SBICs and witnessed the program's 

success. Access to capital is one of the most important issues for small businesses 

nationwide, and for decades, this program has helped fill that void in a perpetually 

underserved area of the financial markets. 

In 2013, we were honored to be awarded the SBIC of the Year by the U.S. Small Business 

Administration (SBA). At the time, SBA administrator Karen Mills stated that "Plexus 

Capital's hard work, innovative ideas and dedication" were factors in us receiving the 

award. We remain committed to those same values as we seek to invest in growing small 

businesses. 

Investment Process and Criteria 

At Plexus we have stayed focused for more than two decades on supporting small 

businesses. We provide low-cost capital that supports growth and helps support the 

necessary transition of primarily baby-boomer owned small businesses to the next 

generation of owner-operators. There are more than 100,000 small businesses with $10-

100 million in sales and roughly 50% are owned by baby boomers. The continuity of these 

businesses and the millions of jobs they support are dependent on successfully 

transitioning the estimated $2 trillion of ownership to the next generation of owneroperators. 

We are currently managing our fourth SBIC fund, and to date, have invested $710 million in 

87 small businesses nationwide, successfully managing through all economic cycles. Plexus 

invests in main-street American small businesses across all industries- including 

manufacturing, service providers, retail and distribution companies. Below is a summary of 

our four SBIC funds that highlight the success of the small businesses we've partnered with: 

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Plexus Fund I: $80 MM 

Closed in November 2005 

10.5% net IRR 

1.7x multiple through the Great Recession 

Plexus Fund II: $175 MM 

Closed in November 2009 

21.8% net IRR 

2.0x multiple 

Plexus Fund III: $300MM 

Closed in March 2013 

$352 million deployed to-date 

Plexus Fund IV: $400 MM 

Closed in October 2016 

$82 million deployed to date 

Our growth has been driven by doing more of the same investments in small businesses. 

We invested in 28 small businesses through our first SBIC fund and expect to invest in 40-

50 small businesses over the life of Plexus Fund IV. While many peers have found great 

success moving up market to serve larger companies, we have been intentional about 

staying focused on smaller businesses who have limited access to capital where we can 

make a meaningful impact on growth. 

We review approximately 1,200 opportunities annually and ultimately invest in 12 -15 

small businesses. On average, we invest between $2 and $10 million and our capital allows 

owners to maintain significant ownership and control of the business. We are generally the 

first institutional partner of the small businesses we invest in and are committed to 

bringing value beyond the capital need. We have a full-time operating partner focused on 

supporting our small businesses in the development and execution of their growth plans, 

and we are committed to expanding this platform in 2018. 

We have 56 banks, 130 individuals, 18 family offices and 9 institutions that have invested 

across our four funds with total private capital raised of more than $475 million. Their 

support is the key to why the SBIC program is unlike any other public-private partnership I 

know of- most programs have public money at risk alongside of (or ahead of) private 

money. Importantly, the SBIC program is unique and operates at zero cost to the taxpayer 

because we, along with our partners, put our capital at risk firll. This not only provides 

obvious protection of taxpayer dollars, but also serves as private market validation of the 

quality of fund managers during the licensing process. 

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Licensing Process 

The SBIC program's licensing process is rigorous-as it should be-to ensure protection of 

taxpayer dollars. To receive an SBIC license, the management teams of SBIC applicants 

must have stellar track records in investment management. As mentioned earlier, we are 

currently on our fourth SBlC fund. Throughout each subsequent licensure process, we have 

proven to SBA that we have the expertise to be trusted with taxpayer dollars. 

We believe strongly that firms with demonstrable success should be encouraged to seek 

additional licenses. Historically firms who have had success with smaller businesses move 

up market, perpetuating the lack of capital for small businesses. The program's sole 

purpose is providing capital to small businesses where it otherwise may not be available -

and what better avenue than existing funds with proven track records. 

The regulations ensure all investments made by SB!Cs go to small businesses - irrespective 

of how long a manager has been in the program. Repeat funds in good standing are known 

entities that reduce the workload on limited resources at SBA, all while keeping much 

needed capital at the small end of the market. 

How SBlCs Are Impacting Communities 

The people, jobs and communities behind the small businesses we support are the real 

story of the SBlC program. While we are often evaluated on financial metrics, the drivers of 

every return we generate are real people with families who are impacting their 

communities- including the now 25 Plexus employees and the thousands of employees 

with our 87 small business partners. 

The following is a sample of the 87 small businesses we've partnered with and a brief 

summary of the people and stories behind them: 

• Agility Recovery (Charlotte, NC): Agility provides disaster support services 

and supports small business across the United States by providing customers 

with fully-operable office space that is delivered within 24 to 48 hours from 

the declaration of a disaster. With the help of our growth investment, Agility 

more than doubled its employment base, growing from 57 to 119. 

• Design Shop (Orlando, FL): Design Shop was founded in 2000 by a husband 

and wife, Doug and Sherri Hughes, and now has 50 employees on its payroll. 

Design Shop provides full-service support of trade show services for 

companies across the United States, and our capital is supporting continued 

growth. 

• Florachem (Jacksonville, FL): Steve McAllister founded Florachem in 1988 

after spending more than 10 years working for a large chemical company. He 

established relationships to supply US-based small businesses with specialty 

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chemicals used in manufacturing processes. At the time of our growth 

investment, Florachem had 16 employees and served more than ZOO small 

manufacturing customers across the United States. 

• Huseby (Charlotte, NC): Huseby was founded in 1989 by Scott Huseby, a 3rd 

generation court reporter, to professionalize the court reporting industry. 

Scott comes from a long line of court reporters - including multiple 

grandparents, both parents, aunts, uncles and cousins. We were Huseby's 

first institutional partner, and we provided capital to continuing growing the 

business. In addition to the 50 full time employees at Huseby, they also work 

with a network of more than 1,800 court reporters across the country. 

Huseby provides a steady flow of work to professionals in what historically 

had been an unpredictable "Mom-and-Pop" industry. 

• MPD (Trevose, PA): MPD was formed through the combination of Oak Bark 

Corporation, founded in 1973 by Bill Oakley and jim Barker, and MPD, 

founded in 1978 by Dr. jack Dickstein. The combined company employed 33 

people at the time of our investment and grew to 57 employees. MPD 

manufactures specialty monomers and polymers used in industrial and 

commercial applications, primarily for use in medical devices. 

• TITAN (Charlotte, NC): Founded in 1998 by Michael Vadini, TITAN employed 

350 people supporting the technology needs of businesses across United 

States. The company had been funded primarily by friends and family and 

various individual investors prior to our investment. Our capital was used 

for growth that the initial investors didn't have the ability to fund. 

Conclusion 

The SBIC program is a vital source of capital for small businesses and is a prime example of 

how the federal government and the private sector can work together to grow the economy 

and create jobs. I am deeply thankful to the entire committee for its support of this 

successful program, and I encourage you to pursue ways to strengthen it so more capital 

can be directed to growing small businesses. Again, I thank the subcommittee for holding 

this hearing and for allowing me to testify. I welcome your questions. 

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Good Morning. My name is Mark Walsh, and I am pleased to join 

you today to discuss the Small Business Investment Company, or 

SBIC program. From late 2015 until January 19th of this year, I 

ran the Office of Investment and Innovation (OII), at the US Small 

Business Administration here in Washington D.C. My area 

oversaw all SBIC, SBIR (Small Business Innovation Research) and 

Incubator/Accelerator programs. I was a Presidential appointee. It 

was my first job in government. Before that I had a 35+ year career in technology, the internet, and media—with senior or C-Suite 

positions at a wide variety of companies, including AOL, GE, HBO, 

VerticaINet, and more. 

Further, for the last 17 years, I have been an active ‘‘Angel’’ and 

venture investor in a wide variety of start-ups, and have served on 

the board of directors for many of those companies and other highgrowth venture backed entities. I have also served as Chairman of 

the Bipartisan Policy Center here in DC. I have a BA from Union 

College in NY, and an MBA from Harvard. 

I am happy to discuss the SBIC program, one of the most innovative, financially successful and well-structured government programs in existence. However, since I left the program almost 10 

months ago, I hope the committee will forgive me if some of my 

recollections and remembrances are dimmed or made suspect by 

the passage of time. Also, my opinions are my own, and are not 

meant to reflect any one else’s or any other agenda. 

The SBIC program takes low-interest debt issued by a consortium of banks, backed by the SBA/OII, and provides it to professionally managed domestic Venture Capital and Private Equity 

funds. These VC and PE funds can only receive the non-dilutive 

debt investment from OII after being granted an SBIC License. 

The license application and approval process is extraordinarily rigorous, and creates an efficient ‘‘filter’’ for mismanaged or ill-targeted funds from receiving taxpayer dollars. 

Further, a licensee is required to report all significant investment activities, sales of companies, additional Limited Partner investments, etc. to the OII on a regular quarterly basis, and there 

are annual on-site inspections by OII trained teammates to validate all the activities and efforts of the licensee. In short, OII is 

as vigilant an investor as any in the private market, if not more 

so. However, as we all know, investment entails risk, so OII also 

had a trained team of ‘‘workout’’ experts who helped funds that ran 

awry of financial health, and in some cases assumed ownership and 

control of failed funds and disposed of the assets at admirable salvage valuations. But, make no mistake, the amount of unrecoverable investment was miniscule, and was the envy of the private 

sector. 

In short, the SBIC program was a fabulous example of a public/ 

private partnership, and one I was proud to be part of. My colleagues and teammates, both career and political-appointees, were 

as motivated, talented and professional as any I have worked with 

in my career. I enjoyed my all-too-short stint immensely. 

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But, I was asked here today to address ways to improve the 

SBIC program. Nothing is perfect, and there are a few areas I 

would try to address if I were still in charge. 

1) Outreach: We made extraordinary progress during my 

time in discovering new funds and new types of funds, and in 

meeting and engaging more diverse fund managers—gender, 

demographic, geographic and market-focused diversity—than 

many prior efforts. That happened because my teammates and 

I made it a priority. The SBIC program should hire and motivate more and more outreach teammates to reignite and continue that trend. 

2) Promote and Reward certain types of Funds: ‘‘Impact 

Funds’’, (aimed at social, environmental, educational, or institutional improvement as opposed to pure profit) are wonderful 

entities. The SBIC program should be able to encourage them 

with lower interest rates, more attractive payback options, or 

faster application processing. Currently, they are not effectively treated any differently than other funds. Also, SBIC had 

a ‘‘Venture Fund’’ category, aimed at higher-risk start up investments, and those funds should also have better terms 

made available for them, as they are often structured to have 

less appetite for debt. 

3) License Processing Streamlining/Reporting Requirement Streamlining: The amount of paperwork expected of a 

license applicant and license holder is heavy. OII and the Program should continue its efforts to use available technologies 

to streamline these processes. Some funds we tried to enroll 

and apply chose not to because the paperwork and processes 

were onerous and time consuming. 

4) Equity Ownership: OII should have the ability to receive 

a very small amount of equity in the companies its capital invests in. The SBIC program, started in the 1950’s, has held 

debt-stakes in a number of iconic companies. For instance, in 

1977 it held over 4% ownership in a small technology company 

called Apple. Over the years, the program has had limited success in taking equity stakes, but I feel that OII should continue 

vigorous and energetic efforts to create some ownership ‘‘upside’’ for American taxpayers through this program with equity 

ownership versus only debt. 

5) More Private-Sector Partnerships: During my stint, 

teammates and I created a wonderful board-diversity initiative 

called ONBoard (The Open Network for Board Diversity) with 

a partner, LinkedIn (the professional Social Network). There 

are a great number of innovative and productive private sector 

companies who would be wonderful partners in new and innovative opportunities. OII should be freer to pursue those. 

6) Networking Opportunities between Funds and Companies: OII was not at liberty to cross pollinate its investment 

funds with each other. Companies looking for capital who 

called OII could not be told about PE or VC funds that might 

be looking to invest in them. OII is a natural clearinghouse for 

a wide variety of data it collects about its Funds, and it should 

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have more ‘‘Open Access’’ to the data for industry observers, 

companies, funds and analysts. 

There are other improvements or opportunities I could detail, but 

these are some that I saw great potential in when I was at the 

Agency. I would encourage the Committee to work with OII and 

the SBA to promote these ideas, if the Committee finds them of 

value. 

Before I conclude, let me also mention the SBIA, or Small Business Investor Alliance. They are the industry association focused 

on the SBIC marketplace. Their staff and management were extraordinarily helpful to me as I learned the program, and were invaluable partners for the initiatives me and my OII colleagues pursued. Their Board and members were truly the ‘‘best of the best’’, 

and I can’t thank them enough for their productive role in the ongoing success of the SBIC program. 

Thank you for inviting me today, and now I am ready to help 

with any questions or comments the Committee may have. 

Mark L. Walsh 

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