SMALL BUSINESS 

INVESTMENT 

COMPANIES

Characteristics and 

Investment 

Performance of Single 

and Multiple 

Licensees

Report to the Ranking Member,

Committee on Small Business,

House of Representatives

January 2016

GAO-16-107

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-107, a report to the 

Ranking Member, Committee on Small 

Business, House of Representatives

January 2016

SMALL BUSINESS INVESTMENT COMPANIES

Characteristics and Investment Performance of 

Single and Multiple Licensees

Why GAO Did This Study

Under the SBIC program, SBA 

licenses privately owned and managed 

investment funds that provide capital to 

small businesses. SBICs use their own 

capital plus funds (known as leverage) 

that are borrowed at favorable rates 

because SBA guarantees the loan 

obligation, which is known as a 

debenture. Holders of SBIC licenses 

can manage a single SBIC (“single 

licensee”) or two or more SBICs 

(“multiple licensee”). 

This report examines (1) the 

characteristics of single- and multiplelicense SBICs, (2) the investment

performance of single versus multiple 

licensees and the attributes of the 

small businesses in which they invest, 

and (3) the SBIC program’s overall 

financial performance and the extent to 

which SBA manages program risk. 

GAO analyzed SBA data (generally 

covering from 2005-2014), policies, 

processes, and procedures and 

interviewed SBA staff, SBIC fund 

managers, and industry stakeholders, 

who were selected to represent a mix 

of SBIC characteristics and based on

suggestions by various stakeholders.

What GAO Recommends

GAO recommends that SBA provide 

guidance to SBIC licensees on how to

collect and report data on their 

investments in minority-, women-, and 

veteran-owned businesses. SBA 

neither agreed nor disagreed with this 

recommendation.

What GAO Found

Small Business Investment Companies (SBIC) managed by entities holding 

multiple licenses controlled most Small Business Administration (SBA) leverage 

and shared similar characteristics with entities holding a single license. At the 

end of fiscal year 2014, multiple licensees controlled $5.2 billion of the $7 billion 

(about 74 percent) in outstanding debenture SBA leverage, compared to 2005, 

when they controlled 24 percent (see figure, left). SBIC characteristics, including 

geographic distribution and management demographics, were largely similar for 

single and multiple licensees.

Multiple licensees have demonstrated better aggregate investment performance 

than single licensees, although the investments have similar attributes. For 

example, from 2005 to 2014, 6 percent of multiple-license debenture SBICs were 

put into liquidation (typically because of excessive losses), compared with 39 

percent of single-license SBICs (see figure, right). Both types of licensees

invested in a roughly similar range of industries and geographic areas. Multiplelicense SBICs were slightly more likely to invest in smaller enterprises or in lowor moderate-income areas. However, data on minority, women, and veteran 

ownership of SBIC investments are unreliable, in part because SBA does not 

provide guidance to SBIC licensees on how to collect and report this information. 

Providing such guidance would help improve the quality, consistency, and value 

of these data, which would help inform SBA’s strategic priority of providing 

financial capital for underserved small businesses. 

The SBIC program’s financial performance has been relatively stable in recent 

years, although the degree to which program performance can be attributed to 

SBA oversight is unclear. For instance, most losses from 2003 to 2014 were 

incurred from SBICs remaining in the participating securities program (where 

SBA held an equity interest in SBICs), for which SBA stopped issuing new 

licenses in 2004 due to losses. The SBIC program’s risk management 

mechanisms include the application and licensing processes, which are largely 

the same for single and multiple licensees, and requirements for private capital 

fundraising. SBA monitors SBICs through risk assessments of their financial 

condition; examinations assessing regulatory compliance; and, as necessary, 

liquidation to recover financial assets. The effect of SBA oversight on financial 

performance is difficult to measure, however, because it cannot easily be isolated 

from other internal and external factors, such as economic conditions.

View GAO-16-107. For more information, 

contact Cindy Brown Barnes at (202) 512-

7215 or BrownBarnesC@gao.gov. 
Page i GAO-16-107 Small Business Investment Companies

Letter 1

Background 2

Multiple Licensees Controlled Most SBA Leverage and Shared 

Similar Characteristics with Single Licensees 6

Multiple Licensees Have Outperformed Single Licensees but Their 

Investments Have Similar Attributes across a Number of 

Measures 13

Recent SBIC Program Performance Has Been Relatively Stable 

and the Program Includes Oversight Measures Intended to 

Manage Risk 25

Conclusions 39

Recommendation for Executive Action 40

Agency Comments 40

Appendix I Objectives, Scope, and Methodology 41

Appendix II GAO Contact and Staff Acknowledgments 47

Tables

Table 1: Number of Small Business Investment Companies 

(SBIC), by Type, as of September 30, 2014 9

Table 2: Small Business Investment Companies (SBIC) 

Transferred to Liquidation, in Aggregate, from September 

30, 2005, to July 15, 2014 14

Table 3: Estimated Loss Rates for Small Business Investment 

Companies (SBIC), Aggregated, from September 30, 

2005, to July 15, 2014 15

Figures

Figure 1: Flow of Small Business Administration (SBA) Leverage 

and Private Capital in the Small Business Investment 

Company Program 4

Figure 2: Number of Debenture Small Business Investment 

Companies (SBIC) and Licensees, as of the End of Fiscal 

Years 2005–2014 7

Contents
Page ii GAO-16-107 Small Business Investment Companies

Figure 3: Number of Small Business Investment Companies 

(SBIC), by License and by Type, as of the End of Fiscal 

Years 2005–2014 8

Figure 4: SBA Leverage Held by Small Business Investment 

Companies (SBIC), All Types, as of the End of Fiscal 

Years 2005–2014 9

Figure 5: SBA Leverage Held by Debenture Small Business 

Investment Companies (SBIC), as of the End of Fiscal 

Years 2005–2014 10

Figure 6: Distribution of Multiple- and Single-License Debenture 

Small Business Investment Companies (SBIC), by State, 

as of September 30, 2014 12

Figure 7: Number of Small Business Investment Companies 

(SBIC) in Capital Impairment, by Type and by Quarter, 

Calendar Years 2005–2014 17

Figure 8: Number and Dollar Amount of Small Business 

Investment Company (SBIC) Investments to Small 

Businesses, as of the End of Fiscal Years 2005–2014 19

Figure 9: Industry Categories for Small Businesses Receiving 

Small Business Investment Company (SBIC) 

Investments, as of September 30, 2014 20

Figure 10: Geographic Distribution for Small Businesses 

Receiving Small Business Investment Company (SBIC) 

Investments, from October 1989 to June 2014 21

Figure 11: Small Business Investment Company Program: 

Ultimate Loss Rate, End of Fiscal Years 1994–2014 26

Figure 12: Small Business Investment Company (SBIC) Program: 

Ultimate Loss Rate for Debenture and Participating 

Securities SBICs, End of Fiscal Years 2003–2014 27

Figure 13: Small Business Investment Company (SBIC) Program: 

Cumulative Ultimate Losses, by Type of SBIC, End of 

Fiscal Years 2003–2014 28

Figure 14: Application and Licensing Process for Small Business 

Investment Company (SBIC) Program 32
Page iii GAO-16-107 Small Business Investment Companies

Abbreviations

OIG Office of Inspector General

SBA Small Business Administration

SBIC Small Business Investment Company

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Page 1 GAO-16-107 Small Business Investment Companies

441 G St. N.W.

Washington, DC 20548

January 27, 2016 

The Honorable Nydia M. Velázquez

Ranking Member

Committee on Small Business

House of Representatives

Dear Ms. Velázquez:

The Small Business Investment Company (SBIC) program provides 

financial assistance to privately owned investment firms that make equity 

and debt investments in small businesses. An entity can have a license 

from the Small Business Administration (SBA), which administers the 

program, to own or operate a single SBIC, or it may have two or more 

SBIC licenses.1 SBA typically provides funds, known as leverage, in the 

amount of $2 for every $1 an SBIC has raised in private capital, up to a 

maximum of $150 million for a single licensee and $350 million for a 

multiple licensee. Collectively, SBICs held approximately $7.7 billion of 

SBA leverage as of September 30, 2014.

You asked us to review aspects of the SBIC program. This report 

examines the (1) characteristics of multiple-license SBICs compared with 

single-license SBICs; (2) investment performance of multiple licensees 

compared with single licensees and the attributes of the small businesses 

in which they invest; and (3) overall financial performance of the SBIC 

program and the extent to which SBA manages the risk associated with 

the program.

To address the first two objectives, we collected and analyzed data from 

SBA on the number of SBICs, the amount of leverage extended to them, 

and the characteristics of the licensees. We also collected and analyzed 

measures of investment performance, such as loss rates, for single and 

1

For this report, we use “single licensee” to refer to an entity that holds one SBIC license 

and “multiple licensee” to refer to an entity that holds two or more SBIC licenses under 

common control. “Common control” is defined as “a condition where two or more persons, 

either through ownership, management, contract, or otherwise are under the control of 

one group or person.” 13 C.F.R. §107.50. We use “single-license SBIC” to refer to an 

SBIC held by a single licensee, and “multiple-license SBIC” to refer to an SBIC held by a 

multiple licensee.

Letter
Page 2 GAO-16-107 Small Business Investment Companies

multiple licensees, and reviewed attributes of their investments that 

included geographic distribution, industry sector, and extent of 

investments in smaller enterprises. In most cases, our analysis covered 

2005 through 2014 because 2005 was the year in which SBA began 

collecting data in a manner that allowed the performance of multiple 

versus single licensees to be isolated. Our analysis of the geographic 

distribution of SBIC investments covered October 1989 to June 2014 

because that is the time frame of the data provided to us by SBA. In 

addition, we reviewed data collected by SBA on the minority, women, and 

veteran ownership of the small businesses in which SBICs invest.

To address the third objective, we reviewed and analyzed SBA data on 

SBIC program performance, including financial losses and credit subsidy 

rates, for fiscal years 1992 through 2014. To assess the reliability of the 

SBA data, we performed electronic testing for obvious errors in accuracy 

and completeness and discussed data collection procedures with SBA 

staff. We determined these data were sufficiently reliable for the purpose 

of this report, with the exception of data on minority, women, and veteran 

ownership of SBIC investments, as discussed later in the report. We also 

reviewed SBA’s policies, processes, and procedures, including the 

program’s application and approval process, examination procedures, 

oversight and audit practices, and financial reporting requirements. In 

addition, to address all the objectives, we interviewed a nongeneralizable 

sample of SBA staff, SBIC fund managers, other industry representatives, 

and an academic researcher. We selected the SBIC fund managers who 

we interviewed to represent a mix of multiple- and single-license SBICs, 

geographic locations, size of investments, and industries, among other 

criteria. We selected the academic researcher to interview based on a 

suggestion by the Small Business Investor Alliance and because his work 

was cited in documents we reviewed. See appendix I for a detailed 

discussion of our scope and methodology.

We conducted this performance audit from July 2014 to January 2016, in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

The Small Business Investment Act of 1958, as amended, created the 

SBIC program to facilitate the flow of capital to small businesses and Background
Page 3 GAO-16-107 Small Business Investment Companies

stimulate the economy.2 Under the program, which is operated by SBA’s 

Office of Investment and Innovation, SBA does not make direct 

investments in small businesses but partners with privately owned and 

managed SBICs that provide financing to qualifying small businesses. 

This financing consists of private capital that the SBIC has raised and 

SBA’s financial assistance through the SBIC program. SBICs are able to 

borrow at favorable rates because SBA guarantees the loan obligations 

(known as debentures) that SBICs make.3 When an SBIC is ready to 

make an investment, in addition to using private capital, it may draw down 

on SBA’s leverage by issuing a debenture with a repayment schedule for 

principal and interest. SBICs also may use their leverage and private 

capital to pay for operating expenses.

Entities applying for an SBIC license must raise the needed capital for an 

investment fund. The fund develops its own strategy for making 

investments in small businesses, offering loans, purchasing equity, or 

both. Generally, applicants must raise a minimum of $5 million of private 

capital to establish an SBIC.4 As seen in figure 1, SBA typically provides 

$2 of government-guaranteed leverage for every $1 of private capital an 

SBIC has raised from private investors.5 These investors can include 

university endowments, insurance companies, banks, high-net-worth 

individuals, and pension funds.

 2

Pub. L. No. 85-699, 72 Stat. 689 (codified as amended at 15 U.S.C. §§ 661-697g).

3

SBA is also authorized to purchase debentures or participating securities issued by 

SBICs. 15 U.S.C. § 683(b). The participating securities program will be discussed further 

below. 

4

13 C.F.R. § 107.210.

5

SBA is permitted by law to provide a maximum of $3 of leverage for every $1 of private 

capital up to the leverage limits of $150 million for single licensees and $350 million for 

multiple licensees. 15 U.S.C. § 683(b)(2). However, according to SBA, to manage 

program risk the agency typically provides $2 of leverage for every $1 of private capital.
Page 4 GAO-16-107 Small Business Investment Companies

Figure 1: Flow of Small Business Administration (SBA) Leverage and Private 

Capital in the Small Business Investment Company Program

Holders of SBIC licenses may own or operate a single SBIC or multiple 

SBICs (sometimes referred to as multiple licenses under common 

control).6 An SBIC can be organized as a corporation, limited partnership, 

or limited liability company. Most SBICs are owned by relatively small 

groups of local investors, although some are wholly or partially owned by 

commercial banks. A few SBICs are corporations with publicly traded 

stock. SBICs can invest in small businesses with tangible net worth not in 

excess of $19.5 million and with an average of not more than $6.5 million 

in net worth after federal tax income over the previous 2 fiscal years at 

the time of investment.7

In fiscal year 2014, SBA committed to guarantee $2.55 billion in SBIC 

small business investments. The Consolidated Appropriations Act, 2014, 

increased the annual amount that SBA was authorized to provide to

SBICs from $3 billion to $4 billion.8 However, according to SBA, the SBIC 

program operates on a “zero-subsidy” basis at no cost to taxpayers, and 

requires no annual appropriations from Congress. To recoup expenses 

 6

For this report, the designation of an SBIC or SBIC licensee as “single” or “multiple”

refers to its status during the specific year noted. However, an entity’s status as single or 

multiple licensee is not necessarily static. For example, all multiple licensees were once 

single licensees and a multiple licensee can revert to a single licensee if it surrenders one 

or more of its licenses.

7

13 C.F.R. § 121.301(c). A business also may be deemed “small” using the North 

American Industry Classification System. 

8

Pub. L. No. 113-76, Div. E, tit. V, 128 Stat. 5, 223.
Page 5 GAO-16-107 Small Business Investment Companies

from any defaults and keep the program at zero subsidy, SBA charges 

SBICs various fees. These include a 1 percent fee on the leverage 

commitment, a 2 percent fee when drawing against this leverage 

commitment, and an annual charge against the outstanding leverage 

balance. By statute, the annual charge may not exceed 1.38 percent, and 

historically it has never exceeded 1 percent, according to SBA.9 In 

addition, SBA is allowed by statute to charge licensing and examination 

fees to recoup administrative costs associated with these activities.10

Overall, the SBIC program’s administrative expenses as a share of the 

SBA leverage (including commitments) declined from 0.24 percent in 

1999 to 0.16 percent in 2013, according to SBA, which noted that the 

program has grown in recent years without a corresponding increase in 

administrative resources.

Currently, there are three types of debenture SBIC licenses. The 

Standard Debenture License has a broad investment mandate with few 

restrictions on an SBIC’s strategy or capital allocation. The Impact 

Investment License requires that at least 50 percent of the fund’s invested 

capital be deployed into investments that have a social, environmental, or 

economic impact.11 The Early Stage SBIC license is designed to attract 

investment fund managers with experience supporting companies in the 

earliest stages of growth.12

In addition to the debenture program, the participating securities program, 

which started in 1994, helped fund SBICs through the issuance of 

preferred equity interests, called participating securities. On October 1, 

2004, SBA stopped issuing new commitments because, according to the 

agency, the program experienced significant losses due to flaws in the 

participating securities instrument that were magnified as investments in 

 9

15 U.S.C. § 683(b).

1015 U.S.C. §§ 681(e) and 687b(b). For fee amounts, see 13 C.F.R. §§ 107.300 and 

107.692.

11Impact investments include, but are not limited to, certain small businesses located in 

low- or moderate-income, economically distressed, or rural areas, energy-saving qualified 

investments, and grant recipients of the Small Business Innovation Research and Small 

Technology Transfer Research programs. They also can include other “impact”

investments identified by the SBIC and approved as eligible by SBA. 

12For this report, we use the terms “debenture SBICs” or “SBIC debenture program” to 

refer to SBICs with Standard Debenture Licenses, Impact Investment Licenses, and Early 

Stage SBIC Licenses. 
Page 6 GAO-16-107 Small Business Investment Companies

technology startup and early stage small businesses lost much of their 

value in the early 2000s. According to SBA, the profit participation and 

fees paid for participating securities leverage were no longer sufficient to 

cover the projected net losses, and Congress did not appropriate any 

additional funds for the program. SBA continued to honor its existing 

commitments to the remaining participants as of 2016.

13

About seventy percent (130 of 187) of debenture SBICs—the most 

common SBIC fund type—were managed by 69 multiple licensees in 

2014, according to our analysis.14 The other 57 debenture SBICs were 

managed by single licensees (see fig. 2). The proportion of debenture 

SBICs managed by multiple licensees has sharply increased, rising from 

about 20 percent in 2005 to about 70 percent in 2014. At the same time, 

the number of single-license debenture SBICs generally decreased.

 13In addition, the specialized SBIC program focused on providing financing to small 

business entrepreneurs whose participation in the free enterprise system was hampered 

because of social or economic disadvantage. This program was repealed in 1996. Existing 

specialized SBICs were grandfathered into the SBIC program and a small number remain 

in operation. SBA also grants licenses to bank-owned SBICs—those fully owned by a 

bank—and nonleveraged SBICs, which do not receive program funding. For this report, 

we combined bank-owned and nonleveraged SBICs in one category and focused on 

SBICs that receive SBA leverage.

14Data for 2014 were the most recent available data at the time we conducted our analysis 

in 2015. Unless otherwise specified, years refer to fiscal years (October 1 of the prior year 

through September 30 of the following calendar year), and data refer to the end of the 

fiscal year (September 30 of the year cited). Unless otherwise noted, our analysis included 

only SBICs that were in operation—that is, under the jurisdiction of the Office of SBIC 

Operations—and not SBICs that had been transferred by SBA to the Office of SBIC 

Liquidation.

Multiple Licensees 

Controlled Most SBA 

Leverage and Shared 

Similar 

Characteristics with 

Single Licensees

Multiple Licensees 

Controlled Most SBICs 

and SBA Leverage in 2014
Page 7 GAO-16-107 Small Business Investment Companies

Figure 2: Number of Debenture Small Business Investment Companies (SBIC) and 

Licensees, as of the End of Fiscal Years 2005–2014

Although the number of debenture SBICs grew from 2005 through 2014, 

the number of SBICs overall—including participating securities SBICs, 

specialized SBICs, bank-owned SBICs, and nonleveraged SBICs—

declined during that time frame (see fig. 3). This decrease was 

commensurate with the declining number of participating securities 

SBICs, the majority of which were managed by single licensees. SBA 

stopped issuing new commitments for participating securities after 2004, 

as noted earlier, and in each year since then several participating 

securities SBICs left the program.
Page 8 GAO-16-107 Small Business Investment Companies

Figure 3: Number of Small Business Investment Companies (SBIC), by License and by Type, as of the End of Fiscal Years 

2005–2014

Nearly three-quarters of multiple-license SBICs in operation in 2014 were 

debenture SBICs, compared with just under 50 percent of single-license 

SBICs (see table 1).
Page 9 GAO-16-107 Small Business Investment Companies

Table 1: Number of Small Business Investment Companies (SBIC), by Type, as of September 30, 2014

Multiple-license SBICs Single-license SBICs

Number of SBICs Percentage of total Number of SBICs Percentage of total

Debenture 130 74% 57 48%

Participating securities 23 13 30 25

Specialized 1 1 8 7

Bank-owned/nonleveraged 22 13 23 19

Total 176 118

Source: GAO analysis of Small Business Administration data. | GAO-16-107

Note: The percentages do not add up to 100 because of rounding.

For all SBIC fund types, the amount of SBA leverage held by multiple 

licensees increased every year from 2005 to 2014 but generally fell for 

single licensees (see fig. 4). This decline was commensurate with the 

phasing out of the participating securities program. In 2014, multiple 

licensees controlled nearly three-quarters of the leverage issued by 

SBA—multiple-license SBICs held more than $5.6 billion in leverage and 

single-license SBICs held more than $2.1 billion.

Figure 4: SBA Leverage Held by Small Business Investment Companies (SBIC), All 

Types, as of the End of Fiscal Years 2005–2014
Page 10 GAO-16-107 Small Business Investment Companies

For debenture SBICs specifically, multiple licensees also increased their 

share of total SBA leverage during 2005–2014 (see fig. 5). These SBICs 

held about 24 percent of SBA leverage in 2005, but about 74 percent of 

the approximately $7 billion in SBA leverage in 2014.

Figure 5: SBA Leverage Held by Debenture Small Business Investment Companies 

(SBIC), as of the End of Fiscal Years 2005–2014

During the period from 2009 to 2014, the maximum amount of SBA 

leverage available to multiple licensees was $225 million, but few multiple 

licensees used, or approached, that amount.15 Our analysis of SBA data 

found that from 2009 to 2014, no more than 2.8 percent of multiple 

licensees reached the then-applicable $225 million leverage limit—

 15The American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 

115, increased the leverage limit for single licensees to the lesser of $150 million or 300 

percent of private capital and $225 million for multiple licensees. § 505(a)(1), 123 Stat. at 

156. Prior to 2009, the leverage limit was the same for both single and multiple 

licensees—although multiple licensees could obtain permission from SBA to exceed that 

limit—and was adjusted annually for inflation. In 2008, the leverage limit was $137.1 

million. The Consolidated Appropriations Act, 2016, raised the leverage limit for multiple 

licenses under common control to $350 million. See Pub. L. No. 114-113, Div. E, tit. V, § 

521(b) (amending 15 U.S.C. § 683(b)(2)(B)).

Few Multiple Licensees 

Used Allowable Maximum 

Leverage
Page 11 GAO-16-107 Small Business Investment Companies

including leverage drawn and SBA commitments—in any year.16

Moreover, few multiple licensees had come close to reaching the 

maximum amount in that period—for example, no more than 5.7 percent 

of multiple-license SBICs drew (or had commitments to draw) more than 

85 percent of the leverage limit during this time frame. From 2005 to 

2008, when the leverage limit for multiple licensees ranged from $124.4 

million to $137.1 million, no more than 3.2 percent of multiple-license 

SBICs appeared to have reached the leverage limit (including 

commitments).17 The Small Business Investor Alliance and some SBIC 

fund managers told us they believed the leverage limit nonetheless has a 

significant effect because it deters some SBIC managers who want to 

substantially grow their fund over the long-term from continuing to 

participate in the program.

SBIC characteristics, including geographic distribution and management 

demographics, were largely similar for single and multiple licensees, 

according to our analysis. For example, although there were some 

differences in their concentrations among states, the extent of geographic 

distribution of multiple- and single-license debenture SBICs was roughly 

similar in 2014. Both types of SBICs were concentrated in several states 

in 2014 (see fig. 6), with the single-license debenture SBICs significantly 

more heavily concentrated in New York. Multiple-license debenture 

SBICs were located in more states (27) overall than single-license 

debenture SBICs (19) in 2014.18 Within states, both multiple- and singlelicense SBICs showed some concentrations in certain cities and regions 

in 2014—particularly New York City, Chicago, San Francisco, and the 

Silicon Valley area.

 16SBA refers to the amount of leverage it issues as “leverage drawn.” An SBA 

commitment refers to a commitment by SBA to allow an SBIC to draw a certain amount of 

leverage in the future. Once approved, SBICs may request leverage draws up to the 

commitment amount for up to 4 years after the fiscal year in which the commitment was 

approved.

17We reviewed the total leverage balance for multiple-license SBICs every year from 2005 

to 2014. Because the amount of SBA leverage held by an SBIC can change over the 

course of a fiscal year, it was not possible to determine the precise number of SBICs that 

had reached the leverage limit. However, SBA staff said they agreed with our finding that 

the number of SBICs that had reached the leverage limit was very small.

18Additionally, there was one single-license debenture SBIC in Washington, D.C. in 2014. 

Single and Multiple 

Licensees Had Largely 

Similar Characteristics
Page 12 GAO-16-107 Small Business Investment Companies

Figure 6: Distribution of Multiple- and Single-License Debenture Small Business Investment Companies (SBIC), by State, as of 

September 30, 2014

SBA does not routinely collect information on the number of minority or 

female SBIC managers or those SBICs located in low- or moderateincome areas, but at our request, the agency asked its operations 

analysts—who are responsible for overseeing and supporting a portfolio 

of SBICs—to provide estimates of these numbers for SBICs in their 

purview. SBA officials told us that because this was an informal survey, 

they could not make any representation about the completeness or 

accuracy of the information. Although the data have limitations, the 

survey showed the following characteristics among the 290 SBICs in 

operation as of July 2014:

• Minority SBIC managers. An estimated 10 percent or less of both 

multiple-license and single-license SBICs had at least one minority 

SBIC manager who was American Indian or Alaska Native, Asian, 

Black or African American, Hispanic or Latino, or Native Hawaiian or 

other Pacific Islander.

• Female SBIC managers. About 6 percent of multiple-license SBICs 

and 11 percent of single-license SBICs were estimated to have at 

least one female SBIC manager.
Page 13 GAO-16-107 Small Business Investment Companies

• SBICs in low- or moderate-income areas. Slightly more than 12 

percent of both multiple- and single-license SBICs were estimated to 

be located in such areas.19

Multiple licensees, in the aggregate, demonstrated better investment 

performance than single licensees from 2005 to 2014, according to our 

analysis. Despite some variation, for most other attributes there were not 

substantial differences between small businesses that received 

investments from multiple-license SBICs and those that received them 

from single-license SBICs. We could not report on minority, women, and 

veteran ownership of SBIC investments because the data were 

unreliable, in part because SBA does not provide guidance to SBIC 

licensees on how to collect and report this information.

In the aggregate, multiple-license SBICs demonstrated better investment 

performance than single-license SBICs during 2005 through 2014, 

according to our analysis. This trend was evident for SBICs overall and 

debenture SBICs specifically. We analyzed two measures of investment 

performance: (1) the rate at which SBICs were transferred to liquidation 

and (2) the estimated loss rate.20 We also examined summary statistics 

 19SBA defines a low- or moderate-income area as any area located within a Historically 

Underutilized Business Zone (as defined in 13 C.F.R. § 126.103), an Urban 

Empowerment Zone or Urban Enterprise Community (as designated by the Secretary of 

Housing and Urban Development), a Rural Empowerment Zone or Rural Enterprise 

Community (as designated by the Secretary of Agriculture), an area of low income or 

moderate income (as recognized by the Federal Financial Institutions Examination 

Council), or a county with persistent poverty (as classified by the Economic Research 

Service of the Department of Agriculture). 13 C.F.R. § 107.50.

20We analyzed investment performance in aggregate because looking at performance in a 

single year can be misleading, according to SBA staff, given that even successful SBICs 

see few returns in their first several years while the businesses in which they invest are 

maturing. SBA began collecting data in a manner that allowed isolating the performance of 

multiple and single licensees in 2005. We included in our analysis only SBICs in operation 

or liquidation as of the end of fiscal year 2005 and all SBICs licensed from that time 

through July 15, 2014.

Multiple Licensees 

Have Outperformed 

Single Licensees but 

Their Investments 

Have Similar 

Attributes across a 

Number of Measures

Multiple Licensees Had 

Better Aggregate 

Investment Performance 

Than Single Licensees
Page 14 GAO-16-107 Small Business Investment Companies

provided by SBA on the number of SBICs that were capitally impaired 

while operating.21

From September 30, 2005, to July 15, 2014, 20 percent of multiplelicense SBICs were liquidated, compared with 57 percent of singlelicense SBICs (see table 2).22 Liquidation rates were highest for SBICs in 

the participating securities program. However, when considering only 

those in the debenture program, multiple-license SBICs also had much 

lower liquidation rates than single-license SBICs (6 percent and 39 

percent, respectively). An SBIC can be liquidated when SBA assesses it 

to have excessive financial losses—that is, to be capitally impaired—or 

other regulatory violations, resulting in the oversight and responsibility of 

the SBIC being transferred from the Office of SBIC Operations to the 

Office of SBIC Liquidation. Once an SBIC is liquidated (which can result 

in the surrender, revocation, or suspension of the SBIC operating 

license), SBA says its primary goal is to maximize the net recovery of 

funds.

Table 2: Small Business Investment Companies (SBIC) Transferred to Liquidation, 

in Aggregate, from September 30, 2005, to July 15, 2014

Multiple-license SBICs Single-license SBICs

SBICs Overall 20% 57%

 Debenture 6 39

 Participating securities 49 69

 Specialized 0 74

Source: GAO analysis of Small Business Administration data. | GAO-16-107

According to SBA, the estimated loss rate for SBICs overall from 

September 30, 2005, to July 15, 2014, was 8.3 percent for multiple-

 21An SBIC is considered capitally impaired when its investment and operating losses 

relative to its private capital exceed the maximum allowable capital impairment 

percentage. 

22For this analysis, the denominator is the total number of licensed SBICs from September 

30, 2005, to July 15, 2014, that were issued leverage, including those in liquidation, on 

September 30, 2005. 

Liquidation Rates

Estimated Loss Rate
Page 15 GAO-16-107 Small Business Investment Companies

license SBICs and 21.3 percent for single-license SBICs (see table 3).23

For debenture SBICs in particular, this loss rate was approximately 3.7 

percent and 10.6 percent for multiple-license and single-license SBICs, 

respectively. The estimated loss rate refers to anticipated ultimate losses 

divided by the sum of SBA leverage redeemed in operations, leverage 

transferred to liquidation, and draws in liquidation.24 SBA estimates how

much an SBIC in liquidation will be unable to repay based on both 

financial losses that have occurred and anticipated losses.

Table 3: Estimated Loss Rates for Small Business Investment Companies (SBIC), 

Aggregated, from September 30, 2005, to July 15, 2014

SBIC type

Anticipated Ultimate Lossesa

(millions of dollars)

Estimated loss 

rateb

(percentages)

Multiple-license SBICs $539 8.3%

 Debenture 111 3.7

 Participating securities 428 12.4

 Specialized 0 0.0

Single-license SBICs $1,757 21.3%

 Debenture 201 10.6

 Participating securities 1,508 24.3

 Specialized 48 31.7

Source: GAO analysis of Small Business Administration data. | GAO-16-107

a

Anticipated ultimate losses represent actual charge-offs (the leverage SBA determines it will not be 

able to recover) and anticipated future losses as estimated by the Office of Liquidation each year.

b

The estimated loss rate represents anticipated ultimate losses divided by the sum of SBA leverage 

redeemed in operations, leverage transferred to liquidation, and draws in liquidation.

During most points in time from calendar years 2005 through 2014, more 

single-license SBICs than multiple-license SBICs experienced capital 

 23The estimated loss rate is a performance measure specifically prepared by SBA at our 

request for comparing the financial performance of single- and multiple-license SBICs. 

The data used in this analysis do not include projected losses on outstanding leverage to 

SBICs in operation. According to SBA, the estimated loss rate is an appropriate measure 

for comparing the investment performance of single- and multiple-license SBICs. 

24Anticipated ultimate losses represent actual charge-offs (the leverage SBA determines it 

will not be able to recover) and anticipated future losses as estimated by the Office of 

Liquidation each year.

Capital Impairment
Page 16 GAO-16-107 Small Business Investment Companies

impairment at some point in their operation. An SBIC is considered 

capitally impaired when its investment and operating losses relative to its 

private capital exceed the maximum allowable capital impairment 

percentage.25 SBA states that capital impairment is the primary factor it 

uses to assess whether an SBIC should be liquidated. SBICs that are 

capitally impaired can be transferred to liquidation or be allowed to 

continue active operation. As seen in figure 7, the number of SBICs in

active operation that were capitally impaired generally declined from 2005 

to 2014, and most capitally impaired SBICs were in the participating 

securities program.

 25The maximum permitted levels of the capital impairment percentage are detailed in the 

regulations and vary depending on the proportion of equity investments made by the 

SBIC. For Section 301(c) licensees, which were the majority of SBICs as of September 

30, 2014, the maximum permitted capital impairment percentage ranges between 70 

percent and 35 percent, depending on the percentage of equity capital investments in the 

licensee’s portfolio. For Section 301(d) licensees (also referred to as specialized SBICs), 

the maximum permitted capital impairment percentage is 75 percent. See 13 C.F.R. § 

107.1830(c).
Page 17 GAO-16-107 Small Business Investment Companies

Figure 7: Number of Small Business Investment Companies (SBIC) in Capital 

Impairment, by Type and by Quarter, Calendar Years 2005–2014

Note: An SBIC that was capitally impaired in one quarter may not stay capitally impaired in the 

subsequent quarter(s).

SBA staff, SBIC managers, and industry participants with whom we spoke 

cited several reasons why multiple licensees performed better, in the 

aggregate, than single licensees. First, they said that multiple-license 

fund managers generally are more experienced and have experience 

operating an SBIC fund. Second, SBA and some industry participants

said that multiple-license SBICs already have demonstrated success 

because approval of a subsequent SBIC license is largely based on the 

financial performance, operating history, and managerial track record of 

the existing SBIC fund. Finally, they said that multiple-license SBICs are 

often larger than single-license SBICs, with investments in a greater 

number of small businesses. Having more investments reduces exposure 

to financial risk if one investment performs poorly. Larger SBICs also may 

have greater staff capacity than smaller SBICs, and may be able to 
Page 18 GAO-16-107 Small Business Investment Companies

provide more technical assistance to their small businesses. Nonetheless, 

SBA staff noted that while these factors may help explain differences in 

performance in the aggregate, single licensees and multiple licensees 

can both perform successfully. In addition, SBA staff and an industry 

participant told us that an SBIC’s age can affect performance—for 

example, young SBICs that have just begun developing their businesses 

are unlikely to be transferred to liquidation. However, our analysis found 

that there was not a substantial difference in the average age of multipleand single-license SBICs—9.0 and 10.2 years respectively—during the 

aggregate period 2005 through 2014.26

SBICs invest in a variety of small businesses, although to some extent 

statutory and regulatory requirements govern these investments, as noted 

earlier.27 We reviewed the number and amount of multiple- and singlelicense SBIC investments in small businesses, as well as characteristics 

of the small businesses receiving the investments. Despite some 

variation, for most attributes, we did not find substantial differences 

between small businesses that received investments from multiplelicense SBICs and those that received them from single-license SBICs.

As of September 30, 2014, SBICs invested in 1,085 small businesses. 

Multiple-license SBICs invested in 731 businesses and single-license 

SBICs in 405 businesses.28 These investments totaled about $5.5 billion, 

of which multiple-license SBICs made about $3.4 billion and singlelicense about $2.1 billion. The total number of small businesses receiving 

SBIC investments largely decreased from 2005 to 2014, but the dollar 

amount of total investments made in that period generally increased (see 

fig. 8).

 26These numbers represent the 10-year average of each year’s average age for multipleand single-license SBICs. 

27See 15 U.S.C. §§ 684-685; 13 C.F.R. pt. 107.

28The sum of small business investments made by single- and multiple-license SBICs 

(1,136) is greater than the number of small businesses receiving investment (1,085) 

because in some cases different SBICs invested in the same small business.

Multiple- and SingleLicense SBICs Invest in 

Small Businesses with 

Roughly Similar Attributes

Number and Trends of 

Investments
Page 19 GAO-16-107 Small Business Investment Companies

Figure 8: Number and Dollar Amount of Small Business Investment Company (SBIC) Investments to Small Businesses, as of 

the End of Fiscal Years 2005–2014

Multiple- and single-license SBICs invested in small businesses 

representing a range of industries in 2014. According to SBIC fund 

managers, some SBICs specialize in a particular field or industry in which 

their management has expertise, and others invest more generally. While 

there was some variation, multiple and single licensees made the majority 

of their investments in four industry areas—manufacturing, professional 

services, information, and health care and social assistance (see fig. 9).29

Among the smaller industries represented, multiple licensees had a larger 

proportion than single licensees of investments in wholesale trade (8 

percent versus 2 percent) and administrative and support and waste 

management (7 percent versus 3 percent).

 29Federal agencies use the North American Industry Classification System to assign 

industry classification codes designating businesses’ main industry and line of business. 

Industry Types
Page 20 GAO-16-107 Small Business Investment Companies

Figure 9: Industry Categories for Small Businesses Receiving Small Business Investment Company (SBIC) Investments, as of 

September 30, 2014

All 50 states, Washington, D.C., Puerto Rico, and the Virgin Islands 

received SBIC investments from multiple- and single-license SBICs from 

October 1989 to June 2014, although the investments were largely 

concentrated in several of the more populous states (see fig. 10), 

according to our analysis.30 In dollar terms, multiple-license SBICs had 

the most investment in California, followed by New York, Texas, 

Massachusetts, and Florida. Collectively, these states accounted for 

nearly half of all multiple-license SBIC investment. Single-license SBIC 

investments were similarly concentrated, with nearly half of their 

investment going to small businesses in California, New York, Texas, 

 30Our analysis covers October 1989 to June 2014 because that is the time frame of the 

data provided to us by SBA related to geographic distribution of SBIC investments. It 

represents distribution of investments made during that time frame for SBICs that were in 

active operation or liquidation as of September 30, 2005, and those SBICs licensed from 

that time to July 15, 2014. 

Geographic Distribution of 

Investments
Page 21 GAO-16-107 Small Business Investment Companies

Illinois, and Massachusetts. From October 1989 to June 2014, 26 states, 

Washington, D.C., Puerto Rico, and the Virgin Islands each received less 

than 1 percent of SBIC investment, in dollar terms, from multiple- and 

single-license SBICs.

Figure 10: Geographic Distribution for Small Businesses Receiving Small Business Investment Company (SBIC) Investments, 

from October 1989 to June 2014
Page 22 GAO-16-107 Small Business Investment Companies

Multiple-license and single-license SBICs placed similar proportions of 

their total dollar investments—about 19 percent and 18 percent, 

respectively—in small businesses in low- or moderate-income areas in 

2014, according to our analysis. In 1999, SBA introduced the low- or 

moderate-income debenture to encourage SBICs to invest in small 

businesses in inner cities and rural areas that have severe shortages of 

equity capital.31 The low- or moderate-income debenture provides 

incentives to SBICs that invest in small businesses that have at least 50 

percent of their employees or tangible assets in a low- or moderateincome area or have at least 35 percent of their full-time employees with 

a primary residence in such an area. It differs from the standard SBAguaranteed debenture in that it is issued at a discount and requires no 

interest payments or fees for the first 5 years.

Multiple licensees were slightly more likely than single licensees to have 

more than half of their investments in “smaller enterprises.” From 

September 30, 2005, to July 15, 2014, our analysis found that 84 percent 

of multiple licensees had more than half their investments in smaller 

enterprises, compared with 73 percent of single licensees.32 SBICs must 

invest a percentage of financings in such enterprises, which are generally 

defined as businesses with a net worth of no more than $6 million and 

average after-tax net income of no more than $2 million.33

 31Small Business Investment Companies, 64 Fed. Reg. 52641 (Sept. 30, 1999) 

(amending 13 C.F.R. § 107.50 and implementing 13 C.F.R. § 107.610). 

32SBA was able to provide us with data on investments in smaller enterprises for 501 of 

the 538 SBIC licensees in operation or liquidations as of the end of fiscal year 2005 and 

all SBICs licensed from that time through July 15, 2014.

33A smaller enterprise has a net worth of not more than $6 million and average after-tax 

net income for the prior 2 years of less than $2 million or another amount that meets an 

alternative test specified by regulation. 13 C.F.R. § 107.710. SBICs licensed after 

February 17, 2009, must invest at least 25 percent of their financings in smaller 

enterprises. 13 C.F.R. § 107.710(b)(1). 

Investments in Low- or 

Moderate-Income Areas and to 

Smaller Enterprises
Page 23 GAO-16-107 Small Business Investment Companies

As part of the required Form 1031, SBIC licensees can voluntarily report 

data on the percentages of minority, women, and veteran ownership of 

the small businesses in which they invest.34 Using these data, SBA 

reported in the 2014 SBIC annual report that SBICs financed 70 small 

businesses owned by women, minorities, or veterans in 2014, which 

would represent about 6 percent of all businesses in which SBICs 

invested.35

However, our review raised questions about the reliability of these data. 

The reporting is voluntary, and a portion of licensees choose not to 

respond.36 It was not possible for us to determine the reporting response 

rate—that is, the proportion of licensees that provided the data—because 

of the design of the questionnaire and inconsistencies in how certain 

questions were answered. For example, it was not clear if a blank 

response to a question on minority-owned investments was intended to 

indicate zero investment or a nonresponse. SBA does not provide 

guidance to SBIC licensees on how to collect and report these data, and 

thus there is no uniform process for doing so. SBIC managers told us that 

they collect these data through various methods, such as by specifically 

asking their small businesses to report whether they are owned by 

women, minorities, or veterans, or by providing an estimate based on 

 34SBICs must submit the Portfolio Financing Report, Form 1031, within 30 days of 

investing in a small business. 13 C.F.R. § 107.640. SBA uses the form to track various 

aspects of SBIC program financing to small businesses.

35Small Business Administration, The Small Business Investment Company Program 

(SBIC), Annual Report Fiscal Year 2014. In addition, the Congressional Research Service 

used data provided by SBA to provide additional breakdowns of the data, which, as 

discussed later in this report, were not sufficiently reliable for our reporting purposes. 

Congressional Research Service, SBA Small Business Investment Company Program,

R41456 (Washington, D.C.: July 14, 2015). SBA defines minorities as individuals who are 

American Indian or Alaska Native, Asian, Black or African American, Hispanic or Latino, or 

Native Hawaiian or other Pacific Islander. 

36SBA officials told us that the Small Business Investment Act of 1958 may give the 

agency the authority to collect demographic information on a voluntary basis but not to 

require SBICs to collect and report such data. The agency could require reporting of such 

information as a condition of retaining program benefits, officials said, only if the agency 

needed it to assess program participants’ compliance with statutory or regulatory criteria 

governing core program requirements, or to make licensing decisions. SBA officials told 

us their position was that demographic information was not necessary for program 

participation and that the agency could not require respondents to report such information 

because SBA did not have authority to assess compliance based on race, ethnicity, or 

gender factors. 

Data on Minority, Women, 

and Veteran Ownership of 

SBIC Investments Are Not 

Reliable
Page 24 GAO-16-107 Small Business Investment Companies

their personal knowledge and observation. In addition, SBA staff told us 

the demographic questions on Form 1031 can be challenging for

licensees to answer because small businesses receiving SBIC 

investments can have complex ownership structures—such as parent 

companies or partnerships—that would make identification of minority, 

women, and veteran ownership difficult. SBA staff told us they do not 

provide guidance on these questions because when the form was 

created, SBA believed the questions were self-explanatory, and 

subsequently it has not received inquiries from licensees requesting 

further explanation.

More reliable data in this area would be consistent with SBA’s strategic 

plan, which cites as a strategic priority of the SBIC program expanding 

access to financial capital for minority-, women-, and veteran-owned 

small businesses.37 In its submission to the Office of Management and 

Budget requesting approval of the collection of information contained in 

Form 1031, SBA supported its request by stating that questions about the 

ethnicity and gender of portfolio company owners and top managers were 

used to evaluate the program’s contribution to furthering the growth of 

small business in historically underserved communities. Specific guidance 

to SBIC licensees on providing voluntary demographic data on their 

investments could help clarify how to define minority-, women-, and 

veteran-owned businesses. In addition, such guidance could help 

improve response rates and help ensure the consistency of these data, 

providing useful information in support of SBIC program goals.

 37Small Business Administration, FY 2014–2018 Strategic Plan (Washington, D.C.: 2014). 
Page 25 GAO-16-107 Small Business Investment Companies

Financial losses in the SBIC program rose significantly in the early 2000s, 

generally declined in the mid-2000s, and have been relatively stable since 

then. The participating securities program, which was created by statute, 

accounted for the majority of losses.38 The degree to which the SBIC 

program’s performance can be attributed to SBA oversight is uncertain, 

but several statutory requirements, regulations, and oversight 

mechanisms—including licensing procedures, examinations, and 

liquidation and asset recovery—seek to manage financial risk. The 

requirements and procedures for approving and overseeing multiple 

licensees are largely the same as for approving single licensees.

The ultimate loss rate for the overall SBIC program fluctuated from 1994 

to 2014 but has been relatively stable since about 2006, according to 

SBA data.39 As shown in figure 11, the loss rate declined from 1994 to 

2001 and then increased sharply between 2001 and 2004, according to 

SBA’s Ultimate Loss Reports.40 Losses then began to decline and have 

remained relatively stable since 2006.

 38Small Business Credit and Business Opportunity Enhancement Act of 1992, Pub. L. 

No.102-366, § 403, 106 Stat. 986, 1009 (codified at 15 U.S.C. § 683(g)). 

39The ultimate loss rate represents the actual and projected losses that SBA estimates will 

not be repaid divided by the total amount of SBA leverage that SBICs have drawn.

40The Ultimate Loss Report documents summary statistics from SBA’s estimates of the 

anticipated future recovery of leverage in liquidation, anticipated ultimate losses (including 

charge-offs and anticipated future losses), and the ultimate loss rate for the SBIC program 

overall and by program type, as of the end of each fiscal year.

Recent SBIC 

Program 

Performance Has 

Been Relatively 

Stable and the 

Program Includes 

Oversight Measures 

Intended to Manage 

Risk

Program Loss Rates Were 

Generally Stable in Recent 

Years
Page 26 GAO-16-107 Small Business Investment Companies

Figure 11: Small Business Investment Company Program: Ultimate Loss Rate, End of Fiscal Years 1994–2014

The participating securities SBICs had a much higher ultimate loss rate 

than debenture SBICs from 2003 to 2014 (see fig. 12).41 As discussed 

earlier in this report, SBA stopped issuing new leverage commitments for 

participating securities SBICs after 2004 due to high losses, but existing 

SBICs created under that program could continue to operate, with 53 still 

in operation as of the end of 2014. Loss rates of the debenture program 

(which accounted for most outstanding SBIC leverage) steadily declined 

from 2003 to 2014. By 2014, the loss rate for participating securities 

SBICs was about 27 percent, compared with 5 percent for debenture 

SBICs.42

 41SBA did not begin to report the ultimate loss rates of the different types of SBICs until 

2003. 

42In addition, as of the end of 2014, nine specialized SBICs remained in operation.
Page 27 GAO-16-107 Small Business Investment Companies

Figure 12: Small Business Investment Company (SBIC) Program: Ultimate Loss Rate for Debenture and Participating 

Securities SBICs, End of Fiscal Years 2003–2014

Correspondingly, participating securities SBICs generated the majority of 

the program’s ultimate losses in dollar terms from 2003 to 2014 (see fig. 

13).43 As of the end of 2014, participating securities SBICs accounted for 

about 77 percent of the ultimate losses for the overall SBIC program, 

although they represented 9 percent of outstanding SBIC leverage. 

Ultimate losses for these SBICs totaled $3.5 billion, while losses for 

debenture SBICs were about $778 million.44

 43According to SBA, ultimate losses in dollar terms for a given year represent the 

cumulative financial losses, as of the end of that year, of all the SBICs that have 

participated in the SBIC program since its inception in 1958.

44In addition, ultimate losses for specialized SBICs were $274 million as of the end of 

2014.
Page 28 GAO-16-107 Small Business Investment Companies

Figure 13: Small Business Investment Company (SBIC) Program: Cumulative Ultimate Losses, by Type of SBIC, End of Fiscal 

Years 2003–2014

SBA has said that the financial performance of the SBIC program 

generally has been comparable with the private equity industry. According 

to SBA’s 2014 SBIC annual report (the most recent available), SBA 

benchmarked the performance of debenture SBICs—licensed in calendar 

years 1998 through 2014—to several industry indexes, such as the 

Preqin Private Equity Index and the S&P 500 Index.45 SBA conducted the 

benchmark analysis using several metrics, including the historical rate of 

return of these SBICs over a number of years. SBA reported that the 

 45Small Business Administration, The Small Business Investment Company Program 

(SBIC), Annual Report Fiscal Year 2014. The Preqin Private Equity Index measures the 

performance of private equity funds—privately managed investment pools administered by 

professional managers, who typically make long-term investments in private companies, 

taking a controlling interest with the aim of increasing the value of these companies. The 

S&P 500 Index is an index that includes 500 leading companies and captures 

approximately 80 percent coverage of available market capitalization and is widely used 

as a gauge of large-cap U.S. equities. According to SBA, the agency selected these 

indexes because they were readily available and typically used by the private equity 

industry as performance benchmarks. 
Page 29 GAO-16-107 Small Business Investment Companies

performance of debenture SBICs was comparable with the performance 

of the private equity industry and that they had outperformed several 

equity market indexes in the 5 years from 2010 to 2014.

Congress required the SBIC program to be self-funded (that is, operate at 

zero subsidy cost) for any financings issued starting in 2001.46 Each year, 

as part of its budget process, SBA forecasts expected SBIC program 

losses and sets fees accordingly to cover the expected losses for 

financing approved during that budget year.47 SBA annually estimates the 

program’s subsidy costs as required by the Federal Credit Reform Act of 

1990, using historical information and various assumptions about such 

things as the fees paid by SBICs, interest income paid on SBIC 

financings, recoveries, and default rates.48 SBA also incorporates 

economic assumptions in the President’s Budget into its estimates, 

although SBA staff told us they do not incorporate economic factors that 

are forward-looking, such as projected macroeconomic conditions.

In addition, the Federal Credit Reform Act of 1990 requires agencies to 

annually reestimate the credit subsidy cost because estimates of credit 

subsidy can change over time. These reestimates reflect any changes in 

 46Small Business Reauthorization Act of 2000, Pub. L. No. 106-554, § 404, 114 Stat. 

2763A-667, 2763A-690-691. 

47SBA generally does not receive annual appropriations for the SBIC program beyond 

funds for salaries and related administrative expenses. As noted earlier, SBA charges 

SBICs different types of fees, including the annual charge, which in 2015 was 0.742 

percent on the outstanding leverage balance. SBA has the authority to determine the 

amount of the annual charge on the outstanding amount of SBA leverage issued, although 

by law it cannot exceed 1.38 percent. 15 U.S.C. § 683(b).

48The Federal Credit Reform Act of 1990 was enacted as part of the Omnibus Budget 

Reconciliation Act of 1990, Pub. L. No. 101-508, tit. XIII, subtit. B, § 13201, 104 Stat. 

1388. An agency program has a positive subsidy when estimated payments by the agency 

exceed estimated payments from the program participants, on a net present value basis 

over the life of the financing. Conversely, the program has a negative subsidy when such 

payments from program participants exceed payments by the agency. A program with 

positive subsidy costs requires appropriations, while a program with negative subsidy 

costs is expected to produce income to the government. The credit subsidy cost does not 

include administrative costs. SBA’s credit subsidy costs and reestimates, including those 

for the SBIC program, are annually audited by an external auditor for accuracy and 

reviewed and approved by the Office of Management and Budget for their consistency 

with guidance and proper methodologies used. The auditor did not report any findings on 

SBA’s credit subsidy model in the agency’s 2014 financial report. SBA staff stated that the 

auditor has never reported any issues with the credit subsidy calculation for the SBIC 

program.
Page 30 GAO-16-107 Small Business Investment Companies

actual performance of the SBIC program since the estimates were 

prepared, as well as any expected changes in assumptions related to 

future performance of the program. From 1994 through 2014, SBA’s 

reestimates for the debenture program generally have been favorable—

that is, they showed a lower estimated cost to the government than the 

original estimate—while reestimates for the participating securities 

program generally have been unfavorable.49

Several statutory requirements, regulations, and oversight mechanisms 

are designed to manage the financial risk presented by the SBIC 

program. These include or derive from the Small Business Investment Act 

of 1958, its implementing regulations, SBIC standard operating 

procedures, and other processes and mechanisms.50 Oversight 

mechanisms intended to manage risk include the application and 

licensing processes, market validation, reporting requirements and risk 

assessments, examinations, and liquidation and asset recovery.51 SBA’s 

oversight affects the financial performance of the SBIC program, although 

its effect can be difficult to measure because factors such as economic 

conditions and program design also affect program performance.

According to SBA, applicant screening, which occurs through the 

application and licensing processes, is a key mechanism for managing 

program risk. As seen in figure 14, application and licensing is a twophase process. For the first phase, SBA offers an optional prescreening 

process designed to help prospective applicants determine whether they 

should formally apply for a license. First-time applicants that proceed 

must submit a management assessment questionnaire in which they 

provide a description of their proposed investment strategy, detailed 

 49When reestimated credit subsidy costs exceed agencies’ original credit subsidy cost 

estimates, the additional subsidy costs are not covered by new appropriations but rather 

are funded from permanent, indefinite budget authority.

50See Pub. L. No. 85-699, 72 Stat. 689 (codified as amended at 15 U.S.C. §§ 661-697g) 

and 13 C.F.R. pt. 107. While regulations provide the rules that govern SBICs, SBA issues 

standard operating procedures to describe how the SBIC program is administered and 

additional guidance to provide further clarification on specific areas and special topics.

51Our description of key risk management activities is based largely on SBA 

documentation, such as its standard operating procedures, and interviews with SBA staff. 

Although we corroborated some of this information with external sources, we did not verify 

SBA’s compliance with its own policies and procedures as part of the scope of our review.

SBIC Program Includes 

Oversight Processes and 

Regulatory Requirements 

Intended to Manage Risk

Application and Licensing 

Processes
Page 31 GAO-16-107 Small Business Investment Companies

investment track records of the fund management team, references, and 

other information. An SBA analyst reviews the questionnaires and 

contacts references to verify the accuracy of the information. The process 

is intended to help assess the applicant’s character, reputation, and 

capability to invest in eligible small businesses.52 Next, the SBA analyst 

prepares an “investment memorandum” with a recommendation to SBA’s 

Investment Committee stating whether the applicant’s management team 

appears to have the minimum qualifications to manage the proposed 

SBIC. On the basis of the information provided in the memorandum, the 

Investment Committee decides whether to invite the applicant to an 

interview.

 52Small Business Administration, Standard Operating Procedure, Processing Applications 

for SBIC Licenses, SOP 10 04 01 (Washington, D.C.: Aug. 6, 2014).
Page 32 GAO-16-107 Small Business Investment Companies

Figure 14: Application and Licensing Process for Small Business Investment Company (SBIC) Program

Note: The Investment Committee, Divisional Committee, and Agency Committee each consist of 

several senior managers of the SBIC program. In addition, while this figure describes SBA’s 

application and licensing processes, we did not examine SBA’s compliance with these processes.

Following the interview, the committee decides whether to formally invite 

the applicant to file a license application once the applicant has raised the 

required minimum amount of private capital. Applicants that succeed in 

raising sufficient private capital within 18 months are permitted to submit 

a formal application for an SBIC license. Section 301(c) of the Small 

Business Investment Act also requires SBA to consider (1) whether the 

applicant is qualified and has the knowledge, experience, and capability 

necessary to comply with the act; and (2) the need for and availability of 

financing for small businesses in the geographic areas in which the 
Page 33 GAO-16-107 Small Business Investment Companies

applicant plans to invest, among other things.53 SBA’s licensing 

procedures state that SBA looks for teams with at least two principals 

who have substantial investment experience and the probability of 

successful operations. In addition, SBA’s procedures state that the 

agency looks for a cohesive management team with complementary skills 

and a history of working together.

SBA staff told us that since the mid-1990s the agency made a number of 

changes to raise the standards for receiving an SBIC license, placing 

greater emphasis on the background and expertise of the prospective 

licensee to attract more experienced applicants. They said these changes 

contributed to significant improvements in the SBIC program and a 

reduction in the number of SBIC defaults. Industry participants with whom 

we spoke generally agreed with this assessment, noting that in recent 

years SBA had set higher standards for approving SBIC management 

teams and investment strategies. According to SBA, from 2010 through 

2014, the agency approved approximately 50 percent of entities applying 

for the first time for an SBIC license.

According to SBA’s licensing procedures, once formally invited to apply 

for an SBIC license, applicants are given 18 months to raise sufficient 

private capital. The applicant’s ability to raise sufficient private capital 

serves as a “market validation” mechanism that manages risk, according 

to SBA officials, SBIC fund managers, and industry participants. SBIC 

fund managers with whom we spoke said that a fund manager’s ability to 

raise private capital demonstrated the market’s assessment that the fund 

manager was competent and likely to operate the SBIC profitably. By 

statute, SBIC applicants must raise at least $5 million in capital from 

private investors.54 However, SBIC fund managers told us that in recent

years, SBA generally expected applicants to raise an amount in excess of 

the statutory minimum (generally more than $20 million) to be approved 

for a license.

 53Pub. L No. 85-699, § 301(c)(3), 72 Stat. 689, 691 (codified as amended at 15 U.S.C. § 

681(c)(3)).

5415 U.S.C. § 682(a)(1)(A).

Market Validation
Page 34 GAO-16-107 Small Business Investment Companies

By regulation, SBICs must submit quarterly and annual financial 

statements.55 Agency guidelines direct SBA financial analysts to use the 

statements to assess the SBIC’s investment risk, continued eligibility for 

leverage, compliance with regulatory requirements, and financial 

performance. An SBIC’s annual financial statement includes information 

on its investment portfolios, regulatory capital, SBA leverage balance, and 

any management changes. As part of the annual statements, SBIC 

licensees also must provide SBA with an assessment of the impact of 

each small business investment, including number of employees, revenue 

and profits, and taxes paid by the business and its employees. By statute, 

the annual form must be audited by an independent certified public 

accountant acceptable to SBA.56

SBA’s risk-management procedures require its financial analysts to 

conduct quarterly risk assessments to determine the level of oversight 

each SBIC requires based on financial performance, capital impairment 

percentage, and other information. SBA has three levels of oversight: 

normal, enhanced, and intensive. Normal oversight, which covers SBICs 

that are in good financial standing and regulatory compliance, includes an 

SBA analysis of the SBIC’s quarterly and annual statements and a review 

of the value of the SBIC’s portfolio companies. SBA provides enhanced 

oversight to SBICs experiencing financial difficulties. Enhanced oversight 

includes stepped-up interactions between SBA and the SBIC’s 

managers—for example, SBA staff visits to the SBIC’s portfolio 

companies. Intensive oversight targets SBICs with serious outstanding 

regulatory violations, excessive financial losses, and capital impairment. 

Intensive oversight includes face-to-face reviews with SBA officials, more 

frequent reporting requirements, and increased monitoring of the SBIC’s 

portfolio companies. In September 2015, SBA staff told us they were 

modifying and refining the risk-assessment procedures of the SBIC 

program to establish a more robust data-driven approach and interactive 

process for establishing risk ratings.

The Small Business Investment Act generally requires SBA to examine all 

SBICs at least every 2 years to (1) determine whether licensees are 

complying with the act and its implementing regulations, (2) help SBA 

assess the financial condition of licensees and SBA’s financial 

 5513 C.F.R. §§ 107.630 and 107.1220.

5615 U.S.C. § 687b(d)(1)(C)(i); 13 C.F.R. § 107.630(a)(1). 

Reporting Requirements and 

Risk Assessments

Examinations
Page 35 GAO-16-107 Small Business Investment Companies

vulnerability, and (3) ensure the accuracy of information licensees submit 

to SBA. SBA’s goal is to examine SBICs that receive SBA leverage on a 

12-month cycle and nonleveraged SBICs on an 18-month cycle. SBA 

usually conducts examinations on-site at the SBIC, and SBA officials told 

us the examinations generally last about 1 week. SBA examiners also 

may decide that field visits to the small businesses that obtain financing 

from an SBIC would meaningfully enhance the examination process. 

During the on-site visits, examiners verify information provided by the 

SBIC fund managers, review licensees’ financial records, and conduct 

regulatory reviews of the licensees’ practices.

We reviewed the data on all examination reports issued in 2014 for 

debenture SBICs and found that 15 percent of examinations resulted in 

findings—that is, they were believed to be major violations of the Small 

Business Investment Act or related regulations, which include things like 

improper valuation of investments and unresolved matters from prior 

examinations.57 According to SBA’s guidance, SBICs must resolve 

examination findings related to regulatory violations within an established 

time frame, ideally no more than 180 days from issuance of the 

examination report. As of March 2015, findings had been resolved in 17 

of the 20 examination reports issued in 2014 that contained findings. Two 

others were in the process of being resolved, and one report was for an 

SBIC that was no longer active.

In September 2013, the SBA Office of Inspector General (OIG) issued an 

audit report on the SBIC examination process.58 The OIG found that the 

SBIC examination function generally addressed statutory requirements 

and agency policy by conducting examinations at least every 2 years and 

checking SBICs for regulatory violations. However, the OIG also reported 

that SBA had largely focused on the frequency and quantity of 

examinations as opposed to quality, increasing the risk that examinations 

would be inaccurate or incomplete. The OIG report noted that there had 

been a significant decrease in examination reports with findings, and that 

fewer findings could indicate that the quality of the assessments had 

 57For the examination reports issued in 2014 for debenture SBICs, about 15 percent and 

17 percent of the examinations of multiple-license and single-license SBICs, respectively, 

had findings.

58U.S. Small Business Administration, Office of Inspector General, Improved Examination 

Quality Can Strengthen SBA’s Oversight of Small Business Investment Companies, Audit 

Report 13-22 (Washington, D.C.: Sept. 30, 2013).
Page 36 GAO-16-107 Small Business Investment Companies

suffered. The audit report also cited outdated guidance, incomplete 

examination checklists, inadequate strategic planning, and the absence of 

training and technology upgrades.

The OIG recommended that SBA (1) create and execute a plan to 

improve the internal operations of the examination function, (2) update 

and improve the existing examination checklist, and (3) assess the costs 

of the examination function and prepare cost-benefit analyses for several 

funding options to cover all examination costs. The OIG report stated that 

SBA did not concur with the OIG’s first recommendation. However, OIG 

officials told us that SBA had since revised its examination standard 

operating procedures, an action that constituted a satisfactory response 

to the first recommendation, and that the recommendation ought to be 

closed in the near future. SBA agreed with the second recommendation 

and took actions to improve the checklist that examiners used when 

conducting examinations. SBA published updated examination guidelines 

in October 2013, and the OIG closed the recommendation. SBA agreed 

with the third recommendation and developed a proposed rule to address 

it, which was undergoing internal review as of September 2015.

If an SBIC has financial or regulatory problems that cannot be resolved, 

SBA has the authority to transfer it to the jurisdiction of the Office of SBIC 

Liquidation. The primary reason for placing SBICs in liquidation is 

significant portfolio losses that result in capital impairment. SBICs can 

also be liquidated if they do not comply with statutory or regulatory 

requirements. The office oversees the liquidation process until the SBIC 

repays all leverage or all assets have been sold or written off. According 

to SBA’s liquidation procedures, the office’s primary goal is to recover 

funds for SBA in the shortest time possible and minimize financial losses. 

To this end, the office prepares a strategy to maximize SBA’s net 

recoveries and minimize the adverse effect on the small businesses 

involved. As of September 30, 2014, SBA estimated it had recovered 50 

percent of leverage for SBICs placed in liquidation since the program’s 

inception in 1958, and estimated that the ultimate recovery rate would be 

60 percent.59

 59The amount of leverage for SBICs in liquidation that was expected to be recovered 

represents the cumulative amount recovered, as of the end of that fiscal year, of all SBICs 

that have participated in the program since its inception in 1958.

Liquidation and Asset 

Recovery
Page 37 GAO-16-107 Small Business Investment Companies

SBA applies largely the same risk management and oversight 

mechanisms to single and multiple licensees, according to agency staff. 

All SBICs are distinct legal entities and are monitored individually. Every 

SBIC must submit quarterly and annual financial statements and undergo 

periodic examinations. SBA staff told us that although SBICs were 

monitored as separate entities, problems with one SBIC managed by a 

multiple licensee could lead to more careful scrutiny of the licensee’s 

other SBICs, especially if the problems appeared to be related to 

management failures or some form of malfeasance. SBA staff told us that 

they assigned the same operations analyst to multiple-license SBICs 

under common control to give that analyst a better understanding of all 

the SBICs controlled by a licensee.

SBIC licensees seeking a subsequent license generally must undergo the 

same application and licensing process, according to SBA. For example, 

SBIC fund managers told us that applicants seeking a subsequent SBIC 

license usually must submit a new management assessment 

questionnaire, as circumstances may have changed since the prior 

application (such as the management team or the investment strategy). 

However, SBA staff told us that their procedures allowed some flexibility 

and generally were intended to streamline the time required to grant the 

subsequent license. For example, SBA has some discretion to accept a 

shorter memorandum from the applicant in lieu of a second management 

assessment questionnaire if the SBIC has not experienced significant 

changes in management or investment strategy. However, several 

multiple licensees with whom we spoke said that even under such 

circumstances, they were not given the option to submit a memorandum

and instead had to submit a management assessment questionnaire, 

which was more time-consuming to complete.

According to SBA staff, the agency evaluates a number of specific 

conditions when determining whether to grant a subsequent license. For 

example, according to SBA’s application and licensing procedures, an 

applicant that is already operating one or more SBICs must have at least 

a 2-year track record in the SBIC program, clean audit opinions from the 

SBIC’s independent public accountant, and no unresolved regulatory 

violations, among other specified conditions. According to SBA, from 

2010 to 2014, fund managers seeking a subsequent license had a 70 

percent approval rate, as compared with about 50 percent for first-time 

license applicants. SBA staff attributed the higher approval rate of 

subsequent applicants to their prior experience with the licensing process 

and their demonstrated track record in the SBIC program.

SBA Oversight 

Mechanisms for Managing 

Program Risk Are Largely 

the Same for Single and 

Multiple Licensees
Page 38 GAO-16-107 Small Business Investment Companies

While SBA has procedures designed to manage financial risk to 

taxpayers from SBICs and their investments, the effect of SBA oversight 

on financial performance would be difficult to measure because it cannot 

easily be isolated from other internal and external factors, which include 

program design, economic conditions, and the characteristics of the 

SBICs and their investments.

The specific rules, sometimes set by statute, governing the different types 

of SBICs can affect the performance of the SBIC program as a whole. For 

instance, the participating securities program, which was created by 

statute, has been responsible for the majority of SBIC program losses in 

recent years, and its termination improved overall program performance. 

SBA staff and at least two research studies have stated that the 

participating securities program’s losses resulted from the statutory 

design of the program.60 The program focused on equity investments, 

which generally are considered to have relatively higher risks, but the 

program was structured so that SBA advanced the interest payments 

(known as prioritized payments) to bond holders and was only repaid 

advanced prioritized payments out of the SBIC’s profits. As such, as of 

May 1, 2015, SBA estimated that it had contributed 59 percent of the total 

amount of SBA leverage drawn and private capital contributed by the 

participating securities SBICs but received less than 27 percent of the 

profit made by these SBICs (including all reimbursed prioritized 

payments, adjustments, and SBA annual charges).

Program performance also can be affected by economic conditions, such 

as the availability of credit and capital, interest rates, the equities markets, 

and economic growth, all of which can affect the financial performance of 

SBIC investments. According to SBA, the financial performance of the 

SBIC program generally follows trends in the private equity industry and 

stock markets. Two studies have noted that the participating securities 

program’s losses in the early 2000s were linked to the fall of the stock 

value of their investments in technology startup and early-stage small 

businesses.61 Additionally, SBA noted that the interest rates on the SBIC 

 60For example, see Timothy R. Dahlstrom, “The Rise and Fall of the Participating 

Securities SBIC Program: Lessons in Public Venture Capital Management,” Perspective in 

Public Affairs, vol. 6 (Spring 2009). 

61These studies are cited in Dahlstrom (Spring 2009) and Congressional Research 

Service, SBA Small Business Investment Company Program (July 14, 2015).

Other Factors May 

Influence Program 

Performance

Program Design

Economic Conditions
Page 39 GAO-16-107 Small Business Investment Companies

leverage draws were connected with the interest rates of the 10-year 

Treasury Note. The interest rates on the SBIC leverage draws have been 

low in recent years, helping SBICs perform better financially by realizing 

higher profit margins on their small business investments.

The age of an SBIC can affect its investment performance, and thus the 

age of SBICs overall affects the financial performance of the SBIC 

program. SBA told us that it was more challenging to assess the financial 

performance of relatively young SBICs because their investments had not

yet reached the stage of generating returns and demonstrating 

performance. The median age of a debenture SBIC transferred to 

liquidation was 10 years, according to SBA. In its 2014 SBIC annual 

report, SBA noted that no debenture SBICs less than 5 years old (which 

represented 71 percent of its outstanding debenture leverage as of 

September 30, 2014) had been transferred to liquidation, compared with 

3 percent of those between 5 and 10 years. As a result, the relatively low 

percentage of debenture SBICs currently in liquidation may be a function 

of the SBIC program’s significant growth in the last 5 years, because 

younger funds typically have not become capitally impaired. The financial 

performance of the debenture program may change in future years, SBA 

staff told us, as the investment performance of the younger SBICs 

becomes clearer.

The proportional share of debt and equity investments made by the 

SBICs also can affect performance of individual SBICs and the SBIC 

program as a whole. SBA staff noted that, generally speaking, debt 

investments are considered relatively less risky than investments in equity 

or with equity features. Debt investments rose from less than 21 percent 

of SBIC financing in 2005 to about 64 percent in 2014. SBA attributed this 

trend to the termination of the participating securities program in 2004 

and the decline in availability of debt capital in the marketplace between 

2009 and 2014. SBA staff told us they anticipated that SBIC investments 

would shift to a greater share of equity investments, in line with historical 

norms, as capital market conditions continued to improve and more debt 

capital became available to small businesses from traditional banks. Such 

a shift to equity investments could result in increased financial risk for the 

SBIC program in future years.

There would be benefits to providing specific guidance to SBIC licensees 

on how to answer the voluntary questions asked in Form 1031 on 

investments in minority-, women-, and veteran-owned businesses. SBA 

does not provide such guidance because it believes the questions are 

Characteristics of SBICs and 

their Investments

Conclusions
Page 40 GAO-16-107 Small Business Investment Companies

self-explanatory. However, specific guidance could clarify how to define 

these businesses and other ambiguities, which could help improve 

response rates and ensure the consistency of these data. More reliable 

data in this area also would be consistent with SBA’s strategic plan, which 

cites expanding access to financial capital for such businesses as a 

strategic priority of the SBIC program. Providing clear and specific 

guidance to SBIC licensees on how to collect and report these data would 

help improve the quality, consistency, and value of the information 

reported.

The Administrator of the Small Business Administration should direct the 

Office of Investment and Innovation to provide clear and specific 

guidance to SBIC licensees on how to collect and report data in Form 

1031 on their investments in minority-, women-, and veteran-owned 

businesses.

We provided a draft of this report to SBA. In its response, SBA neither 

agreed nor disagreed with the recommendation addressed to it and 

provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the Administrator of the Small 

Business Administration, the appropriate congressional committees, and 

other interested parties. In addition, the report will be available at no 

charge on GAO’s website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-7215 or brownbarnesc@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix II.

Sincerely yours,

Cindy Brown Barnes

Director

Education, Workforce, and Income Security

Recommendation for 

Executive Action

Agency Comments
Appendix I: Objectives, Scope, and 

Methodology

Page 41 GAO-16-107 Small Business Investment Companies

The objectives of our report were to examine the (1) characteristics of 

multiple-license Small Business Investment Companies (SBIC) compared 

with single-license SBICs, (2) investment performance of multiple 

licensees compared with single licensees and the attributes of the small 

businesses in which SBICs invest, and (3) overall financial performance 

of the SBIC program and the extent SBA manages the risk associated 

with the program.1

To address the first and second objectives, we analyzed and examined 

primary data from the Small Business Administration’s (SBA) SBIC 

databases and secondary data provided to us in summary format by SBA 

for fiscal years 2005 through 2014. We used the data to distinguish 

between single- and multiple-license SBICs and determine differences 

between these two categories for characteristics such as the number of 

SBICs and SBIC managers, amount of SBA leverage held, and 

geographic distribution. We also analyzed data that SBIC licensees 

submitted to SBA through the annual Portfolio Financing Report (Form 

1031) for fiscal years 2005 through 2014. We sorted these data to 

distinguish between single- and multiple-license SBICs in relation to 

characteristics of the small businesses in which the SBICs invested, such 

as the number and dollar amount of investments. Additionally, we used 

the Form 1031 data to categorize the businesses in which SBICs invested 

by industry sector, using the North American Industry Classification 

System. To describe the investments’ geographic distribution and extent 

of investment in smaller enterprises, we analyzed summary data 

prepared by SBA that was derived from quarterly data the agency 

receives from SBICs on the required Form 468. All dollar values 

expressed in our report are nominal and were not adjusted for inflation.

To compare the investment performance of single- and multiple-license 

SBICs, we analyzed two measures of SBIC’s investment performance: (1) 

the rate at which SBICs were transferred to liquidation, and (2) the 

estimated loss rate. The secondary data for these measures were 

provided to us by SBA, which derived the information from data in its 

SBIC databases and the fiscal year 2013 Ultimate Loss Report. We 

calculated the liquidation rate by dividing the number of SBICs that were 

 1

For this report, we use “single licensee” to refer to an entity that holds one SBIC license, 

and “multiple licensee” to refer to an entity that holds two or more SBIC licenses under 

common control. We use “single-license SBIC” to refer to an SBIC held by a single 

licensee, and “multiple-license SBIC” to refer to an SBIC held by a multiple licensee.

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 42 GAO-16-107 Small Business Investment Companies

liquidated by the total number of licensed SBICs that were issued 

leverage. We also reviewed the estimated loss rate calculated by SBA—

that is, the anticipated ultimate losses divided by the sum of leverage 

redeemed in operations, leverage transferred to liquidation, and draws in 

liquidation.2 In addition to these two performance measures, we analyzed 

summary statistics provided by SBA on the extent of capital impairment 

by single- and multiple-license SBICs in operation, which SBA derived 

from the quarterly data it receives from SBICs. Because the age of an 

SBIC can affect its investment performance, we also reviewed differences 

in average performance based on year of license, and calculated the 

average ages of multiple- and single-license SBICs for the aggregate 

period 2005 through 2014. However, the data available to us did not allow 

us to compare the performance of multiple versus single licensees that 

were licensed in specific years.

We analyzed investment performance in aggregate because looking at 

performance in a single year can be misleading, according to SBA staff—

given that even successful SBICs see few returns in their first several 

years (while the businesses in which they have invested mature). Our 

analysis of investment performance covered 2005 through 2014 because 

2005 was the year in which SBA began collecting data in a manner that 

allowed the performance of multiple versus single licensees to be 

isolated. Our analysis included only SBICs under the jurisdiction of the 

Office of SBIC Operations or Office of SBIC Liquidation as of September 

30, 2005, and all SBICs licensed since that time through July 15, 2014.

To assess the reliability of data on characteristics of SBICs, their 

investments, and their investment performance, we reviewed relevant 

SBA documents, including SBA’s standard operating procedures, and 

regulations related to the process for updating, maintaining, and 

monitoring such data. We also performed electronic testing for obvious 

errors in accuracy and completeness. We interviewed knowledgeable 

SBA officials on, among other things, data limitations and how the data 

 2

The anticipated ultimate losses represent actual charge-offs—the amount of leverage in 

liquidation that SBA determines it will not be able to recover—and anticipated future 

losses as estimated by the Office of Liquidation each year. The estimated loss rate was 

prepared by SBA at our request for the purpose of comparing the financial performance of 

single- and multiple-license SBICs. It does not include projected losses on SBA leverage 

to SBICs in operation that is still outstanding. According to SBA, the estimated loss rate is 

an appropriate measure for comparing the investment performance of single- and 

multiple-license SBICs.
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-16-107 Small Business Investment Companies

are collected and captured. Where we identified questions related to the 

data, we clarified them through discussions with SBA staff. We 

determined that these data were sufficiently reliable for our reporting 

purposes.

We also reviewed and analyzed data provided to us by SBA on the 

number of minority and female SBIC managers and the number of SBICs 

located in low- or moderate-income areas as of July 15, 2014. SBA does 

not routinely collect such information, but at our request, the agency 

conducted an informal survey of its operations analysts. SBA staff told us 

that because this was an informal survey, they could not make any 

representation about the completeness or accuracy of the information. 

Although the data have limitations, we are reporting the data to provide 

contextual information on the number of minority or female SBIC 

managers and SBICs located in low- or moderate-income areas. In 

addition, we reviewed data collected by SBA on the minority, women, and 

veteran ownership of the small businesses in which SBICs invest. We 

determined that these data were not sufficiently reliable for our reporting 

purposes because, among other things, the reporting of this information 

by SBICs is voluntary, the response rate could not be fully assessed, and 

SBA told us it could not make any representation about the completeness 

or accuracy of the data. To identify SBIC program priorities and goals 

related to minority, women, and veteran ownership of small businesses in 

which SBICs invest, we reviewed SBA’s Fiscal Years 2014–2018 

Strategic Plan and SBIC program annual reports.3

To address the third objective, we examined data provided to us by SBA 

on the aggregate financial performance of the SBIC program, including 

data from the SBIC ultimate loss reports prepared by SBA. For the 

program overall, SBA provided ultimate loss data for fiscal years 1994 

through 2014. For the SBIC debenture and participating securities 

programs in particular, SBA provided these data for fiscal years 2003 

through 2014 because 2003 was the year in which SBA started 

separately reporting losses for these two programs. We also reviewed the 

 3

Small Business Administration, Fiscal Years 2014–2018 Strategic Plan (Washington, 

D.C.: 2014). Annual reports included, for example, Small Business Administration, The 

Small Business Investment Company Program (SBIC), Annual Report for Fiscal Year 

Ending September 30, 2013 (Washington, D.C.: 2014), and The Small Business 

Investment Company Program (SBIC), Annual Report, Fiscal Year 2014 (Washington, 

D.C.: 2015).
Appendix I: Objectives, Scope, and 

Methodology

Page 44 GAO-16-107 Small Business Investment Companies

annual credit subsidy estimates and reestimates for the SBIC program 

from fiscal years 1992 through 2014 in the corresponding years’

President’s Budget. To assess the reliability of these data, we reviewed 

SBA’s annual financial reports on how SBA estimates financial losses and 

credit subsidy costs of the SBIC program. We also interviewed 

knowledgeable SBA staff on how loss and credit subsidy data are 

estimated, maintained, and reviewed by SBA and external parties such as 

the Office of Management and Budget. We also conducted electronic 

testing of the data for obvious errors, and we did not identify any. We 

determined the data to be sufficiently reliable for the purpose of reporting 

the financial performance of the SBIC program overall and SBICs by type.

To examine the credit subsidy cost and funding for administrative costs of 

the SBIC program, we reviewed SBIC’s authorizing legislation and 

reviewed requirements and guidance related to credit subsidy cost, 

including the Federal Credit Reform Act of 1990 and Office of 

Management and Budget Circulars A-11 Part 5 and A-129, which 

prescribe guidance on federal credit programs and credit subsidy costs.4

We also reviewed the 2014 SBA annual agency financial report, the 

annual SBIC program reports for fiscal years 2012 through 2014 (the 

most recent available), and an SBA report on the SBIC debenture 

program submitted to the Office of Management and Budget in November 

2014.5

To assess the extent to which the SBIC program manages risk, we 

reviewed SBIC’s authorizing legislation—the Small Business Investment 

Act of 1958—and its amendments and implementing regulations; SBA’s 

standard operating procedures, policies, and technical guidance; SBA 

annual program and financial reports; and forms and guidance associated 

with the application and licensing process.6 We did not validate the extent 

to which SBA follows its written policies and procedures, although where 

 4

Office of Management and Budget, Circular No. A-11 Part 5, Federal Credit (July 2014) 

and Circular No. A-129, Policies for Federal Credit Programs and Non-Tax Receivables 

(January 2013).

5

Small Business Administration, The Small Business Investment Company (SBIC) 

Program: Office of Management and Budget (OMB) Program Review (Washington, D.C.: 

November 2014).

6

Pub. L. No. 85-699, 72 Stat. 689 (codified as amended at 15 U.S.C. §§ 661-697g) and 13 

C.F.R. pt. 107.
Appendix I: Objectives, Scope, and 

Methodology

Page 45 GAO-16-107 Small Business Investment Companies

possible we sought to corroborate the extent through testimonial and 

documentary evidence. We reviewed reports by the SBA Office of 

Inspector General and we interviewed staff of this office to discuss their 

findings and SBA’s implementation of recommendations related to the 

SBIC examination process. We also reviewed the data from SBA’s 

examination reports issued in fiscal year 2014 for debenture SBICs and 

analyzed the number and type of examination findings for SBICs overall 

and for multiple and single licensees in particular. To assess the reliability 

of these data, we reviewed SBA’s standard operating procedures for 

conducting examinations, interviewed knowledgeable agency officials on 

how the examination data were collected and any associated data 

limitations, and traced and verified the accuracy of our calculations. We 

determined these data were sufficiently reliable for the purposes of 

reporting information on numbers of examination findings.

For all of the objectives, we reviewed statements and transcripts of 

relevant congressional hearings and relevant research and studies by 

industry stakeholders, SBA, and the Congressional Research Service, as 

well as prior GAO reports.7 In addition, we conducted interviews with staff 

from federal agencies—SBA, the Department of Commerce’s Minority 

Business Development Agency, and the Congressional Research Service 

— representatives of the Small Business Investor Alliance, which 

represents the interests of SBICs; nine SBIC fund managers; an attorney 

who has represented and advised multiple SBICs; and an academic 

researcher who has studied the SBIC program. We selected the 

academic researcher based on a suggestion by the Small Business 

Investor Alliance and because his work was cited in documents we

reviewed. We selected the nine SBIC fund managers who we interviewed 

to represent a mix of multiple- and single-license SBICs, geographic 

locations, size of investments, and industries, among other criteria. In 

addition, we solicited suggestions from the Small Business Investor 

Alliance and other industry stakeholders for managers to interview. We 

 7

For example, Small Business Administration, The Small Business Investment Company 

(SBIC) Program Annual Report, Fiscal Year 2014; Timothy R. Dahlstrom, “The Rise and 

Fall of the Participating Securities SBIC Program: Lessons in Public Venture Capital 

Management,” Perspectives in Public Affairs, vol. 6 (Spring 2009); and Congressional 

Research Service, SBA Small Business Investment Company Program (July 14, 2015). 

Also see GAO, Government Contracting: Federal Efforts to Assist Small Minority Owned 

Businesses, GAO-12-873 (Washington, D.C.: Sept. 28, 2012); and Small Business: 

Update of Information on SBA’s Small Business Investment Company Programs,

GAO/RCED-97-55 (Washington, D.C.: Feb. 21, 1997).
Appendix I: Objectives, Scope, and 

Methodology

Page 46 GAO-16-107 Small Business Investment Companies

selected the SBIC fund managers and industry stakeholders to gain a 

range of perspectives on the SBIC program; however, their views are not 

generalizable.

We conducted this performance audit from July 2014 to January 2016, in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 47 GAO-16-107 Small Business Investment Companies

Cindy Brown Barnes, (202) 512-7215 or brownbarnesc@gao.gov.

In addition to the individual named above, Jason Bromberg (Assistant 

Director), Bethany Benitez, Benjamin A. Bolitzer, Emily Chalmers, Anna 

Chung, David Dornisch, Isidro Gomez, Marc Molino, and Emily Upstill 

made key contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(250791)
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