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82–204 2013

EXAMINING THE SMALL BUSINESS INVESTMENT 

COMPANY PROGRAM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT 

AND REGULATIONS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

JULY 25, 2013 

Small Business Committee Document Number 113–033 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. David Schweikert ........................................................................................... 1 

Hon. Yvette Clarke .................................................................................................. 1 

WITNESSES 

Pravina Raghavan, Acting Associate Administrator for Investment, United 

States Small Business Administration, Washington, DC ................................. 3 

Steven Brown, President, Trinity Capital Investment, Chandler, AZ, testifying on behalf of The Small Business Investor Alliance ................................. 4 

John Sherman, Founder, Director and Former CEO, Inergy, LP, Kansas 

City, MO ............................................................................................................... 6 

Philip Alexander, CEO, Brandmuscle, Cleveland, Ohio, testifying on behalf 

of the U.S. Chamber of Commerce ..................................................................... 8 

David T. Robinson, Ph.D., Professor of Finance, Fuqua School of Business, 

Duke University, Chapel Hill, NC ...................................................................... 10 

APPENDIX 

Prepared Statements: 

Pravina Raghavan, Acting Associate Administrator for Investment, 

United States Small Business Administration, Washington, DC ............. 21 

Steven Brown, President, Trinity Capital Investment, Chandler, AZ, testifying on behalf of The Small Business Investor Alliance ........................ 24 

John Sherman, Founder, Director and Former CEO, Inergy, LP, Kansas 

City, MO ........................................................................................................ 35 

Philip Alexander, CEO, Brandmuscle, Cleveland, Ohio, testifying on behalf of the U.S. Chamber of Commerce ....................................................... 37 

David T. Robinson, Ph.D., Professor of Finance, Fuqua School of Business, Duke University, Chapel Hill, NC ..................................................... 44 

Question and Answer for the Record: 

Question Submitted by Hon. Sam Graves to Mr. Raghavan ........................ 46 

Additional Material for the Record: 

Jose E. Fernandez-Bjerg, Chairman and CEO, Omega Overseas Investment Corp. ..................................................................................................... 47 

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EXAMINING THE SMALL BUSINESS 

INVESTMENT COMPANY PROGRAM 

THURSDAY, JULY 25, 2013 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND

REGULATIONS, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:04 a.m., in Room 

2360, Rayburn Office Building, Hon. David Schweikert [chairman 

of the Subcommittee], presiding. 

Present: Representatives Schweikert, Chabot, Collins, Rice, 

Clarke, Vela ́zquez, and Kuster. 

Chairman SCHWEIKERT. Good morning. The hearing comes to 

order. This is actually one that I have been personally looking forward to today. 

Today we take a look at a program that actually is fascinating. 

It started back in 1958, which was quite an education for me in 

how long. The founding principle of the Small Business Investment 

Company program that we are going to be speaking to today are 

based around something very simple: access to capital, and how do 

we help that. 

In Fiscal Year 2012 alone, $1.92 billion in capital commitments 

were made to licensed SBICs with a $3.13 billion investment in 937 

small business enterprises that were ultimately capitalized by the 

SBIC. 

As the program grows in both size and dollars, it is necessary for 

us to guarantee that it continues to fulfill its mission. 

For today’s hearing, what I am going to ask each of you, we appreciate the written testimony. A couple of things: help educate us 

on what is working in the program, the reforms that have been 

made in the last couple of years, and also, systematically, we would 

love it if you have a moment within the time of your testimony, 

share with us what you see would make it work better because the 

ultimate goal here is capital formation and creation of jobs for our 

country. 

Ranking Member? 

Ms. CLARKE. Thank you very much, Mr. Chairman. Without 

being lambasted for stating the obvious, we all know that capital 

is the lifeblood for every small business. And without it, most firms 

simply would not survive. 

In 1958, Congress recognized the need for long-term funding for 

growth-oriented small businesses and created the Small Business 

Investment Company, or SBIC Program. SBICs are privately 

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owned and managed investment funds, licensed by the SBA, that 

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

Since its inception, the SBIC Program has provided more than 

$64 billion of long-term debt equity capital to more than 165,000 

small firms in Fiscal Year ’12 alone. Investments from SBICs 

helped create or retain 69,000 jobs. 

While we know it takes capital to run a business and continued 

investment to grow, the current economic environment presents 

significant obstacles to startup and early stage businesses seeking 

funding. Though there have been steady improvements and the 

Federal Reserve has reported that credit markets remain historically tight, unfortunately, as a result, many firms are unable to access traditional debt financing. For these reasons, the alternatives 

offered by the SBICs to small businesses, including simple equity 

as well as hybrid equity and debt financing, is critical, and will 

only play a more important role in job creation moving forward. 

Although SBICs have helped bridge the gap between the need for 

capital demanded by entrepreneurs and the amount of funding 

available in the private market, there is room for improvement. 

SBA has estimated that the total unmet need for early stage equity 

financing for small businesses is approximately $60 billion each 

year. Specifically, investments in low income, underserved minority 

communities fall well short of the rest of the country. According to 

SBA data, the percentage of SBIC investments to women and minorities and veteran owned businesses, as well as LMI areas, declined 17 percent last year, and is on pace for another decline in 

2013. 

Clearly, changes at SBA, including new investment strategies, 

will be required to make a significant impact on the unmet capital 

needs of startups and businesses in traditionally underserved communities. 

In the best of times, capital access can be something of an ordeal. 

Today that task has become especially challenging, and not just for 

businesses seeking traditional funding. During today’s hearing, we 

will take the pulse of the SBIC Program, examine areas ripe for 

improvement, and hear from witnesses on the front lines helping 

today’s main street businesses become tomorrow’s Fortune 500 

companies. 

I would like to thank our witnesses and look forward to hearing 

their testimony on how to facilitate investment in our Nation’s entrepreneurs and small businesses. 

With that, Mr. Chairman, I thank you, and I yield back. 

Chairman SCHWEIKERT. Thank you, Ms. Clarke. 

As a reminder, we have 5 minutes. You will see the system of 

lights. As you get to the yellow light, it means there is 1 minute, 

and that just basically means talk faster. 

Ms. Raghavan? 

Ms. RAGHAVAN. Yes. 

Chairman SCHWEIKERT. Did I get close? I have been practicing. 

Is the acting associate administrator for investment at the SBA. 

You have 5 minutes. Please share with us. 

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STATEMENTS OF PRAVINA RAGHAVAN, ACTING ASSOCIATE 

ADMINISTRATOR FOR INVESTMENT, UNITED STATES SMALL 

BUSINESS ADMINISTRATION, WASHINGTON, D.C.; STEVEN 

BROWN, PRESIDENT, TRINITY CAPITAL INVESTMENT, CHANDLER, ARIZONA; JOHN SHERMAN, FOUNDER, DIRECTOR, 

AND FORMER CEO, INERGY, LP, KANSAS CITY, MISSOURI; 

PHILIP ALEXANDER, CEO, BRANDMUSCLE, CLEVELAND, 

OHIO; AND DAVID T. ROBINSON, PH.D., PROFESSOR OF FINANCE, FUQUA SCHOOL OF BUSINESS, DUKE UNIVERSITY, 

CHAPEL HILL, NORTH CAROLINA 

STATEMENT OF PRAVINA RAGHAVAN 

Ms. RAGHAVAN. Chairman Schweikert, Ranking Member Clarke, 

and members of the Subcommittee, I am pleased to testify before 

you today to discuss the Small Business Investment Company Program. As many of you here today know, SBICs are part of a unique 

program at the SBA that puts long-term patient investment capital 

into America’s small businesses, allowing them to grow and create 

jobs. Today, the SBIC Program serves as a model of a successful 

public-private partnership. 

The program, which began in 1958, is market driven. We do not 

make the investment decisions. Experienced private fund managers 

do. The program oversees 295 operating funds with over $19.2 billion in private and SBA guaranteed capital and commitments. 

SBICs invest in a wide variety of small businesses, such as R360 

Environmental Services, which provides environmental solutions to 

the some of the world’s leading oil and gas producers and providers. Although headquartered in Texas, the company has 26 facilities located across Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming, providing high-paying jobs to hundreds of new employees in rural areas. 

Last year, the SBIC Debenture Program had its third consecutive record-breaking year in licensing and SBA commitments. In 

Fiscal Year 2012, SBA has licensed over 30 SBICs with almost 

$974 million in private capital, and approved over $1.9 billion in 

debenture commitments. 

More importantly, debenture SBICs provide over $2.9 billion in 

financing to 795 small businesses across the country, more than 

twice the amount provided by debenture SBICs in Fiscal Year 

2009. If you consider that SBICs issued only $1.4 billion in SBA 

guaranteed debentures, this means for every one dollar in debentures issued last year, small businesses received over two dollars 

in financing. 

In Fiscal Year 2013, debenture SBICs are on track to exceed Fiscal Year 2012, having already provided $2.6 billion to 671 small 

businesses through June. SBA accomplished this while keeping the 

debenture program at a zero subsidy cost to the taxpayer. 

Much of our credit for keeping the program at zero cost is our 

licensing process. A licensing process consists of three basic steps, 

which is initial review, capital raising, and final licensing. In determining whether to grant a license to an applicant, SBA considers 

the factors identified in our statutes and regulations, which include 

management qualifications, track record, investment strategy, and 

fund economics. 

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Even though a lot of work goes into evaluating the applicants, 

SBA has improved licensing processes and times over the past 4 

years, reducing the average time from 15 months to less than 6 

months. As a result, SBA expects to exceed last year’s licensing 

numbers. 

To help new licensees navigate our program, SBIC’s Office of 

SBIC Operations initiated new webcasts on various aspects of the 

program. SBA also cut in half the average turnaround time on key 

decisions and operations from 60 days in Fiscal Year 2010 to 28 

days in Fiscal Year 2012. 

Obviously with rapid growth, SBA is concerned about program 

risk. Key to managing program risk is good reporting. SBA recently 

implemented a new web-based system to help improve communications and reporting. In addition, this Fiscal Year, SBA published 

its annual report in order to improve transparency and accountability. 

With its processes and reporting in place, SBA believes it is 

poised to handle continued growth. We believe that a legislative 

change currently under consideration would allow this program to 

reach even more small businesses. The change would increase the 

SBIC Debenture Program authorization from $3 billion to $4 billion. While SBA has never hit the $3 billion annual authorization 

over a 3-year period, SBA more than doubled the debenture commitments approvals from $788 million in Fiscal Year 2009 to over 

$1.9 billion in Fiscal Year 2012. SBA expects to exceed the $2 billion this Fiscal Year. With continued growth, SBA will outpace its 

current authorization level. 

We believe this modest change will allow the program to continue to grow, while keeping this program at a zero subsidy. 

In closing, the SBIC Program is well positioned to finance small 

businesses across the country, and I look forward to working with 

you on the policies to help us achieve this goal. 

Thank you, and I am more than happy to answer any questions 

you may have. 

Chairman SCHWEIKERT. Thank you, Ms. Raghavan. 

Our next witness is Steve Brown, who I am very pleased is from 

Arizona. Mr. Brown is the general partner of Trinity Capital Fund 

II, LP. Did we get that right? All right. 

Mr. Brown, 5 minutes. 

STATEMENT OF STEVEN BROWN 

Mr. BROWN. Good morning, Chairman Schweikert, Ranking 

Member Clarke, and the other distinguished members of the Small 

Business Committee. I want to thank you for holding this oversight 

hearing today and examining the Small Business Investment Company Program. And I am here today on behalf of the Small Business Investor Alliance, which is a premiere organization of lower 

middle market private equity funds and investors. 

As the chairman said, I am the managing member and the general partner of Trinity Capital Fund II. We are based in Phoenix, 

and we actually became licensed last year in September of 2012. 

And with our capital, currently the leverage that we have access 

to through the program, we are a little over $70 million in capital 

available for the market. So we are very excited about that. 

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Trinity focuses on equipment and fixed asset leasing and financing to both early stage and emerging growth small businesses, primarily backed by venture capital and/or other institutions. We 

often and sometimes do fund just privately-owned companies as 

well. 

The industries that we fund most end up in the telecommunications arena, the manufacturing arena, and in technology. Our 

primary market focus is in the southwest and the west, but we will 

and have done deals throughout the United States. 

I personally have been in the business of privately funding companies for over 20 years, and specifically in this particular debt 

market. I have been doing this for 10 years, and, again, was introduced to the program a few years ago. I am very excited to be a 

licensee in the program. 

I have firsthand experience seeing these early stage and emerging growth companies struggle for capital. As the ranking member 

mentioned, it is a difficult market and has been for a number of 

years to find capital, and this program does meet that need. It is 

a long way between equity and solid debt financing that many of 

the banks offer, and this program fills that gap in many respects. 

At Trinity, we have and are funding manufacturing companies in 

the technology space, the energy space, the recycling space, all 

things that are important to the government and to the economy. 

Companies that we have funded to date in our fund include a solar 

cell manufacture that has strong revenue, has survived the solar 

manufacturing difficulties in the market, and we are proud to be 

a part of that. We have provided equipment to help them grow. A 

manufacturer of LED lighting, which is a new and efficient way of 

lighting, and we have provided financing for manufacturing equipment there. We have also provided financing for a California-based 

manufacturer of chips for fiber optic in the telecommunications 

space. 

We are currently working with a company in funding, literally as 

we speak in the next day or two, a tire recycler that has a great 

program of recycling tires and getting it back into that market and 

many other markets, including not just the tire industry, but plastics as well. So, we are excited about the portfolio of companies 

that we are funding. 

I would like to just take a second on the SBIC Program. As mentioned, it started in 1958 and has done wonderful things, funding 

many, many companies along the way, including icons like Apple, 

and Intel, and others. It is important to note that most of my referrals in this business come from banks—banks that cannot or are 

unwilling to fund these companies, which, again, shows a reason 

for the need for the program. 

Relative to the program, it is difficult to become a licensee, and 

that is good. We went through a very rigorous process to get licensed, and those that get licensed, I believe, having gone through 

the process, deserve to be able to manage this money. And I think 

that should continue. 

There are some important things, as has been mentioned. Congressman Steve Chabot, I believe is the name, introduced and 

sponsored the SBIC Modernization Act, H.R. 1106, which will increase the family of funds from $225 to $350. We think that is imSBREP-219 with DISTILLER

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portant for this program. We believe leadership is important. There 

are some leadership positions that we need to be filled, and we 

think that is very important that that happens soon. 

Technology is used in the marketplace and is available, and we 

think maybe some technology improvements could be made relative 

to us working, you know, with the Agency. And then the licensing 

process, it is a good and a stringent process. We think maybe some 

efficiencies can be handled there. 

In closing, I just want to reiterate the success, the strength, and 

my support of this SBIC Program. The Agency is licensing qualified 

candidates through a stringent and thorough due diligence process, 

which creates a high standard for licensees to meet before becoming licensed, and having success. 

On behalf of all SBICs, we applaud the efforts of the Agency and 

its employees, while encouraging continued improvements and efficiencies, as referenced herein, and in streamlining the process of licensing and communication with its candidates and licensees, and 

doing that without lowering the important high standard that has 

been set. 

So, we are glad to be a licensee and really proud to be here 

today. 

Chairman SCHWEIKERT. Thank you, Mr. Brown. 

Our next witness is John Sherman, founding director and former 

CEO of, is it—— 

Mr. SHERMAN. Inergy. 

Chairman SCHWEIKERT. Okay. So you are going around playing 

with us. 

[Laughter.] 

So, Inergy Limited Partnership, and was it out of Kansas City, 

Missouri? 

Mr. SHERMAN. Yes. 

Chairman SCHWEIKERT. You have 5 minutes, Mr. Sherman. 

STATEMENT OF JOHN SHERMAN 

Mr. SHERMAN. Thank you, Mr. Chairman. Thank you, Ranking 

Member Clarke and other members of the Subcommittee. My name 

is John Sherman, and I am from Kansas City, Missouri, near the 

congressional district of full Committee Chairman, Sam Graves. I 

appreciate the opportunity to be here today. 

I am an entrepreneur who has been fortunate enough to launch 

and successfully grow and develop two companies from scratch. I 

am here today because I have been asked to share with you my experience with the SBIC Program while building Inergy. Today, the 

company is publicly traded on the New York Stock Exchange. 

Three partners and I launched Inergy in 1998. We were seasoned 

professionals in the propane industry, and through our experience, 

we thought we could build a successful enterprise in the sector. 

The industry was fragmented with approximately 5,000 independent operators across the United States. We believed we could 

build a scalable enterprise. 

Our strategy was simple: acquire local and regional propane operators with excellent customer service and safety records, grow 

the business rapidly both through acquisition, business improvement, and organic expansion, access the public capital markets to 

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ensure our ability to continue to grow, and ultimately diversify 

under the broader energy sector. 

We funded the startup with $600,000 of our own money and 

raised $900,000 of equity from the seller of our original acquisition 

prospect. We went to several banks that turned us down for additional capital, but eventually obtained a $4 and a half million dollar acquisition loan. The bank loan was with a Kansas City bank. 

It had strict covenants and was personally guaranteed by us and 

our spouses. We were all in, so to speak. 

With the goal of ultimately going public, we knew that we would 

need outside equity to serve as a bridge to an eventual IPO. We 

recognized in addition to raising capital, we needed the financial 

expertise that comes with institutional capital. We were business 

operators, not financial professionals, and we needed access to expertise to help us get to that next level. 

We talked with a number of private equity and mezzanine financing firms. We ultimately connected with an SBIC, Kansas City 

Equity Partners, or KCEP, and on December 31st, 1999, we signed 

an agreement with KCEP for Inergy’s first private investment. 

KCEP purchased a $2 million preferred interest in our fledgling 

company. 

It is important to point out that they did their homework and 

took the time to get to know us. They recognized we had deep expertise in our industry. Our business plan was solid, and the 

founders were at risk. Plus, they were flexible as to the financial 

structure, and they were not asking for control, which was important to us. 

We used that initial $2 million investment to acquire a number 

of small, independent propane operations over the ensuing months. 

We also benefited from the partnership with this SBIC, as they 

helped us to focus on what it would take to access public capital 

markets. 

By early 2001, we identified a significant potential transaction, 

Hoosier Propane, located in Indiana that would provide the critical 

mass necessary to take Inergy public. We secured bank financing 

and obtained $7.4 million in equity from the sellers, and they also 

carried back a $5 million loan, but that left a $16 and a half million gap. I think, as Mr. Brown referred to, you know, that is the 

most challenging part of the financing. A group of private investors, led by Kansas City Equity Partners, purchased a $16 and a 

half million preferred interest in Inergy as the anchor investment. 

All members of the group were qualified as SBICs. 

That $16 and a half million investment was the key piece of capital that allowed us to make this strategic acquisition. Very shortly 

after we closed that transaction, we filed the paperwork for our 

IPO process. Seven months later, in July 2001, Inergy went public. 

We grew the company dramatically after that, completing more 

than 75 retail propane acquisitions, becoming the third largest propane company in the country, employing nearly 3,000 people. 

Over the years, we diversified into the midstream energy sector, 

and today the company is recognized as a major developer and operator of U.S. energy infrastructure, including storage, pipelines, 

and logistics assets. 

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In May, we announced a merger with Crestwood Midstream Partners, which would create a $7 and a half billion midstream energy company that is extremely well positioned to leverage the 

growing importance of the emerging shale plays around the country. The combined company will continue to create jobs and invest 

large amounts of capital in energy infrastructure across the United 

States. 

We could not have done any of this, in my view, without the initial investment we received from these SBICs. We have raised literally billions of dollars of capital over the years, but nothing more 

critical as that early stage capital that the SBIC provided us. And 

that served as a platform for our long-term success. 

Thank you, again, for the opportunity to be here today. 

Chairman SCHWEIKERT. Thank you, Mr. Sherman. 

Our next witness is Philip Alexander, president and CEO of 

Brandmuscle, and also speaking on behalf of the U.S. Chamber of 

Commerce. 

Mr. Alexander, 5 minutes. 

STATEMENT OF PHILIP ALEXANDER 

Mr. ALEXANDER. Chairman Schweikert, Ranking Member Clarke, 

and distinguished members of the Subcommittee, thank you for inviting me to testify today on the SBA’s SBIC Program that helps 

entrepreneurs and U.S. businesses to compete in the marketplace. 

As the chairman said, I am Phil Alexander, CEO of 

Brandmuscle, a recently SBIC-funded small business with offices in 

Chicago, Cleveland, Austin, and Los Angeles. I am here to speak 

with you today not only as CEO of Brandmuscle, but also as a 

member of the U.S. Chamber of Commerce. 

I came to the United States over 30 years ago to get an MBA 

from Case Western Reserve University. I pursued a career in marketing, and rapidly ascended to senior management positions both 

with national and international and local retailers, most recently 

as vice president of brand management at Pearl Vision, and prior 

to that, as Vice President of marketing for Western Auto, a subsidiary of Sears, Roebuck, and Company. 

In 2000, I left the safety and security of the company, and 

Brandmuscle was born. The company sought a solution to a common problem that was seen in marketing, actually something that 

has similarities in politics. I think as former U.S. House Speaker 

Tip O’Neill said, ‘‘All politics are local.’’ Well, we have the same 

issue in advertising. Our success is dependent on our understanding of what is needed, the issues of the local constituents and 

communities. 

Brandmuscle was launched to provide just such a solution for 

Fortune 500 companies who needed to respond to marketplace conditions and provide tools and a suite of services so that the local 

distributors, and local franchises, local dealers, could develop programs that were appropriate at the local level. Today, Brandmuscle 

has 550 full-time, well-paid professionals in the United States. 

Our early stage funding came from a variety of sources: initially, 

personal savings, and eventually an angel fund. Several successive 

infusions of venture capital allowed us to grow. We grew to about 

150 employees, but reached a point at which even though we had 

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the growth opportunity, we could not add any more than three to 

four employees because of our debt equity structure. Clearly, we 

had to do something different. 

Our initial investors needed to be taken out. The fund timing 

was over, but we needed cash to position us for expansion. We were 

too small to go public. Additional venture capital was too expensive. And unfortunately, since most of our assets were intangible 

property, typical debt financing was not available to us. Obviously, 

I think a challenge for us as a Nation as we move to more of a 

knowledge-based economy, companies like ours without intangible 

assets cannot find the financing. 

The SBA’s SBIC program was unique in its ability to provide 

Brandmuscle with the resources for our next phase. This Federal 

government program at zero cost to the taxpayer allowed an SBIC 

fund manager to leverage up to twice the amount of their private 

capital in order to provide a company like Brandmuscle with cost 

effective mezzanine debt financing. 

In February of 2012, the Riverside Company, equipped with assets from their recently SBIC-backed fund, Riverside Micro-Cap 

Fund II, signed a purchase agreement to fully acquire 

Brandmuscle, utilizing a mezzanine restructuring debt agreement. 

The Riverside Company that you may familiar with was recently 

named M&A’s private equity firm of the year with over $3.5 billion 

of assets under management, acquired over 300 companies, and 

have 200 employees worldwide. Brandmuscle had instant access to 

their managerial talent and the financial backing of a company like 

Riverside, thanks to the SBIC-backed fund. 

Riverside’s SBIC-backed fund had also allowed the company to 

acquire two other companies that we were quickly integrated with. 

One was Centiv Services, a Chicago-based portfolio marketing automation company, and TradeOne, an Austin-based Texas promotion company. As a result, we were able to strengthen our position in the market and acquire vertical integration. The company 

grew to 550 employees, and we not only grew the business and 

earnings. We also have added 42 employees in the last 12 months. 

Chairman Schweikert and Ranking Member Clarke, without the 

SBA’s SBIC Program, a company with the talent and resources of 

Riverside would not have looked at a company the size of 

Brandmuscle. I am convinced that it was the incentives that were 

afforded to Riverside by the SBIC Program which made us an attractive candidate for their consideration. 

In conclusion, from the day that I conceived Brandmuscle to the 

present, obtaining sufficient capital has always been a challenge. I 

know firsthand that in order for a company to be successful and 

grow, it needs the right capital at the right time. At no expense to 

the taxpayer, the SBA’s SBIC Program fills a void. 

On behalf of the U.S. Chamber of Commerce Small Business 

Membership and myself, I strongly recommend that you retain, enhance, and strengthen this critical source of funding and capital for 

small businesses. To that end, I urge you to pass bill H.R. 1106, 

the Small Business Investment Company Modernization Act of 

2013, into law. 

I thank you for inviting me to testify, and I look forward to answering any questions. 

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Chairman SCHWEIKERT. Thank you, Mr. Alexander. 

Ranking Member Clarke? 

Ms. CLARKE. Thank you, Mr. Chairman. It is now my honor to 

introduce Dr. David Robinson. Dr. David Robinson is a professor of 

finance and the William and Sue Gross Distinguish Research Fellow at Duke University’s Fuqua School of Business, and a research 

associate at the National Bureau of Economic Research. 

He is one of the country’s leading academic experts in the field 

of entrepreneurial finance, venture capital, and private equity. His 

work has appeared in the leading finance and academic journals 

and has been featured in the New York Times and the Wall Street 

Journal. 

As the vice chair of the World Economic Forum’s Global Agenda 

Council on Finance and Capital, Dr. Robinson is involved in international efforts to strengthen our understanding of the importance 

of financial markets for promoting entrepreneurship. He also advises a number of technology startups in the Research Triangle 

Park area. 

He has earned his Ph.D. and MBA degrees at the University of 

Chicago, a master of science from the London School of Economics, 

and a bachelor of arts from the University of North Carolina at 

Chapel Hill. 

Thank you for being here today, Professor Robinson, and we look 

forward to your testimony. 

Chairman SCHWEIKERT. Professor Robinson, 5 minutes. 

STATEMENT OF DAVID T. ROBINSON 

Mr. ROBINSON. Ranking Member Clarke, thank you for that introduction. Chairman Schweikert, members of the Committee, 

thank you for inviting me to testify before you today. 

Economic policy in the U.S. tends to focus on small business, but 

I think it is important to draw a distinction when we think about 

economic policy between supporting small business and supporting 

job creation. The best available economic data indicate that young 

businesses, not small ones, are the ones that are responsible for the 

lion’s share of economic growth in our country, especially if we 

measure growth in terms of jobs. 

The confusion is understandable because almost all young businesses are, by their very nature, small, but most small businesses 

are not young. Small businesses are, without question, an essential 

and important part of the fabric of American life, but most are not 

important engines of job creation. If they were, they would not continue to be small. They would grow and become large organizations. 

Young businesses are a different story. Many fail, but the ones 

that succeed create jobs and, more generally, increase our country’s 

economic dynamism. In this regard, the early stage SBIC initiatives are, in my view, laudable both in terms of their objective and 

in terms of their creativity. I think it is important that we think 

carefully about stimulating access to capital, not just for small 

firms, but for young firms. 

I would like, however, to draw your attention to three facts about 

early stage business activity that I think, taken together, should 

temper our expectations of policies that attempt to stimulate early 

SBREP-219 with DISTILLER

11 

stage business activity by extending leverage to equity investors in 

the market. 

First, my work with Alicia Robb at the Kauffman Foundation 

shows that debt, not equity, is the primary source of capital for 

new businesses. We have long understood that debt is critical for 

small businesses. Small businesses rely very heavily on debt financing, but it is kind of a surprise that new businesses rely so extensively on the banking sector for access to startup capital. This 

is true across a wide range of startups. Even venture-backed 

startups rely very heavily on access to bank capital in their very 

earliest years of life. 

As you have heard from Mr. Sherman’s testimony, personal assets are critical in securing bank loans most of the time because 

home equity is such an important source of collateral for most individuals at the prime age for starting new businesses, which is typically in sort of the 35-year to 45-year range. What this means is 

that the collapse of the housing market, it was as much a crisis for 

entrepreneurship as it was a crisis for the banking system. 

I think one of the things this tells us is that efforts to increase 

bank lending to this sector are incredibly important. And, you 

know, I think Administrator Raghavan’s comments about the SBIC 

Debenture Program bear special consideration in light of the importance of that for startup activity. 

The second fact is that early stage investing is extremely risky. 

For every Google out there, there are literally hundreds of ideas 

that never make it out of an inventor’s garage. There is a very understandable need to curb behavior that would result in excessive 

risk taking and discourage bad investment activity in the early 

stage SBICs. But I think it is important to acknowledge that some 

of the CIP provisions and the payback rules that are in place are 

going to inhibit investment in some of the most desirable areas of 

the economy where we would like to see investment. Those are 

kind of the speculative investments that are often associated with 

some of the most disruptive technological innovations. 

The third fact that I think we should bear in mind is that the 

gestation periods for early stage investments are prohibitively 

lengthy for many investors. It takes too long from the time of first 

investment to that IPO or M&A event for many early stage funds 

to earn a return. I think some of the most interesting features of 

the JOBS Act were those features that stimulated the development 

of the intermediate liquidity opportunities for early stage investors. 

So I think these three facts together conspire to make your job 

a difficult one. We are simply swimming against the current when 

we try to stimulate early stage investment activity by leveraging 

existing equity. And so, in light of that, what will be the underlying 

economic mechanism that will be responsible for success when we 

see it? In my view, it is this: early stage investors without sufficiently deep pockets are often discouraged from making speculative 

early stage investments because they are worried that their early 

investments will become diluted by later stage equity. It is not that 

they need more capital now. They need more capital to be available 

later so that they can make the follow-on investments. 

In my view, the success of this program will hinge on providing 

that capital to those early stage investors. Thank you. 

SBREP-219 with DISTILLER

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Chairman SCHWEIKERT. Thank you, Professor. 

As you heard the bell, we have a vote series that is about to be 

called. But we still have a few minutes or so. I thought we would 

move to the lightning round of questions. 

[Laughter.] 

And, Mr. Rice? 

Mr. RICE. I can go 5 minutes. 

Chairman SCHWEIKERT. No, no, no, no, we will shoot for the one. 

Lightning round. Mr. Rice? 

Mr. RICE. Professor, I am a tax lawyer and CPA by trade, and 

I have certainly seen the troubles that small businesses have with 

access to capital, and totally agree with you their primary source 

is the banks, and particularly small banks. 

Now, you know, coming out of the financial crisis, we had a flurry of laws designed to prevent banks from taking too much risk, 

but on the other hand, you have this conundrum that you are saying we need them to take risk if we are going to create these jobs 

and create this small business economy. So, we created a plethora 

of laws to avoid this risk, like Dodd-Frank, for example. 

In your opinion, does that stifle this small business job creation? 

Does that stifle this risk taking? I hear from my small bank friends 

and former clients that it is a real problem. Tell me your opinion. 

Mr. ROBINSON. Sir, thank you for the question. You know, in 

some ways you have expressed the dilemma perfectly. We want to 

put in responsible curbs against bad behavior, but at the same 

time, by curtailing risk taking, we are starving capital, preventing 

it from flowing to the very areas of the economy where we need it 

most. So I think there is no question that removing the regulations 

or lessening regulations around bank lending would help small 

business activity. 

Perhaps to say it a little more differently, I think that we need 

to move away from sort of a one-size-fits-all approach towards 

banking regulation to something that allows smaller banks that 

serve the small business sector more maneuverability than is currently afforded. 

Chairman SCHWEIKERT. Mr. Collins? 

Mr. COLLINS. Oh, thank you. 

Chairman SCHWEIKERT. Do you want to take the—— 

Mr. COLLINS. Sure. 

Chairman SCHWEIKERT. Actually, can I do this, just because we 

are doing the lightning round? Ms. Clarke? 

Ms. CLARKE. Mr. Chairman, I would like to yield to the ranking 

member of the Committee, Ms. Vela ́zquez of New York. 

Ms. VELA ́ ZQUEZ. Thank you, Ms. Clarke, and thank you, Mr. 

Chairman, for this important hearing. 

Let me just say, Professor Robinson, I do not know how many 

times we hear about how Dodd-Frank is hindering the flow of capital to small businesses. But the fact of the matter is that the distinction is made by Dodd-Frank in the sense that the one-size-fitsall approach does not work. And, indeed, that is what Dodd-Frank 

does in the sense that if I ask any business who is lending to them, 

community banks, are not the big banks, are the community banks, 

are the independent banks. 

SBREP-219 with DISTILLER

13 

Dodd-Frank exempted the community banks from those regula- tions. They do not have assets of more than $10 billion. So, I just 

want for the record to reflect that. I am a member of the Financial 

Services Committee, as well as some of the members here, and 

they know that. 

I would like to ask the acting associate, Ms. Raghavan, and welcome to the capitol. You did a very good job in New York, and I 

hope that you continue to do a better job here. But I want to help 

you. I want for you to succeed. And this is a very important program as a tool of promoting economic development. 

And my questions are based in the new reality that the small 

business face is changing in America. It is more women. It is more 

blacks. It is more Latinos. And we need to make sure that the programs that are in place will benefit everyone. 

So, only 20 percent of businesses receiving financing in the SBIC 

Program are located, only 20 percent in LMI areas. This suggests 

that we need more SBICs licensed to make investment in these 

areas. Even though the statute in Section 301(c)(3) of the Small 

Business Investment Act provides general guidance on that appropriate experience, the SBA has established rigid rules. While we 

want high standards, the SBA should be considering other types of 

experiences that clearly demonstrate qualifications for the SBIC 

Program. 

Will the SBA consider these alternative types of experiences in 

evaluating SBIC applications, especially to target more minority licensees and low income areas? 

Ms. RAGHAVAN. Thank you for the question. We do agree that 

LMI areas, especially women and minorities, are very important to 

the program. In fact, with our new licensees of applicants of funds, 

we have had more women and more minority funds join. And we 

continue to actually press out and do a bigger marketing campaign, 

including using our district offices in the actual country to work 

with the fund managers to get to through the program. 

We are actually putting through clearance on our new licensing 

SOP, which is looking at the alternative ways of licensing applicants. And one of the things we are taking into consideration is different types of track records to ensure that we do have more investment funds that are looking into those hard impact areas. 

We so far have the impact funds. We have two of them. One is 

in Michigan looking at that economic development there, and we 

look to encourage more of those funds, including States as well as 

mayors’ offices, to join the pension funds to be able to encourage 

more growth in LMI areas. 

Ms. VELA ́ ZQUEZ. Okay. Thank you very much, and I will be working on reaching out to you so that we make sure that changes are 

made. 

Mr. Chairman, I would like to ask unanimous consent to submit 

for the record the testimony of Jose Fernandez. He is the chairman 

and CEO of Omega Overseas Investment Corporation. 

Chairman SCHWEIKERT. You have unanimous consent. 

[The information follows:] 

Ms. VELA ́ ZQUEZ. Thank you, and I yield back. 

Chairman SCHWEIKERT. Thank you, Ms. Vela ́zquez. 

As we are running, Mr. Collins had a question. 

SBREP-219 with DISTILLER

14 

Mr. COLLINS. Yeah. Thank you, Mr. Chairman. I would be quick, 

but, Mr. Brown, I am especially interested in the dynamic. As Mr. 

Alexander said earlier, the cost of venture capital was just too 

much. We all know the Golden Rule, ‘‘He who has the gold makes 

the rule.’’ And I am assuming, Mr. Alexander, you are talking 

about dilution. They would come in and say, sure, we will lend you 

some money; we are taking 80 percent of your company, and for an 

entrepreneur who has put their heart and soul in it. 

Now, Mr. Brown, I guess my question is, being an SBIC and having government funding multiply your private investment, would 

you say that that allows you to be a little fairer, if you will, with 

companies like Mr. Alexander’s so the dilution would otherwise be 

much worse for the investor if you did not have the leverage of the 

SBIC? 

Mr. BROWN. The answer to that question is yes, and that is one 

of the benefits of the program. You know, dilution is a big issue for 

small businesses, for growing businesses. Equity is critical to get 

that done. We see that over and over again. And whether it is venture capital, private equity, or even private groups that come together to provide equity can be very dilutive to the founders, the 

people who are the heart and soul of the company that put it together. 

So, this program affords the opportunity to come in and provide 

debt with an equity kicker occasionally in the form of a warrant 

that provides much less dilution than might otherwise be had with 

equity. And so, it really is one of the unique and beneficial parts 

of the program that can save dilution for ownership and still, you 

know, provide some upside for licensees making—— 

Mr. COLLINS. Yeah. One quick follow up. Does that also help you 

get private investors, the investors that come into your fund and 

you say we are going to be an SBIC, and I am going to leverage 

your money two to one, three to one. Therefore, we can be more 

fair, if you will, with the company. 

Mr. BROWN. It does. It provides the opportunity for investors to 

receive a good return on their investment. And because of the leverage and the access to the capital at the cost that we have access 

to, it allows us to be competitive in the marketplace, and provide 

competitive offerings to those that really need it as opposed to 

some of the dilutive options. 

Mr. COLLINS. Thank you, Mr. Chairman. Thank you. 

Chairman SCHWEIKERT. Okay. Thank you, Mr. Collins. 

Mr. Chabot, it is nice having you here. I am not going to ask, 

but we were talking about your legislation a moment ago. 

Mr. CHABOT. Thank you. I just want to put in a plug for it. 

Thank you, Mr. Chairman. 

Chairman SCHWEIKERT. And for our witnesses, how is your timing? We have a vote series. I think it is going to be about 50 minutes is my best estimate. In your lives, are you able to come back? 

Mr. ROBINSON. Yes. 

Mr. ALEXANDER. Yes. 

Mr. SHERMAN. Yes. 

Mr. BROWN. Yes. 

Ms. RAGHAVAN. Yes. 

SBREP-219 with DISTILLER

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Chairman SCHWEIKERT. All right. With that, then we are going 

to have votes on the floor of the House, so we are going to adjourn 

for about 50 minutes. And we will reconvene at the end of votes 

for another series of questions. 

And with that, we are at recess. 

[Recess.] 

Chairman SCHWEIKERT. Reconstitute the Subcommittee. Are we 

back on the record? 

Ranking Member, do you mind if I jump in with a couple of questions? 

Ms. CLARKE. Please go ahead. 

Chairman SCHWEIKERT. Mr. Brown, you and I had a conversation 

yesterday, and I want to better understand because I partially also 

want to put this on the record not only from your testimony, but 

from our conversation. The mechanics you went through to basically be certified to be one of the funds that actually can put the 

money into Mr. Alexander’s, you know, type of businesses, and 

where you thought it worked, and where you thought there might 

be some bottlenecks. 

It is okay. We were not talking about you behind your back, I 

promise. And where you thought that whether electronic pothole or 

maybe certain levels of review may be overkill. Mr. Brown? 

Mr. BROWN. Yeah. So, our experience, you know, we are encouraged to and sought out a law firm. We actually used the firm of 

McGuireWoods in Chicago, and I found out that there are few that 

specialize in this. And we submitted a, you know, brief summary 

that was reviewed by the SBIC and had discussions with an analyst, and was essentially, as I recall, invited to move forward in 

what is called the MAQ process. It is a management assessment 

questionnaire. And we did that. 

We submitted our MAQ. It is a management assessment questionnaire. It is a very thorough questionnaire about who we are, 

our background, our track record, et cetera, for the team. And we 

went into what is called a MAQ phase or the pre-licensing phase, 

I think it is called. 

Very good process. The analytical support or connection that we 

had there at the SBIC was good. Very smart folks that we dealt 

with. Really took time to understand our business, which was 

great. 

Chairman SCHWEIKERT. But my great hope is more just the steps 

you had to go through—— 

Mr. BROWN. Okay. 

Chairman SCHWEIKERT.—the costs you had. I am hunting for if 

there is anything, if I can turn to the acting administrator and say, 

hey, have you thought of this pothole? How do we make it faster, 

save money, and still have the same type of core costs? 

Mr. BROWN. Okay. So, I will consolidate. Thanks. 

MAQ phase, we went to a meeting with the committee, and we 

got what is called a green light letter, which kind of got us through 

the MAQ phase, and then the opportunity then to formally apply 

for the license. And then, we went through a licensing phase where 

there was some of the same work that was done. There was also 

some additional work, but there was some of the same work that 

was done there. 

SBREP-219 with DISTILLER

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Chairman SCHWEIKERT. And share with me the timeline. 

Mr. BROWN. So, we had a little different story, and let me just 

say that. We actually went from start to finish, from our application through, I am going to call it our first go round, was about 12 

to 15 months. We actually had a change of personnel. We had to 

go back in, and we ended up with about 2 years in the program. 

But had we not made the change of personnel, it would have 

been about a 12- to 15-month process, which we were anticipating 

going in. So, there was the MAQ phase, then there was the licensing phase, and then, as I recall, there was a second committee that 

we went and visited with at the licensing phase, and we were approved at that. And then, there was an additional committee that 

we did not need that ultimately voted. So, I believe that was basically the process. 

Timeline, as I shared, you know, sort of had it gone exactly the 

way we intended, it would have been about 12 to 15 months. And 

then, the cost was, you know, for us was in the $200,000 to 

$250,000 range, and that is everything all in, legal, you know, just 

doing everything that we had to do to get to the finish line. 

Chairman SCHWEIKERT. Okay, Administrator Raghavan. I am 

going to get it just right. And I know for fairness, you have only 

been there how long? 

Ms. RAGHAVAN. This is my third week. 

Chairman SCHWEIKERT. Okay. So, that final review, so it is sort 

of like a third committee at the very end that is here, we will say, 

at the Federal level? 

Ms. RAGHAVAN. Yes. 

Chairman SCHWEIKERT. What can you tell me about that, and 

what can you tell me about what value you think that ultimately 

adds, because the hopeful participant does not actually really appear in front of that committee. 

Ms. RAGHAVAN. Correct. 

Chairman SCHWEIKERT. So what does that one accomplish? 

Ms. RAGHAVAN. Sure. So technically, it is the Agency committee, 

which is the committee he is talking about, the third committee, 

which has a group of all senior officials in the SBA: our associate 

administrator of CAP access, our associate administrator of investment, as well as our CFO. It is the actual committee that actually 

issues the license. 

The first two, the investment and the division committee, are actually committees that make recommendations, so they are working with the applicants. That is why we do the interviews to go 

through the process. And then, it is the agency committee that 

makes the final decision because the administrator signs off on the 

license. 

It is similar to what is in the private sector. They have several 

reviews of different portfolios that come in when they do funds to 

funds. So we mimic that process on purpose so that it is very similar. That committee works very well. They all have financial backgrounds, and they understand what we are looking for, and they 

have been looking at these. They get the entire briefing book that 

these gentlemen have put together, which includes their background history, their management fund, the organization structure, 

and where they plan to get the funds. 

SBREP-219 with DISTILLER

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Chairman SCHWEIKERT. Thank you. 

Ms. Clarke? 

Ms. CLARKE. On the issue of the licensing, I wanted to circle 

back to, I think it was the ranking member, Ms. Vela ́zquez, had 

talked a little bit about the licensing of the SBIC Impact Investment Programs in economically distressed communities. And I 

think you mentioned there are two licensees that have been approved specifically for the program. 

And my question is, why have more impact investment SBICs 

not been licensed by the SBA? The process, is it not having enough 

capital to really meet the criteria? What is it that you are finding? 

Ms. RAGHAVAN. So the Impact Investment Fund is actually new. 

It is only in its second year, so that is one of the reasons, I think, 

everything that is new people do not understand, which is why we 

have an aggressive marketing plan to work with actually States 

and local governments to get the word out because it is really looking at the areas across the country. 

We have two that have gone through the program. We actually 

have six funds all together in our traditional SBIC Program that 

do impact investing. So all together, we have eight in the program. 

One of the reasons I think the Impact Investment Program is a 

different hurdle is the percentage that we ask. We are asking at 

least 50 percent to be in low/moderate income areas on the impact 

investing versus the normal SBIC fund. They can do 10, 15 as they 

wish. 

But I think as we go around marketing and explaining the program, we should be getting more, which is the reason why we revamped even the limit to go up to $250 million as opposed to the 

$180 when it was started. 

Ms. CLARKE. And is it that there is a certain assumption around 

the amount of risks that are involved with making investments in 

those impact areas that people do not want to take on, or have you 

gotten any feedback? Other than the fact that it is a new program, 

is there anything that you anticipate that makes people hesitant 

or companies hesitant to engage this particular—— 

Ms. RAGHAVAN. I think it is a new area for companies to go 

ahead and actually invest in. And so, we are trying to broaden to 

show them that they will get the same returns or similar returns 

that they get in other programs. And that is part of the education 

process that we at the SBA are doing. 

And I think the Michigan Fund is a perfect, sterling example of 

looking a big time pension fund to invest in impact areas, and we 

have a second fund in California doing the same. And as they get 

more press and people understand more about it, I think we can 

get some more funds in there. I think it is more about knowing 

that the risk involved is similar to any other type of risk that is 

taken in the market. 

Ms. CLARKE. Very well. And, Mr. Brown, I just wanted to do a 

follow up because in your opening statement, you spoke to the virtues of the SBIC Program that you have embraced. But you also 

mentioned about licensing efficiencies was sort of like—I had a 

question about, you know, whether it is a lacking of efficiency. And 

I think you talked a little bit about the process and some redunSBREP-219 with DISTILLER

18 

dancy and paperwork, or administrative activities. But was there 

something specific in the licensing that you found to be inefficient? 

Mr. BROWN. I would maybe point to—sorry. Thank you. I would 

maybe point to sort of the technology or lack thereof. And, in fact, 

the program is now bringing online some of our opportunities to 

transfer documents, to file forms—468, I believe—and others. So, 

there is progress being made. But what we do not often do when 

we are transacting business is send lots of sort of hard paper files. 

And so, that happened during this process. 

So, I think the use of existing technologies in the marketplace, 

which I know the Agency is working on, will make the process 

more efficient. That would be a prime example of what I was talking about. 

Ms. CLARKE. Okay, very well. Do you anticipate a full-throated 

technological revolution with this process? Are we on our way? 

Ms. RAGHAVAN. Well, as you know, we have been under sequestration and also continuing resolutions, which has made it a bit difficult to invest in technology. So, even though under those circumstances we were able to make our 468, which is an application 

online, and we just launched the web system, we are trying. In 

fact, one of our initiatives is to make sure it could go paperless. We 

are doing that in several initiatives across the Agency. But for the 

SBICs, it is very important. Naturally they work in an e-environment, and we are trying to make sure that we can also do that. 

But we put in plans for more budget for technology, so as the 

technology can be upgraded, we can serve their needs better. 

Ms. CLARKE. And you fed right into my next question, and that 

was, how has sequestration affected the SBA’s ability to provide effective oversight over your portfolio? 

Ms. RAGHAVAN. It has definitely affected the travel cap. We have 

to do examinations of all the SBICs, so with the current travel cap, 

we were unable to do as many as we would like, just because we 

do not have the dollars to go. As well as we would like to do some 

more outreach and marketing, and part of that is going to conferences and making sure people understand the Impact Investing 

Fund, and working with the fund managers, and understanding 

our program. So, the travel has been very difficult. And obviously 

on the technology front, we have not been able to invest as much 

as we would like to to ensure 

On the program operations side, it has not been affected. We still 

continue to make sure our licensing times are down. We still continue to work with them remotely. But those are the effects we 

have had. 

Chairman SCHWEIKERT. And once again, I want to apologize to 

all of you for the nature of the chaos of today. It is just sort of the 

way this day will work. 

Is there anything you think that would be important for us to 

hear to put onto the record that we have not asked, that we have 

not pursued here? And it is always dangerous when you ask an 

open-ended question that you actually do not know the answer. 

In that case, I am going to move to a closing here. I am going 

to, and I did not see it in the normal script here. But is this a onemonth Committee or one-week Committee being submitted to the 

record? 

SBREP-219 with DISTILLER

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Voice. Five legislative days. 

Chairman SCHWEIKERT. Okay. You each are going to have 5 legislative days if you have other documents you would like to submit. 

You may also receive questions from those of us here. 

And actually, my ranking member does have another question. 

Ms. Clarke? 

Ms. CLARKE. Thank you, Mr. Chairman. Thank you for the indulgence. 

Dr. Robinson, I had one final question for you, and that is, finding the right balance for government-backed investment programs 

can be challenging. If it permits too much risk, taxpayers can end 

up on the hook. If it does not take enough, the program will not 

spur economic activity in the areas unable to secure financing. 

What is your view on the current risk appetite for the SBIC Program, and is it too much, or too little, or just right? 

Mr. ROBINSON. Thank you for the question, Ms. Clarke. I think 

it is a delicate balance that we have to strike, and I understand 

both sides of the equation, both the need to make sure that we curb 

excessive risk taking and bad behavior, but also the very great 

need to spur risky investment. 

I think that we have to be very clear about what we want the 

objectives of the program to be and what we are trying to accomplish. I think if what we wish to do is promote innovation, you 

know, truly promote risk taking investment, then I think we probably need to scale back some of the oversight—well, I should not 

say ‘‘oversight’’—scale back some of the restrictions on investment. 

I think that if the objective is to, you know, provide more capital 

to the small business economy, then you probably have the balance 

about right. But, you know, the way I would look at it is, again, 

I would go back to what I said in my opening testimony. I think 

we need to draw a distinction between the small business economy 

and the entrepreneurial economy. And I think that if the objective 

of the program is spur entrepreneurship, then we need to do, in my 

view, dial the meter more towards risk taking. 

Chairman SCHWEIKERT. Thank you, Ms. Clarke. 

And a couple of other quick things here. Professor, I am going 

to actually hunt for some writings you have done, and if you can 

send me some. You actually said something that, in reflection, is 

brilliant: the difference between the small business and the growing, you know, the very young growth business, and how, you 

know, we often say ‘‘small business,’’ but these are very different 

than, like, our family business that may have been around 40 years 

that has just stayed some of the size. So, I would like to understand more about that because that may have a different risk appetite in what we have to do. 

Obviously, as members of Congress, there is this constant fear of 

do we wake up tomorrow and have a black swan type of event, 

something that was out in the tail. And we wake up the next day 

and we are Fannie or Freddie, or something of that nature. At the 

same time, if you have managed your exposure to certain consequences out there, have you, you know, done it in a robust 

enough fashion where we are actually meeting our mission. 

And with that, I ask for unanimous consent that members have 

5 legislative days to submit statements and supporting materials 

SBREP-219 with DISTILLER

20 

for the record. And without objection—I always wait for someone 

to give me an objection one day—so ordered. 

Chairman SCHWEIKERT. And with that, the hearing now is adjourned. 

[Whereupon, at 12:02 p.m., the Subcommittee was adjourned.] 

SBREP-219 with DISTILLER

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A P P E N D I X 

U.S. SMALL BUSINESS ADMINISTRATION 

WASHINGTON, D.C. 20416 

TESTIMONY OF 

PRAVINA RAGHAVAN 

ACTING ASSOCIATE ADMINISTRATOR FOR INVESTMENT 

AND INNOVATION 

U.S. SMALL BUSINESS ADMINISTRATION 

BEFORE THE U.S. HOUSE SMALL BUSINESS 

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND 

REGULATIONS 

JULY 25, 2013 

Chairman Schweikert, Ranking Member Clarke and members of 

the Subcommittee. I’m pleased to testify before you today to discuss 

the Small Business Investment Company (SBIC) program. I want 

to thank you for calling this hearing, and for your strong support 

of the Small Business Administration (SBA) and your commitment 

to providing growth capital to small businesses. 

As many here today know, the SBICs are part of a unique program at SBA that puts long-term patient investment capital into 

America’s small businesses, allowing them to grow and create jobs. 

Today, the SBIC program serves as a model of a successful publicprivate partnership. The program, which began in 1958, is marketdriven. We don’t make the investment decisions; experienced private fund managers do. 

The program oversees 295 operating funds with over $19.2 billion 

in private and SBA guaranteed capital and commitments. These 

SBICs invest in a wide variety of small businesses, such as JSI 

Store Fixtures in Milo, Maine, which manufactures specialty fixtures and displays for the supermarket industry. The company 

more than doubled its workforce from 80 to 200 employees after receiving an SBIC investment in 2006. The company won an award 

last year from the Small Business Investor Alliance at the SBIC 

portfolio company of the year. Another great example is R360 Environmental Services which provides environmental solutions to 

some of the world’s leading oil and gas producers to ensure environmental performance and compliance. Though headquartered in 

Houston, Texas, the company has 26 facilities located across Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming, providing high paying jobs to hundreds of new employees in 

SBREP-219 with DISTILLER

22 

rural areas. While the company has recently been acquired, R360 

increased jobs by 40% after its SBIC investment. 

I am proud to tell you that last fiscal year (FY) the SBIC Debenture program had its third consecutive record-breaking year in 

terms of the number of SBICs licensed, new private capital, and 

SBA-guaranteed leverage commitments. In FY 2012, SBA licensed 

30 SBICs with $973.9 million in private capital and approved over 

$1.9 billion in Debenture commitments. 

More importantly, in FY 2012 Debenture SBICs provided over 

$2.9 billion in financings to 795 small businesses located across the 

country, more than twice the amount provided by Debenture SBICs 

in FY 2009. If you consider that SBICs issued only $1.4 billion in 

SBA-guaranteed Debentures to support these financings, this 

means that for every $1 in Debentures issued last year, small businesses received at least $2 in financing. Over the past 5 years, 

SBIC debenture investment dollars were dispersed across a broad 

spectrum of industries, including 18% going to small U.S. manufacturing firms. In FY 2013, Debenture SBICs are on track to exceed 

FY 2012 financing dollars, having already provided almost $2.6 billion in financing to 671 small businesses through June 2013. SBA 

accomplished this while keeping the Debenture program at zero 

subsidy costs to the taxpayer. 

Much of the credit for keeping the program at zero subsidy cost 

is our licensing process. The licensing process consists of 3 basic 

steps: (1) Initial Review by SBA; (2) Capital Raising; and (3) Final 

Licensing. In the first step, SBA reviews the applicant’s track 

record and performs initial due diligence, leading to a decision by 

SBA’s Investment Committee as to whether to give the applicant 

a ‘‘green light letter’’. Once an applicant receives a green light letter, the managers have up to 18 months to raise the minimum private capital and submit a license application. After receiving the 

application, SBA reviews all legal documents and updated track 

records and performs further analysis and due diligence before consideration by the Investment Division Licensing Committee and 

then the Agency Licensing Committee, which is composed of the 

AA for Investment and senior SBA officials. SBA’s Administrator 

then approves and issues the SBIC license. In determining whether 

to grant a license to an applicant, SBA considers the factors identified in its regulations (13 CFR § 107.305), which include among 

other things: management qualifications; track record; proposed investment strategy; and fund economics. As a result of this process, 

only 1 of the 157 Debenture SBICs licensed since 2002 has been 

transferred to the Office of Liquidation to date. 

Even though a lot of work goes into evaluating applicants, SBA 

improved licensing times over the past four years. It used to take 

almost 15 months on average to get a new SBIC fund licensed. 

That average is now less than 6 months. As a result, SBA is on 

track to exceed its FY 2012 licensing numbers, having already licensed 26 SBICs with almost $1 billion in private capital and approved over $1.5 billion in Debenture commitments in FY 2013 to 

date. 

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To help this large group of new licensees navigate our program, 

SBA’s Office of SBIC Operations has initiated webcasts on various 

aspects of the program. SBA also has reduced average turnaround 

times on key decisions in Operations by over 50%, from 60 days in 

FY 2010 to 28 days in FY 2012. This improvement helps SBICs get 

critical financings to small businesses in a timely manner. 

Obviously with rapid growth, SBA is concerned about program 

risk. Key to managing program risk is good reporting. SBA implemented a new web-based reporting system in FY 2013 to help improve communications and reporting from program participants. In 

addition, in the first quarter of this fiscal year SBA published its 

most recent annual report in order to improve transparency of the 

program and provide accountability. 

With its processes and reporting in place, SBA believes it is 

poised to handle continued growth. And we believe that one legislative change currently under consideration would allow this program to reach even more high growth small businesses. Specifically, the proposal would increase the SBIC Debenture program authorization from $3 billion to $4 billion. While SBA has never hit 

the $3 billion annual authorization limit, we have grown the program significantly in recent years. Over a 3 year period, SBA more 

than doubled the amount of Debenture commitments approved, 

from $788 million in FY 2009 to over $1.9 billion in FY 2012. SBA 

expects to exceed $2 billion in FY 2013. With continued growth, 

SBA will outpace its current authorization level. 

We believe this modest change will allow the program to continue to grow without any significant additional risk to the taxpayer, allowing us to keep this program at zero subsidy. 

In closing, the SBIC program is well positioned to finance small 

businesses across the country. I look forward to working with you 

on policies that will help us achieve this goal. Thank you and I am 

happy to answer any questions you may have. 

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Good morning Chairman Schweikert, Ranking Member Clarke, 

and Members of the House Small Business Subcommittee on Investigations, Oversight, and Regulations. 

Thank you for holding this oversight hearing today to examine 

the Small Business Investment Company (SBIC) program. I am 

here today on behalf of the Small Business Investor Alliance, the 

premier organization of lower middle market private equity funds 

and investors. 

My name is Steven Brown and I am the Managing Member of 

the General Partner of Trinity Capital Fund II, LP, based out of 

Phoenix, Arizona. Trinity Capital became a licensed SBIC in September of 2012, with a current investment capacity of $76 million, 

assuming two tier SBA leverage. Trinity focuses on equipment and 

fixed asset leasing and financing to both earlier staged and emerging growth small businesses primarily backed by Venture Capital 

and/or other institutional investment. The industries we fund most 

are telecommunications, manufacturing and technology, with our 

primary market focused in the southwest and west, however we 

will fund deals in other US markets. 

Since our fund was only recently licensed, I can only speak to our 

direct experiences during the relatively brief period we have been 

in the program. However, because this hearing is performing oversight of the entire SBIC program, I am attaching a letter from our 

trade association that highlights the broader perspective they have 

seen across the industry over a longer period of time. 

Background 

What was true in 1958 is still true today. It is very inefficient 

and difficult for large financial institutions to provide capital to 

small businesses, even if the small business is profitable and trying 

to grow. To address this reality Congress and the Eisenhower Administration applied market principals as they created the SBIC 

credit facility that uses leverage to augment private investment in 

the small business market. Because of the way the program is 

structured, this leverage must be provided with a zero subsidy 

rate—meaning no cost to the taxpayer. The SBIC debenture program continues to successfully operate at its statutorily required 

zero subsidy rate. The SBIC debenture program has consistently 

run at a surplus of several hundred million dollars and the President’s budget estimates that this surplus will grow next year. Since 

the creation of the SBIC program, SBICs have invested more than 

$58 billion in over 100,000 domestic small businesses. Some of 

these small businesses have since grown into icons of American 

free enterprise including: Apple, Intel, Outback Steakhouse, 

Callaway Golf, and many others. There are also thousands of other 

fantastic SBIC-backed businesses that are lesser known, but that 

are mainstays of local economies. 

SBICs are highly regulated private equity funds that invest exclusively in domestic small businesses. Debenture SBICs raise private capital, pass a rigorous licensing process, and then are able 

to increase the amount of capital available for investment by accessing leverage through an SBA-backed credit facility. These 

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funds then invest in a portfolio of U.S. small businesses, creating 

jobs, fostering innovation, and fueling economic growth. 

The SBIC debenture program fills a critical need by providing 

growth and transition capital to small businesses. During the financial crisis SBICs scaled up to provide critical capital that saved 

many businesses and many jobs. The SBIC debenture program continued to operate at a zero subsidy rate throughout the financial 

crisis. Private capital of operating SBICs doubled over the past four 

years, growing from $3.4 billion at the end of fiscal year 2009 to 

$6.8 billion today. This growth came at no additional cost to the 

taxpayer, a remarkable feat for a public-private partnership. This 

program is good public policy because it fills a critical market need 

that otherwise would largely go unmet while simultaneously providing real taxpayer protections. This is a rare alignment of market 

forces with thoughtful public policy. 

Trinity Capital is an example of how an SBIC Fund can provide 

critical capital to businesses that will now continue to grow long 

after the SBIC has exited the investment. Trinity Capital to date 

has funded equipment purchases for the growth of a manufacturing 

line with Suniva, a manufacturer of solar cells based in Atlanta, 

Georgia. Suniva has experienced strong revenue, has survived the 

solar manufacturing down market and is a strong US based manufacturer supplying the residential supply market. Our capital has 

helped grow capacity at the Suniva plant. We have also funded 

manufacturing equipment for Soraa, a US based manufacturer of 

LED lighting, an emerging technology that is replacing much of the 

existing lighting in the marketplace with more efficient and cost effective energy lighting. Soraa is experiencing growing revenues and 

has state of the art technology in this space. We have also funded 

Clariphy, a California based manufacturer of chips for fiber optic 

communications. Clariphy’s product produces a much more efficient 

use of fiber optic networks resulting in more bandwidth and speed. 

Trinity financed test equipment for Clariphy, a company who is experiencing strong and growing revenue. We are currently funding 

a tire recycling company that takes tire manufacturing waste and 

grinds it into a product that is used for production back into the 

tire industry. Trinity is currently funding and plans to fund innovative US based companies that are providing both technology and 

know how to make existing processes more efficient and more profitable. Additionally we have already demonstrated a desire and 

ability to work with companies that are coming up with better and 

more efficient energy solutions and alternatives. 

Let me start out by highlighting how Congress can act right 

away to increase capital flowing to small businesses. Congressman 

Steve Chabot (OH-1) introduced the SBIC Modernization Act (H.R. 

1106) earlier this year which increases a critical cap on the amount 

that successful SBICs can access through the SBA credit facility. 

In fact, thanks to the bipartisan work by this committee at the 

end of last year, the same legislation passed through the House of 

Representatives on December 17, 2012, with a very strong bipartisan vote of 359–36; however given the time constraints at the end 

of the year, the Senate did not act on the bill. Congressman Chabot 

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reintroduced the bill this year with bipartisan support from nine of 

his colleagues. It is worth noting that a Senate version of the bill, 

backed by Senators Landrieu (D-LA) and Risch (R-ID), passed out 

of the Senate Committee with broad bipartisan support. 

It is important to note that H.R. 1106 does not increase federal 

spending or require new appropriations. H.R. 1106 adjusts the 

maximum amount of leverage available to multiple SBICs to a 

limit of $350 million. The only funds that can access the higher 

limits are funds that have successfully operated an SBIC and have 

gone through the licensing process at least twice. Increasing this 

limit will keep proven small business investors in the program and 

increase the amount of capital flowing to small businesses. It is a 

logical to keep the best small business investors investing domestically. This increase has bipartisan, bicameral, and Administration 

support. We encourage its passage. 

Now let me turn the focus of my testimony to discuss issues that 

should be relevant as part of an oversight hearing. It is important 

to put on the record the very significant improvements to the SBIC 

program that have been implemented over the past several years. 

Licensing times have been reduced from a waiting period of nearly 

two years to about six months. The number of licenses issued per 

year has increased from fewer than 10 per year to 30 per year. 

This increase in licensing was achieved while maintaining, if not 

raising, the standards for licensure. Thanks to legislative improvements, the number of regulatory hurdles to normal fund operations 

has been reduced and has allowed SBA resources to be better allocated to address more pressing needs. These improvements are important and should not be overlooked. 

These reforms attracted more private sector investment and allowed SBICs to operate closer to the speed of business to back 

thousands of successful entrepreneurs. Despite the many improvements, there are still areas that require meaningful changes to 

maximize the program’s ability to get capital in the hands of small 

businesses. 

SBA Leadership 

The biggest short term challenge that must be addressed is the 

departure of many key personnel at the SBA. The SBIC program 

has benefitted greatly by the quality of the people appointed to lead 

the SBA and the attention they paid to the SBIC program. SBA 

Administrator Karen Mills is expected to leave her post by the end 

of August and there is no word yet on who her replacement will 

be. There are also vacancies for the positions of the Deputy Administrator, the Associate Administrator for SBA’s Office of Investment, which administers the SBIC program. These are all important positions at SBA that should be filled as soon as possible. The 

Senate confirmation process takes a long time, and without any 

new appointments by the President, this process will be ongoing 

through the fall. We do not want to see programs in charge of regulating and overseeing billions of dollars lacking strong leadership. 

There are significant questions about how licensing and certain 

operational decisions will be made when there is no Administrator. 

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It is not clear who will be acting as Administrator when this position is vacated in August. 

Technology 

There are a number of major technological and information systems challenges that make it very difficult for SBA staff to administer the SBIC program effectively. We encourage a meaningful review and improvement in both the technological tools and the policies around them. 

One of the major problems for SBIC funds is the ability of the 

SBA to accept documents electronically. The SBA still requires 

SBICs to send hard copies for most documentation requests. The 

email system at SBA is unable to send or receive many documents. 

It is common that critical documents are delayed or lost in the mail 

room. The SBA needs to be able to communicate electronically. 

Further, it has been over a decade since laws were changed to require the acceptance of digital signatures, but the SBA requires 

paper copies, often with multiple copies. The SBA needs to modernize its documentation collection process to allow SBICs to communication and submit documents electronically. 

SBA has attempted to update some of their data collections into 

an electronic format. The SBICs applaud them for their efforts, but 

the execution can be improved. The new Form 468 electronic system was delayed in coming on line and has been taken down to fix 

bugs. Once the system is complete and functional, it will provide 

great efficiency to SBA and to SBIC funds, but we are not there 

yet. 

SBA staff have important regulatory duties and need the tools to 

perform those duties well. We would encourage the Committee to 

review the technical capabilities of the SBA and consider 

outsourcing operations or services that require technologies that 

SBA is not able to provide their employees themselves. 

Licensing Process 

The process of applying for a license and becoming a licensed 

SBIC varies from fund to fund. In our experience, the process took 

longer than we expected, but we had a change of personnel along 

the way so we understood and it was successful in the end. The 

SBA could be more transparent with applicants after the submission of the Management Assessment Questionnaire (MAQ). The 

time frame between the MAQ and licensing could be reduced if the 

SBA establishes a consistent work flow process that is transparent 

to the fund applying for a license. This workflow process could be 

improved by allowing information sharing and establishing consistent communication between the SBA and the fund. It would 

also benefit the fund if there was a structure in place to see the 

estimated time remaining to become licensed. 

Dodd-Frank 

The last section of my testimony focuses on the threat of double 

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Frank Act. While the statute provides a limited exemption from 

SEC registration for SBICs that ‘‘solely’’ advises one or more licensed Small Business Investment Company, clarification is needed 

to prevent cases of double regulation. 

The first issue involves ‘‘SBIC capital’’ counting towards the $150 

million threshold. If an adviser advises SBICs and any other private funds (and the total assets under management exceed the 

$150 million registration threshold), then the threshold for full registration is triggered. The SEC has taken the position that registration is triggered if an adviser to an SBIC has absolutely any capital 

in any non-SBIC, no matter how small. Therefore, many SBIC advisers are forced to register with the SEC in spite of the SBIC exemption. 

A second issue deals with fund managers that manage a licensed 

SBIC and a non-related Venture Capital fund. Both SBICs and 

Venture Capital Funds are excluded from SEC registration, but 

only if the manager ‘‘solely’’ manages these funds, and not another 

non-related fund. The SEC has taken the position that a manager 

of a Venture Capital Fund and an SBIC fund must register with 

the SEC if their assets under management exceeds $150 million. 

On their own they are exempt, but jointly they are captured in the 

regulatory regime. 

The third issue involves the regulation of SBICs by the states. 

There is no explicit language in the Dodd-Frank Act that excludes 

SBICs from state registration. Therefore, federally licensed and 

regulated SBIC funds must register with multiple states and territories. A technical correction is needed to remove this unintended 

double regulation, leaving SBICs fully regulated by their licensing 

and reporting entity, the SBA. SBICs would continue to be closely 

regulated by the SBA, as they have for 55 years. 

In closing I want to reiterate the success, the strength and my 

support of the SBIC program. The Agency is licensing qualified 

candidates through a stringent and thorough due diligence process 

which creates a high standard for licensees to meet before become 

licensed and having access to SBA leverage and thus becoming a 

valuable funding source to Small Business concerns and the economy at large. On behalf of all SBIC’s we applaud the efforts of the 

agency and its employees, while encouraging continued improvements and efficiencies as referenced herein that can streamline the 

process of licensing and the communication with its candidates and 

licensees, without lowering the important and high standard that 

had been set by the Agency to award an SBIC License. 

Thank you for giving me the chance to share both my experience 

and the perspective of the SBIC industry. Please see the accompanying letter below from SBIA President Brett Palmer. 

Steven Brown, President TCI and Managing General Partner 

Trinity Capital Fund II (TCF) 

Biography - Steve Brown brings 28 years of lending, investment 

and leasing experience to TCF. Prior to starting TCF, he was a 

General Partner with Point Financial Capital Partners, which 

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managed a Venture Leasing Fund and he led both originations and 

lease financing efforts for all early stage lease finance at Point. 

Prior to Point he served as the President and CFO of InvestLinc 

Financial Services, which was an early-stage Private Equity Fund 

Manager and Business Consulting Firm. Prior to InvestLinc, he 

was a partner in Cornerstone Equity Partners, a private equity 

fund manager, and was co-founder/manager of Cornerstone Fund I, 

a private equity fund based in Phoenix, Arizona. In addition, Steve 

has worked with private investment companies and banking institutions in both real estate and commercial lending and investment 

roles. He has served on the board of directors of numerous operating companies. Mr. Brown holds a B.S. degree from McNeese 

State University in Business Administration and Marketing. 

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Testimony of John J. Sherman 

Founder, Director and Former CEO, Inergy, L.P. 

Before the United States House of Representatives 

House Committee on Small Business 

July 25, 2013 

Good morning. My name is John Sherman and I am from Kansas 

City, Missouri, near the congressional district of full committee 

Chairman Sam Graves. I am an entrepreneur who has been fortunate enough to launch and successfully grow and develop two companies from scratch. I am here today because I have been asked to 

share with you my experience with the SBIC program while building Inergy, L.P., an energy infrastructure company. 

Three partners and I launched Inergy in 1998. We were seasoned 

professionals in the propane industry; and through our experience, 

we thought that we could build a successful enterprise in the sector. There were approximately 5,000 independent propane retailers 

across the U.S. Many of the owners of these businesses were at or 

nearing retirement age, often without family members prepared to 

take over the business. We believed we could build a scalable business. 

Our strategy was simple: 

• acquire local and regional propane operators with excellent 

customer service and safety records; 

• grow the business rapidly, both through acquisition and 

organic expansion; 

• access the public capital markets using a Master Limited 

Partnership (MLP structure) to ensure our ability to grow; and 

• ultimately diversify into the broader energy sector. 

We funded the start-up with $600,000 of our own money and 

raised $900,000 of equity from the seller of our original acquisition 

prospect. We went to several banks that turned us down for additional funds but eventually obtained an additional $4.5 million acquisition loan. The bank loan was with a local Kansas City bank, 

had strict covenants, and was personally guaranteed by us and our 

spouses. 

With a goal of ultimately going public, we recognized that we 

would need private equity to serve as a bridge to an eventual IPO. 

We also recognized that—in addition to gaining capital—we needed 

the expertise that comes with institutional capital and the business 

discipline that must go along with it. We were business operators, 

not financial professionals; and we recognized that we needed access to expertise to help us get to that next level. So we talked with 

a number of private equity and mezzanine financing firms. 

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We ultimately connected with an SBIC, Kansas City Equity Partners (KCEP); and on December 31, 1999, we signed an agreement 

with KCEP for Inergy’s first private equity investment, KCEP purchased a $2 million preferred interest in our fledgling company. 

It is important to point out that KCEP took the time to get to 

know us. They recognized that we had deep expertise in the propane industry, our business plan was solid, and the founders were 

at risk. Plus, KCEP was flexible as to our financial structure; and 

they were not asking for control, which was important to us. 

We used that initial $2 million investment to acquire a number 

of small, independent propane operations over the ensuing months. 

We also benefitted from the partnership with this SBIC as they 

helped us zero in on what it would take to access public capital 

markets. 

By January 2001, we had identified a significant potential transaction—Hoosier Propane located in Indiana—that would provide 

the critical mass necessary for us to take Inergy public. We secured 

bank financing and obtained $7.4 million in equity from the sellers. 

The sellers also carried back a $5 million loan, but that left a gap 

of $16.5 million. 

A group of private equity investors led by Kansas City Equity 

Partners purchased a $16.5 million preferred interest in Inergy as 

the anchor investment. All members of the group were qualified as 

Small Business Investment Companies (SBICs). The other SBICs 

included Mid States Capital, Invest America, Kansas Venture Partners, Rocky Mountain Capital, Diamond States Capital, and Southwest Partners. 

That $16.5 million was the key piece of capital that allowed us 

to make a strategic acquisition. Very shortly after we closed that 

transaction, we filed the paperwork for the IPO process. Just seven 

months later, in July 2001, Inergy went public. We continued to 

grow the company dramatically after that, completing more than 

75 retail propane acquisitions, becoming the third largest propane 

company in the country, and employing nearly 3,000 people. 

Over the years, we diversified Inergy into the midstream energy 

sector; and today the company is recognized as a major developer 

and operator of U.S. energy infrastructure including storage, pipelines, and logistics assets. In May, we announced a merger with 

Crestwood Midstream Partners, which will create a $7.5 billion 

midstream energy company that is extremely well positioned to leverage the growing importance of the emerging shale plays around 

the country. The combined company will continue to create even 

more jobs and invest large amounts of capital in energy infrastructure across the United States. 

We could not have done any of that without the initial investments we received from the SBICs. Although we have raised billions in capital over the years, no investment was more valuable 

to us than the SBIC capital we raised that allowed us to reach critical mass and take Inergy public. 

Thank you for the opportunity to share the Inergy story. 

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The U.S. Chamber of Commerce is the world’s largest business 

federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local 

chambers and industry associations. The Chamber is dedicated to 

promoting, protecting, and defending America’s free enterprise system. 

More than 96% of Chamber member companies have fewer than 

100 employees, and many of the nation’s largest companies are also 

active members. We are therefore cognizant not only of the challenges facing smaller businesses, but also those facing the business 

community at large. 

Besides representing a cross-section of the American business 

community with respect to the number of employees, major classifications of American business—e.g., manufacturing, retailing, services, construction, wholesalers, and finance—are represented. The 

Chamber has membership in all 50 states. 

The Chamber’s international reach is substantial as well. We believe that global interdependence provides opportunities, not 

threats. In addition to the American Chambers of Commerce 

abroad, an increasing number of our members engage in the export 

and import of both goods and services and have ongoing investment 

activities. The Chamber favors strengthened international competitiveness and opposes artificial U.S. and foreign barriers to international business. 

Positions on issues are developed by Chamber members serving 

on committees, subcommittees, councils, and task forces. Nearly 

1,900 businesspeople participate in this process. 

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Statement on 

‘‘Examining the Small Business Investment Company 

Program’’ 

Submitted to 

THE HOUSE COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND 

REGULATIONS 

on behalf of the 

U.S. CHAMBER OF COMMERCE 

By 

Philip Alexander, CEO of Brandmuscle 

Cleveland, Ohio 

July 25, 2013 

Chairman Schweikert, Ranking Member Clarke and distinguished members of the Subcommittee, thank you for inviting me 

to testify before you today on the Small Business Administration’s 

(SBA) Small Business Investment Company (SBIC) program and 

its impact on the ability of U.S. businesses and entrepreneurs to 

compete, innovate and create jobs. I commend your efforts in holding this important hearing to better understand the SBIC program 

and the critical role it has played in the success and growth of my 

business. 

I am Philip Alexander, President and CEO of Brandmuscle, a recently SBIC funded small business that is currently headquartered 

in Chicago, with offices in Cleveland, Austin and Los Angeles. I am 

here to speak with you today, not only as CEO of Brandmuscle, but 

also on behalf of the U.S. Chamber of Commerce. 

The U.S. Chamber of Commerce is the world’s largest business 

federation, representing the interests of more than three million 

businesses and organizations of every size, sector, and region. More 

than 96 percent of the Chamber’s members are small business with 

100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet, virtually all of the nation’s largest companies are also 

active members. Therefore, the Chamber is particularly cognizant 

of the problems of smaller businesses, as well as the issues facing 

the business community at large. 

I came to the United States over thirty years ago with little more 

than the determination to obtain a first class education. After obtaining an MBA degree at Case Western Reserve University, in 

Cleveland, Ohio, I pursued a career in marketing and quickly ascended to senior positions with national and international retailers, 

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serving as vice president of brand management for Pearle Vision 

as well as vice president of marketing for Western Auto, a subsidiary of Sears, Roebuck and Co. 

Although very successful within the corporate world, I always 

knew my entrepreneurial spirit would lead me to even greater opportunities should I strike out on my own. In 2000, I left the comfort and security of my company job and Brandmuscle was born. 

It was a solution to a common problem within the marketing industry that had challenged me for y ears; how do you roll out a national marketing campaign relevant to potential consumers within 

local markets and diverse communities? For a national company, 

building consistent brand equity across all markets is extremely 

important, yet many local perceptions influenced the purchasing 

decision. 

There are close similarities in politics that parallel this marketing dilemma. Former Speaker of the U.S. House Tip O’Neill 

coined the phrase, ‘‘All politics is local.’’ This axiom encapsulates 

the principle that your success is directly tied to your ability to understand and influence the issues of local constituents or communities. As you know only too clearly, attempting to communicate to 

the varying interests within a congressional district is a challenge, 

and trying to broaden a message and outreach nationally can be 

extremely daunting, especially when control of that message is distributed to many well-intentioned supporters throughout the country. 

Brandmuscle was launched as a powerful solution to unleash a 

company’s brand where the buying decisions are made—in the local 

marketplace. Our local marketing software enables companies to 

empower their network of local distributors, dealers, franchisees 

and salespeople with everything they need to deliver brand-approved marketing tactics customized to local needs, tastes and 

other relevant differences that can affect the sale. 

Today, Brandmuscle, has reinvested the local market place and 

evolved into a world class suite of marketing services and solutions. 

We are proud to have as clients some of the most well-known corporate Fortune 500 companies. Some of our current products and 

services include the following: 

1. BrandBuilder® allows a company to customize and execute local marketing campaigns with legally compliant advertising for virtually any type of media on our local marketing 

platform and ad builder. 

2. Design Tracker® allows a company to efficiently manage 

local marketing and in-house graphics activity. A large percentage of on-and-off premise marketing materials are designed and produced locally by distributors or branches. This 

business workflow typically has a lack of cost controls, minimal 

compliance with branding guidelines, and inferior production 

capability. 

3. Display TrackerTM a web-based solution that allows distributors to create customized Point-of-Sale (POS) materials at 

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nology to add personal messages and account names to POS 

material that is kitted for retailer distribution. This provides 

a dramatic reduction in per unit pricing of POS material to 

more closely assimilate long run print pricing. 

Since its launch, Brandmuscle has been honored to receive numerous awards in recognition of our involvement with the community and our business integrity: 

• 2012 Medical Mutual Pillar Share Award, Community 

Service 

• 2012 Crain’s Cleveland Business Leading EDGE Award, 

Entrepreneurs EDGE 

• 2011 Best Internship Program Award Finalist, Northeast 

Ohio Software Association 

• 2011 Richard Shatten Civic Distinction Award, Entrepreneurs EDGE 

• 2010 Weatherhead 100 Award, Council of Smaller Enterprises (COSE) 

• 2010 Crain’s Leading EDGE Award, Entrepreneurs EDGE 

• 2009 Crain’s Cleveland Business Leading EDGE Award, 

Entrepreneurs EDGE 

• 2002 Innovation in Business Award, Smart Business Network Magazine 

• 2002 Philip Alexander named ‘‘Visionary’’, 4th Annual 

SBN Innovation in Business Conference 

Today, Brandmuscle employs over 550 well-paid professionals in 

the United States, many of whom are still located in downtown 

Cleveland, Ohio, where the company was started. Given 

Brandmuscle’s quick rise to success, it is easy to overlook important factors that brought the company to this level. Like many 

small business owners across the nation with a great idea and limited resources, ‘pulling yourself up by your own bootstraps’ is the 

primary way I began my journey to achieve the American dream. 

With limited resources and no staff, convincing my first corporate 

client to purchase services from my fledgling company required almost as much innovation and marketing skills as it did to develop 

the product. Even though it was a memorable event when the first 

dollar arrived, there was little time to celebrate. Delivering on your 

commitments during the early stages of business development requires hiring capable employees and developing internal procedures that exceed the client’s expectations. It takes extraordinary 

amounts of both human and financial capital to build a business. 

While I had confidence in my business and marketing expertise, acquiring enough resources to foster the accelerated growth needed 

to propel Brandmuscle to its current level of market dominance 

took an incredible amount of time and energy. 

There is one commonly misunderstood fact; for a fast-growing, 

job-generating company like Brandmuscle to thrive, many diverse 

avenues of funding are essential. Irrespective of a company’s profits, the inability to access a robust supply of external capital during 

critical times in the growth cycle can severely impact revenues, 

profit, jobs, and even the ability to survive. 

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For Brandmuscle, early stage funding came from savings and an 

early Angel. Not long afterwards, several successive infusions of 

‘‘venture funds’’ provided the foundation to drive revenue growth to 

a level that would support a payroll of approximately one-hundred 

and fifty jobs. Under that business debt/equity structure, 

Brandmuscle had reached a point in which the growth rate could 

only comfortably add another three or four jobs a year. We had not 

yet reached our full potential; our existing capital structure would 

limit our progress. 

While ‘‘angel’’ and ‘‘venture capital’’ funding had served the purpose in filling the gap between start-up financing and our current 

level of market maturity, different funding sources were needed to 

cash-out original investors and reposition us for further expansion. 

Brandmuscle was too small and did not have the resources to go 

public. Additional liquidity through venture capital funding from 

additional private equity placement was an expensive way to recapitalize, given our proven history of success. And we needed to 

do more than just recapitalize to grow—we needed additional capital, products and people. 

Commercial bank debt financing is typically not available to companies with the level of investment risk required that Brandmuscle 

had in 2012. Since most of our assets were intangible property, 

convincing banks to lend based on collateralizing those assets, was 

not practical. 

The SBAs SBIC program was unique in its ability to provide 

Brandmuscle with the resources for our next phase of innovation 

and aggressive growth within the distributed marketing landscape. 

This federal government program, which has zero cost to the taxpayers, allows for a SBIC fund manager to leverage up to twice the 

amount of their private capital in order to provide a company like 

Brandmuscle cost-effective, mezzanine debt financing in order to 

recapitalize and position us to foster more job growth. 

In February of 2012, The Riverside Company, equipped with assets from their recently SBIC backed Riverside Micro-Cap Fund II, 

signed a purchase agreement to fully acquire Brandmuscle through 

a mezzanine debt restructuring arrangement. Brandmuscle had instant access to the extraordinary managerial talents and financial 

backing of the Riverside team, a well-respected leader in PE management. 

Riverside’s SBIC fund provided financial backing for the acquisition and merger of several other companies within their portfolio 

family providing us added opportunities. Brandmuscle was immediately able to integrate with Riverside’s platform Centiv Services, 

a Chicago Illinois-based provider of marketing automation technology and digital print fulfillment services and TradeOne Marketing, an Austin, Texas-based trade promotion management company, to build out our distributed marketing platform. As a result 

of Riversides funding and counsel, in just over a year, 

Brandmuscle’s newly acquired market strength and vertical alignment had dramatically increased income and earnings. This was 

not done at the expense of cutting jobs; we not only sustained our 

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combined level of employment, but created an additional forty-two 

jobs. 

The Riverside Company is one of the largest and oldest global 

private equity firms in the nation with over $3.5 billion in assets 

under management. With more than twenty-five years in business, 

they have completed over three-hundred acquisitions and have over 

two-hundred people worldwide. It was welcome news when 

Brandmuscle was able to obtain the cost-effective, capital needed to 

make it to the next level. Just as important as the funding, was 

Riverside’s commitment to nurture Brandmuscle with the goal of 

building it into a more effective enterprise through time-tested 

management techniques, organic growth and add-on acquisitions. 

Chairman Schweikert and Ranking Member Clarke, without the 

SBAs SBIC program, a company with the talent and resources of 

Riverside would unlikely seen value in engaging with an enterprise 

the size of Brandmuscle. Their SBIC baked Micro-Cap funds represents only a fraction of their massive portfolio. I am convinced 

that it was the incentives that were afforded to Riverside by the 

SBIC program which made us an attractive candidate for their consideration. 

In conclusion, from the day that I conceived the idea of 

Brandmuscle, to the present, obtaining sufficient capital has always been a challenge. I know firsthand that in order for a company to successfully grow, expand and create jobs, it requires the 

right type of capital at the right time. Seed money, start-up capital 

and different stages of growth capital all come at different costs, 

maturities and expectations. All sources of capital play a distinct 

and vital role in bringing a company to the next level as a business 

progresses through its life-cycle. 

At no expense to the taxpayer, the SBAs SBIC program fills a 

void by providing access to capital, especially mezzanine structured 

debt, for fueling the growth of small businesses where alternative 

funding is not available in the private sector. On behalf of the U.S. 

Chamber of Commerce’s small business membership, and myself, I 

strongly recommend that you retain, enhance and strengthen this 

critical source of capital for small businesses. To that end, I urge 

you to pass the bi-partisan bill, H.R. 1106, the ‘Small Business Investment Company Modernization Act of 2013’ into law. 

I thank you for inviting me to testify and look forward to answering any questions. 

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1See John Haltiwanger, Ron Jarmin and Javier Miranda (2010) ‘‘Who Creates Jobs? Small 

vs. Large vs. Young,’’ NBER Working Paper 16300, or Ronnie Chatterji ‘‘Why Washington Has 

it Wrong on Small Business,’’ Wall Street Journal, November 12, 2012. 2 Alicia Robb and David T. Robinson (2013) ‘‘The Capital Structure Decisions of Startup 

Firms,’’ Review of Financial Studies. 3See also Alan Berger and Greg Udell (1998) ‘‘The Economics of Small Business Finance: The 

Roles of Private Equity and Debt Markets in the Financial Growth Cycle,’’ Journal of Banking 

and Finance 22:613–73. 4 Evidence connecting home equity to startup activity can be found in Manuel Adelino, Antoinette Schoar and Felipe Severino (2013) ‘‘Housing Prices, Collateral and Self-Employment,’’ 

working paper, Duke University. 

Congressional Testimony of Professor David T. Robinson, PhD 

before the Committee on Small Business Subcommittee o n Investigations, Oversight and Regulations 

Ladies and Gentlemen of the Committee: Thank you for the 

opportunity to testify before you today. Spurring startup activity in 

the US is central for promoting economic growth more broadly and 

I am grateful for the opportunity to speak before you on this important topic. 

Although economic policy in the United States tends to focus on 

small businesses, the best available economic data indicate that 

young businesses, not small ones, are responsible for the lion’s 

share of economic growth in our country.1 The confusion is understandable: almost all young businesses are by their very nature 

small, but most small businesses are not young. While small businesses are undoubtedly an essential part of the fabric of American 

life, most are not important engines of job creation. (If they were, 

they would not continue to stay small.) Young businesses are a different story: most fail, but the ones that succeed create jobs and 

increase our country’s economic dynamism. 

In this regard, the early-stage SBIC initiative is laudable both in 

terms of its objective and in terms of its creativity. I would like, 

however, to draw your attention to three facts about early stage 

business activity that, taken together, should temper our expectations of policies that attempt to stimulate early-stage business activity by extending leverage to equity investors in this market. 

First, my work with Alicia Robb of the Kauffman Foundation 

shows that debt, not equity, is the primary source of capital for 

new businesses.2 While we have long understood that credit markets were important for small business, it is surprising that NEW 

businesses rely so heavily on the banking sector for access to capital.3 This is true for a wide range of startups: even high-tech, Venture Capital-backed firms rely heavily on access to bank debt 

through credit lines, personal and business bank loans. 

Because home equity is such an important source of collateral for 

most individuals at the prime age for starting new businesses, this 

means that the collapse of the housing market was as much a crisis in entrepreneurship as it was a crisis for the banking system.4

The second fact is that early stage investing is extremely risky. 

Failure occurs often. Successes are rare, but are highly rewarded. 

For every Goggle or Apple, there are thousands of bad ideas that 

never make it out of the inventor’s garage. There is an understandable need to create curbs inhibiting excessive risk-taking and disSBREP-219 with DISTILLER

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couraging bad investment performance, such as the provisions that 

are included in the early-stage SBIC guidelines. We must nevertheless be aware of the fact that these provisions are likely to discourage some of the most desirable investments from being undertaken: 

these are the speculative investments that are sometimes associated with the most disruptive technological innovations. 

The third fact that bears consideration is that the gestation periods for many early stage investments are prohibitively lengthy for 

many investors. Increasing the flow of capital into the sector will 

not change the waiting time between the first investment and the 

acquisition or IPO that will provide the return to the early-stage 

investor. The primary remedy here is increased liquidity in laterstage investment markets. Some of the most interesting features of 

the JOBS Act passed last spring are those features that stimulate 

the development of intermediate liquidity opportunities for early 

stage investors. 

These three facts conspire to make your job a difficult one. To 

put it simply, we are swimming against the current when we attempt to stimulate early stage investment activity by leveraging 

existing equity in the sector. 

Given these facts, what is the underlying economic mechanism 

that will likely be responsible for the successes that we do see? 

In my view, it is this: 

Investors without sufficiently deep pockets are often discouraged 

from making speculative early-stage investments because they are 

worried that their early investments will become diluted by laterstage investors. It’s not that they need capital to make more investments now; they need more capital later to be used when followon investments occur. In my view, the key to this program’s success 

will lie in its ability to amplify the amount of ‘‘dry powder’’ that 

early stage investors have on hand to participate in later-stage 

funding rounds as successful investments grow to fruition. Giving 

early-stage investors the confidence that they will have access to 

sufficient capital to take their investments across the finish line 

will be the hallmark of this program’s success. 

Thank you. 

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House Committee on Small Business 

Subcommittee on Investigations, Oversight and Regulations 

Hearing July 25, 2013 

‘‘Examining the Small Business Investment Company 

Program’’ 

Questions for the Record 

Question: During your testimony, you mentioned that a Standard 

Operating Procedure (SOP) which looks at alternative ways of licensing applicants is currently in the agency’s clearance process. 

This SOP is considered an interpretive regulation of a broader regulation, and as such, is covered under the agency’s responsibility 

to perform a retrospective review pursuant to Executive Order 

(E.O.) 13563. Did SBA comply with E.O. 13563 and reach out to 

the small business community in its review of the licensing process? If so, what feedback did the agency receive? If not, why wasn’t 

this process followed? 

SBA Response 

SOP 10 04 provides internal guidance to personnel engaged in 

the processing of SBIC license applications to ensure that those 

processes are consistent with statutory and regulatory requirements. The draft SOP 10 04 is the result of an ongoing effort by 

SBA’s Office of Investment and Innovation (OII) to improve SBIC 

licensing procedures. It memorializes OII’s streamlined processes 

and reflects current operational practices as well as input received 

over the past several years. 

In compliance with Executive Order (E.O.) 13563, since FY 2009, 

OII has reviewed industry best practices and worked with applicants and stakeholders to identify improvements to our licensing 

procedures. The SBIC industry provided valuable feedback regarding processing times, ‘‘green light letter’’ expiration, and electronicbased licensing. As a result, we have decreased average licensing 

times by 54 percent and extended the green light letter expiration 

period from 12 to 18 months. As I indicated at the hearing, OII is 

actively pursuing technological improvements for SBIC reporting 

as well as its other processes, subject to budget constraints. It is 

important to note that SOP 10 04 will not preclude the adoption 

of technology as it becomes available. 

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U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND 

REGULATIONS 

HEARING: 

EXAMINING THE SMALL BUSINESS INVESTMENT 

COMPANY PROGRAM 

TESTIMONY: 

JOSE E. FERNANDEZ-BJERG 

CHAIRMAN AND CEO, OMEGA OVERSEAS INVESTMENT 

CORP. 

JULY 25, 2013 

Dear Chairman Schweikert, Ranking Member Clarke and subcommittee members, thank you for allowing me to provide testimony on the Small Business Administration’s Small Business Investment Company Program (‘‘SBIC’’), particularly on whether the 

SBIC program is meeting the capital needs of small business owners. 

My name is Jose ́ Enrique Ferna ́ndez-Bjerg. I am the Chief Executive Officer of Omega Overseas Investment Corp., a private international banking institution. I am also a member of the Board of 

Directors of the Government Development Bank for the Commonwealth of Puerto Rico, and have served as a member of the Board 

of Directors of the Federal Home Loan Bank of New York. 

During my 40-year career in banking and finance, I have been 

involved in thousands of financial transactions, including managing 

the operations of Prudential Bache, Paribas, AG Becker and Drexel 

Burnham Lambert. From 1988 to 2004, I led Oriental Bank & 

Trust which evolved into Oriental Financial Group (NYSE: OFG), 

a firm that manages over $10 billion in assets; currently the second 

largest local bank in Puerto Rico. In 2005, I founded Omega as the 

first multi-sector institutional investment firm on the island. Omega’s largest asset class is private equity and our international firm 

manages investments in the United States and over 50 countries. 

My 25 years of private equity experience includes my participation, 

since 1994, as a member of the Investment Committee of the University of Notre Dame. As a Trustee of the University, we oversee 

$8 billion of assets under management and over $2.5 billion in private equity holdings. The portfolio we have managed has been 

ranked among the top 10-performing portfolios in the country for 

the last two decades. 

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1See SBIC Annual Report, Fiscal Year 2012, page 17. 

2Please note that this dramatic drop might be partially explained by the number of participating securities SBICs. 

I testify before this honorable subcommittee today to 

share my concern for the state of the investment ecosystem 

in several Low and Moderate Income jurisdictions of the 

United States, which lack adequate access to capital vehicles for small business owners. I would also like to share 

recommendations on how that ecosystem could be improved. 

Background on SBICs in Low and Moderate Income markets 

As stated by the SBA, the SBIC mission statement is ‘‘...to improve and stimulate the national economy and small businesses by 

stimulating and supplementing the flow of private equity 

capital and long term loan funds for the sound financing, growth, 

expansion and modernization of small business operations while insuring the maximum participation of private financing sources.’’ 

The SBIC has historically being instrumental in achieving that 

mission. Nonetheless, that mission has been concentrated in certain parts of the Nation, such as New York, California, Chicago 

and Massachusetts 1, while other parts of the country still face immense shortages of private equity capital. For instance, while 

the number of SBIC licenses has increased slightly (from 

299 in 2011 to 301 in 2012), during that same period businesses located in Low and Moderate Income areas financed 

by SBICs has dropped by over 38% (from 321 in 2011 to 216 

in 2012) 2. 

While the causes for such a discrepancy may be multiple, it 

seems indisputable that the current licensees are not focusing on 

growing their portfolio of investments in Low and Moderate Income 

markets. That fact exacerbates and perpetuates a vicious cycle by 

which small businesses located in Low and Moderate Income markets are not able to grow due to limited capital options, and therefore stay at a size below their potential, or in the more unfortunate 

cases, fail when they lack capital to expand and compete with better financed competitors. That is precisely the type of system failure that a program such as the SBIC is intended to address, and 

that we hope it can remedy. 

This testimony will summarize our analysis of the SBIC program’s current limitations. The conclusion of our yearlong study is 

that investors in many Low and Moderate Income regions 

have little chance of receiving an SBIC license under the 

current program structure. However, we believe that there is 

an opportunity to correct this imbalance and implement program 

changes that can have a dramatic impact on the economic development of economically disadvantaged zones. 

Evolution of the Private Equity Ecosystem & the SBIC 

Program 

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3 Ibid., page 19. 

4SBA’s Memorandum on ‘‘Start-Up America Impact Investment SBIC Initiative Policy Update’’ Dated September 26, 2012. https://docs.google.com/viewer?url=http://www.sba.gov/sites/default/files/files/External%25201mpact%2520Memo%25202012-09-26%2520final.pdf 

During the 70’s the United States pioneered the private equity 

industry, with its geographic concentration near major financial 

centers or technological centers. In these regions the evolution of 

the private ecosystems is usually world class and self-funded from 

private sources. Thanks to the SBIC program, in the 90’s the private equity industry was able to expand to less-developed surrounding cities/states, and the SBIC program provided much needed capital to the next generation of fund managers. 

By the turn of the century the SBIC program continued to evolve 

and began to implement more professional private equity industry 

practices, which began to outpace the economic development of disadvantage zones. At a recent SBIC conference we heard from a successful fund manager that under the new regulations ‘‘I would have 

never received the license that I was awarded in 1999.’’ 

The most recent financial crisis caused the SBIC to increase restrictions based on private equity performance best practices. While 

necessary, the unintended consequence of those new restrictions 

was that it is not almost impossible to find a universe of managers 

that fit the SBIC licensing specifications in many Low and Moderate Income markets. 

Our task force has met with SBIC experts in Washington DC to 

discuss this issue. They concur with our conclusion that obtaining 

a license in Low and Moderate Income markets that lack a PE ecosystem is extremely difficult. The key reason is that Low and Moderate Income regions do not have developed private equity industries or professionals with enough direct experience to qualify for 

a license. 

SBA’s Actions to address capital shortages in Low and 

Moderate Income markets 

The SBA recognizes that small businesses in Low and Moderate 

Income markets suffer from inadequate access to capital, and has 

taken recent steps towards remedying that deficiency. In particular, as part of the Start-up America initiative, the SBA created 

the Impact Investment SBIC program (hereinafter, the ‘‘Impact 

Program’’), for the purpose of providing access to capital to small 

businesses located in rural areas or employing residents of Low 

and Moderate Income or economically distressed areas. 

Based on the most recent Annual Report from the Office of Investments 3 only two Impact licenses had been issued. While part 

of the limited number of Impact licensees may be due to its relatively recent creation, we have analyzed its requirements and believe the way the licensing process is been implemented may be 

putting insurmountable obstacles to its long-term success. For instance, per the SBA, ‘‘Impact Investment SBIC applicants must 

submit the same documents, follow the same process, and meet the 

same high standards as any applicant to the SBIC program’’ 4 In 

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5SBIC pre-screening instructions: http://www.sba.gov/content/pre-screening-instructions 

6 Ibid. 

fact, based on our analysis of the application process, the Impact 

License has very few advantages over the regular license, while it 

imposes more restrictions. Paraphrasing a senior SBA manager, 

applying for an Impact License ‘‘may save you a couple of months 

in the evaluation process, but it won’t be evaluated any differently 

than a regular license’’. 

SOP limitations to an expanded Impact License Program 

For an applicant in a LMI area, some SBA requirements make 

the approval of an SBIC license quite difficult. For instance, the 

track record requirement, as stated by the SBIC program, includes 

the following: 

• ‘‘The track record contains investments that are analogous 

to the types of investments that are proposed for the SBIC 

with regard to size, stage, structure, sector, or any other key 

variables. 

• The track record contains a meaningful number of 

full, positive realizations that have been achieved within the past ten years. 

• The overall performance of the track record is strong on an 

absolute and relative basis across multiple investment cycles. (Emphasis added.)’’ 5

If there is no, or a very limited, PE ecosystem in a LMI market, 

meeting those requirements of a ten year record, and multiple investment cycles becomes quite difficult. In addition to track record, 

SBA considers the broader qualifications of the applicant’s fund 

management team, including: 

• ‘‘At least two team members have track records that meet 

the requirements discussed above. 

• The team members have a history of working together 

and form a cohesive unit. (Emphasis added.)’’ 6

While in New York City, San Francisco or Boston, there is a 

much higher probability of applying as a team that has a history 

of working together, in LMI markets where deals are few and far 

apart, that requirement could be very difficult to attain. In essence, 

LMI markets are in the proverbial chicken-and-egg situation, since 

there are very few PE firms with a long history, and track record 

working together, the ability to benefit from programs such as the 

Impact SBIC is quite limited. But it is precisely programs such as 

the Impact SBIC that could allow for those funds to be created and 

flourish. 

Finally, I would like to bring to your attention the role of the 

banking industry in LMI regions like Puerto Rico. Puerto Rico’s 

local banks also have to meet the FDIC’s community reinvestment 

regulations (CRA). In larger markets banks work and invest in 

SBIC funds, which in turn help them comply with CRA requirements. Unfortunately, in Puerto Rico and other LMI areas banks 

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meet their CRA requirements through basic mortgage lending and 

thus feel no need to work, invest, or establish SBIC funds. 

Recommendations 

Our task force respectfully recommends four courses of action to 

address the imbalance in disadvantaged regions: 

1) Conduct an investigation on the reasons why the SBIC licensing process has not been as successful in economically disadvantage zones. The analysis should have a specific focus on 

understanding zones that lack a private equity ecosystem. The 

report should provide solutions to correct this imbalance and 

promote small businesses and private equity fund market development. 

2) Conduct a thorough review of the SOP, with the intent of 

easing certain SBIC Impact License requirements in economically underdeveloped regions, including: 

a. Ease the need to demonstrate a significant and prolonged track record in LMIs where the existing PE ecosystem is fairly underdeveloped. 

b. Ease the team requirements to allow partnerships to 

be created, even if they might not have worked directly in 

the past 

3) Promote the creation of more SBICs in LMI areas by: 

a. Assigning a portion of the Impact allocation, possibly 

via an RFP, to fund SBICs in selected underserved regions 

within the next 18 months. 

b. Establishing a mentoring system for SBIC Impact License applicants, including training and education programs, which would allow for the creation of SBICs in underserved regions within the next 18 months. 

4) The SBA should work with the FDIC to promote that local 

banks in places like Puerto Rico and other LMI areas invest 

in SBIC funds, by revising the CRA requirements in a way 

that would provide incentives to go beyond their current practice of solely investing in mortgages to comply. 

Conclusion 

While the creation of the SBIC Impact License is a step in the 

right direction, we respectfully suggest that its licensing process be 

modified to allow for the development of investment ecosystems in 

areas that have not benefitted from adequate access to capital. Certainly, these modifications should be developed while safeguarding 

the resources of the agency and of taxpayers. Nevertheless, we are 

confident that the current Impact License requirements could be 

eased to allow for the creation of new and successful SBICs with 

safeguards that are better suited to markets with limited PE ecosystems. 

Thank you very much. 

Æ 

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