Small Business Investment Companies: Characteristics and Investment Performance of Single and Multiple Licensees
Published: 2016-01-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Under the SBIC program, SBA licenses privately owned and managed investment funds that provide capital to small businesses. SBICs use their own capital plus funds (known as leverage) that are borrowed at favorable rates because SBA guarantees the loan obligation, which is known as a debenture. Holders of SBIC licenses can manage a single SBIC (“single licensee”) or two or more SBICs (“multiple licensee”).
This report examines (1) the characteristics of single- and multiple-license SBICs, (2) the investment performance of single versus multiple licensees and the attributes of the small businesses in which they invest, and (3) the SBIC program's overall financial performance and the extent to which SBA manages program risk. GAO analyzed SBA data (generally covering from 2005-2014), policies, processes, and procedures and interviewed SBA staff, SBIC fund managers, and industry stakeholders, who were selected to represent a mix of SBIC characteristics and based on suggestions by various stakeholders.
section_title: What GAO Found
paragraphs: Small Business Investment Companies (SBIC) managed by entities holding multiple licenses controlled most Small Business Administration (SBA) leverage and shared similar characteristics with entities holding a single license. At the end of fiscal year 2014, multiple licensees controlled $5.2 billion of the $7 billion (about 74 percent) in outstanding debenture SBA leverage, compared to 2005, when they controlled 24 percent (see figure, left). SBIC characteristics, including geographic distribution and management demographics, were largely similar for single and multiple licensees.
Multiple licensees have demonstrated better aggregate investment performance than single licensees, although the investments have similar attributes. For example, from 2005 to 2014, 6 percent of multiple-license debenture SBICs were put into liquidation (typically because of excessive losses), compared with 39 percent of single-license SBICs (see figure, right). Both types of licensees invested in a roughly similar range of industries and geographic areas. Multiple-license SBICs were slightly more likely to invest in smaller enterprises or in low- or moderate-income areas. However, data on minority, women, and veteran ownership of SBIC investments are unreliable, in part because SBA does not provide guidance to SBIC licensees on how to collect and report this information. Providing such guidance would help improve the quality, consistency, and value of these data, which would help inform SBA's strategic priority of providing financial capital for underserved small businesses.
The SBIC program's financial performance has been relatively stable in recent years, although the degree to which program performance can be attributed to SBA oversight is unclear. For instance, most losses from 2003 to 2014 were incurred from SBICs remaining in the participating securities program (where SBA held an equity interest in SBICs), for which SBA stopped issuing new licenses in 2004 due to losses. The SBIC program's risk management mechanisms include the application and licensing processes, which are largely the same for single and multiple licensees, and requirements for private capital fundraising. SBA monitors SBICs through risk assessments of their financial condition; examinations assessing regulatory compliance; and, as necessary, liquidation to recover financial assets. The effect of SBA oversight on financial performance is difficult to measure, however, because it cannot easily be isolated from other internal and external factors, such as economic conditions.
section_title: What GAO Recommends
paragraphs: GAO recommends that SBA provide guidance to SBIC licensees on how to collect and report data on their investments in minority-, women-, and veteran-owned businesses. SBA neither agreed nor disagreed with this recommendation.

section_title: Letter
paragraphs: The Small Business Investment Company (SBIC) program provides  financial assistance to privately owned investment firms that make equity  and debt investments in small businesses. An entity can have a license  from the Small Business Administration (SBA), which administers the  program, to own or operate a single SBIC, or it may have two or more  SBIC licenses. SBA typically provides funds, known as leverage, in the  amount of $2 for every $1 an SBIC has raised in private capital, up to a  maximum of $150 million for a single licensee and $350 million for a  multiple licensee. Collectively, SBICs held approximately $7.7 billion of  SBA leverage as of September 30, 2014.
You asked us to review aspects of the SBIC program. This report  examines the (1) characteristics of multiple-license SBICs compared with  single-license SBICs; (2) investment performance of multiple licensees  compared with single licensees and the attributes of the small businesses  in which they invest; and (3) overall financial performance of the SBIC  program and the extent to which SBA manages the risk associated with  the program.
To address the first two objectives, we collected and analyzed data from  SBA on the number of SBICs, the amount of leverage extended to them,  and the characteristics of the licensees. We also collected and analyzed  measures of investment performance, such as loss rates, for single and  multiple licensees, and reviewed attributes of their investments that  included geographic distribution, industry sector, and extent of  investments in smaller enterprises. In most cases, our analysis covered  2005 through 2014 because 2005 was the year in which SBA began  collecting data in a manner that allowed the performance of multiple  versus single licensees to be isolated. Our analysis of the geographic  distribution of SBIC investments covered October 1989 to June 2014  because that is the time frame of the data provided to us by SBA. In  addition, we reviewed data collected by SBA on the minority, women, and  veteran ownership of the small businesses in which SBICs invest.
To address the third objective, we reviewed and analyzed SBA data on  SBIC program performance, including financial losses and credit subsidy  rates, for fiscal years 1992 through 2014. To assess the reliability of the  SBA data, we performed electronic testing for obvious errors in accuracy  and completeness and discussed data collection procedures with SBA  staff. We determined these data were sufficiently reliable for the purpose  of this report, with the exception of data on minority, women, and veteran  ownership of SBIC investments, as discussed later in the report. We also  reviewed SBA’s policies, processes, and procedures, including the  program’s application and approval process, examination procedures,  oversight and audit practices, and financial reporting requirements. In  addition, to address all the objectives, we interviewed a nongeneralizable  sample of SBA staff, SBIC fund managers, other industry representatives,  and an academic researcher. We selected the SBIC fund managers who  we interviewed to represent a mix of multiple- and single-license SBICs,  geographic locations, size of investments, and industries, among other  criteria. We selected the academic researcher to interview based on a  suggestion by the Small Business Investor Alliance and because his work  was cited in documents we reviewed. See appendix I for a detailed  discussion of our scope and methodology.
We conducted this performance audit from July 2014 to January 2016, in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The Small Business Investment Act of 1958, as amended, created the  SBIC program to facilitate the flow of capital to small businesses and  stimulate the economy. Under the program, which is operated by SBA’s  Office of Investment and Innovation, SBA does not make direct  investments in small businesses but partners with privately owned and  managed SBICs that provide financing to qualifying small businesses.  This financing consists of private capital that the SBIC has raised and  SBA’s financial assistance through the SBIC program. SBICs are able to  borrow at favorable rates because SBA guarantees the loan obligations  (known as debentures) that SBICs make. When an SBIC is ready to  make an investment, in addition to using private capital, it may draw down  on SBA’s leverage by issuing a debenture with a repayment schedule for  principal and interest. SBICs also may use their leverage and private  capital to pay for operating expenses.
Entities applying for an SBIC license must raise the needed capital for an  investment fund. The fund develops its own strategy for making  investments in small businesses, offering loans, purchasing equity, or  both. Generally, applicants must raise a minimum of $5 million of private  capital to establish an SBIC. As seen in figure 1, SBA typically provides  $2 of government-guaranteed leverage for every $1 of private capital an  SBIC has raised from private investors. These investors can include  university endowments, insurance companies, banks, high-net-worth  individuals, and pension funds.
Holders of SBIC licenses may own or operate a single SBIC or multiple  SBICs (sometimes referred to as multiple licenses under common  control). An SBIC can be organized as a corporation, limited partnership,  or limited liability company. Most SBICs are owned by relatively small  groups of local investors, although some are wholly or partially owned by  commercial banks. A few SBICs are corporations with publicly traded  stock. SBICs can invest in small businesses with tangible net worth not in  excess of $19.5 million and with an average of not more than $6.5 million  in net worth after federal tax income over the previous 2 fiscal years at  the time of investment.
In fiscal year 2014, SBA committed to guarantee $2.55 billion in SBIC  small business investments. The Consolidated Appropriations Act, 2014,  increased the annual amount that SBA was authorized to provide to  SBICs from $3 billion to $4 billion. However, according to SBA, the SBIC  program operates on a “zero-subsidy” basis at no cost to taxpayers, and  requires no annual appropriations from Congress. To recoup expenses  from any defaults and keep the program at zero subsidy, SBA charges  SBICs various fees. These include a 1 percent fee on the leverage  commitment, a 2 percent fee when drawing against this leverage  commitment, and an annual charge against the outstanding leverage  balance. By statute, the annual charge may not exceed 1.38 percent, and  historically it has never exceeded 1 percent, according to SBA. In  addition, SBA is allowed by statute to charge licensing and examination  fees to recoup administrative costs associated with these activities.  Overall, the SBIC program’s administrative expenses as a share of the  SBA leverage (including commitments) declined from 0.24 percent in  1999 to 0.16 percent in 2013, according to SBA, which noted that the  program has grown in recent years without a corresponding increase in  administrative resources.
Currently, there are three types of debenture SBIC licenses. The  Standard Debenture License has a broad investment mandate with few  restrictions on an SBIC’s strategy or capital allocation. The Impact  Investment License requires that at least 50 percent of the fund’s invested  capital be deployed into investments that have a social, environmental, or  economic impact. The Early Stage SBIC license is designed to attract  investment fund managers with experience supporting companies in the  earliest stages of growth.
In addition to the debenture program, the participating securities program,  which started in 1994, helped fund SBICs through the issuance of  preferred equity interests, called participating securities. On October 1,  2004, SBA stopped issuing new commitments because, according to the  agency, the program experienced significant losses due to flaws in the  participating securities instrument that were magnified as investments in  technology startup and early stage small businesses lost much of their  value in the early 2000s. According to SBA, the profit participation and  fees paid for participating securities leverage were no longer sufficient to  cover the projected net losses, and Congress did not appropriate any  additional funds for the program. SBA continued to honor its existing  commitments to the remaining participants as of 2016.
section_title: Multiple Licensees Controlled Most SBA Leverage and Shared Similar Characteristics with Single Licensees
subsections: section_title: Multiple Licensees Controlled Most SBICs and SBA Leverage in 2014
paragraphs: About seventy percent (130 of 187) of debenture SBICs—the most  common SBIC fund type—were managed by 69 multiple licensees in  2014, according to our analysis. The other 57 debenture SBICs were  managed by single licensees (see fig. 2). The proportion of debenture  SBICs managed by multiple licensees has sharply increased, rising from  about 20 percent in 2005 to about 70 percent in 2014. At the same time,  the number of single-license debenture SBICs generally decreased.
Although the number of debenture SBICs grew from 2005 through 2014,  the number of SBICs overall—including participating securities SBICs,  specialized SBICs, bank-owned SBICs, and nonleveraged SBICs— declined during that time frame (see fig. 3). This decrease was  commensurate with the declining number of participating securities  SBICs, the majority of which were managed by single licensees. SBA  stopped issuing new commitments for participating securities after 2004,  as noted earlier, and in each year since then several participating  securities SBICs left the program.
Nearly three-quarters of multiple-license SBICs in operation in 2014 were  debenture SBICs, compared with just under 50 percent of single-license  SBICs (see table 1).
For all SBIC fund types, the amount of SBA leverage held by multiple  licensees increased every year from 2005 to 2014 but generally fell for  single licensees (see fig. 4). This decline was commensurate with the  phasing out of the participating securities program. In 2014, multiple  licensees controlled nearly three-quarters of the leverage issued by  SBA—multiple-license SBICs held more than $5.6 billion in leverage and  single-license SBICs held more than $2.1 billion.
For debenture SBICs specifically, multiple licensees also increased their  share of total SBA leverage during 2005–2014 (see fig. 5). These SBICs  held about 24 percent of SBA leverage in 2005, but about 74 percent of  the approximately $7 billion in SBA leverage in 2014.
section_title: Few Multiple Licensees Used Allowable Maximum Leverage
paragraphs: During the period from 2009 to 2014, the maximum amount of SBA  leverage available to multiple licensees was $225 million, but few multiple  licensees used, or approached, that amount. Our analysis of SBA data  found that from 2009 to 2014, no more than 2.8 percent of multiple  licensees reached the then-applicable $225 million leverage limit— including leverage drawn and SBA commitments—in any year.  Moreover, few multiple licensees had come close to reaching the  maximum amount in that period—for example, no more than 5.7 percent  of multiple-license SBICs drew (or had commitments to draw) more than  85 percent of the leverage limit during this time frame. From 2005 to  2008, when the leverage limit for multiple licensees ranged from $124.4  million to $137.1 million, no more than 3.2 percent of multiple-license  SBICs appeared to have reached the leverage limit (including  commitments). The Small Business Investor Alliance and some SBIC  fund managers told us they believed the leverage limit nonetheless has a  significant effect because it deters some SBIC managers who want to  substantially grow their fund over the long-term from continuing to  participate in the program.
section_title: Single and Multiple Licensees Had Largely Similar Characteristics
paragraphs: SBIC characteristics, including geographic distribution and management  demographics, were largely similar for single and multiple licensees,  according to our analysis. For example, although there were some  differences in their concentrations among states, the extent of geographic  distribution of multiple- and single-license debenture SBICs was roughly  similar in 2014. Both types of SBICs were concentrated in several states  in 2014 (see fig. 6), with the single-license debenture SBICs significantly  more heavily concentrated in New York. Multiple-license debenture  SBICs were located in more states (27) overall than single-license  debenture SBICs (19) in 2014. Within states, both multiple- and single- license SBICs showed some concentrations in certain cities and regions  in 2014—particularly New York City, Chicago, San Francisco, and the  Silicon Valley area.
SBA does not routinely collect information on the number of minority or  female SBIC managers or those SBICs located in low- or moderate- income areas, but at our request, the agency asked its operations  analysts—who are responsible for overseeing and supporting a portfolio  of SBICs—to provide estimates of these numbers for SBICs in their  purview. SBA officials told us that because this was an informal survey,  they could not make any representation about the completeness or  accuracy of the information. Although the data have limitations, the  survey showed the following characteristics among the 290 SBICs in  operation as of July 2014:
Minority SBIC managers. An estimated 10 percent or less of both  multiple-license and single-license SBICs had at least one minority  SBIC manager who was American Indian or Alaska Native, Asian,  Black or African American, Hispanic or Latino, or Native Hawaiian or  other Pacific Islander.
Female SBIC managers. About 6 percent of multiple-license SBICs  and 11 percent of single-license SBICs were estimated to have at  least one female SBIC manager.
SBICs in low- or moderate-income areas. Slightly more than 12  percent of both multiple- and single-license SBICs were estimated to  be located in such areas.
section_title: Multiple Licensees Have Outperformed Single Licensees but Their Investments Have Similar Attributes across a Number of Measures
paragraphs: Multiple licensees, in the aggregate, demonstrated better investment  performance than single licensees from 2005 to 2014, according to our  analysis. Despite some variation, for most other attributes there were not  substantial differences between small businesses that received  investments from multiple-license SBICs and those that received them  from single-license SBICs. We could not report on minority, women, and  veteran ownership of SBIC investments because the data were  unreliable, in part because SBA does not provide guidance to SBIC  licensees on how to collect and report this information.
subsections: section_title: Multiple Licensees Had Better Aggregate Investment Performance Than Single Licensees
paragraphs: In the aggregate, multiple-license SBICs demonstrated better investment  performance than single-license SBICs during 2005 through 2014,  according to our analysis. This trend was evident for SBICs overall and  debenture SBICs specifically. We analyzed two measures of investment  performance: (1) the rate at which SBICs were transferred to liquidation  and (2) the estimated loss rate. We also examined summary statistics  provided by SBA on the number of SBICs that were capitally impaired  while operating.
subsections: section_title: Liquidation Rates
paragraphs: From September 30, 2005, to July 15, 2014, 20 percent of multiple- license SBICs were liquidated, compared with 57 percent of single- license SBICs (see table 2). Liquidation rates were highest for SBICs in  the participating securities program. However, when considering only  those in the debenture program, multiple-license SBICs also had much  lower liquidation rates than single-license SBICs (6 percent and 39  percent, respectively). An SBIC can be liquidated when SBA assesses it  to have excessive financial losses—that is, to be capitally impaired—or  other regulatory violations, resulting in the oversight and responsibility of  the SBIC being transferred from the Office of SBIC Operations to the  Office of SBIC Liquidation. Once an SBIC is liquidated (which can result  in the surrender, revocation, or suspension of the SBIC operating  license), SBA says its primary goal is to maximize the net recovery of  funds.
According to SBA, the estimated loss rate for SBICs overall from  September 30, 2005, to July 15, 2014, was 8.3 percent for multiple- license SBICs and 21.3 percent for single-license SBICs (see table 3).  For debenture SBICs in particular, this loss rate was approximately 3.7  percent and 10.6 percent for multiple-license and single-license SBICs,  respectively. The estimated loss rate refers to anticipated ultimate losses  divided by the sum of SBA leverage redeemed in operations, leverage  transferred to liquidation, and draws in liquidation. SBA estimates how  much an SBIC in liquidation will be unable to repay based on both  financial losses that have occurred and anticipated losses.
During most points in time from calendar years 2005 through 2014, more  single-license SBICs than multiple-license SBICs experienced capital  impairment at some point in their operation. An SBIC is considered  capitally impaired when its investment and operating losses relative to its  private capital exceed the maximum allowable capital impairment  percentage. SBA states that capital impairment is the primary factor it  uses to assess whether an SBIC should be liquidated. SBICs that are  capitally impaired can be transferred to liquidation or be allowed to  continue active operation. As seen in figure 7, the number of SBICs in  active operation that were capitally impaired generally declined from 2005  to 2014, and most capitally impaired SBICs were in the participating  securities program.
SBA staff, SBIC managers, and industry participants with whom we spoke  cited several reasons why multiple licensees performed better, in the  aggregate, than single licensees. First, they said that multiple-license  fund managers generally are more experienced and have experience  operating an SBIC fund. Second, SBA and some industry participants  said that multiple-license SBICs already have demonstrated success  because approval of a subsequent SBIC license is largely based on the  financial performance, operating history, and managerial track record of  the existing SBIC fund. Finally, they said that multiple-license SBICs are  often larger than single-license SBICs, with investments in a greater  number of small businesses. Having more investments reduces exposure  to financial risk if one investment performs poorly. Larger SBICs also may  have greater staff capacity than smaller SBICs, and may be able to  provide more technical assistance to their small businesses. Nonetheless,  SBA staff noted that while these factors may help explain differences in  performance in the aggregate, single licensees and multiple licensees  can both perform successfully. In addition, SBA staff and an industry  participant told us that an SBIC’s age can affect performance—for  example, young SBICs that have just begun developing their businesses  are unlikely to be transferred to liquidation. However, our analysis found  that there was not a substantial difference in the average age of multiple-  and single-license SBICs—9.0 and 10.2 years respectively—during the  aggregate period 2005 through 2014.
section_title: Multiple- and Single- License SBICs Invest in Small Businesses with Roughly Similar Attributes
paragraphs: SBICs invest in a variety of small businesses, although to some extent  statutory and regulatory requirements govern these investments, as noted  earlier. We reviewed the number and amount of multiple- and single- license SBIC investments in small businesses, as well as characteristics  of the small businesses receiving the investments. Despite some  variation, for most attributes, we did not find substantial differences  between small businesses that received investments from multiple- license SBICs and those that received them from single-license SBICs.
subsections: section_title: Number and Trends of Investments
paragraphs: As of September 30, 2014, SBICs invested in 1,085 small businesses.  Multiple-license SBICs invested in 731 businesses and single-license  SBICs in 405 businesses. These investments totaled about $5.5 billion,  of which multiple-license SBICs made about $3.4 billion and single- license about $2.1 billion. The total number of small businesses receiving  SBIC investments largely decreased from 2005 to 2014, but the dollar  amount of total investments made in that period generally increased (see  fig. 8).
Multiple- and single-license SBICs invested in small businesses  representing a range of industries in 2014. According to SBIC fund  managers, some SBICs specialize in a particular field or industry in which  their management has expertise, and others invest more generally. While  there was some variation, multiple and single licensees made the majority  of their investments in four industry areas—manufacturing, professional  services, information, and health care and social assistance (see fig. 9).  Among the smaller industries represented, multiple licensees had a larger  proportion than single licensees of investments in wholesale trade (8  percent versus 2 percent) and administrative and support and waste  management (7 percent versus 3 percent).
All 50 states, Washington, D.C., Puerto Rico, and the Virgin Islands  received SBIC investments from multiple- and single-license SBICs from  October 1989 to June 2014, although the investments were largely  concentrated in several of the more populous states (see fig. 10),  according to our analysis. In dollar terms, multiple-license SBICs had  the most investment in California, followed by New York, Texas,  Massachusetts, and Florida. Collectively, these states accounted for  nearly half of all multiple-license SBIC investment. Single-license SBIC  investments were similarly concentrated, with nearly half of their  investment going to small businesses in California, New York, Texas,  Illinois, and Massachusetts. From October 1989 to June 2014, 26 states,  Washington, D.C., Puerto Rico, and the Virgin Islands each received less  than 1 percent of SBIC investment, in dollar terms, from multiple- and  single-license SBICs.
Multiple-license and single-license SBICs placed similar proportions of  their total dollar investments—about 19 percent and 18 percent,  respectively—in small businesses in low- or moderate-income areas in  2014, according to our analysis. In 1999, SBA introduced the low- or  moderate-income debenture to encourage SBICs to invest in small  businesses in inner cities and rural areas that have severe shortages of  equity capital. The low- or moderate-income debenture provides  incentives to SBICs that invest in small businesses that have at least 50  percent of their employees or tangible assets in a low- or moderate- income area or have at least 35 percent of their full-time employees with  a primary residence in such an area. It differs from the standard SBA- guaranteed debenture in that it is issued at a discount and requires no  interest payments or fees for the first 5 years.
Multiple licensees were slightly more likely than single licensees to have  more than half of their investments in “smaller enterprises.” From  September 30, 2005, to July 15, 2014, our analysis found that 84 percent  of multiple licensees had more than half their investments in smaller  enterprises, compared with 73 percent of single licensees. SBICs must  invest a percentage of financings in such enterprises, which are generally  defined as businesses with a net worth of no more than $6 million and  average after-tax net income of no more than $2 million.
section_title: Data on Minority, Women, and Veteran Ownership of SBIC Investments Are Not Reliable
paragraphs: As part of the required Form 1031, SBIC licensees can voluntarily report  data on the percentages of minority, women, and veteran ownership of  the small businesses in which they invest. Using these data, SBA  reported in the 2014 SBIC annual report that SBICs financed 70 small  businesses owned by women, minorities, or veterans in 2014, which  would represent about 6 percent of all businesses in which SBICs  invested.
However, our review raised questions about the reliability of these data.  The reporting is voluntary, and a portion of licensees choose not to  respond. It was not possible for us to determine the reporting response  rate—that is, the proportion of licensees that provided the data—because  of the design of the questionnaire and inconsistencies in how certain  questions were answered. For example, it was not clear if a blank  response to a question on minority-owned investments was intended to  indicate zero investment or a nonresponse. SBA does not provide  guidance to SBIC licensees on how to collect and report these data, and  thus there is no uniform process for doing so. SBIC managers told us that  they collect these data through various methods, such as by specifically  asking their small businesses to report whether they are owned by  women, minorities, or veterans, or by providing an estimate based on  their personal knowledge and observation. In addition, SBA staff told us  the demographic questions on Form 1031 can be challenging for  licensees to answer because small businesses receiving SBIC  investments can have complex ownership structures—such as parent  companies or partnerships—that would make identification of minority,  women, and veteran ownership difficult. SBA staff told us they do not  provide guidance on these questions because when the form was  created, SBA believed the questions were self-explanatory, and  subsequently it has not received inquiries from licensees requesting  further explanation.
More reliable data in this area would be consistent with SBA’s strategic  plan, which cites as a strategic priority of the SBIC program expanding  access to financial capital for minority-, women-, and veteran-owned  small businesses. In its submission to the Office of Management and  Budget requesting approval of the collection of information contained in  Form 1031, SBA supported its request by stating that questions about the  ethnicity and gender of portfolio company owners and top managers were  used to evaluate the program’s contribution to furthering the growth of  small business in historically underserved communities. Specific guidance  to SBIC licensees on providing voluntary demographic data on their  investments could help clarify how to define minority-, women-, and  veteran-owned businesses. In addition, such guidance could help  improve response rates and help ensure the consistency of these data,  providing useful information in support of SBIC program goals.
section_title: Recent SBIC Program Performance Has Been Relatively Stable and the Program Includes Oversight Measures Intended to Manage Risk
paragraphs: Financial losses in the SBIC program rose significantly in the early 2000s,  generally declined in the mid-2000s, and have been relatively stable since  then. The participating securities program, which was created by statute,  accounted for the majority of losses. The degree to which the SBIC  program’s performance can be attributed to SBA oversight is uncertain,  but several statutory requirements, regulations, and oversight  mechanisms—including licensing procedures, examinations, and  liquidation and asset recovery—seek to manage financial risk. The  requirements and procedures for approving and overseeing multiple  licensees are largely the same as for approving single licensees.
subsections: section_title: Program Loss Rates Were Generally Stable in Recent Years
paragraphs: The ultimate loss rate for the overall SBIC program fluctuated from 1994  to 2014 but has been relatively stable since about 2006, according to  SBA data. As shown in figure 11, the loss rate declined from 1994 to  2001 and then increased sharply between 2001 and 2004, according to  SBA’s Ultimate Loss Reports. Losses then began to decline and have  remained relatively stable since 2006.
The participating securities SBICs had a much higher ultimate loss rate  than debenture SBICs from 2003 to 2014 (see fig. 12). As discussed  earlier in this report, SBA stopped issuing new leverage commitments for  participating securities SBICs after 2004 due to high losses, but existing  SBICs created under that program could continue to operate, with 53 still  in operation as of the end of 2014. Loss rates of the debenture program  (which accounted for most outstanding SBIC leverage) steadily declined  from 2003 to 2014. By 2014, the loss rate for participating securities  SBICs was about 27 percent, compared with 5 percent for debenture  SBICs.
Correspondingly, participating securities SBICs generated the majority of  the program’s ultimate losses in dollar terms from 2003 to 2014 (see fig.  13). As of the end of 2014, participating securities SBICs accounted for  about 77 percent of the ultimate losses for the overall SBIC program,  although they represented 9 percent of outstanding SBIC leverage.  Ultimate losses for these SBICs totaled $3.5 billion, while losses for  debenture SBICs were about $778 million.
SBA has said that the financial performance of the SBIC program  generally has been comparable with the private equity industry. According  to SBA’s 2014 SBIC annual report (the most recent available), SBA  benchmarked the performance of debenture SBICs—licensed in calendar  years 1998 through 2014—to several industry indexes, such as the  Preqin Private Equity Index and the S&P 500 Index. SBA conducted the  benchmark analysis using several metrics, including the historical rate of  return of these SBICs over a number of years. SBA reported that the  performance of debenture SBICs was comparable with the performance  of the private equity industry and that they had outperformed several  equity market indexes in the 5 years from 2010 to 2014.
Congress required the SBIC program to be self-funded (that is, operate at  zero subsidy cost) for any financings issued starting in 2001. Each year,  as part of its budget process, SBA forecasts expected SBIC program  losses and sets fees accordingly to cover the expected losses for  financing approved during that budget year. SBA annually estimates the  program’s subsidy costs as required by the Federal Credit Reform Act of  1990, using historical information and various assumptions about such  things as the fees paid by SBICs, interest income paid on SBIC  financings, recoveries, and default rates. SBA also incorporates  economic assumptions in the President’s Budget into its estimates,  although SBA staff told us they do not incorporate economic factors that  are forward-looking, such as projected macroeconomic conditions.
In addition, the Federal Credit Reform Act of 1990 requires agencies to  annually reestimate the credit subsidy cost because estimates of credit  subsidy can change over time. These reestimates reflect any changes in  actual performance of the SBIC program since the estimates were  prepared, as well as any expected changes in assumptions related to  future performance of the program. From 1994 through 2014, SBA’s  reestimates for the debenture program generally have been favorable— that is, they showed a lower estimated cost to the government than the  original estimate—while reestimates for the participating securities  program generally have been unfavorable.
section_title: SBIC Program Includes Oversight Processes and Regulatory Requirements Intended to Manage Risk
paragraphs: Several statutory requirements, regulations, and oversight mechanisms  are designed to manage the financial risk presented by the SBIC  program. These include or derive from the Small Business Investment Act  of 1958, its implementing regulations, SBIC standard operating  procedures, and other processes and mechanisms. Oversight  mechanisms intended to manage risk include the application and  licensing processes, market validation, reporting requirements and risk  assessments, examinations, and liquidation and asset recovery. SBA’s  oversight affects the financial performance of the SBIC program, although  its effect can be difficult to measure because factors such as economic  conditions and program design also affect program performance.
subsections: section_title: Application and Licensing Processes
paragraphs: According to SBA, applicant screening, which occurs through the  application and licensing processes, is a key mechanism for managing  program risk. As seen in figure 14, application and licensing is a two- phase process. For the first phase, SBA offers an optional prescreening  process designed to help prospective applicants determine whether they  should formally apply for a license. First-time applicants that proceed  must submit a management assessment questionnaire in which they  provide a description of their proposed investment strategy, detailed  investment track records of the fund management team, references, and  other information. An SBA analyst reviews the questionnaires and  contacts references to verify the accuracy of the information. The process  is intended to help assess the applicant’s character, reputation, and  capability to invest in eligible small businesses. Next, the SBA analyst  prepares an “investment memorandum” with a recommendation to SBA’s  Investment Committee stating whether the applicant’s management team  appears to have the minimum qualifications to manage the proposed  SBIC. On the basis of the information provided in the memorandum, the  Investment Committee decides whether to invite the applicant to an  interview.
Following the interview, the committee decides whether to formally invite  the applicant to file a license application once the applicant has raised the  required minimum amount of private capital. Applicants that succeed in  raising sufficient private capital within 18 months are permitted to submit  a formal application for an SBIC license. Section 301(c) of the Small  Business Investment Act also requires SBA to consider (1) whether the  applicant is qualified and has the knowledge, experience, and capability  necessary to comply with the act; and (2) the need for and availability of  financing for small businesses in the geographic areas in which the  applicant plans to invest, among other things. SBA’s licensing  procedures state that SBA looks for teams with at least two principals  who have substantial investment experience and the probability of  successful operations. In addition, SBA’s procedures state that the  agency looks for a cohesive management team with complementary skills  and a history of working together.
SBA staff told us that since the mid-1990s the agency made a number of  changes to raise the standards for receiving an SBIC license, placing  greater emphasis on the background and expertise of the prospective  licensee to attract more experienced applicants. They said these changes  contributed to significant improvements in the SBIC program and a  reduction in the number of SBIC defaults. Industry participants with whom  we spoke generally agreed with this assessment, noting that in recent  years SBA had set higher standards for approving SBIC management  teams and investment strategies. According to SBA, from 2010 through  2014, the agency approved approximately 50 percent of entities applying  for the first time for an SBIC license.
section_title: Market Validation
paragraphs: According to SBA’s licensing procedures, once formally invited to apply  for an SBIC license, applicants are given 18 months to raise sufficient  private capital. The applicant’s ability to raise sufficient private capital  serves as a “market validation” mechanism that manages risk, according  to SBA officials, SBIC fund managers, and industry participants. SBIC  fund managers with whom we spoke said that a fund manager’s ability to  raise private capital demonstrated the market’s assessment that the fund  manager was competent and likely to operate the SBIC profitably. By  statute, SBIC applicants must raise at least $5 million in capital from  private investors. However, SBIC fund managers told us that in recent  years, SBA generally expected applicants to raise an amount in excess of  the statutory minimum (generally more than $20 million) to be approved  for a license.
section_title: Reporting Requirements and Risk Assessments
paragraphs: By regulation, SBICs must submit quarterly and annual financial  statements. Agency guidelines direct SBA financial analysts to use the  statements to assess the SBIC’s investment risk, continued eligibility for  leverage, compliance with regulatory requirements, and financial  performance. An SBIC’s annual financial statement includes information  on its investment portfolios, regulatory capital, SBA leverage balance, and  any management changes. As part of the annual statements, SBIC  licensees also must provide SBA with an assessment of the impact of  each small business investment, including number of employees, revenue  and profits, and taxes paid by the business and its employees. By statute,  the annual form must be audited by an independent certified public  accountant acceptable to SBA.
SBA’s risk-management procedures require its financial analysts to  conduct quarterly risk assessments to determine the level of oversight  each SBIC requires based on financial performance, capital impairment  percentage, and other information. SBA has three levels of oversight:  normal, enhanced, and intensive. Normal oversight, which covers SBICs  that are in good financial standing and regulatory compliance, includes an  SBA analysis of the SBIC’s quarterly and annual statements and a review  of the value of the SBIC’s portfolio companies. SBA provides enhanced  oversight to SBICs experiencing financial difficulties. Enhanced oversight  includes stepped-up interactions between SBA and the SBIC’s  managers—for example, SBA staff visits to the SBIC’s portfolio  companies. Intensive oversight targets SBICs with serious outstanding  regulatory violations, excessive financial losses, and capital impairment.  Intensive oversight includes face-to-face reviews with SBA officials, more  frequent reporting requirements, and increased monitoring of the SBIC’s  portfolio companies. In September 2015, SBA staff told us they were  modifying and refining the risk-assessment procedures of the SBIC  program to establish a more robust data-driven approach and interactive  process for establishing risk ratings.
section_title: Examinations
paragraphs: The Small Business Investment Act generally requires SBA to examine all  SBICs at least every 2 years to (1) determine whether licensees are  complying with the act and its implementing regulations, (2) help SBA  assess the financial condition of licensees and SBA’s financial  vulnerability, and (3) ensure the accuracy of information licensees submit  to SBA. SBA’s goal is to examine SBICs that receive SBA leverage on a  12-month cycle and nonleveraged SBICs on an 18-month cycle. SBA  usually conducts examinations on-site at the SBIC, and SBA officials told  us the examinations generally last about 1 week. SBA examiners also  may decide that field visits to the small businesses that obtain financing  from an SBIC would meaningfully enhance the examination process.  During the on-site visits, examiners verify information provided by the  SBIC fund managers, review licensees’ financial records, and conduct  regulatory reviews of the licensees’ practices.
We reviewed the data on all examination reports issued in 2014 for  debenture SBICs and found that 15 percent of examinations resulted in  findings—that is, they were believed to be major violations of the Small  Business Investment Act or related regulations, which include things like  improper valuation of investments and unresolved matters from prior  examinations. According to SBA’s guidance, SBICs must resolve  examination findings related to regulatory violations within an established  time frame, ideally no more than 180 days from issuance of the  examination report. As of March 2015, findings had been resolved in 17  of the 20 examination reports issued in 2014 that contained findings. Two  others were in the process of being resolved, and one report was for an  SBIC that was no longer active.
In September 2013, the SBA Office of Inspector General (OIG) issued an  audit report on the SBIC examination process. The OIG found that the  SBIC examination function generally addressed statutory requirements  and agency policy by conducting examinations at least every 2 years and  checking SBICs for regulatory violations. However, the OIG also reported  that SBA had largely focused on the frequency and quantity of  examinations as opposed to quality, increasing the risk that examinations  would be inaccurate or incomplete. The OIG report noted that there had  been a significant decrease in examination reports with findings, and that  fewer findings could indicate that the quality of the assessments had  suffered. The audit report also cited outdated guidance, incomplete  examination checklists, inadequate strategic planning, and the absence of  training and technology upgrades.
The OIG recommended that SBA (1) create and execute a plan to  improve the internal operations of the examination function, (2) update  and improve the existing examination checklist, and (3) assess the costs  of the examination function and prepare cost-benefit analyses for several  funding options to cover all examination costs. The OIG report stated that  SBA did not concur with the OIG’s first recommendation. However, OIG  officials told us that SBA had since revised its examination standard  operating procedures, an action that constituted a satisfactory response  to the first recommendation, and that the recommendation ought to be  closed in the near future. SBA agreed with the second recommendation  and took actions to improve the checklist that examiners used when  conducting examinations. SBA published updated examination guidelines  in October 2013, and the OIG closed the recommendation. SBA agreed  with the third recommendation and developed a proposed rule to address  it, which was undergoing internal review as of September 2015.
section_title: Liquidation and Asset Recovery
paragraphs: If an SBIC has financial or regulatory problems that cannot be resolved,  SBA has the authority to transfer it to the jurisdiction of the Office of SBIC  Liquidation. The primary reason for placing SBICs in liquidation is  significant portfolio losses that result in capital impairment. SBICs can  also be liquidated if they do not comply with statutory or regulatory  requirements. The office oversees the liquidation process until the SBIC  repays all leverage or all assets have been sold or written off. According  to SBA’s liquidation procedures, the office’s primary goal is to recover  funds for SBA in the shortest time possible and minimize financial losses.  To this end, the office prepares a strategy to maximize SBA’s net  recoveries and minimize the adverse effect on the small businesses  involved. As of September 30, 2014, SBA estimated it had recovered 50  percent of leverage for SBICs placed in liquidation since the program’s  inception in 1958, and estimated that the ultimate recovery rate would be  60 percent.
section_title: SBA Oversight Mechanisms for Managing Program Risk Are Largely the Same for Single and Multiple Licensees
paragraphs: SBA applies largely the same risk management and oversight  mechanisms to single and multiple licensees, according to agency staff.  All SBICs are distinct legal entities and are monitored individually. Every  SBIC must submit quarterly and annual financial statements and undergo  periodic examinations. SBA staff told us that although SBICs were  monitored as separate entities, problems with one SBIC managed by a  multiple licensee could lead to more careful scrutiny of the licensee’s  other SBICs, especially if the problems appeared to be related to  management failures or some form of malfeasance. SBA staff told us that  they assigned the same operations analyst to multiple-license SBICs  under common control to give that analyst a better understanding of all  the SBICs controlled by a licensee.
SBIC licensees seeking a subsequent license generally must undergo the  same application and licensing process, according to SBA. For example,  SBIC fund managers told us that applicants seeking a subsequent SBIC  license usually must submit a new management assessment  questionnaire, as circumstances may have changed since the prior  application (such as the management team or the investment strategy).  However, SBA staff told us that their procedures allowed some flexibility  and generally were intended to streamline the time required to grant the  subsequent license. For example, SBA has some discretion to accept a  shorter memorandum from the applicant in lieu of a second management  assessment questionnaire if the SBIC has not experienced significant  changes in management or investment strategy. However, several  multiple licensees with whom we spoke said that even under such  circumstances, they were not given the option to submit a memorandum  and instead had to submit a management assessment questionnaire,  which was more time-consuming to complete.
According to SBA staff, the agency evaluates a number of specific  conditions when determining whether to grant a subsequent license. For  example, according to SBA’s application and licensing procedures, an  applicant that is already operating one or more SBICs must have at least  a 2-year track record in the SBIC program, clean audit opinions from the  SBIC’s independent public accountant, and no unresolved regulatory  violations, among other specified conditions. According to SBA, from  2010 to 2014, fund managers seeking a subsequent license had a 70  percent approval rate, as compared with about 50 percent for first-time  license applicants. SBA staff attributed the higher approval rate of  subsequent applicants to their prior experience with the licensing process  and their demonstrated track record in the SBIC program.
section_title: Other Factors May Influence Program Performance
paragraphs: While SBA has procedures designed to manage financial risk to  taxpayers from SBICs and their investments, the effect of SBA oversight  on financial performance would be difficult to measure because it cannot  easily be isolated from other internal and external factors, which include  program design, economic conditions, and the characteristics of the  SBICs and their investments.
subsections: section_title: Program Design
paragraphs: The specific rules, sometimes set by statute, governing the different types  of SBICs can affect the performance of the SBIC program as a whole. For  instance, the participating securities program, which was created by  statute, has been responsible for the majority of SBIC program losses in  recent years, and its termination improved overall program performance.  SBA staff and at least two research studies have stated that the  participating securities program’s losses resulted from the statutory  design of the program. The program focused on equity investments,  which generally are considered to have relatively higher risks, but the  program was structured so that SBA advanced the interest payments  (known as prioritized payments) to bond holders and was only repaid  advanced prioritized payments out of the SBIC’s profits. As such, as of  May 1, 2015, SBA estimated that it had contributed 59 percent of the total  amount of SBA leverage drawn and private capital contributed by the  participating securities SBICs but received less than 27 percent of the  profit made by these SBICs (including all reimbursed prioritized  payments, adjustments, and SBA annual charges).
section_title: Economic Conditions
paragraphs: Program performance also can be affected by economic conditions, such  as the availability of credit and capital, interest rates, the equities markets,  and economic growth, all of which can affect the financial performance of  SBIC investments. According to SBA, the financial performance of the  SBIC program generally follows trends in the private equity industry and  stock markets. Two studies have noted that the participating securities  program’s losses in the early 2000s were linked to the fall of the stock  value of their investments in technology startup and early-stage small  businesses. Additionally, SBA noted that the interest rates on the SBIC  leverage draws were connected with the interest rates of the 10-year  Treasury Note. The interest rates on the SBIC leverage draws have been  low in recent years, helping SBICs perform better financially by realizing  higher profit margins on their small business investments.
section_title: Characteristics of SBICs and their Investments
paragraphs: The age of an SBIC can affect its investment performance, and thus the  age of SBICs overall affects the financial performance of the SBIC  program. SBA told us that it was more challenging to assess the financial  performance of relatively young SBICs because their investments had not  yet reached the stage of generating returns and demonstrating  performance. The median age of a debenture SBIC transferred to  liquidation was 10 years, according to SBA. In its 2014 SBIC annual  report, SBA noted that no debenture SBICs less than 5 years old (which  represented 71 percent of its outstanding debenture leverage as of  September 30, 2014) had been transferred to liquidation, compared with  3 percent of those between 5 and 10 years. As a result, the relatively low  percentage of debenture SBICs currently in liquidation may be a function  of the SBIC program’s significant growth in the last 5 years, because  younger funds typically have not become capitally impaired. The financial  performance of the debenture program may change in future years, SBA  staff told us, as the investment performance of the younger SBICs  becomes clearer.
The proportional share of debt and equity investments made by the  SBICs also can affect performance of individual SBICs and the SBIC  program as a whole. SBA staff noted that, generally speaking, debt  investments are considered relatively less risky than investments in equity  or with equity features. Debt investments rose from less than 21 percent  of SBIC financing in 2005 to about 64 percent in 2014. SBA attributed this  trend to the termination of the participating securities program in 2004  and the decline in availability of debt capital in the marketplace between  2009 and 2014. SBA staff told us they anticipated that SBIC investments  would shift to a greater share of equity investments, in line with historical  norms, as capital market conditions continued to improve and more debt  capital became available to small businesses from traditional banks. Such  a shift to equity investments could result in increased financial risk for the  SBIC program in future years.
section_title: Conclusions
paragraphs: There would be benefits to providing specific guidance to SBIC licensees  on how to answer the voluntary questions asked in Form 1031 on  investments in minority-, women-, and veteran-owned businesses. SBA  does not provide such guidance because it believes the questions are  self-explanatory. However, specific guidance could clarify how to define  these businesses and other ambiguities, which could help improve  response rates and ensure the consistency of these data. More reliable  data in this area also would be consistent with SBA’s strategic plan, which  cites expanding access to financial capital for such businesses as a  strategic priority of the SBIC program. Providing clear and specific  guidance to SBIC licensees on how to collect and report these data would  help improve the quality, consistency, and value of the information  reported.
section_title: Recommendation for Executive Action
paragraphs: The Administrator of the Small Business Administration should direct the  Office of Investment and Innovation to provide clear and specific  guidance to SBIC licensees on how to collect and report data in Form  1031 on their investments in minority-, women-, and veteran-owned  businesses.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SBA. In its response, SBA neither  agreed nor disagreed with the recommendation addressed to it and  provided technical comments, which we incorporated as appropriate.
We are sending copies of this report to the Administrator of the Small  Business Administration, the appropriate congressional committees, and  other interested parties. In addition, the report will be available at no  charge on GAO’s website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7215 or brownbarnesc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our report were to examine the (1) characteristics of  multiple-license Small Business Investment Companies (SBIC) compared  with single-license SBICs, (2) investment performance of multiple  licensees compared with single licensees and the attributes of the small  businesses in which SBICs invest, and (3) overall financial performance  of the SBIC program and the extent SBA manages the risk associated  with the program.
To address the first and second objectives, we analyzed and examined  primary data from the Small Business Administration’s (SBA) SBIC  databases and secondary data provided to us in summary format by SBA  for fiscal years 2005 through 2014. We used the data to distinguish  between single- and multiple-license SBICs and determine differences  between these two categories for characteristics such as the number of  SBICs and SBIC managers, amount of SBA leverage held, and  geographic distribution. We also analyzed data that SBIC licensees  submitted to SBA through the annual Portfolio Financing Report (Form  1031) for fiscal years 2005 through 2014. We sorted these data to  distinguish between single- and multiple-license SBICs in relation to  characteristics of the small businesses in which the SBICs invested, such  as the number and dollar amount of investments. Additionally, we used  the Form 1031 data to categorize the businesses in which SBICs invested  by industry sector, using the North American Industry Classification  System. To describe the investments’ geographic distribution and extent  of investment in smaller enterprises, we analyzed summary data  prepared by SBA that was derived from quarterly data the agency  receives from SBICs on the required Form 468. All dollar values  expressed in our report are nominal and were not adjusted for inflation.
To compare the investment performance of single- and multiple-license  SBICs, we analyzed two measures of SBIC’s investment performance: (1)  the rate at which SBICs were transferred to liquidation, and (2) the  estimated loss rate. The secondary data for these measures were  provided to us by SBA, which derived the information from data in its  SBIC databases and the fiscal year 2013 Ultimate Loss Report. We  calculated the liquidation rate by dividing the number of SBICs that were  liquidated by the total number of licensed SBICs that were issued  leverage. We also reviewed the estimated loss rate calculated by SBA— that is, the anticipated ultimate losses divided by the sum of leverage  redeemed in operations, leverage transferred to liquidation, and draws in  liquidation. In addition to these two performance measures, we analyzed  summary statistics provided by SBA on the extent of capital impairment  by single- and multiple-license SBICs in operation, which SBA derived  from the quarterly data it receives from SBICs. Because the age of an  SBIC can affect its investment performance, we also reviewed differences  in average performance based on year of license, and calculated the  average ages of multiple- and single-license SBICs for the aggregate  period 2005 through 2014. However, the data available to us did not allow  us to compare the performance of multiple versus single licensees that  were licensed in specific years.
We analyzed investment performance in aggregate because looking at  performance in a single year can be misleading, according to SBA staff— given that even successful SBICs see few returns in their first several  years (while the businesses in which they have invested mature). Our  analysis of investment performance covered 2005 through 2014 because  2005 was the year in which SBA began collecting data in a manner that  allowed the performance of multiple versus single licensees to be  isolated. Our analysis included only SBICs under the jurisdiction of the  Office of SBIC Operations or Office of SBIC Liquidation as of September  30, 2005, and all SBICs licensed since that time through July 15, 2014.
To assess the reliability of data on characteristics of SBICs, their  investments, and their investment performance, we reviewed relevant  SBA documents, including SBA’s standard operating procedures, and  regulations related to the process for updating, maintaining, and  monitoring such data. We also performed electronic testing for obvious  errors in accuracy and completeness. We interviewed knowledgeable  SBA officials on, among other things, data limitations and how the data  are collected and captured. Where we identified questions related to the  data, we clarified them through discussions with SBA staff. We  determined that these data were sufficiently reliable for our reporting  purposes.
We also reviewed and analyzed data provided to us by SBA on the  number of minority and female SBIC managers and the number of SBICs  located in low- or moderate-income areas as of July 15, 2014. SBA does  not routinely collect such information, but at our request, the agency  conducted an informal survey of its operations analysts. SBA staff told us  that because this was an informal survey, they could not make any  representation about the completeness or accuracy of the information.  Although the data have limitations, we are reporting the data to provide  contextual information on the number of minority or female SBIC  managers and SBICs located in low- or moderate-income areas. In  addition, we reviewed data collected by SBA on the minority, women, and  veteran ownership of the small businesses in which SBICs invest. We  determined that these data were not sufficiently reliable for our reporting  purposes because, among other things, the reporting of this information  by SBICs is voluntary, the response rate could not be fully assessed, and  SBA told us it could not make any representation about the completeness  or accuracy of the data. To identify SBIC program priorities and goals  related to minority, women, and veteran ownership of small businesses in  which SBICs invest, we reviewed SBA’s Fiscal Years 2014–2018  Strategic Plan and SBIC program annual reports.
To address the third objective, we examined data provided to us by SBA  on the aggregate financial performance of the SBIC program, including  data from the SBIC ultimate loss reports prepared by SBA. For the  program overall, SBA provided ultimate loss data for fiscal years 1994  through 2014. For the SBIC debenture and participating securities  programs in particular, SBA provided these data for fiscal years 2003  through 2014 because 2003 was the year in which SBA started  separately reporting losses for these two programs. We also reviewed the  annual credit subsidy estimates and reestimates for the SBIC program  from fiscal years 1992 through 2014 in the corresponding years’  President’s Budget. To assess the reliability of these data, we reviewed  SBA’s annual financial reports on how SBA estimates financial losses and  credit subsidy costs of the SBIC program. We also interviewed  knowledgeable SBA staff on how loss and credit subsidy data are  estimated, maintained, and reviewed by SBA and external parties such as  the Office of Management and Budget. We also conducted electronic  testing of the data for obvious errors, and we did not identify any. We  determined the data to be sufficiently reliable for the purpose of reporting  the financial performance of the SBIC program overall and SBICs by type.
To examine the credit subsidy cost and funding for administrative costs of  the SBIC program, we reviewed SBIC’s authorizing legislation and  reviewed requirements and guidance related to credit subsidy cost,  including the Federal Credit Reform Act of 1990 and Office of  Management and Budget Circulars A-11 Part 5 and A-129, which  prescribe guidance on federal credit programs and credit subsidy costs.  We also reviewed the 2014 SBA annual agency financial report, the  annual SBIC program reports for fiscal years 2012 through 2014 (the  most recent available), and an SBA report on the SBIC debenture  program submitted to the Office of Management and Budget in November  2014.
To assess the extent to which the SBIC program manages risk, we  reviewed SBIC’s authorizing legislation—the Small Business Investment  Act of 1958—and its amendments and implementing regulations; SBA’s  standard operating procedures, policies, and technical guidance; SBA  annual program and financial reports; and forms and guidance associated  with the application and licensing process. We did not validate the extent  to which SBA follows its written policies and procedures, although where  possible we sought to corroborate the extent through testimonial and  documentary evidence. We reviewed reports by the SBA Office of  Inspector General and we interviewed staff of this office to discuss their  findings and SBA’s implementation of recommendations related to the  SBIC examination process. We also reviewed the data from SBA’s  examination reports issued in fiscal year 2014 for debenture SBICs and  analyzed the number and type of examination findings for SBICs overall  and for multiple and single licensees in particular. To assess the reliability  of these data, we reviewed SBA’s standard operating procedures for  conducting examinations, interviewed knowledgeable agency officials on  how the examination data were collected and any associated data  limitations, and traced and verified the accuracy of our calculations. We  determined these data were sufficiently reliable for the purposes of  reporting information on numbers of examination findings.
For all of the objectives, we reviewed statements and transcripts of  relevant congressional hearings and relevant research and studies by  industry stakeholders, SBA, and the Congressional Research Service, as  well as prior GAO reports. In addition, we conducted interviews with staff  from federal agencies—SBA, the Department of Commerce’s Minority  Business Development Agency, and the Congressional Research Service  — representatives of the Small Business Investor Alliance, which  represents the interests of SBICs; nine SBIC fund managers; an attorney  who has represented and advised multiple SBICs; and an academic  researcher who has studied the SBIC program. We selected the  academic researcher based on a suggestion by the Small Business  Investor Alliance and because his work was cited in documents we  reviewed. We selected the nine SBIC fund managers who we interviewed  to represent a mix of multiple- and single-license SBICs, geographic  locations, size of investments, and industries, among other criteria. In  addition, we solicited suggestions from the Small Business Investor  Alliance and other industry stakeholders for managers to interview. We  selected the SBIC fund managers and industry stakeholders to gain a  range of perspectives on the SBIC program; however, their views are not  generalizable.
We conducted this performance audit from July 2014 to January 2016, in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Cindy Brown Barnes, (202) 512-7215 or brownbarnesc@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Jason Bromberg (Assistant  Director), Bethany Benitez, Benjamin A. Bolitzer, Emily Chalmers, Anna  Chung, David Dornisch, Isidro Gomez, Marc Molino, and Emily Upstill  made key contributions to this report.