Update on the Small Business Investment Company (SBIC) Program from the Perspective of the Small Business Investor Community
SBIA Comment Letter to:
The Honorable Linda McMahon
Small Business Administration
Washington, DC 20416
Dear Administrator McMahon,
With the transition completed, fiscal year 2017 closed, and the calendar year coming to an end, I write you today to provide an update on the Small Business Investment Company (SBIC) program from the perspective of the small business investor community.
While no program is perfect, the SBIC program inherited by this Administration was operating well and had been for a very long time. SBICs were investing near record amounts in domestic small businesses, losses were at record lows, licenses were being processed in a timely manner, quality fund managers were being attracted to the program, jobs were being created, and there was record interest from institutional investors to provide capital to small businesses via SBICs. The program was working to benefit America’s small businesses. With the increased small business optimism spurred by the election of President Trump and with your appointment to lead the Small Business Administration, SBICs were optimistic that they could be a constructive partner in translating that optimism into positive outcomes.
By the close of FY 2017, the optimism around the operation of the SBIC program has changed. Licensing for first time SBIC funds was down 92% year over year. Licensing for all Debenture SBICs funds (first time and repeat SBICs) was down 35%. This reduction in licensing appears less precipitous than it really was because the licensing numbers in FY 2017 included strong licensing results from the previous Administration. For example, through March 31 of this year total licensing was up 40% year over year, but then there was a change and licensing finished the fiscal year down 35%. The number and amount of investments by SBICs were down in FY 2017 as were the jobs created, but the actual amounts are not known because the SBA’s Investment Division ceased releasing most SBIC data to the public. Some private institutional investors (e.g., endowments, banks, pension funds) that provide the bulk of the private capital into SBICs have become unnerved by the slow pace of the operations of the program, the unpredictability of licensing and operations, and the lack of constructive engagement by the political leadership of the Investment Division. Some of these institutional investors are now building in an additional four to six month waiting period for each stage of the licensing process, while others are completely stepping back from the SBIC program until there is new management of the program. The new management culture and practices are discouraging the best fund managers from being in the program and this will create an adverse selection problem and create unnecessary downside risk that previously did not exist. In sum, there is now a serious leadership problem at the Investment Division that has not existed since the nadir of the program during the period of mismanagement from 2007 through January of 2009.
The pro-small business regulatory reforms and performance of the 7a program are clear examples of what the Trump Administration, as good stewards of a small business program, is accomplishing. However, and in contrast to the successes of the 7a program, there is very deep and broad-based concern across the small business investor community about the management of the SBIC program. Given that this program was fully operational less than a year ago, there is still time to address the problem before the current situation is institutionalized. Given your unwavering commitment to American small businesses and your entrepreneurial and executive experience, I ask that you address the problem in the SBIC program before a stable, productive small business resource becomes neither stable nor productive.
The SBIC industry is committed to improving the nation by empowering small businesses and the SBIA would welcome the opportunity to work constructively with the SBA to make effective use of the Small Business Investment Company program.
About the Small Business Investor Alliance (SBIA)
The Small Business Investor Alliance (SBIA) is the premier organization of lower middle market private equity funds and investors. SBIA works on behalf of its members as a tireless advocate for policies that promote competitive markets and robust domestic investment for growing small businesses. SBIA has been playing a pivotal role in promoting the growth and vitality of the private equity industry for over 50 years. For more information, visit www.SBIA.org or call (202) 628-5055.