[House Hearing, 117 Congress] [From the U.S. Government Publishing Office] A REVIEW OF THE SBIC PROGRAM ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS OF THE COMMITTEE ON SMALL BUSINESS UNITED STATES HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTEENTH CONGRESS FIRST SESSION __________ HEARING HELD OCTOBER 27, 2021 __________ [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Small Business Committee Document Number 117-038 Available via the GPO Website: www.govinfo.gov __________ U.S. GOVERNMENT PUBLISHING OFFICE 45-938 WASHINGTON : 2022 ----------------------------------------------------------------------------------- HOUSE COMMITTEE ON SMALL BUSINESS NYDIA VELAZQUEZ, New York, Chairwoman JARED GOLDEN, Maine JASON CROW, Colorado SHARICE DAVIDS, Kansas KWEISI MFUME, Maryland DEAN PHILLIPS, Minnesota MARIE NEWMAN, Illinois CAROLYN BOURDEAUX, Georgia TROY CARTER, Louisiana JUDY CHU, California DWIGHT EVANS, Pennsylvania ANTONIO DELGADO, New York CHRISSY HOULAHAN, Pennsylvania ANDY KIM, New Jersey ANGIE CRAIG, Minnesota BLAINE LUETKEMEYER, Missouri, Ranking Member ROGER WILLIAMS, Texas JIM HAGEDORN, Minnesota PETE STAUBER, Minnesota DAN MEUSER, Pennsylvania CLAUDIA TENNEY, New York ANDREW GARBARINO, New York YOUNG KIM, California BETH VAN DUYNE, Texas BYRON DONALDS, Florida MARIA SALAZAR, Florida SCOTT FITZGERALD, Wisconsin Melissa Jung, Majority Staff Director Ellen Harrington, Majority Deputy Staff Director David Planning, Staff Director C O N T E N T S OPENING STATEMENTS Page Hon. Sharice Davids.............................................. 1 Hon. Dan Meuser.................................................. 2 WITNESSES Ms. Holly Huels, Founder and Managing Partner, Holleway Capital Partners, LLC, St. Louis, MO................................... 5 Ms. Carmen Palafox, Partner, MiLA Capital, Chatsworth, CA........ 6 Mr. John Mickelson, Managing Partner, Midwest Growth Partners, West Des Moines, IA............................................ 8 APPENDIX Prepared Statements: Ms. Holly Huels, Founder and Managing Partner, Holleway Capital Partners, LLC, St. Louis, MO....................... 22 Ms. Carmen Palafox, Partner, MiLA Capital, Chatsworth, CA.... 27 Mr. John Mickelson, Managing Partner, Midwest Growth Partners, West Des Moines, IA.............................. 31 Questions for the Record: None. Answers for the Record: None. Additional Material for the Record: New America Alliance......................................... 35 Mr. Carl Kopfinger, Senior Vice President, TD Bank, Philadelphia, PA........................................... 37 A REVIEW OF THE SBIC PROGRAM ---------- WEDNESDAY, OCTOBER 27, 2021 House of Representatives, Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital Access, Washington, DC. The Subcommittee met, pursuant to call, at 10:01 a.m., in Room 2360, Rayburn House Office Building, Hon. Sharice Davids [chairwoman of the Subcommittee] presiding. Present: Representatives Davids, Newman, Bourdeaux, Chu, Mr. Kim of New Jersey, Meuser, Garbarino, and Van Duyne. Chairwoman DAVIDS. All right. Good morning, everybody. I call this hearing to order. Without objection, the Chair is authorized to declare a recess at any time. I would like to begin by noting some important requirements. Let me begin by saying that the standing House and Committee rules and practice will continue to apply during hybrid proceedings. All Members are reminded that they are expected to adhere to these standing rules, including decorum. House regulations require Members to be visible through a video connection throughout the proceeding, so please keep your cameras on. Also, please remember to remain muted until you are recognized to minimize background noise. If you have to participate in another proceeding, please exit this one and log back in later. In the event a Member encounters technical issues that prevent them from being recognized for their questioning, I will move to the next available Member of the same party, and I will recognize that Member at the next appropriate time slot, provided that they have returned to the proceeding. For those Members and staff physically present in the Committee room today, in accordance with the Attending Physician's most recent guidance, all Members and staff who attend this hybrid hearing in person will be required to wear masks in the hearing room. With that said, Members will be allowed to briefly remove their masks if they have been recognized to speak. I will now begin with my opening statement. Small businesses are the backbone of the American economy. They employ nearly half the private workforce and drive development through groundbreaking innovations. However, to be successful, they need capital. Congress has long realized that funding on reasonable terms can be hard to come by for small firms. So, in 1958, Congress created the Small Business Investment Company program at SBA, or the SBIC program. The goal was to bridge the gap between availability of venture capital and the needs of high-growth small businesses. Under the SBIC program, SBA partners with private institutions to provide financing to small early-stage companies. Since its inception, the SBIC program has provided over $100 billion in capital to entrepreneurs across the country. These funds have helped transform small firms into powerhouse job-creators. Early-stage small businesses that received SBIC investments include Apple, Costco, FedEx, and Intel. In fiscal year 2020, SBICs financed 1,063 small businesses, with an average amount of just under $2 million. These funds helped entrepreneurs acquire new companies, refinance debt, conduct R&D, purchase equipment, and generally operate their enterprise. This is progress from the delays and mismanagement that has plagued the program in years past and our Committee has worked to correct. In fact, last year, the SBA licensed 26 new SBICs, which is up from 18. And, in 2021, they broke the record again, licensing 32 new SBICs. Despite these successes, there are still issues with the program that the Committee must continue to address. One such problem is the lack of diversity both among investors and portfolio companies. In 2007, the SBA acknowledged that women and minorities participated in the program at low rates. Today, the diversity numbers haven't budged. For example, in 2020, SBICs only made up around 5 percent of their total financing to minority-owned small businesses. The numbers were even worse for businesses owned by women and veterans. After nearly 15 years of poor diversity metrics, we must get serious about increasing participation for women and minorities in the program. So, today, I am looking forward to discussing ways that this Committee can further improve the SBIC program. I also look forward to learning from our witnesses who have extensive experience within this sector. I would now like to yield to the Ranking Member, Mr. Meuser, for his opening statement. Mr. MEUSER. Thank you, Chair Davids. And thank you to all of our witnesses here today. Mr. Mickelson, we appreciate you making the trip in from Iowa. Thank you very much. So, Chairwoman Davids, thank you for calling this hearing to examine this important issue, the SBA's Small Business Investment Company program. Before we delve too deeply into federal government investing programs, I want to touch on some of the realities on the ground that are facing small businesses nationwide, certainly in my district and throughout Pennsylvania. Unfortunately, even with a high level of demand, it is a tough time for small business. After the devastating blows of COVID-19, particularly in certain States where arbitrary shutdowns were forced of various small businesses on a relatively random basis, the nation's job-creators are facing rising costs, spiking inflation, trouble with finding workers, difficulty with keeping their shelves filled, for that matter. With holidays approaching, these supply-chain issues are bottlenecking and potentially jeopardizing what could be a light at the end of the tunnel for many of these small businesses, which is certainly their hope. Through all of this, the Biden administration and much of the Democrat leadership in the House do continue to threaten more government spending on the demand side of the equation, paid for by raising taxes on small businesses. This is a very, very self-defeating initiative. In one of the latest regulations for small businesses, on September 9 of this year, the Biden administration announced a vaccine mandate for small businesses with 100 employees or more. There are many businesses with less employees than that that think, because the guidelines haven't been issued, that they will be affected as well. So it creates levels of uncertainty, which is the last thing a business wants. To say the least, this announcement has left small business with numerous outstanding questions and concerns about retaining their employees, especially during such a severe labor crisis. There is no doubt these are difficult times for small businesses. However, the nation's smallest firms are some of the most resilient. We don't have to look very far to find a small business that received a direct hit from COVID-19 but got back on their feet because of their perseverance and, yes, some government programs, such as the PPP. Many of these businesses did, in fact, reinvent themselves, while others simply were able to meet the demand where it was to be found. We all, on this Committee, salute these businesses as they continue to work through the recovery. And they are what the recovery is all about. In addition to the economic firestorms that small businesses are facing, they also struggle continuously with access to capital and financing opportunities to grow and expand their businesses. That is why the SBIC program has been an important resource in the Small Business Administration toolbox. With the goal of injecting private equity into the small- business ecosystem, the SBIC program and other federal programs have the ability to reach down to businesses that might be geographically overlooked, including in my district in Pennsylvania. Ensuring small businesses across our nation have access to these tools is important. Unfortunately, much of the investing is currently dedicated or siloed in certain areas of the country. Small businesses in rural areas often struggle with gaining access to capital. I am hoping that through this hearing we can develop pragmatic solutions to encourage more investment opportunities in worthy companies located particularly in rural America. This Committee should work together through regular order, meaning examining an issue at a Committee hearing level, crafting legislation together and voting on it at the Committee level, and, if successful, moving it to the full House of Representatives. Unfortunately, that process was bypassed by my Democrat colleagues when they drafted and took up the most recent budget reconciliation bill without Republican input. I do look forward to discussing all of these issues this morning with our witnesses, as well as ensuring this program does reach its full potential. This program really should be studied and examined comprehensively. As Members of Congress and as Members of this Committee, it is important for us to exercise our oversight duty to explore how these programs are operating year-in and year-out. The SBIC program has many layers, and it is worth examining thoroughly. I look forward to this conversation beyond this hearing. Again, I want to thank our witnesses for joining, and I yield back. Chairwoman DAVIDS. Thank you, Mr. Meuser. The gentleman yields back. I would like to take a moment to explain how the hearing will proceed. Each witness will have 5 minutes to provide a statement, and each Committee Member will have 5 minutes for questions. Please ensure that your microphone is on when you begin speaking and that you return to mute when you are finished. With that, I would like to introduce--I will go through and introduce each of our witnesses, and then we will get started. Our first witness is Ms. Holly Huels. Ms. Huels is the founder and managing partner of Holleway Capital Partners, which is an SBIC-licensed small-business investment company with offices in the district I represent, targeting small manufacturers in the greater Midwest and Southern U.S. Her insights will be critical for us to learn how SBA's SBIC program can play a role in helping finance the future of our domestic manufacturing base. She previously testified before the Committee in October of 2009. So we are pleased to be able to hear from you again regarding SBIC program. Thank you for joining us today, Ms. Huels. Our second witness is Ms. Carmen Palafox, a partner with MiLA Capital, a pre-seed and seed-stage investment fund based in Los Angeles. Thirty-two percent of MiLA Capital's portfolio companies are led by women CEOs, 58 percent are led by immigrants, and 42 percent address United Nations sustainable development goals. As a non-SBIC investment fund, she represents the type of investor who would be well-served by the Committee's recent efforts to expand licensing options within the SBIC program. Ms. Palafox is also a founding board member of LatinxVC, a group of experienced investors working to engage and foster the Latinx venture capital ecosystem. Thank you for joining us today, Ms. Palafox. The Ranking Member, Mr. Meuser, is now going to introduce our third and final witness. Mr. MEUSER. Thank you, Madam Chairwoman. Our next witness is John Mickelson. Mr. Mickelson is a co- founder and managing partner of Midwest Growth Partners in West Des Moines, Iowa. Midwest Growth Partners is a private equity fund management firm that specializes in assisting and investing in underserved rural markets, including businesses in the food and agriculture, manufacturing, and distribution and logistics industries. Mr. Mickelson has an extensive background in investing and finance and has an undergraduate degree, law degree, and MBA from the University of Iowa and was also a Member of the school's Division I football team. I don't know how they did that week, but maybe we will--or that year, but maybe we will get into it, while you were there. Additionally, Mr. Mickelson is a former city councilman in West Des Moines, Iowa. I am looking to learning more about the strategic rural investing that Mr. Mickelson brings to his rural community. I want to thank again all the witnesses for joining us today, for taking the time away from your busy schedules. And I yield back. Chairwoman DAVIDS. Thank you, Mr. Meuser. And I appreciate all of you being here today. And, with that, I will turn it over--Ms. Huels, you are recognized for 5 minutes for your testimony. STATEMENTS OF HOLLY HUELS, FOUNDER AND MANAGING PARTNER, HOLLEWAY CAPITAL PARTNERS, LLC, ST. LOUIS, MO; CARMEN PALAFOX, PARTNER, MILA CAPITAL, CHATSWORTH, CA; AND JOHN MICKELSON, MANAGING PARTNER, MIDWEST GROWTH PARTNERS, WEST DES MOINES, IA STATEMENT OF HOLLY HUELS Ms. HUELS. Thank you, Subcommittee Chair Davids, Ranking Member Meuser, and Members of the Subcommittee. My name is Holly Huels, founder and managing partner of Holleway Capital Partners. We are a small-business investment company headquartered in St. Louis, Missouri, with an office in Kansas City, Kansas. I am also a former Chairwoman of the Small Business Investor Alliance, a national organization that represents small-business funds and their investors in the lower-middle market. Holleway Capital focuses on investing in small manufacturers and distributors throughout the Midwest, High Plains, Rocky Mountains, and Southern regions of the United States. Our investment strategy targets small businesses with annual sales between $10 million and $75 million. Holleway specializes in working with small-business owners who want to sell, most commonly because they want to retire. We help these sellers align with buyer management teams to tailor an ownership transition and investment structure to each company's needs, market position, and future opportunity. With Holleway as a partner, the business has the capital and management to update technology, purchase capital equipment, and expand into new markets. Without our capital, many of these businesses would simply shut down or have their operations consolidated into another company. We are proud that we help these businesses remain independent, modernize, grow, and build a brighter future for their employees and communities. I have highlighted the success of two of our recent SBIC portfolio company investments in my written statement. I am happy to report that the SBIC program is fulfilling its mission. As this Subcommittee knows, the program had several years of suboptimal management, but, thanks in part to bipartisan congressional oversight, this SBIC program is helping more small businesses than ever before. On behalf of the SBICs across the nation, thank you for your critical and ongoing oversight role. The SBIC program, administered by the U.S. Small Business Administration, is largely working well. But I would like to point out, as with any federal program, targeted improvements can help strengthen the program's ability to expand the benefits of free enterprise to more people and places. First, SBA's SBIC information technology needs an investment upgrade. This is a $34 billion program essentially running on Microsoft Office software. SBA's limited IT technology cripples productivity and creates unnecessary taxpayer risk. SBA has an incredible amount of data but cannot convert it into useful information to make informed decisions or to educate Congress. Second, SBIC's primary regulators are called Operations Analysts, who are supposed to carry 10 to 12 SBIC funds per analyst. Staffing shortages currently have individual Analysts juggling as many as 50 SBICs. Regulated entities do not normally ask for more regulators, but we are. SBA needs the resources, both human and technological, to ensure SBA can run this successful program, provide necessary oversight, and remain responsive. Last, small businesses need access to more equity capital because it is the most patient form of capital. It is also a critical resource for domestic small businesses to keep U.S. businesses competitive and to strengthen supply chains. If the SBA had the tools to allow SBIC equity investment, this would be an incredible advantage to small businesses experiencing high growth or surviving the bumps that they face. I would also like to add that, since I last testified before this Committee in 2009, there has been a meaningful increase in women SBIC fund managers. Our trade association has 11 women on the board. And, while I was the first to Chair the board, several women have also served as Chair behind me, and several more are in line to serve as Chair in the years to come. Thanks to Congress, the SBIC program is serving as a great program for women fund managers to thrive. Thank you for the opportunity to testify on the state of the SBIC program and offer recommendations to help maintain the program's critical role to provide much-needed capital to domestic small businesses. I am happy to answer any questions you may have. Chairwoman DAVIDS. Thank you, Ms. Huels. And the Chair now recognizes Ms. Palafox for 5 minutes. STATEMENT OF CARMEN PALAFOX Ms. PALAFOX. I appreciate the opportunity to testify before you today. I dedicate a lot of time and effort to expanding economic growth and capital access. I founded 2045 Ventures in 2020 to fill persistent gaps in the market for underrepresented founders and invest in sectors that will drive our future, including climate tech, fintech, and health tech. I serve on the National Venture Capital Association Board of Directors, and I am a founding board Member of LatinxVC. As a founding board Member at LatinxVC, I focus on creating opportunities for emerging fund managers like me. I was born and raised in San Diego, California, and moved to Los Angeles to study economics at the University of Southern California. I spent 15 years at Dimensional Fund Advisors, a global asset management firm, and gained deep appreciation for capital markets. I left Dimensional in 2011 to pursue an executive MBA at Berkeley Haas. There, I was immersed in venture capital and startups and recognized the industry's increasing importance to our economy. After graduating from Berkeley Haas in 2014, I wanted to launch a fund to invest in underrepresented founders, but I was too early. The ecosystem supporting women and underrepresented founders and emerging managers wasn't as robust as it is today. So, instead, I joined two business partners and launched a venture capital fund, an accelerator, and innovation lab to invest in hardware technology startups. Our firm reached entrepreneurs in 70 countries and 33 States. We invested in 22 startups across sectors including ed tech, digital therapeutics, climate tech, and space tech. And some of our startups were beneficiaries of government grants and R&D scale- up manufacturing. In October 2020, I launched 2045 Capital to fill gaps in the market. 2045's thesis is that diverse teams outperform, a view supported by data. The data shows that startups with ethnically diverse teams return 30 percent more capital to investors and startups with at least one female founder outperform all-male teams by 63 percent. And a quarter of all our U.S. science and technology firms are founded by immigrants. So 2045's objective is to invest in startups where at least one founder is a woman, an immigrant, or a founder of color. So, in terms of the state of venture capital, it continues to be a powerful industry. The most recent third-quarter 2021 PitchBook and NVCA Venture Monitor reports that venture- capital-backed startups are at the top of the public markets. VC-backed IPOs accounted for more than two-thirds of the total U.S. listings year to date. In addition, 2021 is on a track record for another breaking year for venture investment, exit activity, and fundraising, with a total of $238.7 billion. The VC ecosystem is thriving for most, but not for women and minorities. This inequity is unsustainable when you consider the changing demographics of our nation. The Census predicts that by 2045 there won't be a racial majority in the United States, which is the case in five States today. Already, there isn't a racial majority for youth under 18, and 25 percent of Gen Z are Latinx. In L.A., where I reside, 45 percent of the population is Latinx, but only 2 percent of VC capital investment goes to Black female founders and 3 percent to Latina founders. Furthermore, there is only less than 1 percent of female check- writers like myself in Los Angeles. So programs such as SBIC can help women and underrepresented fund managers grow their presence, activate more investment into startups, and generate other benefits to society. Women and underrepresented managers are more than two times as likely to invest in female and underrepresented fund entrepreneurs---- Chairwoman DAVIDS. Thank you. Thank you, Ms. Palafox. We will return to you for questions after we yield to Mr. Mickelson for 5 minutes. STATEMENT OF JOHN MICKELSON Mr. MICKELSON. Thank you, Chairwoman and Ranking Member, and thank you, distinguished Members of the Subcommittee. My name is John Mickelson, and I am the co-founder and managing partner of Midwest Growth Partners, located in West Des Moines, Iowa, with an additional office in Omaha, Nebraska. Midwest Growth Partners is a USDA-licensed Rural Business Investment Company, or an RBIC, and we raise dollars from the private sector to make succession planning and growth investments in food and agricultural, manufacturing, and distribution businesses in rural communities across the U.S. Like the SBIC program, RBICs make investments in small businesses where institutional capital is scarce, particularly in non-coastal communities. Our investors include Members of the Farm Credit System, rural electric co-ops, ag trade organizations such as the Iowa Corn Growers, and commercial banks. Starting with 7 after our first acquisition in 2014, Midwest Growth Partners' portfolio companies have over 2,600 employees today, employed in and often living in rural communities. These jobs all pay above the living wage, provide benefits, and generated more than $7 million in federal, local, and state withholding taxes in 2020. While we are proud of the impact these portfolio company jobs provide, we are just as proud knowing that many of the jobs provide off-farm income, allowing one spouse to remain farming while the other spouse secures benefits for the family. Since inception, Midwest Growth Partners has grown the employment at its portfolio companies by 25 percent, on average, from the date of its original investment by making 19 investments in rural areas totaling more than $100 million of much-needed private capital. A real-life example of Midwest Growth Partners' capital at work is our investment in Fast Ag Solutions, located in Windom, Minnesota, population 4,400. Fast Ag manufacturers sprayers and liquid fertilizer applicators. Midwest Growth Partners partnered with the Fast Ag management team to purchase the company in the fall of 2020, and we have grown full-time employment from 52 to 73 since then. This type of economic development in rural areas would not be possible without programs like the RBIC, but more can be done. Examples include: providing support for the Rural Capital Access Act, which would enable RBICs to utilize leftovers funds from the SBIC program; the creation of a Micro-SBIC license, which will create a more inclusive pool of talented entrepreneurs to invest in underserved communities; the creation of an SBIC working group to increase the number of SBIC applicants, specifically those located in underserved communities and underlicensed States; and, finally, the creation of an SBA Office of Rural Affairs. Unfortunately, all the success that has been made and the promise of the critical programs mentioned above could be muted because of current issues facing small businesses. PPP was a critical lifeline during the COVID-19 pandemic in 2020, but now businesses are facing a new set of challenges in 2021. Our portfolio companies are facing 30- to 40-percent price increases in raw materials used to make goods, and that is if they can even secure the materials at all. Supply-chain constraints are having a direct impact on sales and profit margins, which constrict the ability to reinvest in our business and hire more employees. The prospect of higher taxes of all forms is delaying business decisions necessary for long-term business planning. Midwest Growth Partners has experienced these challenges daily in the work we do in rural communities with small businesses. On the passthrough income tax side, these proposals aren't impacting only billionaires but small-business owners, who, when faced with the prospect of a tax increase, will forego the hiring of additional workers, even one or two, or an investment in capital goods, such as something as simple as a forklift. Possible increases of capital gains rates or to the 1202 Code have already created unnatural business outcomes, as owners and investors accelerate or indefinitely delay decisions related to their personal succession planning and growth investment strategy. Possible changes to the carried-interest model will disincentivize fund managers from making investments in all areas, including rural and other underserved communities. Businesses in rural areas, and small businesses generally, already face a scarcity of capital access, negatively impacting the lives of millions of Americans. As we near the hopeful end of the COVID-19 pandemic, these businesses are optimistic to grow and create prosperity for their employees and communities. Small and rural business owners and investors are used to facing headwinds. No day is ever easy. But adding additional regulatory and cost burdens is not in their best interest and definitely not in the best interest of the communities they operate in and the millions of employees who provide goods and services which make our country the land of opportunity. Thank you, and I would welcome any questions that you have. Chairwoman DAVIDS. Thank you, Mr. Mickelson. I will now recognize myself for 5 minutes for my first question. Ms. Huels, your fund invests primarily in manufacturing companies throughout the Midwest, including from one of your offices in Overland Park, Kansas, which is in the Third District. This Committee passed a section of the Build Back--I can take my mask off. This Committee passed a section of the Build Back Better Act which included funds for the SBIC program to provide capital for underserved markets and small manufacturers. Can you speak to the challenges that small manufacturers face in accessing capital and what more the SBIC program could be doing for these small businesses? I know you made a few recommendations related to information technology, the number of operations analysts and equity investments, and I would be curious if you want to go into any more detail about that. Ms. HUELS. Well, we invest primarily, as you said, in manufacturers and distributors in the middle part of the country, and we really see two broad trends. Companies are coming back from COVID, and they are in need of growth capital to respond to the marketplace. And, as Mr. Mickelson said, there are challenges with regard to that with employees and supply chain. But then there is also this acceleration of baby boomers who are late in their career and they are looking for what they are going to do with their business in order to retire. So we are managing the portfolio companies that we have, as well as the substantial amount of need for capital, which is-- you know, there is a very strong demand for capital in the market for both growth and for transition as people are trying to get in front of any kind of capital gains tax change that may happen in the future. I hope that answers your question. Chairwoman DAVIDS. Yeah. And then I am curious--just a quick followup, and then I will move on to the next question--about the ways that--because the pandemic has exacerbated various issues, when we are thinking about some of the considerations, whether it is the capital gains, this sort of thing, how has the pandemic, like, either highlighted or maybe brought to the forefront the way that folks are thinking about that? Ms. HUELS. Well, the pandemic--I agree with Mr. Mickelson, the PPP was an incredible resource to keep our companies and many, many companies viable through the pandemic. Now that they have survived that, the next big issue is the supply chain and lack of talent in the market, lack of employees in the marketplace. So I would say probably the biggest struggle of most of our companies at this point--and we have companies in places like Wichita, Kansas, and Montgomery, Alabama. These are small- market-type businesses that are really struggling to, you know, fix supply-chain issues and find talent, employees. Chairwoman DAVIDS. Okay. I appreciate that. And then I guess my next question really has to do with-- you know, we held a hearing in the last Congress to review the management of the SBIC program and had heard a lot of concerns about delayed processing and inefficiency. And I am curious if you have seen in the last 2 years any improvements or what your experience and what you have seen with that program. Ms. HUELS. Yes, candidly, as you are aware, the program was struggling for several years. And I can say that the program is back. The management is excellent. The career folks at the SBA are excellent and do a fantastic job. And the management of SBA is doing--or the management of the OII and the SBIC program are in a great place now. Really happy with the improvements. So thank you. Chairwoman DAVIDS. I am glad to hear that, and just would also encourage you and other folks who are participating in the SBIC program to, you know, keep the lines of communication open. Let us know if you continue to see issues with the program, because we want to make sure it is running well. And, with that, I will yield and recognize the Ranking Member, Mr. Meuser, for 5 minutes. Mr. MEUSER. Thank you again, Chair Davids. Thanks again to our witnesses. So what I would like to try to get through in my 5 minutes here is, what can we do for you? And then let's talk about what you can do for us, as far as legislation or strengthening the SBA, the SBIC, the RBIC as well, overall. So, Mr. Mickelson, I will start with you. You stated that there are various businesses that are underserved by institutional capital. You initially thought there would be 100 opportunities, and turned out there were many more that you are evaluating, 230 or so, and you might have the capacity that there may be far more than that. So let's just talk about what--and Ms. Huels mentioned about the IT systems, which I know usually government agencies could use some real upgrades there. So give me a little bit more on what you would need from the SBIC or, Mr. Mickelson, in your case, the RBIC that would be helpful to you--and, Ms. Huels, I am going to follow up with you, as well, on the same question--for the rural communities. Mr. MICKELSON. Yeah, thank you, Ranking Member. As you mentioned, when we got started in 2013, we told our investors that we hoped to see 100 opportunities a year, because they were concerned in rural areas there wouldn't be enough investment opportunities. In the first full year of operation, we saw over 230. And, for this year, 2021, we will evaluate over 800 investment opportunities. And so there are a ton of wonderful businesses out in the rural areas. And because capital is concentrated in places other than those rural areas, it is a tremendous opportunity for us and other participants in the RBIC program. And I think there should be more funds. When we went through our licensing process for the RBIC in 2018, we were the fourth fund to fully go through the process, and now I believe there are 10, but there could be several more. So one of the things that I think would be helpful for RBICs would be additional support. Similar to what we have heard on the SBA side, the USDA has wonderful people that are working there and overseeing the program. However, there are not many of them. And as I think there is more need for capital in these rural areas, I think there will need to be more oversight and funding for that program. I mentioned in my remarks the Rural Capital Access Act. Right now, the RBIC program does not have access to leverage, like the SBIC program does. And if a fund like us had that tool, we could deploy additional capital into rural markets. And, as I have stated earlier, there is definitely a need for it, and there are not a lot of institutional capital providers like us that are focused on that area. Mr. MEUSER. You mentioned to me earlier it is successful, it is working out well, your returns are pretty good--or very-- you know, what you anticipated, because you are a smart investor. And the SBIC---- Mr. MICKELSON. Thank you. Mr. MEUSER. Well, yeah. The RBIC--you are as good as your last deal, as it says, right? The RBIC is a good partner for you. Do you focus on startups? I mean, the risk factor would be a little bit more there, but give me 20 seconds on how you relate with startups. Mr. MICKELSON. Yeah, yeah, we don't. We focus on food and agriculture, manufacturing, and distribution. Part of that is our collective background as a management team, and then part of it is just the part of the country that we are in. And so, in these rural markets, you don't see a lot of startup tech funds like you would see on the coasts. Mr. MEUSER. Okay. Mr. MICKELSON. And so we are well-suited, uniquely qualified to chase the market that we chase. We would not be as well-suited to go after the technology companies. Mr. MEUSER. Okay. Ms. Huels, same question, and maybe you could answer something related to startups. We are looking at how we can expand, right, in a market-oriented, relatively risk-free manner that your organizations seek, right? So, please, Ms. Huels, if you would respond. Ms. HUELS. Yeah, I think the SBA does a pretty good job with dispersion of SBICs and diversity, but it is always something that needs focus, needs improvement, as more fund managers gain experience within a fund or in some other job experience and to be able to bring that into a fund management. I think there needs to be continued focused from the SBA to find small fund managers in geographies that are less served than the large markets. And I know it is definitely part of their criteria that they look at, as new fund managers are coming into the market. But supporting emerging fund managers, you know, is definitely--you know, there is a risk and a reward to that, and the SBA can manage that risk by allowing smaller, diverse management teams into the program and metering out the amount of leverage that they give those fund managers as they create a track record within the SBIC program. You know, they have to be able to raise private capital, but to be able to supplement that with SBA debentures is a very powerful way to get capital to small markets, especially if the investor is in that small market. They have a tendency, as we do as well, to---- Mr. MEUSER. Excuse me. Thank you, Ms. Huels. We ran out of time, but we will---- Ms. HUELS. Okay. Sorry. Mr. MEUSER.--cover this, perhaps, later. Thank you, Madam Chair. I yield back. Chairwoman DAVIDS. Thank you. The gentleman yields back. The Chair will now recognize Ms. Newman. Ms. NEWMAN. Thank you, Madam Chair, and thank you, Ranking Member, for putting this on today. So I would like to ask a couple questions. One is to Ms. Palafox and then to Ms. Huels. So, Ms. Palafox, thank you so much for your data in your testimony. I would like to share one of your pieces of testimony, because it is very concerning to me, and I also experienced it. I will raise the analysis from reports that 64 percent of VC firms in the U.S. with more than $25 million in assets under management have zero--I will quote again--zero female check- writers and, of the women that became investors in 2020, only one self-reporting as African American and zero as Latinx. So, quick aside: I twice have been involved in startups where, in fact, there was--on the folks that were assessing our businesses, there was not one female and not one person of color. And I pitched my business to over 75 VCs, PE, and early- stage investors and angels. So I can attest to that personally. So my question for you is, what can Congress do to change that horrifying statistic? Ms. PALAFOX. Thank you for that question. I represent 0.1 percent of the whole market as a Latina investor, and so I do recognize the issue. It is a big problem. And 2020, as you mentioned, was a backslide for many of us, as a lot of institutional investors fled to traditional names. I do invest in startups. I invest early. I invest pre- revenue, pre-product. I am willing to take those risks. And I don't do so just geographically in California; I do that across the United States. One of my recommendations for the program is that you focus on outcomes. So, if you want to move the needle in terms of having more representation of women and minorities, then you have to focus there and be intentional about it. I would say that you also have to just take out a lot of the requirements that prevent, for example, solo managers for accessing these capital--for SBIC. There are many female solo managers. SheVC has done a great job of highlighting managers, female managers, that start their own funds independently. Often, these managers raise $5 million to $25 million in private capital. They have diverse backgrounds, coming from investment banking or, like me, asset management, and they invest with intention. Ms. NEWMAN. That is fantastic. Do you have any other ideas about how we can bring more not just female and people-of-color investors into the fold but how we can make that known to them? So things like raising the cap on some of the funds, I think, helps a lot, but what do you think are some ways that we can work with this community to make sure that they have equal representation in the investment community and through the SBIC? Ms. PALAFOX. Right. So, since 2015, there are many organizations that support female and underrepresented managers. I have named and listed many of them in my written testimony. These include All Raise, which is focused on female founders and funders; Women in VC, which was established in 2015; Transact, which is a group of female general partners established in 2018; LatinxVC; BLCK VC; and Venture Forward, which is a part of the NVCA. Ms. NEWMAN. Outstanding. Thank you for your very helpful answer. And then I will turn my attention to Ms. Huels. A similar question to you, but I will focus it on your organization. So, understanding you work directly with SBIC and can certainly--we know some of the things that we have to do, but what could your organization do to make sure that not only there are more investors that are women and people of color in your programs but also that women and people of color are recipients of your investments? Ms. HUELS. Well, I have been active in the SBIC program for over 25 years, and when I first joined the SBIC program, I was with a different fund, and I am proud to say that I gained a lot of experience during my time with that fund. But I used that experience and relationships, and a former partner and I broke away to be able to form a women-owned SBIC, but we had to get that experience to get into the program. It is a long track--you know, it took a long time to get a track record. So I think one thing that could be done is to have the SBA consider investors like myself but maybe with a slightly shorter track record to get more entrants into the program, people of color and women. And I would say, what my fund specifically is doing---- Ms. NEWMAN. Thank you, Ms. Huels. I am so sorry. Ms. HUELS. Okay, that is fine. Ms. NEWMAN. I yield back. Sorry, but thank you very much for your answer, Ms. Huels. Ms. HUELS. No problem. Chairwoman DAVIDS. Thank you. The gentlelady yields back. And the Chair now recognizes Rep. Garbarino from New York for 5 minutes. Mr. GARBARINO. Thank you, Chairwoman, and thank you, Ranking Member, for hosting this hearing. Thank you to the witnesses for being here. My first question is for Ms. Huels. I was reading through your testimony, and you state that your firm specializes in working with small-business owners that are interested in selling. Can you expand on this? Ms. HUELS. Sure. Businesses go through a continuum. They start with Carmen and early-stage investing and getting a company started. And then, you know, we are focused on manufacturing and distribution companies; they go through a lifecycle of growth and meeting market demands. But, ultimately, an owner or founder or a couple of founders have to decide what they are going to do with that business at the end of their career, and that is really where we can step in. That owner has a couple of choices. They can liquidate that investment and turn their life's work into cash by selling the assets. They could sell it to a corporate buyer, who may or may not leave the company in their current location; it may get absorbed into another facility. Or they can work with their management team to create a transition to keep the company in its current location, keep the employees, and find new markets to grow that business. And that is really when Holleway steps in, to partner with those management teams to give the capital to the retiring owner and allow, you know, growth in the business, purchase of capital equipment, and growth into new markets where they might not have been able to go with their former owner. So there are needs for capital across the continuum. We, because of our background and experience, serve the later- stage-type businesses that are going through that kind of transition. Mr. GARBARINO. That is fascinating. I appreciate your answer there. And just turning to something else, you said you have been with SBIC or you have been part of the program for over 25 years now. How do you think it is running now compared to--you know, there have been some hiccups along the way, but, I mean, is it working well? What could we do better, if we are not doing something better? Ms. HUELS. Well, I will just take the time to say that the career staff is excellent. They do a fantastic job working with the fund managers, licensing new funds. You know, the career staff does great. There have been periods of time where leadership of the office has been fantastic, and then there have been times where it has been suboptimal, as I said. And, thankfully, right now we are in a period where the program is really running strong, I am happy to say. Mr. GARBARINO. So is this something that we should just leave alone, since it is running well now, and just let it take its course? Ms. HUELS. Well, new licensing is running well. There is definitely room for--a need for new or additional operations analysts. I think they are swamped. The number of new fund managers and just the staffing is short-staffed. I definitely think that is something that could be fixed. As I said, the technology element is definitely something that needs some focus and investment. You know, the SBA has a lot of portfolio companies under their domain, and I think being able to gather data would, frankly, give folks like yourself more information about how many companies and how successful the program is. It is hard for them to gather that data using their current systems. Mr. GARBARINO. I appreciate that. I can testify, myself, to the staffing level. I had a breakfast--I think it is just short everywhere. I had a breakfast this morning with a bunch of equipment salesmen, and they were just saying, between the supply chain and staffing, you know, it is just very hard for them to grow. And they said, even if supply-chain problems didn't exist, they wouldn't have the staff to take care of it. Are you hearing that from your small businesses? You discussed staffing, supply-chain issues, and, I guess, costs as well. And if those are problems, you know, would we want to add new taxes onto that now? I know there are discussions about possible new taxes coming on businesses. You know, would that add to part of the problem that we are seeing right now with some of the growth of small businesses? Ms. HUELS. Certainly raising taxes discourages investment into long-term, illiquid investments, which is what we do-- long-term, illiquid investments. And capital gains rates increasing could deter, will deter, investors from investing in long-term asset classes like ours for sure. Mr. GARBARINO. Yeah. Ms. HUELS. And in terms of the employees, employees and supply chain are the two things we hear from our portfolio companies every day. Mr. GARBARINO. I appreciate your answers. And I only have 10 seconds left, so I yield back, Madam Chair. Chairwoman DAVIDS. Thank you. The gentleman yields back. The Chair will now recognize Ms. Chu from California for 5 minutes. Ms. CHU. Ms. Huels, thank you so much for mentioning my bipartisan legislation, the Investing in Main Street Act, which has been favorably reported by this Committee for the past three Congresses and has actually passed out of the House in past Congresses. And what it does is increasing the amount of capital that could be invested in the SBICs, particularly from banks. Under current law, the Small Business Investment Act of 1958 prohibits SBICs from taking investments from banks that have over 5 percent of their capital invested in SBICs already. But bank regulations already permit the exact same institutions to invest up to 15 percent of their capital and surplus into SBICs. So this bill would simply align the outdated small-business investing law with current banking law and unlock up to three times as much investment capital for SBICs at no additional cost. So what impact would this policy change have on the SBIC program and institutions such as yours? Ms. HUELS. Representative Chu, I agree with you, there is a regulatory mismatch between the banking regulations and the SBIC regulations. I think bringing them into parity would be supported and would definitely bring more capital into the market--it would provide clarity to investors of how much they can invest into SBIC funds, which would allow more capital to flow to fund managers, which would ultimately allow more capital to go to small business. I think it is definitely a regulatory mismatch that should be fixed. Thank you for supporting it. Ms. CHU. Thank you so much. Ms. Palafox, your story is so impressive. And as a Representative of the Los Angeles area myself, I am so glad that you came before the Committee today to tell your story. As you know, the SBIC program has historically struggled to reach underserved businesses and to license funds operated by women and people of color. CRS research finds that SBICs provide about 5 percent of their total funding to minority- owned businesses, about 3 percent to women-owned businesses, and less than 1 percent to veteran-owned small businesses. These low numbers led SBA to have the Library of Congress research this issue, and they found that racially diverse SBICs make more investments in minority-led and minority-owned portfolio companies, as well as in women-led and women-owned businesses, than non-racially-diverse SBICs. So, to address the lagging diversity in the SBIC program, the House Small Business Committee's section of the Build Back Better Act includes almost $10 billion in investments in the SBIC program, largely to ensure that it reaches more underserved businesses. It would establish a new Venture SBIC program to provide capital to underserved markets and small manufacturers, create an Emerging Managers Program to help less experienced fund managers get an SBA license, and implement a new MicroCap SBIC license subprogram to increase SBIC diversity. So can you talk about the challenges that somebody from an underserved group would have to get this venture capital and how these particular kinds of programs in the Build Back Better Act could address this? Ms. PALAFOX. Thank you for that question. You know, Los Angeles is the third-largest tech ecosystem in the United States, but, as I mentioned, it is not working for women and underrepresented minorities, and that is because there is this funder-founder gap. We don't have enough women check-writers. We don't have enough minority check-writers. And so we do need to act quickly. We need to issue licenses quickly, and we need to allocate the billions of dollars that you talk about. As I mentioned in my statement, $238 billion was invested in venture capital year to date. That is just year to date. So, in order to have meaningful progress, we need to move quickly. We need to work with organizations that are supporting women and emerging managers. There are so many out there now, today, that can be helpful in this process to reach these communities. I, myself, am considered a first-time manager, but I have invested in over 25 startups at day one. These companies have gone on to raise over $210 million and are doing meaningful work for our country. Ms. CHU. Thank you. I yield back. Chairwoman DAVIDS. Thank you. The gentlelady yields back. The Chair will now recognize Rep. Van Duyne, the Ranking Member of the Subcommittee on Oversight, Investigations, and Regulations, for 5 minutes. Ms. VAN DUYNE. Thank you very much. I really appreciate you having this hearing today. I do have a question for Mr. John Mickelson. First of all, I want to thank you for your work as a city council Member. I, too, served on city council for 6 years. I think you will agree it is one of the hardest jobs that we have had but also one of the most personal and meaningful. As a result, I am sure you had opportunities to talk to business owners and employees in your city to figure out what their needs are and can tell about that firsthand. One of the SBIC program goals is to improve and stimulate the national economy and the small-business segment in particular. I would be remiss if, while discussing how to stimulate our economy, we didn't touch on the current economic situation for small businesses. Record inflation and hiring shortages are severely impacting our small businesses. NFIB reports that 51 percent of small businesses have employment openings that they can't fill and 90 percent of small businesses are experiencing supply- chain troubles. And this doesn't make light of the fact that small businesses are also awaiting potential tax hikes and increased regulatory burdens that this administration is pushing. So, when considering the success of small businesses, do you find that this current business environment, primarily due to an overactive administration, is more challenging than it needs to be? Mr. MICKELSON. Thank you, Congresswoman, for the question. And thank you for your comments on the city council. It was a good, wonderful time in my life. Yeah, there is no question that the current challenges facing small businesses--as I mentioned in my remarks, inflation, a hiring shortage, the potential for a vaccine mandate which will impact companies with more than 100 employees, and then uncertainty around tax, both for passthrough businesses but then also on the capital gains side--is really just creating uncertainty. And uncertainty is bad when planning a business. So, this time of year, all of our businesses are going through a budget process to plan for 2022 and what kind of investments they can make in people and in capital goods. And because so many of these things are sort of in flux, it is very hard to plan. And that makes it very inefficient to run and operate a business. Ms. VAN DUYNE. Okay. I appreciate that. I have spoken to businesses of all sizes, and a common concern that they have shared with me is the upcoming vaccine mandates that are being imposed by the Biden administration. While we are experiencing, as I just mentioned the numbers, a significant labor crisis, how do you think that the vaccine mandate will affect small businesses' ability to be able to manage their current staff, to hire, and to grow? Mr. MICKELSON. Yeah. Thank you for the question. You know, in rural communities and predominantly blue- collar environments, there is a lot of hesitancy as it relates to getting the vaccine. And, whether that is right or wrong, that is just the facts that we are dealing with today. And I know several business owners, including our portfolio companies, that are concerned, should this pass--I think it was announced on September 9, and we haven't been given a lot of guidance since then--but, should this become law, they will have up to 50 percent of their workforce leave and go find jobs elsewhere. And so the business owners are concerned that the obligations that they have made to fulfill contracts for things that they have agreed to build or to do in their business for customers they won't be able to do, because they just simply won't have the people there to do that. So, at a minimum, providing some further information, some guidance for businesses, would be extremely helpful for small businesses. Ms. VAN DUYNE. In representing a rural district, I have had a lot of opportunities to speak with folks who actually are in the shipping area. And I am assuming a lot of your small businesses are relying on that. Part of this vaccine mandate is going to definitely affect pilots of shipping for supplies. So, given the fact that we already have such a supply-chain shortage now and issues with that, do you see the vaccine mandate being able to hurt small businesses, specifically in the rural areas, because of the hiccup in transportation? Mr. MICKELSON. Yes. The definition of ``social distancing'' would be being by yourself in a semi truck, hauling goods and services--or hauling goods for customers. And so I know that many of these trucking companies have more than 100 drivers and they have a chronic shortage of drivers. And so, to the extent that they lose, you know, up to half of those drivers overnight, it will have catastrophic impacts on getting raw materials to manufacturers, like the ones that we are invested in, to go and build further products. Ms. VAN DUYNE. I appreciate that. And, actually, I think it was UPS, as well, that said they were going to have a dramatic impact on the commerce in the United States if this mandate were to go through as well. I appreciate your time. And I yield back. Chairwoman DAVIDS. Thank you. The Chair now recognizes Rep. Bourdeaux for 5 minutes. Ms. BOURDEAUX. Thank you, Chairwoman Davids and Ranking Member Meuser. In this committee, we frequently hear from small-business owners and advocates dealing with issues of accessing capital. Access to capital is very much at the top of the list in terms of issues that I hear about when I talk to small businesses in my community. And the SBIC program really does offer a vital source of capital for these folks. In Georgia alone, SBICs have invested more than $1.7 billion in 332 small businesses since 2011. Just a couple of questions. Ms. Huels, I noticed that you got cut off when you were answering Congresswoman Newman's questions about getting more women involved in the SBIC program, and would love to take a minute, just if you could flesh out some of your ideas there about how to do that. Ms. HUELS. Thank you for circling back. I appreciate that. What I was really just going to say is, we, as a fund, have taken the challenge of getting more women into the program very personally. My partner and I have been--or, we have two analysts--we are a firm of five people, and myself and our associate and senior associate are all women. We are trying to, you know, use our little corner of the world to try to support more women coming into the program and getting experience. As a check-writer, as Carmen has said, as a check-writer in the program and becoming a qualified investor, you need to get experience hopefully early in your career. So we have done that by using the two positions that we have, and both of them are women, and we are really happy about that. Ms. BOURDEAUX. Okay. You mentioned something about, you know, should we think about adjusting the standards; we want to make sure that women are in there, that they are qualified, though, when they do it; and, you know, shortening the time where, you know, women are, you know, learning the ropes, as it were. Is there anything like that that we should just think about? Ms. HUELS. Well, there are qualified women out there who may not have exact SBIC experience, and I think and I am hopeful that the SBA takes that other experience into account as they are looking at these emerging managers. So to give someone a license either with no leverage or limited leverage as they learn the program, make investments, and build a track record, I think, is definitely something the SBA could look at or look at further, if they are not already, to be able to manage taxpayer risk by metering leverage, the amount of leverage, to the smaller or emerging fund managers who may not have quite as much experience. Ms. BOURDEAUX. Okay. Thank you so much on that. And then one other issue really of interest to me is around manufacturers---- [Audio interruption.] Sorry about that. We have all sorts of internet problems. I think I froze there for a second. Interested in the manufacturers. And you said about a third of all program funds are invest in small manufacturers. What makes the SBIC program well-suited to investing in manufacturing firms? And what can we do to make it more attractive to continue and build those investments in the small manufacturers? Ms. HUELS. Did you direct that question toward me? I am sorry. Ms. BOURDEAUX. That was--yes, yes. Ms. HUELS. Oh, okay. Ms. BOURDEAUX. Sorry. It might have gotten lost in the gap. Ms. HUELS. No, that is okay. Yep, manufacturing companies are the heart of what we--our entire investment thesis and strategy is around manufacturers and distributors, in the middle part of the country specifically. We are, as I mentioned, going to places like Wichita and Montgomery, Alabama, and other, sort of, off-market places, and there are a lot of really great manufacturing firms that are in this transition phase that I have mentioned a couple of times. And the way to support them with growth and capital is to allow them to transition away from a retiring owner, give that person the value of the business, but backing the management team to continue to operate in the locality that they are and grow with additional capital to support the additional markets. It is a really important source of capital that many SBIC fund managers---- But the definition of--we are a debenture fund, so we need interest income, so these need to be cash-flowing, typically later-stage business that have cash flow available to pay interest so that we can pay the SBA debentures. So a more equity-oriented investment needs a different kind of a tool than what the SBA structure is currently--debenture program is currently structured to support. Ms. BOURDEAUX. And what would be a more equity-oriented- type program? What would that look like? Ms. HUELS. There are several equity-oriented programs on the, you know, docket that are being looked at that would use the SBIC infrastructure to make longer-term investments in companies that may not yet have the cash flow available to serve this interest but take a more equity-oriented longer term to give companies time to create cash flow. Ms. BOURDEAUX. Okay. Got it. Thank you so much. And I yield back. Chairwoman DAVIDS. Thank you. The gentlewoman yields back. Well, first of all, I want to say thank you to all of our witnesses again for being here today. Your testimony is certainly critical as our committee takes steps to enhance not just the SBIC program but other areas where we can increase access to capital, particularly in rural areas, as we heard today, and then, of course, build on years of success that the SBIC program has seen. This program is essential. It is providing billions of dollars to small businesses seeking investment capital, facilitating economic growth, and helping to create jobs in that process. And it is why we have to address the program's shortcomings and ensure that it is operating as efficiently as possible as well. You know, by making critical reforms, we can expand licensing options to investors funding the 21st-century entrepreneurs, facilitating more small-business growth. And I am definitely looking forward to collaborating with Committee Members to reach this goal. And, with that said, I would ask unanimous consent that Members have 5 legislative days to submit statements and supporting materials for the record. Without objection, so ordered. And if there is no further business to come before the committee, we are adjourned. Thank you. [Whereupon, at 11:08 a.m., the Subcommittee was adjourned.] A P P E N D I X [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]