[Senate Hearing 117-211] [From the U.S. Government Publishing Office] S. Hrg. 117-211 REVIEW OF THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM ======================================================================= HEARING BEFORE THE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP OF THE UNITED STATES SENATE ONE HUNDRED SEVENTEENTH CONGRESS FIRST SESSION __________ JUNE 9, 2021 __________ Printed for the Committee on Small Business and Entrepreneurship [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.govinfo.gov __________ U.S. GOVERNMENT PUBLISHING OFFICE 47-000 PDF WASHINGTON : 2022 ----------------------------------------------------------------------------------- COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP ONE HUNDRED SEVENTEENTH CONGRESS ---------- BENJAMIN L. CARDIN, Maryland, Chairman RAND PAUL, Kentucky, Ranking Member MARIA CANTWELL, Washington MARCO RUBIO, Florida JEANNE SHAHEEN, New Hampshire JAMES E. RISCH, Idaho EDWARD J. MARKEY, Massachusetts TIM SCOTT, South Carolina CORY A. BOOKER, New Jersey JONI ERNST, Iowa CHRISTOPHER A. COONS, Delaware JAMES M. INHOFE, Oklahoma MAZIE HIRONO, Hawaii TODD YOUNG, Indiana TAMMY DUCKWORTH, Illinois JOHN KENNEDY, Louisiana JACKY ROSEN, Nevada JOSH HAWLEY, Missouri JOHN HICKENLOOPER, Colorado ROGER MARSHALL, Kansas Sean Moore, Democratic Staff Director William Henderson, Republican Staff Director C O N T E N T S ---------- Opening Statements Page Cardin, Hon. Benjamin L., Chairman, a U.S. Senator from Maryland. 1 Witnesses Wittelsberger, Mrs. Stacey R., Principal, Patriot Capital, Baltimore, MD.................................................. 4 Rodriguez Simon, Mrs. Ivelisse, Managing Partner, Avante Capital Partners, Los Angeles, CA...................................... 13 Alphabetical Listing and Appendix Material Submitted Cardin, Hon. Benjamin L. Opening statement............................................ 1 Rodriguez Simon, Mrs. Ivelisse Testimony.................................................... 13 Prepared statement........................................... 15 Responses to questions submitted by Senators Hirono and Rubio 44 Wittelsberger, Mrs. Stacey R. Testimony.................................................... 4 Prepared statement........................................... 6 Responses to questions submitted by Senators Hirono, Rubio, Inhofe, and Young.......................................... 36 REVIEW OF THE SMALL BUSINESS INVESTMENT COMPANY PROGRAM ---------- WEDNESDAY, JUNE 9, 2021 United States Senate, Committee on Small Business and Entrepreneurship, Washington, DC. The Committee met, pursuant to notice, at 2:30 p.m. in Room 215, Dirksen Senate Office Building, Hon. Ben Cardin, Chairman of the Committee, presiding. Present: Senators Cardin, Cantwell, Duckworth, Rosen, Hickenlooper, Scott, Ernst, Inhofe, Young, Hawley, and Marshall. OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, CHAIRMAN, A U.S. SENATOR FROM MARYLAND Chairman Cardin. The Small Business and Entrepreneurship Committee will come to order. I have checked with Senator Paul and he will be here shortly, and he has asked that we start the hearing, so we will start the hearing, with Senator Inhofe here in person, Senator Ernst here in person. I think I saw Senator Young on the Webex. We are still doing these hybrid hearings between the Webex and in person, and I take it we have one of our witnesses that is going to be also by Webex. So today's hearing involves the small business investment companies, the SBIC. I want to thank Senator Paul for his help in allowing us to put together this hearing. The SBICs were created in 1958, and to date have been responsible for investing over $100 billion into small businesses, to tens of thousands of small businesses that have benefited through the SBIC. The companies that have benefited from small businesses, many have gone on to become even global brands, such as Intel, Apple, FedEx, so good things happen when we can find a way to finance creative ideas. I have my own experience with the SBICs. Before I was in Congress, I represented small businesses and had the opportunity to help manage an SBIC that provided help to independent groceries that were struggling to get started. I am proud to say that some of these small, independent grocers are now regional chains that have grown as a result of being able to get financing to start, and the SBIC helped make that a reality. The 2020 numbers are extremely impressive--$4.8 billion was invested to over 1,000 companies, without any cost to the taxpayers whatsoever. I know that is going to make a lot of my colleagues on this Committee very happy to know that this is one in which there has been no cost to the taxpayers. It actually is a benefit to our small businesses and it allows our economy to grow. It is our Committee's responsibility to find ways to make this program even more effective, particularly coming out of COVID-19, considering the impact it has had on small businesses. So we have challenges. We have challenges in all of our programs. We have the historic problems of women-owned businesses, black, Hispanic, rural, and other underserved communities that existed before COVID-19, that was made more difficult as a result of COVID-19 in attracting capital. This is particularly acute in venture capital, startup companies. The numbers there are shocking. Ninety-three percent of venture capital is controlled by white male ownership. A majority of our venture capitalists are located in three communities: Boston, New York City, and Silicon Valley. When we look at venture capital and the availability of venture capital today, less than 1 percent goes to black-owned businesses, 2 percent to Hispanic-owned businesses, and 3 percent to women- owned businesses. We can and must do better, and the SBIC can play a very important role in making that a reality. Consider, for example, CSS Antenna, a women-owned business founded in Edgewood, Maryland. Founded in 1997, CSS was a designer and manufacturer of telecommunications products such as antennas and filters. Between 1999 and 2005, the company increased revenue by more than 2,000 percent, from $2 million to $44 million. By 2007, due to the slowdown in cellular technology development and the growing economic crisis, CSS experienced a significant decline in sales, and was in desperate need of capital. The company's primary lender at the time was not willing to provide capital during the downturn, but through an investment from Patriot Capital, which is being represented here today by our witness, Stacey Wittelsberger, CSS was able to bounce back. After being forced to lay off employees due to lack of funding in 2008, the company grew from $8 million in revenues that year to $19 million in 2009, and were able to rehire their workforce. By 2013, annual sales at the company were once again more than $40 million. A clear example of where the SBIC really came in to serve our small business community. When the company was eventually sold to competitors based in Liverpool, New York, in 2013, all of their employees, which at the time numbered more than 100, kept their jobs. That success story would not have been possible without SBIC funding. Our focus today must be on how we can take SBIC from a good program to a great program, a more inclusive program, that reaches underserved communities frozen out of traditional venture capital markets. I want to thank our colleagues, Senator John Hickenlooper and Senator Jim Risch for their leadership on this issue. This is bipartisan support in our Committee. They have introduced the MicroCap Small Business Investing Act, legislation to authorize the SBA to create a MicroCap SBIC license that would encourage more underrepresented investment managers to participate in the program. The bill is important because we know that racially and gender-diverse SBIC funds invest more frequently in minority- and women-owned businesses. We must also create an on-ramp for fund managers from underrepresented communities to get into existing SBIC programs. One of our witnesses, Ivelisse Rodriguez Simon, of Avante Capital Partners, has spearheaded an excellent internship program at her firm that could serve as a model as we continue our work to diversify the SBIC program, and I look forward to her testimony and explaining that program. We also need to explore ways to restore one of the pillars of the program, equity investing. After the collapse of participating securities 15 years ago there has been a gap in the program's ability to deliver patient capital to startups and small manufacturers. And we must also explore policies that will create strong innovation ecosystems in underserved communities. In January, Senator Hirono and I introduced the UPLIFT Act, which would nurture innovation ecosystems in minority, low-income, rural, and other underserved communities by providing HBCUs, minority- serving institutions, and community colleges with the resources to establish and expand incubators and accelerators for underserved entrepreneurs. Because while SBIC is able to support innovation to small businesses ready to take on investment, it is also vital that we fund growth accelerators and incubators that could help innovators turn their ideas into a startup. So I am looking forward to a robust discussion with our witnesses today about what the Federal Government can do to better support these programs. The months and years ahead will provide us an opportunity to reshape our Nation's economy. We should also improve the SBIC, invest in it, and make it more equitable so we can build back better. We have a unique opportunity, and this hearing will help us in what we should do in order to improve that program, that very important program. With that, I will interrupt our witnesses when Senator Paul arrives so he can have a chance to make opening statements, but at this point we will proceed with our witnesses. Our first witness--I have already alluded to our two witnesses today, but our first witnesses is Stacey Wittelsberger, who is the Principal Partner at Patriot Capital. Patriot Capital is an SBIC located in Baltimore, and she has been there since June 2010. She is responsible for originating, underwriting, execution, portfolio management, and investor relations, and she lives in the Fells Point neighborhood of Baltimore, Maryland, one of my favorite places to go in the city of Baltimore. Our second witness is Ivelisse Rodriguez Simon, Managing Partner of Avante Capital Partners. She is a managing partner, which is based in Los Angeles. She currently manages the fund's portfolio and new deal activities. Ms. Rodriguez Simon joined Avante in 2009, as a founding member of the firm. So we have two individuals who are intimately involved in the management of SBICs, so they can tell us how it works and hopefully ways in which we can innovate to make the program work even better as we look at ways to improve the program. We still start with Stacey. By the way, your full statements will be made part of the record, and you may proceed as you choose. STATEMENT OF STACEY R. WITTELSBERGER, PRINCIPAL, PATRIOT CAPITAL, BALTIMORE, MD Mrs. Wittelsberger. Thank you. Chair Cardin and members of the Committee, thank you for inviting me to testify today on behalf of the Small Business Investor Alliance. My name is Stacey Wittelsberger. I am a principal with Patriot Capital, headquartered in Baltimore, with offices in Chicago, Dallas, and Atlanta. Patriot Capital is a multi-strategy middle market investment manager that is a five-time licensee in the program. Additionally, we are an active member of the SBIA. Our firm focuses on investment opportunities in small and medium-sized, privately held companies. We typically invest $3 to $25 million in each of our portfolio companies. According to internal data from our three most recent funds, representing a portfolio of about 84 small businesses, either current or exited, our companies employ approximately 33,100 employees, which represents a 27 percent increase in jobs from the time in which we made the initial investments. One example of a portfolio company investment, previously discussed by Chair Cardin, with strong job creation right in my home State of Maryland and also women owned, was a telecom manufacturing business called CSS Antenna. At the time of our investment in 2008, the company employed approximately 40 individuals. Our capital helped the business survive as the industry was transitioning from 3G to 4G technology development buildout, causing a lull in customer demand. CSS further grew to over 150 employees at the time of our exit in 2013. SBICs are an American success story, an example of successful Federal public policy that aligns the power of private markets with the public interest of job creation and expanding economic growth and opportunity. The SBIC program is largely working well, but targeted improvements would help. I would like to discuss some potential recommendations for improvement. First, SBA Administrator Guzman has inherited an agency operating an unprecedented number of new pandemic trigger programs, set up in an inconceivably short amount of time. The SBA, however, continues to be chronically understaffed, with outdated technologies and a limited budget to secure new technology tools. The SBIC program, in particular, needs an appointed leader to serve as the Associate Administrator for the Office of Investment and Innovation. The OII staffing shortages are also not conducive to capital access or healthy oversight of the program. For example, frontline SBIC regulators typically monitor and regulate only about 10 to 12 funds per regulator, because of the unique nature of each of the funds. Today, however, the SBA is so short-staffed that the ratio between OII regulator and regulated SBIC fund is at an impossible level of about 45 or more funds per operations analyst. We encourage Congress to provide the necessary resources, both human and technological, to ensure that the SBA is able to run this successful program and provide necessary oversight. The SBIA also supports the Investing in Main Street Act, a bill introduced during the last Congress session by Senators Duckworth and Young. The bipartisan bill, which passed in the House by a vote of 403-2, but was not considered in the Senate, would fix a drafting discrepancy between small business and banking law, and permit banks to invest up to 15 percent of their surplus capital in SBICs. Next, the SBIA supports a bipartisan bill, introduced recently by Senators Hickenlooper and Risch, the MicroCap Small Business Investing Act of 2021. It would authorize the SBIA to create a new pathway to license newer, smaller funds within the existing parameters of the current SBIC program. The goal of the legislation is to expand the pool of qualifying fund managers in the SBIC program by providing broader access for talented, underrepresented, diverse people, in potentially smaller geographies, where there is currently limited access to participating in the SBIC program, with the goal of directing much needed capital to smaller markets. The SBIA encourages the Senate to pass the Hickenlooper-Risch bill. Finally, small businesses need more access to equity, which is the most patient form of capital. Equity investments are typically less of a cash constraint than debt, allowing for more money to be reinvested into a business, fueling growth. Equity is also typically more appropriate for earlier-stage businesses, not yet generating significant revenue. Equity capital, however, can be the hardest for small businesses to access, especially many early stage businesses which tend to be composed of a younger, more diverse demographic than prior generations. The SBIA supports empowering SBICs to provide more equity investments than currently allowed by the SBA. This would also help create economic opportunity in parts of the country that are undercapitalized compared to the three regions previously mentioned that receive an estimated 75 percent of early stage capital investments today. In conclusion, the SBIC program is well positioned to provide much-needed capital to domestic small businesses, and Patriot Capital is proud to be one of the growing numbers of SBIC's licensees, helping U.S. small businesses, stimulate the economy, and create jobs. Thank you again for the opportunity to testify on behalf of the SBIA. [The prepared statement of Mrs. Wittelsberger follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Mrs. Wittelsberger, thank you very much for your testimony. We will now turn to Mrs. Rodriguez Simon, via Webex. STATEMENT OF IVELISSE RODRIGUEZ SIMON, MANAGING PARTNER, AVANTE CAPITAL PARTNERS, LOS ANGELES, CA Mrs. Rodriguez Simon. Good afternoon, Chairman Cardin, Ranking Member Paul, and members of the Committee. It is my sincere honor to be speaking with you all today. My name is Ivelisse Rodriguez Simon. I am originally from Puerto Rico, and I grew up in a low-income neighborhood on the south side of Chicago. I was the first person in my family to attend college, and I started my career in the mid-1990s in investment banking on Wall Street. I have more than 20 years of experience in investment management and an MBA from Harvard Business School. I am a managing partner and one of the founders of Avante Capital. Avante is a 100 percent women-owned firm with close to $900 million of capital under management. Our firm was founded in 2009, and has been a proud member of the SBIC program ever since. In 2018, we were selected as the SBIC Fund of the Year for our strong track record of performance and our commitment to job creation. Over the last decade, we have invested more than $500 million in both debt and equity in over 100 companies, and we have never had a cash loan loss. Of our 16 team members, 12 are women, minorities, or both. We are passionate about supporting women and underrepresented communities in this industry, and we fundamentally believe that diversity is not only a social imperative, it is also good business that drives better returns and incremental job creation. There are two questions I would like to discuss with the Committee today. First, how could we better utilize the SBIC program to drive additional job creation and innovation across the country? And second, how do we increase diversity within the program to spur investments in underserved communities? The existing SBIC debenture program is, by all accounts, a huge success. As mentioned by Senator Cardin, SBIC funds have provided more than $100 billion of funding across 200,000 financings to small businesses, creating more than 3 million jobs in just the last 20 years. Last year alone, SBIC funds facilitated more than $4.8 billion in investments to more than 1,000 companies across the country, at no cost to American taxpayers. Despite the success of the SBIC program, it is underutilized. While the SBA is authorized to provide up to $4 in leverage to SBICs annually, SBIC funds are only drawing about $2 billion in SBA leverage each year. We should expand the program and fully utilize it to get more capital invested in small businesses, especially now when those businesses will be key to our economic recovery and growth. One way to do this is by providing more capital and human resources to the Office of Investment and Innovation at the SBA. They are a highly competent, committed group of professions. However, they are under-resourced. Providing them additional resources would allow them to process and manage more license, and as a result, SBICs will deploy more capital to small businesses. Another way to inject more capital into small businesses is to establish an SBIC equity program. An equity program would broaden access to capital for small business that are prime for growth but unsuited for the current debenture program. Broadening the impact of the SBIC program, however, does not just mean adding resources and new types of financing. It also means deploying capital in a more fair and equitable way. Each year, SBICs provide only 5 percent of the total financing to minority-owned businesses, and about 3 percent to women- owned businesses. This lack of diversity in investments stems directly from the lack of diversity among SBIC fund managers. This is no more than a handful or two of women and minority- owned investment managers in the 300-plus SBIC licenses outstanding. Yet we know that SBIC managers, diverse SBIC managers, invest more frequently in minority and women-owned businesses. To invest more equitably, we need more diverse managers in the existing program. When I talk about diversity in this industry I often hear that there is not a robust pipeline of qualified diverse managers. I am here to tell you that is just not true. There are many experienced women and people of color with proven track records, who are amply qualified to manage a successful SBIC fund. We need to reach out to these diverse managers and recruit them to benefit from their experience and their diverse networks. To further facilitate the growth of diverse SBIC managers, we should also establish an official Mentor-Protege program. We should provide incentives for established funds to invest in and support new, diverse manager funds and guide their development within the SBIC program. Lastly, diversity efforts work best when everyone is involved. We should create a diversity task force or working group charged with implementing and tracking initiatives that drive meaningful diversity of manager and investments. And we should work closely with private industry. As Senator Cardin mentioned, my firm launched the first-ever internship program in the SBIC industry. This summer, we will welcome 30 interns, all women and people of color, who will work at 25 SBIC funds across the country. We are very excited about growing the program. In closing, I would like to offer my continued support to work with any of the members of the Committee in our collective efforts to expand the SBIC program and drive diversity within it. And thank you for allowing me to participate virtually. I actually had a baby eight days ago, and so while I may be sleep deprived, I am very honored to be here today. [The prepared statement of Mrs. Rodriguez Simon follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Well first, congratulations on your child. A boy, I understand? Mrs. Rodriguez Simon. A boy. Yes, sir. Chairman Cardin. He is doing well? Mrs. Rodriguez Simon. He is doing very well. He is baby number four, so it is old hat by now. Chairman Cardin. So you are used to this. You are a real pro at this. Well, congratulations to you, and thank you very much for your testimony. I want to first cover a point that both of you have talked about, and that is equity funding and how we need to deal with this. It is interesting that we have provided help to large industries during economic downturns. During the Great Recession we provided substantial help to major industries. We took back notes that gave us the ability to take some of the profits, based upon what happens in the future. So the government has been involved in ways in which we can provide help to industries. The SBIC has traditionally not been involved in that particular field, so you are suggesting perhaps a separate fund that would deal with equity investment or startup. Is that what I understand the recommendation? I think, Mrs. Rodriguez Simon, you specifically mentioned that, and Mrs. Wittelsberger, you said we have to do something in regards to equity funding. Are there specific recommendations you have in that regard? Mrs. Rodriguez Simon. Yes, sir. Mrs. Wittelsberger. Go ahead. Chairman Cardin. Go ahead, Mrs. Rodriguez Simon. Mrs. Rodriguez Simon. Yes. There is a very significant opportunity for us to continue to support small businesses through equity investing. Currently, the debenture program invest primarily debt, which is a very effective way to help companies grow. However, not all companies are suited for debt. There are businesses that are either too small, too new in their cycle, do not generate enough cash-flow, that really could utilize equity. And so my suggestion would be that we create a program very similar to the debenture program but that allows for equity, allows for SBIC funds to invest equity rather than debt. They would go through a very similar process for licensing, and they would be managed in a very similar way. My additional suggestion, though, is that we need to be very intentional about making sure that we recruit diverse managers into that equity program, so that we do not face the same challenges we face in the debenture program, which is the large majority of investment managers are not diverse, and so the majority of the capital goes to businesses that are not diverse. And so if we can start the program off in a good way, and make sure that a number of those managers are also diverse, I think that we would be able to significantly increase the amount of capital and the amount of jobs that we can create through that equity program. Chairman Cardin. I want to come back to the diverse fund managers. In startup capital, the numbers are even much worse than general capital, when it comes to opportunities from underserved communities. So having a mechanism to deal with equity capital, under our supervision, would certainly be a tool that could help deal with that. Mrs. Wittelsberger, in regards to equity capital? Mrs. Wittelsberger. Yes. Thank you, Chair Cardin. As I mentioned in my testimony, I think the program is largely working, and I am not sure that we entirely need a new equity program, and my main issues there are things that I mentioned in the testimony, of the SBA being short-staffed right now and not having the technology tools to run the existing program in its volume. So I think that it is set up appropriately and that we could potentially add a subset or equity tools to the existing program that would address some of the issues and concerns that you have, with the primary focus really being that we make sure that the subset and the tools work for small business participants, and that it works for the taxpayer as well. Chairman Cardin. Let me drill down on the resources at SBA. We provided substantially more resources to SBA during COVID- 19, not just in the trillion dollars of relief it provided to small businesses, but in their administrative support. We did give them more help. Both of you have mentioned a need for additional personnel and technology. Personnel, I understand. Talk a little bit about technology. Where is the SBA lacking in providing the technical support necessary to process the SBIC applications? Mrs. Wittelsberger. Sure. I am happy to speak on that. So the SBA is running about a $33 billion program today on very antiquated tools, including Microsoft Access and Excel, and we are a $315 million fund and have better technology and resources than the SBA, and we only have 30-some companies to manage. You know, key challenges like getting something out of the SBA's Access and Excel tools can take a week or days for them to reformat in order to be able to review the data, which just really is not good for the program overall or the taxpayer. So upgrading the technology tools that are available to the SBA would be a huge add. Chairman Cardin. Thank you. I have some questions in regards to the diversity managers, but I am going to yield to my other colleagues that are here, and I will come back on a second round. Senator Marshall? Senator Marshall. Thank you, Chairman. It is great to be back here and talk small business issues. Certainly every trip back home, access to capital is a question I get and a riddle we have not been able to solve. These SBICs, there is only one in Kansas, and it is currently listed as not likely investing. The passage of the Spurring Business and Communities Act of 2017, the SBA gave first priority to companies in an under-licensed or under- financed State. Kansas was not included on either list. Are there moneys that are not being used and Kansas was too far down, or pretty much are you able to utilize all the capital that you have available to us? Stacey, Mrs. Wittelsberger, if you want to go first. Wittelsberger--I am going to get that right. If you want to go first, if you can help me out. Mrs. Wittelsberger. Yes. So I think Chair Cardin mentioned this in his remarks as well, but we have about $4 billion in accessible capital to the program. We expect to be over $3 billion of that this year, so there are certainly more funds to be used. And I think to address your concern, Senator Marshall, that the MicroCap bill is a potential outlet for that to bring new managers to the program, potentially, in your State, that maybe through the existing SBIC program would not be licensed. So, you know, bringing more capital to your State and the small businesses there. Senator Marshall. So help me understand. Is the reason nobody in Kansas has applied for it is because they just have not applied, or they have applied for it, you think, and they are just not high enough on the list then? Mrs. Wittelsberger. Potentially within the existing requirements for the SBIC program it is just too daunting or they do not think that they will be able to get a license so they do not attempt to do it. Senator Marshall. Okay. Mrs. Rodriguez Simon, anything to add? It sounds like we covered it pretty good. Mrs. Rodriguez Simon. I think she covered it. One thing I would say is, you know, if we are intentional about recruiting either rural or from a specific State, and it is the same comment I have about recruiting diverse candidates, I think that there are many, many investment professionals out there that could be recruited to this program. However, we have not been intentional. We have not made that a priority and a goal. And so I think we can certainly include making sure that we have investment managers from states that are not represented. Senator Marshall. Okay. And I will start with Mrs. Rodriguez Simon and go backward, to give you both a chance at first shot. My next one is, like I mentioned, this company in Kansas is not likely investing. Is that a common thing, and why are people, I guess, dropping out or not active? Is that common for people to become not likely investing now? Mrs. Rodriguez Simon. I have not heard that that is common. I think that there are a number of us that have been in the program for a very long time, like Avante has been. We have four licenses. So I do not have a good answer on that, sir. Senator Marshall. Yes. Mrs. Wittelsberger, any further comment? Mrs. Wittelsberger. Yep, I do not have the specifics. Senator Marshall. Okay. What are the barriers to more firms being licensed as an SBIC and participating in this program? Or are there any barriers to be licensed as an SBIC and participate? Mrs. Wittelsberger, I will let you go first. Mrs. Wittelsberger. Sure. Thank you. The licensing process today is very subjective. There is a lot of uncertainty around the time related to the licensing process. It can be very slow. It can cost hundreds of thousands of dollars. So for a first- time fund manager that is pretty daunting and risky to leave your existing job. For repeat managers like Patriot Capital and Avante, we have been through it so we have some level of certainty in getting through the program. Senator Marshall. Okay. I will go to Mrs. Rodriguez Simon for my last question. I am going to hate to admit this, Chairman, but I did not know about this program until today. And, I was a Congressman for four years, ran multiple small businesses, party of a community bank, and this is the first time I have heard of this program. What can we do to raise awareness? Mrs. Rodriguez Simon. Senator, that is such an excellent question, because I think that that is one of the reasons why we do not have diverse or rural participants, because there is really a lack of education across the investment industry about this program. It is an amazing program. I mean, it is compelling for the funds. It does a lot of good for our country. I think, again, we have to be intentional about it. We have to give the SBIC the resources to be able to go out and convince other people, or convince more of the investment managers to join the program. Senator Marshall. Again, we invite you all to participate. You know, some of my urban areas, the Chambers there, I think my Hispanic Chamber in Kansas City is one of the best Chambers in the country, and this would be one more tool that they could put in their toolbox. So thank you so much. Chairman Cardin. Senator Marshall, I agree with you completely. That is one of our real challenges. We only have 300 managers in the country and it is not diverse at all. And from the point of view of not just minority and underserved communities but also geographically. So it is an area that we really need to improve, and that is going to be one of the goals of this. So thank you for raising those issues. Senator Duckworth is available through Webex. Senator Duckworth. Thank you, Mr. Chairman. Already the discussion is very interesting. My first question is for Mrs. Wittelsberger. As part of the President's fiscal year 2022 budget, the Small Business Administration recently identified expanding access to capital for small businesses as Strategic Objective 1.1, and I could not agree more. My top priorities to assist small businesses are to increase access to capital and to double down on proven in-demand programs that already work. The SBIC program meets both priorities. First, we know it is popular, especially in times of recovery, and after the Great Recession the SBA witnessed a significant uptick in SBIC applicants, and the agency expects a similar uptick during this recovery. And we know that it works, right? Not only is it popular, it works, because over the past six years it has supported an average of more than 100,000 jobs per year, and that is why we must increase funding available to SBIC participants. Last Congress, I worked with Senators Young and Risch to introduce the Investing in Main Street Act, legislation that would allow banks, particularly small ones, to provide more money to SBICs. The bill passed the House, 403-2, but it did not receive a vote in the Senate. Mrs. Wittelsberger, I know that was a long preamble. You mentioned this bill in your testimony. Can you describe how this simple initiative could spur even greater investments into SBIC funds, and how vital this capital would be as we emerge from the pandemic? Mrs. Wittelsberger. Thank you, Senator Duckworth, and yes, we are totally supportive of the Investing in Main Street Act. As you mentioned, it seems pretty simple to us. There is a mismatch today between the banking laws and the small business laws. Banks are allowed to invest more dollars in SBICs than SBICs are allowed to accept today. You know, a lot of this is mainly impacting smaller banks. So cleaning up the mismatch between the 15 and 5 percent we think is an easy fix, and we are supportive of the act. Senator Duckworth. Thank you. My second question is for Mrs. Simon. Mrs. Simon, I know you live in Los Angeles, but I know that you are a native Illinoian, with Chicago roots, and as you said, you just gave birth last week. Now I brought my baby to the floor of the Senate to vote at 10 days, so you have beat me in terms of time. You are a true inspiration. I appreciated your testimony about the importance of mentorship programs, and in Illinois we have seen this importance firsthand. Commissioner Jamie Rhee at the Chicago Department of Aviation is spearheading a mentorship program between large and small businesses for projects at the O'Hare and Midway airports, with the goal being to create a more diverse set of participating company owners and to give the smallest of small businesses more prime contracting opportunities. I want our recovery to include more initiatives like the one at the Chicago Department of Aviation. Mrs. Simon, can you describe why having a mentorship program is crucial for promoting opportunity for new and diverse business owners within the SBIC program? Mrs. Rodriguez Simon. Absolutely. Thank you so much for your question, Senator Duckworth. It is an honor to speak to you. I have admired you for a very long time. The mentorship program, I think, is instrumental in increasing the number of diverse investment managers, and also can be used to increase the number of investments in diverse businesses. This is an industry of very talented investment managers. The existing SBIC funds, while not diverse, include a number of really, really great, talented investors. And if we can connect them with first-time managers, like funds that may have diverse investment professionals that may already have track records but that have never run a fund before, if we could connect them with established funds it will have a significantly higher chance of success. And this program has always been a public-private partnership. It has been since its very beginning. And so if we continue that strategy, where we are continuing to partner together with all of the incumbents within the existing program, I think that we can make really very significant change. I think it is an easy program to implement. I think that talking to my colleagues, a large number of them would be interested, and again, I think it would make a very significant difference in making sure that we get more diverse managers and more capital to diverse companies. Senator Duckworth. Thank you. And I know that our Chairman, Senator Cardin, is working on this very program with President Biden, and I look forward to joining them in this endeavor. Thank you so much to both of you for being here today. I yield back, Mr. Chairman. Chairman Cardin. Thank you, Senator Duckworth. Senator Cantwell. Senator Cantwell. Thank you, Mr. Chairman. Carrying on that same line, Mrs. Rodriguez Simon, this issue of--in my State we had SBICs invested $204 million in small businesses between 2016 and 2020. So that could have been more if we looked at our 215,000 women-owned businesses. So as you pointed out, we need to do more. We are only financing about 5 percent of those minority-owned businesses. So I know you just elaborated, and know the Chair, I so appreciate Chairman Cardin exploring this issue as well. So what is that we need to do? I want you to speak more about what increasing diversity at the SBIC investment team or management teams, what we could do to help the teams look more like the women and minority businesses that they are taking a look at? I know there is a fund in my State that was started by a group of women for this very reason, but what else could we do? What else should we be doing to make sure these investment teams look more like the people that we are trying to attract, or fund, I should say. Mrs. Rodriguez Simon. I appreciate the question. It is really a passion of my team and I to recruit more diverse managers into this program. So first, I want to start by saying that they exist. People of color exist as investment managers. We already are out there, working outside of the SBIC, in a large number. The NAIC, which is an organization that supports diverse- owned managers, there are 120 members that that have under management $225 billion. They are out there, a lot of them. I am not a unicorn, right? Even though I am one of the very few in the SBIC fund, the SBIC program, there are many out there. We need to recruit them. And it is not as hard, I think, as we expect it to be. In fact, I started a few months ago with a small panel connecting diverse managers to the licensing team at the SBIC, which, by the way, they have been incredibly collaborative and just fantastic partners. We connected 11 diverse managers to this team, and 3 are already interested in applying. So it is a matter of being very intentional about recruiting these managers, about helping them through the process, creating a Mentor-Protege program so that they are positioned to succeed, and making it a clearer path to getting into the program. I hope that answers the question. Senator Cantwell. It does. We are dealing with the same issue as it relates to science, engineering, and math, what we need to recruit more women into the sciences. And we have studied it, actually. NSF studied it. They said we needed to be aggressive, that it cannot be passive. It has to be aggressive. So what you are saying is the same thing. And I am just thinking about this group that did a fund in the Pacific Northwest. It really did not take them long to get the resources. It is almost like there was a ready-made group of people that were waiting for them to form so they could give them the funds. So they came up with funds very quickly. And then by doing that, you can then attract--and people can say, ``Oh, I can go to them. I can go to them to talk about my business idea because of who they represent.'' And they did target more mentoring. I think that is the other thing, too. Once you create a more representative group, they focus in on those things that you think are important, and in this case these women knew that mentoring, in a certain particular way, was going to be more important, and that they would have to spend more time with people looking at that particular fund. So I just feel like part of our challenge, right, is to have a distributed network of opportunity throughout the United States, and we should really think about what we can do, Mr. Chairman, in this area. What can we do, almost like incenting people to set up these funds that look more diverse. Mrs. Rodriguez Simon. If I can just add, I think the words ``being aggressive'' is exactly right. It is really making it a top priority, putting resources behind it, having a diversity task force that really keeps all stakeholders accountable, and that reports back to this Committee on progress. It will happen. I mean, at our firm everybody told us we would never be able to hire as many women and people of color as we thought we could. Well, 12 of our 16 people are women or people of color, because we have been intentional about it. People say there are none of us. There are tons of us. We are out there, and we are excited and ready to help. Senator Cantwell. Well, I think, to me, Mr. Chairman, 75 percent of job growth comes from small business, and 50 percent of our population are women. And so if you are not encouraging the job growth to happen within 50 percent of the sector of your population, you are limiting your job growth. So, to me, we should figure out a way to, as you said, accelerate or be aggressive on this and figure out how to get that distribution across the United States. Or, I do not know, even it was just to learn from the ones that are already out there. But I almost feel like there are a lot of women who are in these business positions that probably--I am not saying they do not think they are ready. I think if you said, ``Please take up the mantle, and here is a little bit of resource so that you can start doing that,'' I think we would see a response. Mrs. Wittelsberger. Senator Cantwell, if I could add, we have talked about this today, but the MicroCap program that is part of the discussion I think would address some of these concerns. It is really growing the on-ramp of potential fund managers, which would be most likely first-time fund managers. So people are not as scared to risk leaving their current job to enter the program. We would have a clear path, and likely a clear path to a smaller first-time fund, which would allow these funds to invest in smaller companies, smaller dollar amounts, and, you know, covering more diverse companies, and them themselves being more diverse. Senator Cantwell. Thank you. Thank you, Mr. Chairman. Chairman Cardin. Just to underscore Senator Cantwell's point. According to information I have, only 5 percent of the funds go to companies owned by women, veterans, or minorities. I mean, we are talking about a very small amount of SBIC funds actually getting into the minority community or women-owned businesses. And then you look at the geographical division, we have some states where there is zero activity on SBIC. So we have a geographical problem and we have certainly a problem of reaching the underserved community. And as I said, this is a good program that can be made much better. Senator Rosen via Webex. Senator Rosen. Well, thank you, Chairman Cardin and Ranking Member Paul. I appreciate you holding the hearing on the SBIC program, and I want to thank everyone for being here today. I know we are on the topic of women and working women, and so, Mrs. Simon, I hear you just had a baby, so congratulations to you for being one of those working moms that we are talking about, and congratulations on your new addition. Mrs. Rodriguez Simon. Thank you. Senator Rosen. And, you know, I just want to talk a little bit about what others have been talking about, that lack of SBICs. We have them in Nevada, and Nevada is home to more than 280,000 small businesses, which make up over 99 percent of all businesses in my State. Unfortunately, there are no SBA- licensed small business investment companies located in Nevada, meaning that Nevada small businesses seeking private capital need either to pursue funding from SBICs located in neighboring states, like California, or look elsewhere around the country for access to capital. So given that most SBICs, they focus on investing in very specific geographic areas, small businesses in Nevada, and of course in other states without SBICs, they really may be missing out on these types of impactful, private capital opportunities that really uplift their business, especially those that simply just need additional streams of capital to grow. So, Mrs. Wittelsberger, as a member of the Small Business Investor Alliance, what barriers in the SBIC program do you see for states like Nevada that currently lack SBICs, and then I would like to go over to Mrs. Simon, and say coming from a western State, obviously bordering Nevada, I would like your take on that as well. Mrs. Wittelsberger. Thank you, Senator Rosen. I think the key barriers today are the uncertainty around the licensing process, and, you know, previously discussed, the MicroCap bill, I think, would be a perfect solution for your concerns around the lack of SBICs in the State of Nevada. Nevada is a perfect place for SBICs to set up shop, and I think the MicroCap would address focusing on these areas outside of the SBIC epicenters. And it would provide, as we mentioned before, a wider on- ramp for bringing new fund managers into the program, given that there would be a change in the licensing process as compared to the overall SBIC program for these new fund managers who would be looking to set up funds in the State of Nevada. Mrs. Rodriguez Simon. I agree, although I imagine that in your great State of Nevada there has to be at least somebody that is qualified to join the existing program and would not need to on-ramp through a MicroSBIC program. And I probably sound like a broken record, but it is really all about being intentional about recruiting where you need and want more capital available. It all starts with investment managers. The investment managers decide what investments they are going to make. And so if there is nobody in the program that cares about Nevada, well, then Nevada is not going to get any capital. If there is nobody in the program that really has a network within women or diverse companies, then those companies do not get capital. And so, again, it is about really being aggressive and recruiting diverse managers, and I do not mean diverse just women and minorities but also geographically, and expanding those programs so that there is room for additional managers. As I just discussed in my testimony, we only use about half of the leverage available. It is just such a wasted opportunity. This is such incredible capital that should be going to our small businesses. We should be using every last dollar of it. And in order to do that, we have to have more licenses. In order to do that, the very hardworking team at the OII needs more resources. They need more people to process licenses and to manage it. Senator Rosen. Well, thank you. I could not agree more. I would love to see it expand in Nevada, because we also need to invest in our minority-owned businesses, and in Nevada we have one of the Nation's largest Latino populations per capita, and one of the fastest-growing AAPI communities in the country. We are the proud home of more than 70,000 minority-owned businesses. However, SBA reporting says only 5 percent, just like you are saying, of total businesses, investments go to minority-owned businesses. So again, Mrs. Simon, in your experience, what else besides attracting people to the table, how would we get them to see us? I know we are a small State, 3 million people, but we have a lot going on--99 percent small business, 50, 60, 70 million tourists through our State every year. We are prime opportunity to grow our small business. Mrs. Rodriguez Simon. It certainly sounds like it, and it sounds like I need to spend a little bit more time in Nevada, as a fund ourselves. You know, I think, Senator, it is recruiting people that have the network and sources in Nevada. It is making it a priority, pushing that agenda. I wish I had additional--I really think if we start there--if we get two investment managers in Nevada in the next two years, it will make a significant difference. We have zero now. Let's get one or two. Senator Rosen. Well, I am going to maybe reach out with you and see how we can set up some roundtables to make some of those things happen for my great State. My time is up. Thank you, Mr. Chairman. Chairman Cardin. Well, thank you, Senator Rosen. I believe shortly we will be joined by Senator Hickenlooper, but let me ask a question, or just make an observation and then sort of bring us together. We have talked about this at great length. The SBIC allows a lender to be able to leverage private sector investment, low-interest loans, affordability. It gives you all that flexibility. And most of the SBIC funds will concentrate in certain industries or certain locations. They have a strategy. And as has been pointed out by both of you, if you do not have diversity in the management and location, you are not going to have diversity in where these loans are made. And I think that is absolutely a certainty. So whether we are looking at underserved communities or we are looking at the geographic distribution of these loans, it is critically important to have management that recognizes and has, as you said, Mrs. Simon, the connections to the different communities. So your mentorship program that you have talked about, I am interested in that, because whether you are mentoring future managers that will connect to an existing SBIC or perhaps initiate a new license, by giving a person that represents diversity that opportunity we are creating the next generation of leaders that will represent opportunities in more diverse communities. So what has your experience shown? It looks like you have gone through this for a while. Tell us a little bit about the experiences of your mentorship program, and how you got it started. Mrs. Rodriguez Simon. So our internship program? Chairman Cardin. Yes, I meant internship. Mrs. Rodriguez Simon. Internship program. Sure. Absolutely. So we started our Avante internship program just at our firm to help support women in nontraditional backgrounds get access to this industry. It is a very difficult industry to enter. Typically you have to have a business degree from just a certain type of business school, and you have to have the network to enter into this industry. That is really the key. And I understand how we got here. You know, 50 years ago, sir, women and minorities, we were not in the place to be successful in investment management--we did not have the education, we did not have the access. The great news is, 50, 60 years later, we have made a lot of progress. Many of us have been in education. Many of us are able to access the industry. And so we started to just create opportunities for interns to break into the industry, and we have grown that program. We established the first-ever diversity internship program for the SBIC. It is called the ``Small Business Investment Scholars,'' and we have 30 interns, all women and people of color, that will be working at 25 SBIC funds. And to the credit of my colleagues, my colleagues were very willing, very collaborative, and very excited about getting a diverse intern on their team. And so they are going to be working with this intern, giving them incredible exposure to the industry, and putting them on a path so that they can eventually join their firm and eventually launch their own funds. But these internships are incredibly important to build a pipeline, and the mentorship programs are incredibly important to provide guidance from established funds to funds that may have track records but have never run a fund before. And so that collaboration between existing funds, you know, that are willing to collaborate, and bringing on new, diverse managers is what we are pretty excited about. Chairman Cardin. We might be asking you specifically if there is something we can do in Congress as far as legislation is concerned to assist in this type of program. We would welcome your suggestions in that regard, because we are very much interested in workable programs to improve diversity among fund managers. So we are going to be working with you to try to see how we can advance that. Now in Maryland we are blessed with having great leadership in our community on women-owned businesses and on minority- owned businesses. We have now three Women Business Centers in Maryland. We are very proud about that. And the SBIC penetration is pretty strong in the State of Maryland. So let me take it from a State that already has an established record here. What more can we do to reach underserved communities in a State like Maryland that has a rich number of minority small businesses and women-owned small businesses, and are still not getting the same percentage of help as the demographics would want to indicate? Mrs. Wittelsberger. You are right, Chair Cardin, that we do have three existing, strong SBICs in the State of Maryland. I keep going back to the MicroCap program, but there has been discussion of this mentorship concept, which actually already exists in the MicroCap program proposal, which would expand the requirements, or not loosen the requirements but allow for new fund managers into the program at smaller amounts, and set them up for success, pair them with existing SBIC fund managers who have already been successful in the program. So, you know, expanding the program through the MicroCap bill I think would allow for more diverse fund managers, even in the State of Maryland, which has a strong SBIC community. Chairman Cardin. Mrs. Wittelsberger, that is the best introduction you could give to Senator Hickenlooper, who is now joining us, who is the sponsor of that legislation. So Senator Hickenlooper. Senator Hickenlooper. Thank you, Chairman Cardin, and I had to jump out there so I missed about 15 minutes of your testimony, and I apologize for that because it sounds like I missed some of the best parts. Certainly, as a former entrepreneur--I refer to myself frequently as a recovering entrepreneur--the willingness, and actually the desire and the healthiness of mentoring a young entrepreneur once you have already become established and successful, it is not only healthy and pleasurable but it really does create a healthy ecosystem. And one of the things we did in Colorado, intentionally, was to try and take some of those mentorships out into the rural parts of the State and try and do kick-starts by kick-starts I mean trying to recreate the network that can provide that kind of mentoring, in rural Colorado as well as urban Colorado. I want to ask both of you, Mrs. Wittelsberger and Mrs. Rodriguez Simon, to answer this, because you talked in the beginning, and I am sure you have continued to talk about it while I was out of the room, you mentioned the concentration of venture capital and investment in Silicon Valley, in Boston, and New York City. I think you could probably include Seattle these days. The question is, could a MicroCap SBIC really jump-start capital in rural and other underserved areas, and by jump- starting I mean create an expansion and a follow-on effort. The SBIC program is credited with leading the way and, in essence, jump-starting or kick-starting the broader venture capital industry. How can we use the SBIC program to have that same impact and spur increased diversity in private equity and in the venture capital space, as well? Mrs. Wittelsberger. I can start on that, Senator Hickenlooper. As we have talked about today, these individuals do exist that have the capability to run a first-time fund. So I think through the MicroCap bill that you have introduced this would allow us to reduce the potential time, which is a hurdle for a new fund manager, potentially change the cost structure for them--it is very expensive for a first-time fund manager to take that risk and jump to raise a new fund, with a lot of uncertainty, and the overall licensing process, and the time that it is going to take. And then existing restrictions on the specific background that you need to have between you and your other partners in raising a fund. A lot of first-time fund managers may not have that. So the slight tweaks to the program, as it relates to the MicroCap program, I think--and we are supportive of the bill-- we think that it would attract new people to the program, especially in smaller markets that you have identified. Senator Hickenlooper. Great. Mrs. Rodriguez Simon? Mrs. Rodriguez Simon. Thank you, Senator. You know, I support and I commend all efforts to increase diversity in the SBIC program, and I certainly think that there is a place for the MicroCap SBIC. However, I would really caution this Committee on relying solely on those types of programs, and the reason I say that is that they have historically been challenging to administer. The investment restrictions, the fund size limitations, investment committee mandates, they make these funds inherently more challenging than the existing, successful fund. It is harder for these smaller funds to compete. It is harder for them to fundraise. It is harder for them to recruit teams, because they are smaller funds. So there are some challenges with them. However, as I mentioned, I do support all diversity efforts, and I do think that there is a place for them. I just would hope that we do not rely solely on them, and that we really focus on the large program and attracting diverse managers to that program, which is already established. It is already successful. We already know it works. And so that is my honest opinion, sir. Senator Hickenlooper. No, that is why you are here, is for that honest, candid appraisal. And I applied for an SBA 504 in 1991. I am on the Hall of Fame in the Denver SBA offices. But the truth is, it drove me nuts. There was so much red tape and so much more bureaucracy. And it is pretty clear that that is because taxpayers do not want us to risk their money. So there are these extra layers of what they believe is security for the investment, which, in the end, really, I think, in many cases, drives away the better candidates who are more deserving and would be more successful, create more jobs, create better businesses if we got them the resources when they needed it. You both talked a little bit about the importance of patient capital. And I struggled for a long time because I was in business four years before I could use the SBA 504, before I had enough wherewithal, and there was nobody. I had to do all friends and family, which took me two years, at $5,000 here and $10,000 there. It is a long story. I am sure you have each got your own long stories. But the truth is, there is no reason why we cannot make the processes of the Small Business Administration more efficient. Mrs. Rodriguez Simon. Absolutely. Senator Hickenlooper. Isabel Guzman, the new Administrator, was out in Colorado last week, and so I got to spend several hours with her, going and talking to small businesses in northern Colorado. And I think we share that recognition, that this is a time where making sure we protect the taxpayers' dollar, we can make it easier and more efficient for small businesses, truly small businesses, to get that. I just used up my own time giving a speech, so I apologize. I will pass along my questions and make sure that you get them for the record and get to answer them separately. Thank you. I yield back to the Chair. Chairman Cardin. Thank you, Senator Hickenlooper, and we appreciate your leadership on this issue, and to sort of help us reach some of the states where we have not had as much participation. So thank you very much for your help on that. President Biden's American Jobs Plan, the Build Back Better, includes a provision to help small businesses, and his charge to all of us is to figure out how we can get capital into underserved communities, and to do that particularly as it relates to startup capital, venture capital equity. So that he recognizes that historically we have had a challenge in reaching underserved communities, whether they are rural America, whether it is minority communities, women-owned businesses, veteran, disabled veteran communities. We have all these target communities, hub zones, and we recognize that we have programs to try to deal with that, but the President is challenging us to do better as we build back better. So I think this hearing has been extremely helpful as to how the Small Business Investment program can really help us in achieving what President Biden has challenged us to do, in building back a better and fairer America that provides opportunity for entrepreneurship in all communities. So we are going to certainly use the information you all presented as we try to work with President Biden on the American Jobs Plan. I know there are a lot of groups meeting and negotiating. We are going to make sure that small businesses are properly represented in those negotiations. Let me thank both of our witnesses for your contributions today. We may be coming back to you with more specific requests for help as we craft the congressional response. The record of this Committee will remain open for two weeks. If questions are asked for the record we would ask that you respond in a prompt manner. And with that the Committee will stand adjourned. Thank you all for your attendance. Mrs. Wittelsberger. Thank you. [Whereupon, at 3:40 p.m., the Committee was adjourned.] APPENDIX MATERIAL SUBMITTED [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]