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Public-private SBA firms capitalize in secret

By   /   March 11, 2015  /   News  /   No Comments

AP file photo

PRAYING FOR PROFITS: Maria Contreras-Sweet, founder of a community bank in Los Angeles, chairs the U.S. Small Business Administration.

 

By Kenric Ward | Watchdog.org

Government-approved Small Business Investment Companies are gambling taxpayer dollars behind a wall of state secrecy.

With its 2009 stimulus legislation, “Congress expanded the authorization of the Small Business Administration to license and provide billions of dollars worth of credit to non-traditional lenders, like private equity-style firms,” said Adam Andrzejewski, founder of Open the Books, a public research group.

One firm, Solutions Capital of Arlington, received $150 million — the SBA’s largest outlay in Virginia. But where Solutions Capital put the money is not known. Neither the SBA nor the company would say.

A filing with the U.S. Securities and Exchange Commission shows that Solutions Capital left the investment program last fall. Its parent company, MCG Capital Corp., stated, “we repaid in full the $150 million of SBIC debentures owed to the SBA.”

“After repayment, Solutions Capital surrendered its SBIC license to the SBA,” the filing stated.

During its six years of operation, Solutions Capital said it used funds “to provide debt and equity capital to qualifying small businesses.” Explaining its exit from the SBA investment program, the company disclosed, “we were not permitted to use these funds to provide working capital to MCG.”

Photo courtesy of Mercatus Center

SKEPTIC: Veronique de Rugy would shut down the SBA’s investment companies.

Veronique de Rugy, a financial policy expert at George Mason University’s Mercatus Center, said government should not be in the venture capital business. She said leveraging public and private funds is “problematic at best.”

“It shifts the burden of potential default and risk onto shoulders of taxpayers,” de Rugy told Watchdog.org.

It also raises the privacy wall, enabling government officials to withhold information as “proprietary.”

Meanwhile, the investment firms profit. On average, the SBA investment firms collect an average of $28.23 million per transaction, Andrzejewski said.

The SBA asserts its public-private investment program doesn’t cost taxpayers.

“That’s what Freddie Mac and Fannie Mae said until the taxpayer bailout,” said David Burton, senior fellow in economic policy at the Heritage Foundation.

Like those quasi-governmental entities, SBICs “distort the credit market because decisions are based on policy makers, not markets,” Burton said in an interview. For example, SBA grants more lucrative packages to SBICs that fund alternative-energy ventures.

Beneficiaries of SBICs include Apple Computer, Intel, Federal Express, Whole Foods and Staples, which is now in the process of buying out Office Depot.

Those successes raise more questions about the SBA’s mission because the corporations are far larger than “small businesses,” generally defined as having fewer than 500 employees and tangible assets of less than $18 million.

The portfolio of “small businesses” in SBIC programs are mostly mature companies with stable dividend cash flows of up to $50 million in revenues, Andrzejewski said.

“This is the privatization of profits and the socialization of loss,” Burton said.

Citing the public-private funding formulas used by the SBA, Burton figures that taxpayers, not private investors, are taking two-thirds of the risk.

SBA spokesman David Hall said the agency would not disclose repayment or default rates. Watchdog.org has filed a Freedom of Information request for data related to the investment program.

De Rugy calls the lack of transparency at SBA troubling.

“The moment taxpayers are involved, it should be public. It’s wrong all around. These programs should be shut down,” she said.

Kenric Ward is a national correspondent for Watchdog.org and chief of its Virginia Bureau. Contact him at (571) 319-9824. @Kenricward

 

 

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Kenric Ward was a former San Antonio-based reporter for Watchdog.org.