Feds at Work: Overhauled SBA program to stimulate the economy
Small Business Administration program generates $6 billion in private investments to build businesses and create jobs
For many years, a federal program that guarantees investments in small businesses was experiencing huge losses. When defaults occurred and assets had to be liquidated, the Small Business Administration recovered only 52 cents on the dollar.
After Thomas Morris arrived at the SBA’s Office of Liquidation three decades ago, he started overhauling how to handle failed investment companies and their assets. His efforts steadily raised the collection rate on defaults for the SBA’s primary small-business investment company program to one of the highest in the federal government — more than 80 cents on the dollar.
“He’s a very creative thinker,” said Michele Schimpp, SBA’s deputy associate administrator, adding Morris almost single-handedly saved the program.
“The investment program would crumble if we weren’t able to keep up the recovery rates,” Schimpp said.
Small business investment companies, or SBICs, are privately owned and managed investment funds that are licensed and regulated by SBA. They use their own capital plus borrowed funds with an SBA guarantee to make investments in small businesses. Since 1958, SBICs have invested $73 billion in more than 118,000 businesses.
The SBIC program operates at no cost to the government because of fees investment firms pay to the SBA, and largely because of the innovative loss recovery processes Morris created. These changes have resulted in recoveries of more than $3.5 billion since the early 1990s from investments that did not pan out as expected.
“He discovers pearls in oysters.” ~Mark Walsh, Small Business Administration
While business failures are a fact of life, many of the government-backed investments SBICs made have paid off — many big time. Federal Express, Costco, Staples, Whole Foods, and Outback Steakhouse all received help early on from the investment program, which defines small businesses as entities with a tangible net worth of less than $19.5 million. One quarter of the funding is reserved for businesses with a tangible net worth of less than $6 million.
When an investment firm that has relied on the SBA backing fails, the agency tries to recoup whatever funds it can by liquidating these entities and the available assets.
In 1985, the standard practice had been to allow failed investment companies to liquidate themselves, and the government usually ended up losing money. Morris led the effort to reform the process, setting up new protocols and creating higher standards and different options for liquidating the investment firms and the companies they controlled and financed.
“He doesn’t rest on his laurels,” Schimpp said. “He’s always looking for new innovations and new adaptations.”
Now, failed investment firms can work out their own agreements only if they can show they likely will be able to repay the agency if given a reasonable amount of time.
Otherwise, the SBA can be named as a court-appointed receiver of the failed entity. The agency can bring in new management teams to take over the investment firms’ operations and, if necessary, the defaulting companies in which they have controlling interest. The SBA receiver then can sell off the SBIC’s investments or work to revitalize these businesses before putting them on the market for sale to help cover debts to SBA and other creditors.
In one case, the SBA liquidation office took over a failed investment company and became the receiver of assets that included a private airport hangar worth several million dollars. Morris worked with accountants and financial experts, and eventually decided to put more money into the asset. “It was a bumpy 10-year ride,” recalled Gail Green, the branch chief of account resolution at SBA. Ultimately, Morris and his team got all the invested money back, she said.
Morris also instituted a new liquidation method for an investment group’s multiple holdings by using the secondary sales market instead of trying to dispose of one company at a time. By selling all the assets at once to big financial buyout firms, the liquidation process is wrapped up with one transaction.
“Tom is the end of the railroad line for troubled equity and investments,” said Mark Walsh, associate administrator of the agency. “He discovers pearls in oysters.”
Morris said his motivation gets down to the numbers: $6 billion in investments generated by the SBIC program during the last year is building businesses, creating jobs and stimulating economic growth, without a government subsidy due to SBA’s high recovery rate on defaults.
“That’s what makes me feel great, that it’s making a difference,” Morris said.
Thomas Morris is a finalist for a 2016 Samuel J. Heyman Service to America Medal, or Sammies. Each year, the Partnership for Public Service honors federal employees whose remarkable accomplishments make our government and our nation stronger. For the second time, we will also present the annual “People’s Choice” award. Please vote for the person or team you find most inspiring. (Voting closes at 11:59 p.m. EST on September 9, 2016.)
