Testimony of Ivelisse Rodriguez Simon, Avante Capital Partners — June 9, 2021

Summary

Written testimony dated June 9, 2021 by Ivelisse Rodriguez Simon, Managing Partner of Avante Capital Partners, addressed to Chairman Cardin, Ranking Member Paul and members of the Committee on the SBIC program. The testimony describes Avante's funds and its diversity initiatives, including an internship program for SBIC firms and a diverse manager panel with the SBIC licensing team. It states that SBICs have provided more than $108 billion of funding since the program's inception and that the SBA is authorized to provide up to $4 billion in leverage annually, while SBICs draw on about $2 billion. It recommends more resources for the Office of Investment and Innovation, a mentor-protégé program, raising the individual fund leverage cap from $175 million to $250 million for mentoring funds, an equity program and a Diversity Task Force. It closes with MicroSBIC recommendations.

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Ivelisse Rodriguez Simon
Managing Partner of Avante Capital Partners

Testimony of Ivelisse Rodriguez Simon

June 9, 2021


Good Morning, Chairman Cardin, Ranking Member Paul, and members of the Committee. Thank
you all for your leadership during these unprecedented times. It is my sincere honor to be
speaking with you all today about the SBIC program, the opportunity to diversify its license
holders, and ultimately how to get capital to American business owners. My name is Ivelisse
Rodriguez Simon, and I am the Managing Partner at Avante Capital Partners. As an SBIC fund, we
have never been prouder to operate within the SBA and to support the agency’s efforts to sustain
small businesses and drive the recovery of our economy.
Avante Capital Partners Background
Avante Capital Partners was founded in 2009 and has been a proud member of the SBIC program
since our inception. Our first fund closed in 2010 at $218 million of capital, our second fund in
2015 at $250 million of capital, and we are about to close our third fund at nearly $400 million of
capital. Based in Los Angeles, California, we have invested both debt and equity in over 100
companies (platform and add-on acquisitions) throughout the United States, and we have
generated zero cash loan losses since inception. The SBIA named Avante its SBIC Fund of the Year
in 2018 based on our excellent track record, as well as our commitment to the mission of the
SBIC program.
Avante is 100% women-owned and 50% minority-owned. Of our 16 team members, 12 people
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, but it is also good business that drives better returns and
incremental job creation.
Avante Diversity Initiatives
Avante has implemented several initiatives focused on diversity in the SBIC industry. The first
initiative that Avante created is the Small Business Investing Scholars Program, the first diversity
internship in the SBIC industry. Started in 2020, the program seeks to create a pipeline of diverse
talent for the SBIC industry. Our first internship class in Summer 2020 consisted of nine
undergraduate interns across six California SBIC firms. Three of the interns received full-time
offers with SBIC firms, and the others are pursuing other roles in the industry. This Summer 2021,
we are pleased to report that we will be welcoming 30 interns across 25 SBIC firms around the
nation; 73% of the interns are women, and 73% are people of color. Some of these SBIC firms


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have never had a woman or person of color on their investment teams, and our vision is that
eventually the SBA will officially sponsor the program and that all 175+ SBIC firms will participate.
Our second relevant initiative is the SBA diverse manager panel. Beginning this Spring, Avante
hosts a recurring panel with the SBIC licensing team to prepare diverse managers for potential
SBIC licensing applications. The initial panel includes 11 diverse managers with proven
investment track records who provide invaluable advice to those emerging funds seeking to learn
from established SBIC funds. A number of these experienced, diverse managers are already
considering applying for a license within the debenture program. We have found the staff at the
Office of Investment and Innovation (“OII”) including the licensing team to be highly competent
professionals who are committed to increasing diversity in the program and we have appreciated
their collaboration and partnership on our diversity efforts.
We also support other initiatives within our firm and the broader industry to drive diversity
including an internship at Avante to support women from non-traditional backgrounds, an
industry wide effort to support women professionals in private equity (with over 300 women
investment managers participating in our programs) and an effort to drive more women on
private equity board of directors. In all our initiatives, Avante seeks to advocate for underserved
communities and diverse populations in our industry. During the recent COVID-19 pandemic,
Avante deployed a significant pro bono outreach program to educate and help other
independent small businesses access capital to help them to survive the crisis and maintain their
employee bases. We greatly appreciate the U.S. Small Business Administration’s support and
continue to be amazed by the resiliency of U.S. businesses during this difficult time.
Existing SBIC Debenture Program is Successful and Should be Expanded
Established in 1958 to spur job creation and long-term investment in small businesses, the SBIC
program has achieved its intention of expanding small business access to investment capital
which in turn has facilitated growth, modernization, and more vibrant communities where these
companies conduct business. From the program’s inception through 2020 year-end, SBICs have
provided more than $108 billion of funding across 186,400+ financings to small businesses, with
these businesses having created more than 3 million jobs in just the last 20 years 1.
Last year alone, SBICs facilitated more than $4.8 billion in investments to more than 1,060
companies across the country on a zero-subsidy basis (i.e., no cost to the American taxpayer),
which is a testament to the success of the program in supporting disciplined and experienced
investors in directing capital to small companies across the country. However, the existing
program is currently underutilized – while the SBA is authorized to provide up to $4 billion in
leverage to SBICs annually, SBICs are generally drawing on only ~$2 billion in SBA leverage each
year.



1 U.S. Small Business Administration Offering Circular, Series SBIC 2021-10A, March 16, 2021



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We recommend continuing to support this successful program by investing in the Office of
Investment and Innovation and significantly increasing resources and staff to increase the
number of licenses approved every year. This would translate to a larger pool of companies
being financed, and more capital directed to creating jobs. Not only could this change be
implemented quickly but the fact remains that the current SBA leverage utilization in the
aggregate is about half of what it could be.
Increasing Diversity of SBIC Managers and Investments
While some progress has been made, significant work remains to be done, especially in
promoting greater access to capital for underserved communities and underrepresented
business owners. Each year, SBICs provide only about 5% of their total financing to minority-
owned and controlled small businesses and about 3% to women-owned small businesses 2. One
primary cause of this lack of diverse investment is the lack of diversity among SBIC fund
managers. As substantiated by data including the 2016 Library of Congress study, racially- and
gender-diverse SBIC funds invest more frequently in minority- and women-owned businesses.
It is incumbent upon the SBIC investment community to foster a more diverse and inclusive
entrepreneurial ecosystem, as the long-term economic vitality of this country depends on it.
Improving the SBIC program to be more inclusive by encouraging increased participation by
diverse fund managers will drive capital investment in underserved communities. Various
research studies reinforce the prevailing takeaway that teams comprised of diverse backgrounds
– be it ethnic, socioeconomic, or gender, inter alia – drive better decision-making. Specifically, a
2015 McKinsey study analyzed the relationship between diversity and business results and
concluded that companies in the top quarter for racial and ethnic diversity are 35% more likely
to have financial returns above their respective industry medians. Diversity drives enhanced
returns and job creation through growth.
If we seek to foster a more diverse and inclusive entrepreneurial ecosystem, we should learn
from our previous successes and challenges. Despite the best of intentions, and our collective
aspirations to diversify the allocation and deployment of capital through the SBIC program, there
are still only a handful of women- and minority-owned SBIC funds in the program. What we have
attempted in the past simply has not worked. What can we do differently to achieve a new and
better result?
Based on my experience working as a diverse professional in the investment management
industry for over 20 years, I believe that our efforts to drive diversity should adhere to certain
principles that are directly informed by our previous attempts in this area:
    1. We cannot rely solely on lesser programs designated for women and minority fund
       managers. Such programs place these funds at a distinct disadvantage to the established
       SBIC funds. Whether through investment restrictions, fund size limitations, or investment

2 SBA, Office of Legislative and Congressional Affairs, “Correspondence with the author,” December 20, 2018



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       committee mandates, these funds are inherently prevented from competing on a level
       playing field and are destined to achieve sub-par returns. That leads to the foreseeable,
       but erroneous, conclusion that women and minority-owned funds simply cannot
       compete.

   2. We should endeavor to leverage what is already working extremely well in the SBIC
      program to achieve our diversity goals. SBIC funds already generate excellent returns,
      create thousands of jobs each year, and invest significant capital into the economy. Our
      diversity efforts should focus on recruiting diverse managers to this existing, successful
      program and to supporting emerging firms to be well positioned to succeed.

   3. We should use carrots rather than sticks to encourage diversity. We can design a program
      that encourages existing funds to become part of the solution. These funds have decades
      of institutional knowledge, investing experience, and program expertise that constitute
      the exact recipe for success that new, diverse fund managers need. Established SBIC
      funds have been highly successful in executing on the SBIC’s mission and can play a
      powerful role in supporting the growth and increased inclusion of the program. We can
      and should encourage these funds to share those resources, and we should incentivize
      them to help support diversity. As demonstrated by the significant interest in the
      diversity internship program, SBIC incumbent funds are supportive of expanding the
      program to include more diverse communities.

   4. Lastly, we should make it a continuing mission of the SBA to license diverse funds and to
      facilitate the deployment of that capital into underserved sectors of the economy.
      Woman- and minority-owned small businesses, rural areas, and manufacturing
      businesses continue to struggle to attract capital in meaningful ways, and that leads to a
      great imbalance in the economy. SBIC funds will continue to adjust based on the guidance
      and priorities of the SBA, and we should continue to reinforce the priority of diverse
      investors and investments through all channels at our disposal.
Given these principles, I have the following recommendations to advance diversity and inclusion
within the SBIC investment community. I firmly believe that greater diversity will lead to
improved decision making, enhanced returns, and incremental job creation across the country.
      First, we should make it a priority within the SBIC to recruit experienced diverse
       managers that have proven track records and can successfully manage an SBIC fund
       within the existing debenture program. Contrary to popular belief, their already exists a
       large talent pool of diverse investment professionals who are highly capable of managing
       an SBIC fund. Resources should be provided to the OII to expand its reach and to prioritize
       licensing for these candidates. In addition, the program should partner with private
       industry to collaborate on initiatives that can increase diversity. Together through a


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    public-private partnership we can work jointly to expand the program to serve more
    communities.

   A mentor-protégé program should be officially established as a means to increase access
    to capital for diverse managers that have significant investing experience but may not
    meet all of the existing licensing criteria in the existing debenture program (specifically
    the requirement that every fund have two managers that have prior experience working
    together). One of the best ways for new, diverse managers to succeed as an SBIC fund is
    to learn from those who have already been successful. Encourage existing funds to take
    meaningful ownership positions in new funds run by diverse managers. The veteran fund
    will help in the establishment and operation of the new fund, providing the very
    experience and tutelage the diverse managers need to succeed.

   How should we encourage established funds to mentor new funds? They clearly have
    enough on their plate already, and previous attempts to drive diversity have not
    succeeded as intended. A meaningful motivation for established funds is greater access
    to SBIC leverage. Allow established funds that mentor new, diverse-manager funds to
    increase the current SBA leverage cap of $175 million for an individual SBIC fund to $250
    million, and to increase family of funds cap from $350mm to $600mm. That incentive
    makes a meaningful difference to an SBIC fund. I predict this simple change would
    generate an immediate response from established funds, and it would quickly create a
    virtuous cycle of established funds teaching new funds how to emulate their methods of
    success. Another incentives can and should be considered.

   Support the establishment of an equity program (as compared to the existing SBIC
    program where funds invest primarily in debt securities) to broaden the universe of
    growing small companies that gain access to longer term capital. Many small businesses
    cannot support the burden of a debt investment and require equity to grow and create
    job and wealth in a community. The agency should consider establishing a new program
    designated for experienced fund managers to invest equity capital into small businesses.
    A specific plan to ensure that a meaningful number of these equity managers are
    experienced, diverse investment professionals should be enacted to safeguard that
    underserved communities will also gain access to this equity capital.

   Create a Diversity Task Force or working group that would be charged with implementing
    and tracking initiatives that drive meaningful diversity of managers and investments. We
    suggest that the task force be comprised of existing women and minority SBIC fund
    managers along with members of the team at the Office of Investment and Innovation.
    The group should report back to this committee on a consistent basis to increase
    accountability and success.


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A hallmark of the SBIC’s program enduring success and tenure has been a willingness to
continually adapt and improve as well as revisit past policies and initiatives to ascertain their
effectiveness. Throughout the course of the program’s 63-year history, it has undergone
significant changes that have strengthened the efficacy and reach of the program. I believe it is
an ideal time in history to significantly invest in the SBIC program and drive additional investment
to small businesses across a diverse set of communities.
Private Partnerships to help drive Diversity
Women and people of color have made significant strides in the investment management
industry over the last decade and while we continue to represent a small percentage of the
industry our numbers are growing. As demonstrated by organizations like the Robert Toigo
Foundation, a foundation that supports diverse investment professionals, the number of
experienced diverse investment managers has significantly grown in the past years. The Toigo
Foundation now has over 1,000 alums who are all women and people of color who have
graduated from top business schools and have significant investment experience.
I recommend that the agency consider partnering with some of these industry organizations that
support and develop diverse investment professionals to recruit qualified managers to the
existing SBIC debenture program and eventually to any newly established equity program.
Specifically, I recommend a partnership with The National Association of Investment Companies
(NAIC), a Washington DC-based trade association and the largest network of diverse-owned
private equity firms and hedge funds. The NAIC is comprised of 120 member firms, managing
$225 billion in institutional capital, in the aggregate. Through education, advocacy and other
innovative programs, the NAIC is focused on increasing the flow of capital to high-performing
diverse investment managers often underutilized by institutional investors. The NAIC can play a
pivotal role along with the OII to recruit and attract experienced diverse managers to the existing
program as well as the mentor-protégé program. They have a large network of diverse managers
and offer a well established training program for new, emerging investment managers entitled
“Establishing the Next Generation of Private Firms”. By partnering with organizations like the
NAIC, the agency can significantly increase the number of diverse license holders and ultimately
increase the number of diverse companies and communities who gain access to SBIC capital.
Also, according to research conducted by the NAIC (represented by NAIC member funds in the
NAIC Private Equity Index) diverse managers performed better than the Burgiss Median Quartile
in 78.6 percent of the vintage years studied. For the continuous reporting period of 2011 to 2018,
NAIC member funds reported a net IRR of 20.99 percent, a net MOIC of 1.48x and a net DPI of
0.53x. Recruiting diverse managers to the existing, SBIC debenture program should be deemed
a critical imperative for the agency.




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Additional Considerations
We support the intention behind all the proposals to increase diversity and support investments
in underserved markets. However, I would like to include words of caution related to the SSBIC
program and the MicroSBIC Designation proposals.
SSBIC Program
One of the key learnings from our observations of the SSBIC program’s history is that the
lackluster adoption and success of the program can partly be attributable to an overly restrictive
set of parameters on the permissible investment opportunity set. While we appreciate the desire
to address the funding gap for the economically and socially disadvantaged, the addressable
market of companies to whom the SSBIC fund managers were limited made this challenging from
the outset. We believe the objectives of the SSBIC program can be addressed in the existing
program through active recruitment of experienced diverse managers and the establishment of
a mentor protégé program.
MicroSBIC Designation
Investing, like any profession, requires training and expertise. We would recommend some level
of investment experience required for those participants in a MicroSBIC program. Alternatively,
we would at a minimum recommend that the Independent Managers (i.e., licensed SBIC
managers who participate on Investment Committee) be paid a stipend or management fee,
rather than carried interest only. This will ensure the full participation of experienced
professionals in the investment decision process. We would also recommend compulsory
training for this cohort of managers (for example, the training provided by the NAIC would be a
viable option). Additionally, we would recommend not constraining the investment universe for
potential portfolio opportunities. The goal is to afford these managers maximum potential for
success, such that over time they would be able to participate in the broader SBIC program and
prudently invest more capital in American businesses. And finally, we would strongly recommend
a clear path for these investors to enter the existing, larger SBIC program.
In closing, I would like to offer my continued support, and that of my firm, to work with any of
the Senators on how we might, together, further expand the SBIC program and drive diversity
within it. We are committed to broader representation to the benefit of greater prosperity as a
whole and are ready to partner with you at any time to forge toward progress.




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