American taxpayers poured some $14 billion in low-interest loans into hedge funds and other Wall Street firms since 2007. Long after the financial crisis ended, tax dollars continue to flow into investment houses with little public oversight while risks to taxpayers grow.
The Small Business Administration, a federal agency, has an arm called the Small Business Investment Company, that provides billions to private equity firms, which earn profits with those funds.
Taxpayers are at risk if the government-backed deals sour.
And there are losses. There have been about $1.6 billion in losses over the past decade, according to government reports.
Putting taxpayers on the hook for private risk-taking rankles watchdogs like Adam Andrzejewski, founder of OpenTheBooks.com, a Chicago-based non-profit that examines state and federal budgets. “Government should never be in the business of 'making money,’” Andrzejewski told American Media Institute. “Instead, it should be about creating the conditions for individuals to make money.”
Andrzejewski added: “There’s a real lack of public purpose here that will upset a lot of folks that are not insiders or don’t have clout, but pay a lot of taxes."
Private firms are earning much higher returns while the feds are taking most of the risk, he said. Andrzejewski interviewed with a partner in the investment firm Monroe Partners, which is involved in SBIC deals, who said returns on its SBIC investments were “greater than 20%” since 2011.
By contrast, profits on investments in the ordinary marketplace, outside the SBIC program, were "a couple hundred basis points lower," OpenTheBooks.com found. That's a difference of more than two percent per year--a large margin in an industry which measures its results in one-hundreths of a percentage point.
The SBA currently lists 313 investment firms with SBIC licenses who manage more than $28 billion in assets. They include Hercules Capital and New Mountain Capital, publicly traded firms each worth around $1 billion.
The program’s details were first reported by James Varney for RealClearInvestigations.
Instead of providing loans to small businesses, the original mission of the federal agency, the SBIC “funds the funders,” providing “funding to qualified investment management firms with expertise in certain sectors or industries,” the program's website explains.
The SBIC's website says the program is “unique” in that “SBICs are privately owned and managed investment funds, licensed and regulated by SBA that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses.”
The SBA said that “for every $1 the fund raises from private investors, SBA will commit $2 in debt, subject to a cap of $150 million.”
“When the investments are realized and the fund begins to wind-down,” the SBA said, “the SBIC will repay its SBA-guaranteed debt and share the profits from its investments with the private investors who backed the fund.”
Private equity firms to pay the SBA 3 to 3.5 percent on the funds they receive from the government.
Mark Walsh, who runs the program for the SBA, told RealClearInvestigations that those bad bets are far outweighed by the successes. The SBIC, he said, makes money for the government while funneling money to underserved communities. “Sixty-six percent of venture capital in this country is raised and spent in 25 ZIP codes,” he said. “We get it into other ZIP codes and I think we do a pretty good job.”