In October 2016, the U.S. Small Business Administration (SBA) issued a report, Measuring the Representation of Women and Minorities in the SBIC Program, revealing diversity-related trends in small business investing. In order to address the diversity of SBICs and portfolio company program participants, the SBA approached the Library of Congress’s Federal Research Division with the following inquiries:
- How diverse are SBICs in terms of having women and/or ethnic or racial minorities in leadership positions?
2. Are racially diverse SBICs more likely to invest in small businesses led or owned by women and/or ethnic or racial minorities?
3. Are gender-diverse SBICs more likely to invest in small businesses led or owned by women and/or ethnic or racial minorities?
4. How do SBICs led by women and/or ethnic or racial minorities compare in terms of investment performance to non-diverse SBICs?
5. Are diverse SBICs more likely to invest in low and moderate income (LMI) communities?
As the study articulates, the SBIC Program “provides an alternative source of financing for high-risk small businesses lacking access to adequate capital from traditional sources.” From the program’s creation in 1958 through December 2015, SBICs have provided $80.5 billion in capital into roughly 172, 800 investments, and remain a decisive tool for thousands of underserved entrepreneurs.
While there is greater gender diversity among the investment teams of SBICs than is present in the broader private equity investment community, it is difficult to make this comparison with regard to the racial diversity of SBICs because of a lack of data on minority participation in the overall private equity community.
Researchers found that only 7.9 percent of firms in the venture capital and private equity (VCPE) sectors had female investment professionals while 11.9 percent of SBIC investment teams had women on their staffs. SBIC data also shows that 10.2 percent of SBICs had at least one ethnic or racial minority on their teams; but this data is not specifically collected in the private equity arena, which is a subset of the venture capital field. However, the report does feature a claim from the National Venture Capital Association (NVCA) stating, “The venture capital industry has not kept pace in investing in people of diverse backgrounds.”
Racially diverse SBICs make more investments in minority-led and minority-owned portfolio companies, as well as in women-led and women-owned businesses than non-racially diverse SBICs.
SBIC Program data from 2013-2015 reveals that approximately 12 percent of the investments made by racially diverse SBICs are in companies with minority CEOs, the analogous figure for SBICs without racially diverse investment teams is 5 percent. Furthermore, about 19 percent of racially diverse SBIC investments are in companies at least partly owned by women or ethnic or racial minorities, while SBICs without racial diversity only invested in these businesses 13 percent of the time.
Gender-diverse SBICs make more investments in women-led and women-owned portfolio companies than non-gender-diverse SBICs. However, gender-diverse SBICs are not more likely to invest in minority-led or minority-owned businesses.
Gender-diverse SBICs invest two to three times more in portfolio companies with a female CEO than male-only SBICs. The report articulates, “For example, among active licensees in the SBA’s debenture program, 10.3 percent of the investments made by gender-diverse SBICs are in female-led companies, while the corresponding figure for SBICs with no gender diversity is 3.35 percent.” A similar trend is present regarding investment in women-owned portfolio companies: among gender-diverse SBICs, 18.18 percent invest in women-owned portfolio companies while only 13.73 percent of male-only SBICs make such investments. There is no evidence suggesting that gender-diverse SBICs make more investments than non-gender diverse SBICs in portfolio companies with racially diverse leadership.
There is no evidence that gender-diverse or racially diverse SBICs perform better or worse than white-male-only-managed SBICs.
From 1995-2015, there is no evidence of performance differences between gender-diverse, racially diverse and white-male-only-managed SBIC funds. The report explains, “Even controlling for the fact that many racially or gender-diverse funds are smaller and have begun investing more recently, there appears to be no evidence that investors in such companies face different returns as a consequence of the SBICs directing investments toward either gender-diverse or racially diverse businesses.”
There is some evidence that racially diverse SBICs direct more capital to LMI communities, whereas there is no evidence that gender-diverse SBICs do.
Evidence demonstrates that racially diverse SBICs invest more in low- and moderate-income (LMI) communities than SBICs without racially diverse investment teams. Additionally, gender-diverse SBICs are statistically less likely to invest in LMI communities in comparison with male-only investment teams.
These findings are a valuable resource depicting the position of women and minorities, and the financial consideration they are provided, within the Small Business Investment Company (SBIC) Program. Perhaps most influential is the fact that evidence depicts gender-diverse and racially diverse SBICs performing equally in comparison to white-male-only-managed SBICs, despite the two former being smaller and possessing less investment experience than the latter. Why does there remain a persistent difficulty in growing the utilization of women-owned, women-led, minority-led and minority-owned businesses in the SBIC Program and business world?