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’s recovery rate was only 52 cents on the dollar.
After Thomas Morris arrived at the SBA’s Office of Liquidation three decades ago, he started overhauling how failed investment companies and their assets were handled. 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, the SBA’s deputy associate administrator, adding that Morris almost single handedly saved the Small Business Investment Company program.
“The investment program would crumble if we weren’t able to keep up the recovery rates,” said Schimpp.
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 paid by the investment firms to the SBA and largely because of the innovative loss recovery processes created by Morris. 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.
While business failures are a fact of life, many of the government-backed investments made by the SBICs have paid off—some big time. Some of the country’s most successful corporations received financing from SBICs during their early stages of growth. Federal Express, Costco, Staples, Whole Foods, and Outback Steakhouse all received help 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 faces losses and tries to recoup whatever funds it can by liquidating these entities and the available assets.
In 1985, the standard practice had been to allow the failed investment companies to liquidate themselves, which usually ended up with the government 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.”
Currently, failed investment firms can work out their own agreements only if they can show that they will likely be able to repay the agency in full if given a reasonable amount of time.
If they can’t meet this standard, 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 day-to-day operations of the investment firms and, if necessary, the defaulting companies in which they have controlling interest. The SBA receiver can then 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. But ultimately, she said, Morris and his team got all of the invested money back.
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 each company one at a time. By selling all of the assets at once to big financial buyout firms, his office has been able to wrap up the liquidation process 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.”
One pearl was an 82-acre, defunct amusement park in Warwick, Rhode Island that had been a popular, regional landmark and had received financing from an SBA-backed investment firm. Initially, Morris worked with local officials to set up guidelines to sell the property to a developer, who planned to build homes on the site. When the real estate market crashed, the deal fell through. Morris retrenched and eventually enabled the state and the city to buy the land and create a park. Rocky Point Park opened in 2014, and the SBA recouped its money.
Morris said his motivation gets down to the numbers: $6 billion in investments currently generated by the SBIC program during the last year that are building businesses, creating jobs and stimulating economic growth, all without a government subsidy because of the SBA’s high recovery rate on defaults.
“That’s what makes me feel great, that it’s making a difference” said Morris.