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A Lender Who Is Starting Small : Business loans: Western General Capital Corp. of Sherman Oaks invests private and federal money into small firms from Laundromats to herbal tea stores.

September 25, 1990|PATRICE APODACA | TIMES STAFF WRITER

For example, an SBIC owned by Continental Illinois Bank invested about $500,000 in Apple Computer when it was starting up in 1978. After Apple went public in 1980, Continental sold its position over a two-year period for a $44-million gain.

John Hines, the Continental SBIC's now-retired president, "became kind of a legend in the industry after that deal," said Mike Kim, Continental's chief financial officer.

But such success stories are rare among SBICs. Since the program started in 1958, 465 SBICs out of a total of 1,597 have been placed in liquidation after defaulting on their payments. Since 1980, the backlog of the SBIC program's liquidation portfolio has grown from $100 million to more than $500 million, and the number of SBICs placed in liquidation has doubled in the past five years.

"SBICs are the venture capital arm of the SBA," said Bernard Kulik, who runs the SBIC program. "They're probably the riskiest single operation in the agency's inventory."

Why are SBIC liquidations up? For one thing, many of the small companies that SBICs finance hope to sell stock to the public eventually and use the money to finance their growth. But Kulik said the market for new securities has never fully recovered from the 1987 stock market crash, hindering many SBIC-backed companies from raising enough money to keep operations going.

But officials admit that the SBIC program also suffers from internal problems. In testimony before the Senate Committee on Small Business last month, SBA Administrator Susan Engeleiter said SBIC problems also "result from spotty government oversight and supervision of the program."

SBICs must have an independent audit done annually and must comply with certain regulations, such as limits on the size of companies that receive financing. But beyond that, it is up to each SBIC to decide which businesses it will invest in. "We do not pass on individual investments," Kulik said.

The SBA also doesn't place any restrictions on ownership of SBICs, nor does it offer a precise definition of "social or economic disadvantages." It does pass approval on an SBIC's manager, but offers few guidelines as to who would qualify.

Thian said he hopes to avoid the problems that have beset other SBICs by picking businesses that produce steady returns, rather than trying to strike it big with a high-risk technology or an oil and gas company.

He also said he's leaning heavily on the expertise of Chris Lin, chairman of another SBIC, Myriad Capital Inc. in Monterey Park, which helped fund General Bank.

Lin said he "got burned pretty bad" when he started Myriad 10 years ago by investing in businesses with poor management, such as a seafood trading company that failed because of the owners' lack of experience. Those early losses taught him to carefully scrutinize an owner's background before investing, he said.

With advice from Lin, Thian said he has refused loans to applicants who wanted to start Laundromats because they lacked experience and their business plans "just didn't make sense."

The businesses that Western General has invested in are all owned by Asian immigrants. Thian said that's because he has only invested private capital so far and initially turned to the community he knows best.

After he starts receiving government funds, Thian said he will start advertising his services and "I'll extend loans to all nationalities and races."

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