Q4 2020 Fidus Investment Corp Earnings Call
[music].
Ladies and gentlemen, and thanks for standing by and welcome each of the fourth quarter 'twenty and 'twenty earnings Conference call at this time all participants.
And the only mode. After the speaker presentation, there will be a question and answer session well that's great question and during the session you will need to press star one of your telephone and please be advised that today's conference is being recorded if you require any further assistance. Please press star zero, and one and I like to hand, the conference out with the MS. Stephanie. Thank you. Please go ahead ma'am.
Thank you Felicia and good morning, everyone and thank you for joining us for fight US investment Corp, fourth quarter, two and 'twenty and 'twenty earnings Conference call.
For me. This morning are Ed Ross five of this investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer, The Tightest Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results.
Copy of the press release is available and the Investor Relations page of the company's website and S. T U S dot com and all.
And so I'd like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.
Conference call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results and cashless Society of investment Corporation of.
The management believes these statements are reasonable based on estimates assumptions and projections as of today February 'twenty six 'twenty 'twenty. One the statements are not guarantees of future performance time sensitive information may no longer be accurate at the time of any telephonic for webcast replay actual results may differ materially as a result of it.
The risks uncertainties and other factors, including but not limited to the factors set forth and the company's filings with the Securities and Exchange Commission.
I just undertakes no obligation to update or revise any of these forward looking statements with that and I would now like to turn the call over to Ed and good morning, Ed.
Good morning, Jody and good morning, everyone.
Welcome to our fourth quarter 2020 earnings conference call.
All of you your families friends and coworkers are staying healthy and well.
I'm going to open today's call with commentary about the state of our portfolio and year end.
And I'll, then review of fourth quarter highlights and share our views on deal activity and the lower middle market during the first quarter of 2021.
Shelby will cover the fourth quarter financial results and our liquidity position.
Once we have completed and our prepared remarks.
And we'll be happy to take your questions.
And I look back at 2020 and recall of the uncertainties, we were facing towards the end of the first quarter due to the pandemic.
We did not know at that time, what the ultimate impact on our portfolio of companies business operations would be.
We indicated that we believe the vast majority of our portfolio of companies had resilient business models that could absorb of economic stress.
We believe that our strategy of selectively investing in companies with defensive characteristics, including strong free cash flow and positive long term outlooks would enable our portfolio to weather the storm.
And under unprecedented adverse business conditions.
Pleased to report that our portfolio of overall has in fact weather the storm, thus far and perform well and a difficult year and testament to the success of our strategy.
Due to the great uncertainties, we were all facing we also made a deliberate decision to manage the business with great caution for it.
Just on maintaining a strong liquidity position and preserving capital.
This decision has served us well.
After writing down the fair value of the portfolio and the first quarter to reflect the negative impacts of the pandemic.
Over the remainder of the year our portfolio continuously improved the trend that continued in Q4 for a number of our portal.
Which resulted and pronounced depreciation and the fair value of our debt and equity investment.
And maybe a year and increased $21 $2 million for five 4% to $410.8 million from $389 $6 million at the end of the third quarter.
We ended the year with NAV per share of $16 and 81.
And this force since share.
<unk> of the level at the end of 2019.
Our assessment of the portfolio risk based on company operations has also steadily improved since the first quarter.
At that time, we considered a little more than 80% of the portfolio to be and the low to medium risk range.
For the fourth quarter, our view is the 94% is and the low to medium risk range categories.
While many of the companies and our portfolio of found ways to capitalize on competitor of weaknesses and of our heightened and market demand.
Their overall and finding ways to persevere and the current business environment and to remain well positioned for long term success.
We ended the year with one portfolio company on Pik, non accrual status and our non accrual balances less and 1% of the portfolio on the fair value basis.
As you may recall, the pandemic had particularly severe repercussions on accident business and 2020.
Q4, we realized a loss of $36 $1 million, an accent food services.
In terms of our portfolio of construction and metrics the fair market value of our investment portfolio as of December 31, 2020, with $742 $9 million.
And it goes to 108, 1% of cost and.
Compared to 99, 9% of cost for the third quarter and.
98, 3% for the first quarter.
We ended the fourth quarter with 66 active portfolio companies and three companies that have sold their underlying operations.
During 2020, we continue to increase the mix of first lien debt investments and the portfolio.
And at year end of the first lien debt accounted for 25, 2% of the portfolio and a fair value basis compared to 2000 14.1 per cent as of December 31 2019.
The breakdown of the rest of the portfolio by investment type of as of December 31 was as follows second lien debt 44, 7%.
Net of debt 14, 5% and equity investments 15, 6%.
Our portfolio remains well structured the remained healthy during difficult times. In addition, our equity investments continue to give us the opportunity to enhance returns over the long term.
Turning to our results for the fourth quarter, we reported adjusted net investment income, which we defined as net investment income and excluding any capital gains incentive fee attributable to realized and unrealized gains and losses of $10 $7 million for 44 per share.
For the $8 3 million or <unk> 34 per share for the same period last year.
Completing a year of sequential gains in adjusted NII.
On December 18th 2020 price paid a regular quarterly dividend of <unk> 30 per share and a supplemental dividend of <unk> <unk> per share to stockholders of record as of December 4th.
As you May recall last April our board of directors reduced the quarterly dividend from <unk> 39 per share the <unk> 30 per share.
We made this very difficult decision to reflect the unprecedented uncertainties. We were all facing at the time and the challenges some of our portfolio of companies, we're contending with due to the pandemic.
As a result of the steady improvement and the overall health of the portfolio of since then the board has increased the base quarterly dividend by <unk> <unk>.
31 cents per share and implemented a supplemental quarterly dividend for 2021 equal to 50% of the surplus and adjusted NII over the base dividend for the prior quarter.
This formula and resulted in a surplus of <unk> 14 per share from Q4.
Generating the first quarter's supplemental dividend of <unk> <unk> per share.
On February 19, 2021, and the board of directors, therefore, declare a day base quarterly dividend of <unk> 31 per share and the supplemental quarterly dividend of <unk> <unk> per share the.
Base quarterly dividend and the supplemental cash dividend will be payable on March 26, 2021 to stockholders of record as of March 12.
Turning to originations and repayments I mentioned on the third quarter call that M&A activity and the lower middle market was very high.
Particularly for companies that were not meaningfully impacted by the pandemic.
As a result and and.
And as anticipated we had an extremely busy quarter in terms of investment activity.
In terms of originations.
The $103 $9 million and debt and equity securities during the quarter.
Of the $103 $9 million $58 5 million or 56% was in first lien debt investments and we invested and seven new portfolio companies.
These were $9 $1 million and first lien debt common equity and preferred equity and apply data Corporation, a leading provider of fresh item management technology for grocery and convenience stores.
The $11 million and first lien debt and common equity and comply 365, LLC, a leading provider of SaaS enterprise content and compliance management solutions for the aviation and rail markets.
$21 $5 million and first lien debt and common equity and data Guide, Inc, and <unk>.
Provider of automated data discovery classification protection and continuous monitoring software.
$8 $2 million, and first lien and revolving debt and elements brands LLC and e-commerce platform dedicated to developing consumer products brands and <unk>.
$9 $3 million and first lien debt and common equity and Hallmark Healthcare solutions, Inc. A software as a service company operating physician compensation and workforce management solutions for health systems.
Academic medical centers and physician groups.
$6 $8 million and first lien debt and preferred equity and helps us and I don't see a leading provider of revenue cycle vendor management solutions to hospitals and health systems.
And $13 $5 million, and second lien debt and common equity and pool and electrical products LLC, a leading regional distributor of pool equipment and supplies.
These investments and new portfolio of companies share of the defensive characteristics critical to the success of our strategy.
And the business models with recurring and reoccurring revenue streams and strong cash flow generation to service debt and positive outlooks for growth over the long term.
They also operating in industries, we know well and these cases and software or Tech enabled services business services and healthcare services.
In addition to investing in new portfolio companies, we refinanced our $20 million second lien debt investment and wheel pros during Q4.
In terms of repayments and realizations, we received proceeds of $107 million in terms of exits, we exited our debt and equity investments and Pugh lubricants, LLC, receiving payment and full of $26 $6 million, including a prepayment penalty on our second lien debt investment.
And realized a gain of approximately $25 million on our equity investment.
Exited our equity investment and and who knew at LLC and realized the gain of approximately <unk> $2 million.
And receive payment and full of $4 $3 million on our first lien debt and global plasma solutions.
We exited our debt and equity investments and control scan, Inc. We received payment in full of $6 $8 million on our subordinated debt investment and realized a gain of approximately $7 million on our equity investment.
We exited our debt and equity investments and BCC Group Holdings, Inc.
For the payment in full of $18 $5 million, including the prepayment penalty on our subordinated debt investment and realized a nominal gain on our equity investment and.
And as I mentioned, we refinanced our $20 million second lien debt investment and wheel Pros Inc.
Subsequent to year, and we closed $42 million of investments, including investments and three new portfolio companies.
Primarily in the first lien debt and equity and received proceeds of $68 6 million and repayments and realizations.
Before I close with comments about the market I wanted to highlight.
The exit of our debt and equity investments and fts.
<unk> was acquired and combined with Calculus, Inc, and Oregon Corporation under a new holding company spectra A&D holdings.
The assets and avionics company that we control for the past several years and this exit and effective reinvestment of the proceeds into a now much larger and better positioned company was well executed by our team.
Importantly, the new company is now very well positioned for the future.
As a result of the transaction, we now have a first lien debt investment and a meaningfully meaningful minority equity investment alongside a private equity group that focuses on the aerospace and defense space and.
This was a nice transaction for F. The U S and Allstate go stakeholders involved.
After the flurry of deal activity and the fourth quarter, and M&A and the lower middle market has moderated a bit and the first quarter. Nonetheless, we have had some deal flow held over from 2020, and we believe we will have a decent level of investments and the first quarter.
Repayments on the other hand will likely the slightly higher than the fourth quarter.
While we are not discounting the uncertainties that are still with the surround the strength and pace of the economic recovery.
We have demonstrated success and redeploying proceeds in the portfolio companies that provide us with a high level of current and recurring investment income and equity upsides.
Our steadfast commitment to our underwriting disciplines, and proving and investment strategy will continue to serve us well as will our conservative approach to managing the business for the long term.
Focused on generating attractive risk adjusted returns and preserving capital and the interest of our shareholders.
I'll now turn the call over to Shelby for.
Our fans.
Thank you Ed and good morning, everyone I'll review, our fourth quarter results in more detail and close with comments on our liquidity position. Please note I will be providing comparative commentary versus the prior quarter Q3, 'twenty and 'twenty.
Total investment income was $23 6 million for the three months ended December 31 2020.
The $2 6 million increase from Q3, primarily due to a $1 6 million increase and fee income from new investment amendments and prepayments.
One point for a million increase and dividend offset by 1.4 million net decrease in interest income primarily related to timing of repayments versus new investments and Q4.
Total expenses, including tax provision were $17 6 million for the fourth quarter of.
Approximately $3 4 million higher than the prior quarter, primarily due to an increase and the capital gains incentive fee accrual of $1 9 million related to meaningful appreciation and the fair value of the portfolio.
The point 7 million excise tax accrued in Q4 related to the estimated spillover income of approximately 22 million of our 90 per share.
<unk> 3 million increase and professional fees related to audit and tax expenses and the point 2 million increase and the income incentive fee.
As of December 31st the weighted average interest rate on our outstanding debt was four 7% as of December 31st we had $454 3 million of debt outstanding comprised of $147 million of SBA debentures, and 307 $3 million of unsecured notes our debt to <unk>.
Equity ratio was one one times of seven five times statutory leverage excluding exempt SBA debentures.
In late December we successfully issued a $125 million of unsecured notes at a 475 interest rate. The net proceeds were used to pay down the outstanding balance on the line of credit of 23 million of closing and to fully redeem our 5.87 and $550 million public notes in January and.
To partially redeem $50 million of the total of 69 million, 6% notes in February.
The notice requirements the bond redemption occurred subsequent to year and so we ended the year with artificially higher leverage and conjunction with the bond redemption, we will realize a onetime loss on extinguishment of debt and Q1, 'twenty and 'twenty one of approximately $1 9 million related to the unamortized deferred.
Financing cost on the redeemed bonds.
Into account the bond redemptions on our GAAP, our GAAP debt to equity ratio is now currently approximately.
Eight six times.
Net investment income or NII for the three months ended December 31, 2020 was 25 cents per share versus 28 cents per share and Q3, adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investment was for.
And four cents per share and Q4 horses, <unk> 40 per share and Q3.
For the three months ended December 31, 'twenty and 'twenty lightest had approximately $33 9 million of net realized losses related to $36 1 million of realized losses on accent food services offset by $2 3 million of realized gains on the exit of several of our equity investment primarily include.
<unk> controls scan point 7 million gain P lubricants, and <unk> 5 million gain and who knew it point of $2 million gain.
Turning now to portfolio statistics as of December 31st our total investment portfolio had a fair value of $742 9 million, our average portfolio company investment on the cost basis was $10 4 million at the end of the fourth quarter, which exclude the investments and three portfolio companies and that's all there.
The operations are in the process of winding down.
We have equity investments and approximately 88, 4% of our portfolio of companies with a weighted average fully diluted equity ownership of five 8%.
Weighted average effective yield on debt investments was 12, 2% as of December 31st the weighted average yield is computed using the effective interest rates for debt investment at cost, including accretion of original issue discount and loan origination fees, but excluding investments on non accrual if any.
Now I'd like to briefly discuss our available liquidity as of December 31st our liquidity and capital resources included cash of $124 3 million $100 million of availability on our line of credit, resulting in total liquidity of approximately $224 3 million.
Taking into accounts subsequent events, including the bond redemptions. We currently have approximately $143 1 million of liquidity and access to 161 5 million of additional SBA debentures under our third SBA license.
The two SBA regulatory requirements and approval now I will turn the call back to Ed for concluding comments Ed.
Thanks Shelby.
And as always I'd like to thank our team and the board of directors and Fridays for their dedication and hard work and our shareholders for their continued support.
I will now turn the call over to Felicia for Q&A Felicia.
And as a reminder to ask a question and you would need to press star, one and go telephone and too.
For your question press, the pound or hash key and please standby while we compile.
And I will start.
And your first question comes from the line of Chris Kotowski of Oppenheimer.
Yeah. Good morning, Thanks for taking the question.
Well the first of all of I guess I kind of wanted to.
I think your new dividend policy is kind of the ingenious of I guess I've always kind of thought the.
Having a a.
38 cents of every single quarter or whatever the number is kind of artificial and and now that the world doesn't and you have the exact same opportunities.
And every single quarter.
And over a long period of time, and so I'm wondering how are you thinking of making that move kind of permanent and and I'm kind of curious how that will then kind of the interact with the buildup and spillover I mean, you know it just.
Presumably your spillover income would grow a lot faster under this kind of thing rather than having a fixed dividend the targets what you expect to earn over the over the over time.
Sure sure.
Let me give you of this kind of a perspective on on our thinking and.
And.
As all of US would agree Theres still.
A fair bit of uncertainty of the world today, and so from our perspective being aggressive with dividend policy just doesn't seem like the right thing to do.
We're thrilled with our performance and our overall outlook, we're also thrilled to be making of meaningfully.
Supplemental distribution this quarter, which is a direct correlation to our performance.
As we mentioned in our prepared remarks, we feel this approaches.
A good solution for at least 2021.
And it provides significant upside to the base dividend.
As we have and the last two quarters, while also providing what I'd say is the durable and flexible distribution model and these uncertain times so.
Overall, we do like this approach.
Especially this year and an environment like this.
And so said another way, we think operating with a reasonable level of caution makes a lot of sense at the moment and you know to your specific question will this be a permanent and move it could be.
I think the base dividend and it's something we'll always look at.
But the.
And the approach is a good one and I wouldn't say, we you know I'm of the.
The first to do this but.
And I do think it's a good one, especially in this environment and we will consider you know kind of it.
The permanent basis as well as we move forward, but this is a 2021 move at this point and time regarding spillover.
And it falls in line with the no we're still operating in an environment.
As you know has some uncertainty and an elevated level of uncertainty.
And so we are we like the idea of of having the high spillover position like we do for a rainy day reasons and.
So at the moment.
And we're going to kind of keep spillover and the range that it is.
Assuming it stays there and I think it will so it.
And it didn't factor into the of the dividend equation really because we like having this cushion at the moment.
One of that answers your question.
Yeah. That's helpful. Thank you and then secondly, I was wondering if the.
And it looks like your first lien debt positions are now you know roughly 30 per cent of the portfolio and you know it.
As recently as two years ago, I think they were less than 10.
And again can you talk a bit about what's driving that change is it the.
And does it impact you know kind of the mix of business and the yields and and and and how much further does that go.
Sure sure of its a great question.
And we've talked about it a little bit on previous calls, but I would say several years ago, we started.
The 24 months ago, maybe 24 to 30 months ago.
We started to focus more on first lien investments and particular on what I would call more lower middle market smaller EBITDA businesses, and we felt like that was the right approach, where we can control of the balance sheet of little bit more and if things move around.
And obviously, we're also doing a fair bit of tech enabled and and software lending today, and that's and the approach that we're using with regard to that.
You know that in market as well at least on the smaller EBITDA businesses. If you will.
Conscious approach pre Covid and I will tell you post COVID-19 and Covid showed up we also made a very deliberate decision to say the junior capital investments here and the at least near term are going to be very few and far between and only.
And of meet the superlative opportunities and the.
So it just seemed like the right thing to do.
Cosmetically as well as just structurally so we can.
Really control of those assets a little bit more.
And so it's a conscious decision that we've made pre COVID-19, it's continuing and this COVID-19 environment and.
And quite frankly, we're finding a lot of success.
And with our clients and providing first lien solutions now some of the solutions. Our first out last out where it will bring in of bank debt to lower the.
Lower the rates and obviously give us a little bit higher yield, but these are transactions, where we're originating the debt investment and we're deciding whether we want to do that which as you know provide a first out last out solution or we're just providing the first lien solution and we're the only lender so.
We've been doing it for a while and I would expect that trend to continue and to some degree for sure.
And are you still getting warrants to roughly the same degree that you did historically.
No I mean, I think Laurence we were getting quite of few warrants.
Yeah, I'd say seven years ago nine years ago, 10 years ago, I think and the where we're focused with private equity groups.
And chip and that's a large majority of what we're doing today getting warrants the they're going to be of pretty hairy situation, which we haven't been doing my job. So it's more.
Direct equity investments alongside the private equity groups, and then providing the debt solution as well.
And that's and that's the approach for a while.
Over the recent years, if you will.
Okay Alright. Thank you that's it for me. Thank you talking to you Chris.
Your next question comes from the line of Matt Tjaden from Raymond James.
Hey, everyone more and again and thanks for taking my questions and maybe first one for you any commentary you can give on from the pipeline you're seeing.
And where spreads and terms are sitting right now versus pre COVID-19 levels.
Sure.
Great question Matt.
What I would say as you know.
The vintage if you will.
Currently.
Q4, and Q1 is very similar.
And nature, we're continuing to see yields be at reasonable levels I would say at least at COVID-19 of pre COVID-19, but probably a little bit better.
Given what I just talked about I think the structures most of its first lien debt for us by definition is probably a little bit better from our perspective.
And then also the.
And the underlying assets that we're invested in and so and this market. What we're seeing is a lot of interest and recurring revenue models reoccurring revenue models businesses that haven't been impacted greatly by Covid and.
And obviously those underlying types of assets or things we of a high degree of interest and and we like very much so and I think about the vintage if you will the we're investing and today and we were in Q4.
We think that it's very attractive.
How I would talk about it.
I'd say deals, Okay, and then and the.
Flow has moderated here in Q1, and I think some of that seasonality I think there was a huge push and surge in Q4, but we are continuing to see.
Pretty good opportunity.
And the lower middle market.
Probably not at the same robust level, we did in Q4.
Great maybe as a follow up to that just on the commentary.
Pipeline sounds like it's a lot of COVID-19 kind of resistant names and names of performed well and 2020.
Our sponsors right now willing to invest in and those more COVID-19 affected names or whereas the play kind of the wait it out and in and see what happens.
I think there is I think they'll do both I think a large large majority of of what we're seeing and what people are gravitating towards us non bid.
Is that have not been and impacted materially by Covid.
Having said that there are others that are willing to look at business and say look you know, we're we're getting closer to you know.
And out of the woods here with regard to Covid and.
Yes. This company was impacted but I can.
Look at that adjustment and say that's real.
No there is not nearly as much of that going on but there is some of that for sure.
Great. That's it for me appreciate the time this morning.
Thank you good talking to you Matt.
Your next question comes from the line of Ryan Lynch.
Yes.
Hey, good morning, and thanks for taking my questions.
The first one day, just kind of following up from the investment philosophy standpoint, obviously and.
The past several years, you've talked about the cycle investing.
And you know 10 years from and from the last downturn.
And now it seems that debt, we are coming out of the severe economic downturn and theirs.
The way to go but but if the economic recovery continues as it is planned and in 'twenty and 'twenty one.
Do you see yourself.
Changing your investment philosophy is.
The way you guys of approach to the market at all whether that's for the industry. As you guys are focusing on or whereas the focusing where you guys are and the capital structure at all.
Sure Great Great question.
Generally speaking I would say no.
And we've been approaching the market now for several years or two plus years.
Always have been a solution provider, we always did senior debt I would tell you there's a increased.
Emphasis on that and also receptivity from.
From clients. So that is that has gone very well from my perspective and.
Yes, so from a philosophy.
We are of solution provider, we still are looking at very high quality.
The second lien investments and subordinated debt investment, but there they are typically bigger companies.
And and companies that we believe have great staying power and resilience and.
And cash flows for that matter. So those are that's the approach it's been that way for a while.
You know towards the.
We really stayed away from investing and cyclicals over the last several years. We knew we were late cycle. We also sort of gravitating towards more first lien investments for that matter and so I think the thought process. I think we will continue as it has recently I think we again the solution provider, but it will.
The majority of senior debt type solutions.
With opportunistic very high quality junior debt investments.
So I don't see a change from where we are today quite frankly, no I understand and that's fair certainty of guys very well.
You guys had some some really nice gains this quarter and a few equity investment and I was wondering if you could give us a couple of lines just a line what drove the meaningful.
The equal gains and container.
Yeah and.
And our global plasma installations.
Sure.
So you know the.
And the energy I would say generally speaking our portfolio.
The the growth was driven by.
Performance.
<unk> said that we do need we have recalibrate and that's what you do from a valuation perspective, and so in certain instances.
Calibration is part of it I E change the multiples if there has been big market movement of outlooks change.
So a good example of that would be energy, which is and the.
Energy services business a day.
Performing very well, beating budget number two.
They also the outlook has improved greatly and if you look at the multiples and that business.
They are you know are much much higher so there's a combination there, but it's mostly performance.
When I think about.
And steel that's performance.
Driven.
And global plasma of that performance.
So we do this on every reinvestment right, we look at it and we.
Do we need to calibrate or not.
But those three and I don't know if you mentioned of any others, but.
As I just mentioned.
Okay.
That's helpful.
And then one last one maybe for for.
For shell D I.
I saw the fee income was was was.
What types of core that was obviously due to the strong activity that you guys had.
And.
And the repayment side, but dividend income was also very high I'm just wondering.
What was that most of I know you've got to get a little bit, but you know somewhat of that a little bit of out of the recurring.
From a quarterly standpoint, that's right.
The $1 8 million in the quarter was was that all most of the one time or do you expect what is kind of your outlook for dividend income.
Q1.
And so I would characterize those as one time.
The two very large dividend from two separate two separate companies and one of which you know maybe annually, but certainly not in Q1 and then another just one time big dividend that happened in Q4 that if something were to happen again I characterize that as more sporadic. So I would definitely say Q4 was outsized in terms of.
Run rate dividend that will not be continuing.
Okay the thing.
I would add to that I agree with Joey's comments completely but there is companies are performing very well and are positioned to do incremental dividends, if they chose to its not and our.
The share decision not our decision but you.
So there is there is the opportunity for more.
Dividend distributions, but her comments very.
We on the.
For more.
The sporadic in nature and the.
One time as opposed to reoccurring.
Okay, and then just one quick last one the one.
And one 9 million dollar of realized loss and extinguishment of debt just to be clear of that is going to run through the realized losses.
Line items in Q1, not the interest and finance and lack of cracks.
That is correct.
And for that.
Okay, great well, we'll add Shelby.
Really nice quarter, and the fourth quarter and probably more importantly, you know really nice 2020, and just to keep NAV basically stable throughout the year and you know given the economic environment and the kind of pandemic. It is really a great accomplishment. So so so well done on that and.
I appreciate the times a day.
Thanks, Ryan and I appreciate it and and good talking to you.
And your next question comes from the line of Nike of Ladenburg.
Ladenburg.
Hi, Yes, good morning, Ed and Shelby I wanted to join.
And and congratulating you on very good results for the.
Very very difficult time for everyone.
And outside.
The site has experienced a high portfolio of turnover.
During the quarter and.
And you managed to offset high repayments with new originations, which is definitely not the case at all of the Bdcs that I cover.
So I thought it would be a good time for you to update us on your team's origination strategy and and what proportion of your deal flow is currently sponsored and and also what share of our use of lead and non bank lender.
Sure.
Great question Mickey.
I think.
We've spent.
A lot of time over the last I'd say five years, we've always been of direct origination shop, and I think we spent a lot of time trying to get better at it and spending more time as a firm.
We've also built you know what I would say of very deep team and I mean, we have.
Over 30 people here at <unk>.
So for.
The fund our size, we've got a deep team and a lot of resources. They can then go out and directly originate and look of businesses and work with the private equity groups.
And others, we focus on for channels, but a large majority of what we do.
The sponsor driven transactions and that represents if you think about our portfolio today as of I think.
And the sponsor of sponsor, it's about 94% of the portfolio.
So that is that has been the focus.
And we obviously also gravitate towards.
Sponsors and quite frankly opportunities that the.
Reside in industry and markets, where we have expertise and experience and so that's how we go about it.
But I think that answers your question if there's.
And then I guess the one the other part for Q4.
We started working very hard on on originations and trying to generate deal flow and Q3, when we started to see the market open up because of our debt repayments and we like okay.
The time to get back the work, we had really shut things down and we didn't know where it was going to go and.
And so we were we spent the second half of the year working hard on originations and what you're seeing as you know.
There was pent up demand across the market and obviously you know that.
And that hit us on both sides, we had fair number of repayments and realizations and then we also generate of the opportunity and invest in seven new portfolio companies.
Hopefully that's helpful.
That's helpful and I appreciate the explanation and.
And I don't want to put the salt and the wound but I'm just.
Just curious could you review the outcome for accent foods and and in terms of the very low recovery and do you think that's more of an idiosyncratic event related to COVID-19 or was there something and that process of underwriting debt you know shed some light debt.
You'd like to two to include in your future underwriting strategy.
Sure it's of Great question Mickey and.
You know there obviously is some salt and that one of them to say the least.
The.
What I would say look accident was on non accrual prior to COVID-19.
Having said that it had a positive outlook and add real market presence of marine revenues were growing.
And it just it needed to clean up of attack, which is actually now done and.
Covid create the opportunity for a for the company to do that and get their cost structure and line and whatnot, but.
So the.
You know what what happened was and as you know the the shelter in place orders and and particularly the work from home orders greatly impacted the business right. The most of any company in our portfolio and no questions of our one non accrual got hit the hardest.
Secondly, I will say of the senior debt providers and quite frankly, the equity group and were not helpful to put it mildly and.
And and the senior group played loan to own ball and.
As opposed to work together, which most people do and so given the status of the company.
The second half of the year, which were very different quite frankly than the projections. We were getting throughout the COVID-19 period, we chose not to double down and basically take a controlling stake and the company we have that opportunity.
And it would have required a very large equity investment and so it's very unfortunate all round.
That's how it played out and company has a solid medium term outlook and a good management team and so we supported the company.
Actually the small equity investment and.
And the new restructured company.
And so that's the situations very unfortunate.
But we didn't have the other than owning the company and right and the very big equity checks. We didn't have the cards given the given COVID-19 and that's what happened, okay, I understand and and is there anything and that process that it's similar at headlands or is that suffering from different tissues.
It's the same issue right. It's COVID-19 I mean everyone's is the retailer and the northeast its focus on sneakers and apparel and urban areas and.
We've known this business for a long long time, it's a very good business.
But it's been impacted by the pandemic and the shelter and place orders.
And then the various things that come with that.
And then they have had obviously vendor challenges as well as many people have and shipping and other things. So it's.
The junior debt investment.
And we obviously put it on non accrual in Q1.
We took it off because of the performance and now it's back on Pik non accrual.
You know and what I'd say is the valuation reflects the the risk profile of the business and.
Now, having said that theyre continuing to weather the storm and the impressive way, but the the <unk>.
Situation, it's a tough environment and the situation is that it's a tough environment for their.
They're doing the best they can and performed admirably at the moment and.
There's risk and the.
And that's where we are.
Okay.
Understand my last question is just to gauge your appetite on rotating out of French deal. It's you know you've got an enormous of unrealized gain there and.
Potentially down the road be interested and rotating into a.
The new investment is that something we can expect you know this year or.
How are you looking at it and general.
Sure. It's of Great question as you know, we did rotate the half of our investment and rotate out of it and the Q1 of last year.
Hi.
Sales of manufacturer of high purity sugars and active ingredient ingredients for injectable drugs and biologics logic drugs, mostly in the oncology arena, we're focused on the oncology arena.
Also do participate and the vaccine arena to a certain degree.
So I'd say the company is performing very well and the outlook is also strong.
So the positives are outweighing any potential negatives of COVID-19 at this point in times of valuation reflects the performance of the company.
And I would say.
Look we are.
And we like the outlook of the business. So it's a it's not an easy question to answer I think at some point you know getting incremental liquidity makes some sense for providers.
The purpose of the question and so but at the same time, we're not in control of of.
The company and.
That would require discussions with the company or sale of the business, which neither of which are happening at this point, so but at some point, we should get some liquidity, but I don't think theres any rush and again, we like the of the outlook of the business.
I understand okay. That's very helpful and those are all my questions. This morning again.
Grant's on very good results for 'twenty and 'twenty.
And look forward to talking to you again soon thank you.
Thanks, Mike and good talking to you as well.
And your next question comes from the line of.
And of the wireless security.
Yes.
Hey, good morning, and thanks for taking my question here.
Good morning Sarkis.
Yes. So you mentioned in the prepared remarks, you have deal flow Thats held over from from 2020 of the decent level of investment activity here and the first quarter.
Do you expect the investment origination to outpaced repayments.
And the first quarter.
Actually.
And if I were a betting person sitting here at the end of February I'd say, no I think repayments at the moment look like they are going to exceed originations, but it's too early to make that statement of affirmatively, but.
That's what it feels like to me.
Good day comment yet.
And given kind of debt.
Activity.
What youre seeing to date, maybe if you can describe your expectations on the cadence of deploying capital versus repayments as the year goes on and you.
So and be able to grow the portfolio.
Great question.
And especially in light of the fact that we had effectively of record repayment level for fight us and Q4, and we may exceed that here in Q1.
And probably will.
And.
Having said that I think originations are still relatively solid and sound the here in Q1 and.
And then what my expectations are is the M&A environment will continue to be healthy.
All of which will create opportunity for originations or more opportunity for originations. So I think thats, a positive and I do as I sit here and look at our portfolio today, we will have incremental repayments in Q2, three and for but I don't think there'll be at the levels. We've had and the last two quarters I think thats kind of subside so the.
The answer to answer your question is I do think we will be.
Be able to grow the portfolio over the course of the year timing of which I don't know, but that's what I would expect at this point I think.
The the repayments have been kind of surge levels and I don't expect them to stay there.
Yeah, no. Thanks for that and I guess as you see kind of the Prepays come on.
And on into the to the books essentially.
From a fee income perspective, do you expect 2021, so it probably would be.
Richer.
Year from from kind of the incremental Steve perspective degeneration.
That's a really really hard.
Question to answer what I would I would say and I Wanna get Shelby's thoughts on this as well.
Is that I would expect fees and assuming we don't have more events here and.
The change the dynamics of the market.
I would expect fees to be at least as good as what we had in 2020, so what I would say.
But the Shelby you got any incremental thoughts for that.
No I think that's right and again.
And it's just hard to predict because at the end of the day it will depend largely on the level of investment activity and to the extent and we see some repayments that are still early enough and the lifecycle of the alone the generate prepayment fees.
Thanks, so much for that I'll hop back into the queue.
Okay. Thanks, Scott good talking to you.
And I'll turn the call back over to Mr. Ross.
For closing remarks.
Thank you Felicia and thank you everyone for joining us this morning.
We look forward to speaking with you on our first quarter call in early May.
Have a great day and have a great weekend.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
[music].