Q1 2021 Fidus Investment Corp Earnings Call
[music].
Good day and thank you for standing by welcome to the first quarter 2021 earnings Conference call.
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I would now like to turn the call over to your speaker today Jody for name.
Yeah.
Thank you Lisa and good morning, everyone and thank you for joining us for fight US investment corporations first quarter 2021 earnings conference call.
With me. This morning are Ed Ross I, This investment corporations, Chairman and Chief Executive Officer.
Shelby Sherard Chief Financial Officer.
<unk> investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results a copy of the press release is available on the Investor Relations page of the company's website at F. D U S Dot com.
I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.
The conference call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results cash flows for finance investment Corp.
Although management believes these statements are reasonable based on estimates assumptions and projections as of today may seven 2021. These 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 risks.
Uncertainties and other factors, including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission filings.
Undertakes no obligation to update or revise any of these forward looking statements with that I would now like to turn the call over to Ed Good morning, Ed.
Good morning, Jody and.
Good morning, everyone welcome to our first quarter 2021 earnings conference call.
Hope all of you your families friends and coworkers are staying healthy and well.
I'm going to open today's call with a review of our first quarter performance.
And portfolio at quarter end, and then share with you our views on deal activity in the lower middle market.
Shelby will cover the first quarter financial results and our liquidity position.
Once we have completed our prepared remarks, we'll be happy to take your questions.
Our first quarter results demonstrate the stability of our portfolio and the effectiveness of our strategy to build a well diversified portfolio of debt and equity investments in lower middle market businesses.
And we believe will produce high levels of recurring income.
For us the opportunity to participate in equity gains, thereby preserving capital and generating attractive risk adjusted returns over time.
We carefully select companies that have strong yet defensible market positions.
Zillions business models that generate free cash flow and have positive long term outlooks for growth over the long term.
Our first quarter operating results were solid and our portfolio performing well and generating adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized and unrealized gains and losses of $11 2 million.
For 46 per share.
This compares favorably to adjusted NII for the fourth quarter of last year, a 44 cents per.
Per share.
Finally paid a base quarterly dividend of <unk> 31 per share and a supplemental cash dividend of <unk> <unk> per share to stockholders of record as of March 12.
On March 26 2021.
As a reminder, the board has devised a formula to calculate the supplemental dividend each quarter under which 50% of the surplus and adjusted NII over the base dividend from the prior quarter is distributed to shareholders.
For the second quarter that surplus is <unk> 15 per share.
Therefore on May 3rd 2021, the board of directors declared a base quarterly dividend of <unk> 31 per share.
A supplemental quarterly cash dividend of eight <unk> per share.
The base quarterly net and the supplemental cash dividend will be payable on June 28, 2021 to stockholders of record as of June 14th 2021.
Net.
We continue to improve as a result of both our solid operating performance in the underlying portfolio fair value appreciation.
We ended the quarter with net asset value of $413 million for $16 90 per share.
Will that is I'd like to point out.
The NAV of our portfolio as of December 31, 2019.
We were all dealing with the pandemic.
Deal flow activity during the first quarter was at reasonable levels, driven by both M&A and refinancing opportunities.
In terms of originations, we invested $63 $1 million in debt and equity securities.
The $6 $9 million or 58, 5% was invested in first lien debt.
Investments in new portfolio companies consisted of.
$7 $5 million in first lien debt and common equity and carlock printing and converting and converter of plastic film into flexible packaging solutions.
$6 $5 million in first lien debt and core business technology provider of revenue management and payment solutions to government health care and education sectors.
We also made a 2 million dollar delayed draw term loan commitment to this company, which was unfunded at close.
$8 $8 $9 million in first lien debt and visa Inc. A global provider of intelligent cloud based direct spend management software solutions.
Also made a point $4 million delayed draw term loan commitment to this company, which is unfunded at close.
And finally $17 million in subordinated debt and common equity and lifespan Biosciences, Inc.
Global provider developer and distributor of antibodies and related reagents, primarily to the academic and pharmaceutical research markets.
The remaining $19 $2 million.
Instead of add on investments in six portfolio companies, primarily related to recapitalization of two portfolio companies.
In terms of repayments and realizations, we received proceeds totaling $98 $6 million.
I've seen another quarter of relatively strong M&A activity and higher.
Debt refinancing volume.
In terms of exits we received payment in full of $15 $6 million, including a prepayment penalty on our first lien debt and Bandon Fitness Inc.
Received payment in full of $6 $6 million, including a prepayment penalty on our first lien debt in Alzheimer's research and treatment Center L. L C.
We received payment in full of $10 million on our subordinated debt investment in O M C investors.
And reinvested $5 million of new second lien debt.
We exited our debt and equity investment and F. D S avionics.
Corp, receiving payment in full of $5 $1 million on our revolving and subordinated debt investments and realized a gain of <unk> $9 million on our equity investment.
We received <unk> one.
$1 million in first lien debt.
And common equity of the acquirer spectra Aerospace and Defense acquisition, Inc.
We received payment in full of $24 million on our second lien debt and wheel Pros Inc.
Including prepayment penalties, we received payment in full of $4 $2 million on our first lien debt in French transit L. L C.
Accident at our debt and equity investments in software technology, LLC, receiving payment in full of $10 million on our subordinated debt investment and realized a gain of approximately $1 $4 million on our equity investment.
And we exited our debt and equity investments and Rohrer Corporation, receiving payment in full of $14 million on our subordinated debt investment and realized a gain of approximately $9 million.
On our equity investment.
Subsequent to quarter end, we invested $11 million in first lien debt of why or why not is foods, Inc. A leading provider of natural and processed cheese products sauces and for.
Land based alternatives.
We invested $5 $5 million in first lien debt and $1 billion in common equity of level Education group common LLC doing business as you see for less a leading provider of online continuing education for mental health and nursing professionals.
We exited our debt investment in Qiagen company LLC doing businesses.
As outward Hound and received payment in full of $15 million on our second lien debt, which includes a prepayment fee.
We invested $25 $5 million in first lien debt common equity and made a commitment up to $2 million of additional first lien debt of.
S. I P. S. G holdings LLC doing business as incentives solutions, Inc. A tech enabled incentive rewards and digital marketing firm that facilitates and optimizes its clients indirect sales channel strategies.
We exited our debt investment and made sure no assurance holdings LLC and received payment in full of $8 million on our second lien debt and we exited our debt investment in Virginia tile company LLC and we received payment in full of $12 million on our second lien debt.
With repayments and exits outpacing originations during the first quarter assets under management as at March 31, 2021.
As expected lower than December 31, 2020.
As at March 31, the fair market value of our portfolio was $711 $9 million.
Equal to 108, 4% of cost and we ended the first quarter with 67 active portfolio companies and for companies that have sold their underlying operations.
In terms of portfolio construction, we continue to increase the mix of first lien debt investment on an absolute basis and as a percent of the total portfolio and at quarter end first lien debt accounted for 27, 5% of the portfolio on a fair value basis compare.
For 225, 2% as of December 31, 2020.
The breakdown of the rest of the portfolio by investment type as of March 31 was as follows second lien debt 41, 5% subordinated debt, 14% in equity since 17%.
With this security mix, our portfolio remains well structured for current economic conditions and positioned to provide us with a high level of current and recurring income from debt investments along with the opportunity for incremental returns for monetizing equity investment.
Moving to portfolio performance overall.
Overall, our portfolio is performing well and risk is at comfortable levels.
Some of our portfolio companies have encountered supply chain disruptions higher input costs, including freight costs, but overall they are managing these issues well.
In the long term fundamentals of their businesses remain in good shape.
<unk> remains on Pik non accrual crew, representing 8% of total fair value of the portfolio.
We track several quality measures on a quarterly basis to help us assess the overall health stability and performance of our investment portfolio.
First we track the portfolios weighted average investment rating based on our internal system.
Under our methodology a rating of one is outperform and a rating of five is an expected loss.
<unk> 31, the weighted average investment ratio for the portfolio was two on a fair value basis. Another metric. We track is the credit performance of our portfolio, which is measured by our portfolio companies combined ratio of total net debt to refinance this debt investments to total EBITDA for it.
The first quarter. This ratio is four four times.
Excluding equity only and <unk> deals.
The third measure we track is.
The combined ratio of our portfolio company's total EBITDA to total cash interest expense.
Which is indicative of arc of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us.
For the first quarter. This metric was three four times, excluding equity only NAR our deals.
Yeah.
With high levels of repayments and exits exceeding originations recently, we were pleased to see that M&A activity in the lower middle market remains robust and is expected to remain strong throughout the year offering us opportunities to invest in high quality companies that meet our underwriting standards and supporting our.
Our positive outlook to build our portfolio of debt and equity investment in a disciplined and measured way as we have in the past.
At the same time, we do expect repayments to continue through the year, but at a slower pace than in the recent past overall.
Overall, we believe the portfolio is headed in the right direction and remains well structured in support of our capital preservation and income goals.
Our strategy is working and we.
We remain committed to our goal of growing net asset value over time through careful investment selection and focus on cash preservation and on generating attractive risk adjusted returns.
I will now turn the call over to Shelby to review, our financial results and liquidity position Shelby.
Thank you Ed and good morning, everyone.
I'll review, our first 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 Q4 'twenty 'twenty.
Total investment income was $23 $3 million for the three months ended March 31st a point 3 million dollar decrease from Q4, primarily due up due to a $1 $7 million decrease in dividend income offset by a $9 million increase in fee income from new investments amendments and.
And a point $5 million increase in interest income intra.
Interest income in Q1 included approximately $1 million of accelerated amortization of closing fees and OID from the Bandon fitness and wheel pros repayments.
Total expenses, including income tax provision were $12 $2 million for the first quarter.
<unk> five point for a million dollars lower than the prior quarter, primarily due to.
$4 $6 million decrease in the capital gains incentive fee accrual in Q4, we accrued for $7 million of capital gains incentive fees getting meaningful appreciation in the fair value of the portfolio.
And a decrease related to a point $7 million of annual excise tax which was accrued in Q4 related to estimated 2000 Twenty's spillover income.
The capital gains incentive fee is accrued for GAAP purposes, but not currently payable.
As of March 31st the weighted average interest rate on our outstanding debt was $4 three per cent and we had $356 1 billion of debt outstanding comprised of $133 8 million of SBA debentures, $207 3 million of unsecured notes and $15 million outstanding on our line of.
Credit in Q1, using the proceeds from our December bond offering we fully redeemed our 5.8, 75% 50 million dollar notes due 2023, and partially redeemed $50 million of our 6% public notes due 2024. In addition, we paid down $19.
2 million of SBA debentures, and our second Spic's fund, we realized a one time loss on extinguishment of debt in Q1 of approximately $2 2 million from the acceleration of unamortized deferred financing cost on the redeem bonds in SBA debentures.
Debt to equity ratio as of March 31st was <unk> nine times or five times statutory leverage excluding exempt SBA debentures.
Net investment income or NII for the three months ended March 31st was <unk> 45 per share versus 25 cents per share in Q4, adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investment was 46 cents per share.
In Q1 versus 44 cents per share in Q4.
For the three months ended March 31st we recognized approximately $3 2 million of net realized gains from the sale of several equity investments, including software technology or one point for a million dollar gain F. D S appoint $9 million gain and ROI appoint $9 million gain.
Turning now to portfolio statistics as of March 31st our total investment portfolio had fair value of $711 9 million down from $742 9 million at year end as repayments outpace new investment activity in Q1.
Our average portfolio company investment on a cost basis was $9 8 million at the end of the first quarter.
Excludes investments and for portfolio companies that sold their operations and are in the process of winding down.
We have equity investments in approximately 87, 3% of our portfolio companies with weighted average fully diluted equity ownership of $5 three per cent.
Weighted average effective yield on debt investments was 12, 3% as of March 31st the weighted average yield is computed using the effective interest rate for debt investments at cost, including the 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 March 31st our liquidity and capital resources included cash of $60 2 million $5 5 million of available SBA debentures and $85 million of availability on our line of credit, resulting in total liquidity of approximately 105.
Ft $7 million.
Taking into account subsequent events. We currently have approximately $142 8 million of liquidity GAAP leverage of <unk> eight times and access to $150 million of additional SBA debentures under our third SP I see license subject to SBA regulatory requirements and approval.
Now I will turn the call back to Ed for concluding comments Ed.
Thanks, Shelby as always I'd like to thank our team.
And the board of directors at <unk> for their dedication and hard work and our shareholders for their continued support.
I'll now turn the call for to Liza for Q&A Lisa.
At this time I would like.
Everyone.
Question. Please.
And then the number one.
Keith.
Your first question comes from the line of Ryan Lynch with K B W.
Thanks for taking my questions.
First one I had was you guys, obviously had a very strong fee income in Q1.
It is driven by the.
The strong level of free.
Repayments that you had can you just talk about you know I know repayments have been pretty strong. So for E. Q2 can you just talk about your expectations for fee.
Fee income levels in Q2 compared to Q1.
Sure Good morning, Ryan.
Yes, what I would say Q1 fee income was.
A little higher than normal.
Some events there that were large events not small.
That's obviously positive and its a.
The benefit of our model, but it's not something that I would say is going to reoccur every quarter for sure. So when I look at.
Q2 from a fee perspective, my current expectation would be for fees to be lower.
And that also is dependent on what activity happens here the rest of the quarter, which as you know is there is some fair number of loans what deals that we're working on now do actually close.
And what repayments actually occur and so.
But my expectation would be for fees to come down a little.
For sure.
And Ryan I would just add to that to put it in perspective in Q1, we had about $3 1 million of fees approximately half of that was from prepayments.
And so in Q2, I would expect our fees to really be driven more from origination activity and maybe to a minor extent, maybe a few amendment fees, but not the level of prepayment fees, we saw in Q1.
Okay.
And then a question kind of on the market environment and your outlook kind of a two part question.
You talked about M&A.
Continuing to be pretty active in that state. Obviously that presents you know a lot of deal activity for you guys to deploy capital, but also put pressure on.
Repayment can you just talk about first.
What do you think that your guys ability to actually grow the portfolio over the next coming quarters is again I know, it's hard to Cal not you know asking you use necessary for prediction, but just just high level thoughts on that and then also.
The environment has gotten very competitive certainly in the upper middle market.
Certainly back to pre COVID-19 levels I'm, just wondering you know as far as the terms and structures that you guys are seeing kind of in the lower middle market and middle market.
Of those sort of return back to pre COVID-19 levels or are those still a little bit more favorable.
Great question Ross.
<unk> should I say.
And so let me maybe I'll start with just the market you know.
Give you a little context on originations and repayments and then try to address those last questions.
You know from a market perspective, as you know Q1 started out I'd say, a little slow and that was just.
Timing, given the Q4 activity levels.
I would say towards the end of Q1 things start to pick up in the M&A market in a meaningful manner in our market at least for lower middle market.
You know.
In Q4, we saw a high level of deal flow and more importantly, a.
A lot of high quality and actionable.
Opportunities as the market was flocking to.
Very high quality businesses that haven't been impacted by COVID-19 I would tell you the market seems to be you know continue to be focused on.
Yes.
This is that haven't been meaningfully impacted by COVID-19.
And so we are and.
In fact, I'd say theres, a premium pay for those businesses. So there is a fair bit of activity.
Today.
Sitting here today I would suggest activity levels are good.
And we expect that.
Two what I would say robust M&A market throughout the year at this point you know anything can change, but that's what we're hearing that's what we're seeing so from an originations perspective, obviously, we're focused on capital preservation attractive risk adjusted returns and we're being very disciplined in.
We're going to continue to focus on first lien investment and strong credit.
And we will continue to Opportunistically focus on second lien investments and what I would call you know just superlative type situations and so.
We expect Q2 to be relatively busy from origination perspective. This quarter was you know.
I guess in April we had 43 million in originations.
We're working hard on several opportunities right now, but you know as you know it's too hard to tell what will close and what work you think.
Can happen with the deal and so that's the challenge when I look at it but I do expect some incremental originations obviously.
With regard to repayments, we've had three debt repayments this quarter.
At this point, we do expect some additional realization activity one company that's in the process of refinancing the balance sheet and.
We have two others that are in the market.
Executing the strategic alternatives process don't know the timing or certainty of those but I don't know.
So that's going on.
So overall, what I would expect as originations this quarter too you know I'd say main pain or you know or exceed.
Repayments.
And it's really just it depends on what what occurs here in the last 50 days of the quarter.
So it's you know it's dynamic it's slowly, but it's very active.
As I look forward or I tried to answer your two last question. Your questions can we grow the portfolio.
As I see it today as I do think.
Repayments will will slow down a bit I think a lot of the low hanging fruit in our portfolio.
As has kind of transpired if you will.
<unk>.
So.
So I do expect.
For the day.
The portfolio to grow.
The rest of the year you know.
What happens this quarter, it's kind of hard to tell but just based on activity levels and expect for activity levels.
Comparative repayments that we can see I would expect our.
Originations to outpace.
Repayments and exits.
In terms of the competitive environment had obviously is competitive.
Good news is we're participating in the lower middle market.
Highly fragmented and represents close to 90% of the transactions that take place in the in the marketplace.
So we like we like what we're seeing what I would tell you is from a competitiveness terms terms arent changing leverage is probably lower levels than pre COVID-19 levels. Overall, so I think thats a positive and pricing is probably in line with pre COVID-19 levels.
At this point.
You know for the last year, obviously pricing has been above where things were and I do think pricing overall has come down.
Here over the last three or four months to more of pre COVID-19 levels at least that's what we're experiencing so.
That's a long winded way to try to answer those questions, but hopefully that's helpful.
I really appreciate.
The color and commentary on the.
The market environment and also on your kind of thoughts for.
Portfolio growth for the rest of Europe for fully knowing that you don't have a crystal ball.
On your debt so.
So.
I appreciate the time today I'll hop back in the queue.
Okay, Thanks, Ron and good talking to you.
Your next question comes from the line of price.
Good day.
Great. Thank you good morning, Ed and Shelby.
Good morning Bryce.
Ryan asked some good questions there on repayments and originations and appreciate the.
The color you gave on the market.
And the pace of deal flow, maybe just wanted to ask a little bit about the.
The SBA and the use of SBA debentures at a topic that we've talked about in past.
Cash calls quite a bit and understand that you all look to.
Redeem.
Those those are those that are kind of coming coming due.
A little bit early in terms of in terms of the SBA SBA debentures, but it was good to see you.
You all draw some again here.
In the quarter and so just kind of curious what's your outlook is for.
Newer originations kind of sitting fitting the FDIC bucket, whereas maybe it's been a little bit more limited.
You know over over the last couple of years in terms of being able to use that that bucket.
Sure.
Great question, Bryce I think.
Just our SBA situation, we are generally.
Winding down Spic's too and obviously starting to build.
In a more meaningful manner.
Spic's III.
From an origination perspective expectations, we're continuing to play in the same old market. We played in for a long time.
My expectation would be for <unk>.
Three to grow.
Here over the next whatever 12 24 36 months.
And in a reasonably meaningful way.
Yeah.
As you know there are.
Hurdles, we have to get over from a qualification perspective.
Uh huh.
The impact and sometimes you know companies don't qualify or do they have.
Too many operations overseas things like that but at the same time, we're very focused on the U S market as you well know, but there are a lot of nuances to get in the way sometimes of for.
Deals qualifying for the SBA, but when they do qualify we intend to use the <unk>.
R R.
Our funding.
Vehicle.
Yeah to the largest extent that we can the SBA has been a great partner for providers we.
We continue to want to build that portfolio and it would be a good partner for the SBA as well. So hopefully thats helpful. I would expect it to grow you know at what pace. It is impossible to kind of no.
Sure.
<unk> go ahead, Charlie sorry.
I I would just add that prior to COVID-19 and this is just a function of timing, we had a number of repayments and FMC too and so as we had new SAIC eligible originations, we actually use funds out of the FDIC too to redeploy capital as opposed to growing the third bond at that point in time, and we kind of.
Had a little pause with COVID-19, but I'd say as I had mentioned now really got Spic's two in wind down mode, and so any new originations will place in three so you'll start to see a little bit more growth in three.
Okay, Okay, maybe one follow up on a.
On the liability structure.
You've got some cash sitting on the balance sheet it sounds like.
You've got uses for them from a from an origination perspective, but also pressure from from repayments. So so Shelby just curious how you think about that.
The remaining.
For more expensive notes that are sitting out there tied to the tie to those that you've you've already redeemed a portion of it.
Yeah, we even just in the subsequent events, we did pay down the $15 million outstanding on our line of credit with excess cash that day.
<unk> said as you noted we did have some repayments. So we do still have some excess cash but right now I'd say, we've kind of really got that more queued up for origination activity for.
From a maturity day perspective, there's there's not really a real need to pay down the other baby bonds.
Certainly it's something if we found ourselves in a situation where repayments started outpacing investments, we'd reevaluate that just because it is more cost effective and then the only other thing I'd add is right now most of our cash is really sitting at the BDC as opposed to trapped in the SP I see so it really is available for any type of origination activity.
Great that's good stuff. Thanks.
Thanks price good talking to you.
Our next question comes from the line of Matt Tjaden with Raymond James.
Yes.
Hey, all good morning, and I. Appreciate you taking the time first question maybe for you Ed on the I know over the past couple of quarters, we've talked on the day.
The transition to a higher percentage of first lien investments in the book I'm interested is that driven by a desire to be higher in the capital structure or is it driven by you know less second lien opportunities available or kind of some combination of the two.
Great question Matt.
In short in summary, I'd say it's.
A couple of things.
We are we made a strategic decision.
Several years ago to focus a little bit more on first lien investments we thought it would.
Hands really quite frankly, our opportunity set and it has done that.
And it gives us a chance to provide full solutions, which we we like that aspect of it as well.
And then your comment on are there is many second lien opportunities out there today vis vis <unk> I would say three or five or seven years ago. The answer is no. There is more first lien unit tranche investments being made so.
I think the move we've made.
We like from a lot of angles, but we do think it's increased our.
Opportunity set as we look for and as you know as well.
What we've had over the last.
Several years. So it is first lien investments represent a majority of what we're doing from an origination perspective and has done so really the last three years or so.
That's helpful, but it's.
You know it's been a it's been a good transition for US we've always made first lien investments, but yes.
We are now it's a majority of what we're doing and where.
Very much going to market as a solution provider.
You know I think that's working very well.
Okay. That's helpful. I guess kind of as a follow up for that as well as first lien continues to trend higher how do you think about leverage are you comfortable taking leverage modestly higher with a higher first lien book.
Great question.
Comfortable the answer is yes.
Two I frankly, as you know in Spic's fund can be funded two to one and even with junior capital investments.
And when we were private Thats, where we were levered. So we're comfortable with junior debt investment.
Being levered higher so comfortable absolutely we think though as we just.
Thinking about the market and whatnot.
Targeted one to one leverage number.
Our plan is not to exceed.
That greatly for sure.
We don't we haven't changed those thoughts.
But from a comfort, we're very comfortable with those levels and even higher as just the general kind of view as you know with the complexion of our portfolio.
It makes sense to be more in the one to one leverage and I think we like that.
That kind of flexibility that it gives us.
We've always operated with a you know.
Carefully and with sometimes an abundance of caution.
How we think about it at this point.
Great. That's it for me appreciate the time, Thank you Matt appreciate it.
Your next question comes from the line of Chris Kotowski with Oppenheimer.
Yeah.
May not be an answer to this question, but I'm kind of thinking back at this time last year. We were all just kind of wondering you know how much the economy it would slow down and how high unemployment would go and you know how.
How much damage it would do to that.
Net payment capacity and now we have the vaccines and <unk>.
Stimulus in place and it just seems too good to be true and so I'm wondering are there any signs as you look through your portfolio companies of company's overheating labor shortages pressure on inflationary pressures or any other adverse impact of like two two.
Good news.
Sure.
Great question, Chris Yeah, It's amazing a year later the difference right.
Close to 10% of our portfolio being impacted meaningfully by shelter in place orders.
A year ago, when we spoke to you. So it is a it's a very different.
Time period, which is good obviously.
The answer.
To your question is yes, we are seeing.
Certain companies impacted.
By labor shortages, it's tougher to get people to work in certain environments.
When there is opportunity that's being provided by the government that it sometimes exceeds that that pay hopefully.
Hopefully thats its size at some point later in the year, but it is something that our portfolio companies are managing and dealing with but at the same time I'd say, it's far from <unk>.
Far from perfect and then from input cost perspective, whether.
You know you name it I do think there has been an increase in prices.
And it kind of varies by portfolio company, what the reason is as we.
We all know freight costs for instance are very high today relative to a year ago.
And so you got to pass those costs on and so that's.
One very good example that we're seeing in more than a few companies and the good news is the environment is good enough to where you can pass those.
You can implement price increases to offset those types of situations.
But the short answer is yes, that's very real and the environment today and you know the good news is the portfolio of companies that we have or are dealing with it and addressing it.
A couple of cases to be honest it took a couple of quarters to figure it out into.
To address it but what we've seen is.
Pretty healthy.
Our ability to manage through those issues.
Labor is difficult and sometimes limits capacity of certain manufacturing companies, but there is still operating it just maybe not at the optimal goal if you will.
Okay Alright.
Like I said I'm not.
But I guess it doesn't sound like it's impacting in a to a significant degree the financial performance of <unk>.
Portfolio of companies.
That's what we're seeing that's exactly right I think it's given the overall environment.
What we're seeing is there is an ability for that.
Companies to manage through the issues, but.
The real World is there are there are issues that they're having to address and find ways to improve.
It provides and deal with.
Yeah.
Okay. Thank you that's it for me.
Thank you Chris.
Your next question comes from the line of Sarkis.
Securities.
Hey, Thanks for taking my question here most of them were asked but I do want to ask and learn if your team sees more opportunities in certain industries that fit your risk profile is better in this current environment.
Looking at the industry composition table on our invested cost basis quarter on quarter, it looks like manufacturing and health care moved up so any insight you can share here.
Sure I mean, I think what I would say from a.
Strategy and approach perspective.
We're focused very much on cash.
Cash flow and high free cash flow.
Businesses.
And you can find those in a large variety of markets right.
So recurring revenue close to recurring revenue type business models with positive outlooks and that hasn't been greatly impacted by this environment.
These are the types of end markets in situations that we are.
We're looking for and.
We also have the ability and do execute some more asset oriented type situations I can think about for.
From a recurring revenue perspective <unk> deals.
That's something that we've we view that very much is.
And those two simple clean investment, but that's been a big focus for us in the.
I would say software space in tech enabled space.
And so that is something we've done a lot over the years, but now I'd say an increased focus even over the last several years.
And in this COVID-19 environment again for looking for recurring revenue so.
Health care clearly is an area, where we've spent a lot of time over the years, we're staying away from.
More companies that can be impacted by reimbursement rate changes.
But there's obviously a lot of other opportunities in the healthcare arena or businesses that serve the health care Arena.
That's it in and that we see and that's an area. We liked very much again looking for more.
<unk> type business situations recurring revenue type situations.
Yeah.
Got it that's all for me. Thank you okay.
Good talking to you start this thank you.
Your next question comes from the line of.
Right.
Yes, good morning, Ed and Shelby.
Congratulations on another strong quarter.
Ed.
I sort of wanted to follow up on a previous question.
In terms of looking back over the last year. It is amazing to see how well you know your lower middle market portfolio has performed as well as some of your peers and I'm curious to understand whether you've sort of done a postmortem.
On that performance.
Given the government still.
Long supported the economy in other words.
If the fed hadn't come in with a trillion dollar checks the way it did in the stimulus payments and PPP main street lending for everything.
Do you do you have a sense of how the portfolio would have performed and is that impacting your target market in terms of you know.
Perhaps getting a little bit more up market to avoid having to count on the government in the future.
Sure.
Great question, Mickey a tough one [laughter].
Postmortem, what I would say is clearly what the government the cares act and whatnot.
What is helpful to our portfolio companies.
We are the ones that utilize the program.
And so clearly that was helpful. Having a private equity driven portfolio, where it represents.
If you include fund less sponsors, 90% to 95% of our portfolio companies.
Having some stewardship, there and capital behind you as was helpful. But they werent huge investments made but in certain cases. It was helpful. So what I would say.
What's important in times like this as you know is having a business that can weather storms, but also just the underlying long term fundamentals.
Our positive right and it should be.
Strong sustainable cash flow generator.
Good.
Good times and in bad quite frankly, and so thats been our focus we clearly haven't been perfect, but at the same time I think we've done a good job of.
Investing in businesses that had a real reason for being and has good long term outlooks and good cash generation.
Capabilities and so I think that's ultimately more important than that.
The support that the government gave the support for the government gave clearly has.
I think put us in the position we're in today I still think we would have gotten to this position, but I guess the timing of it would have been different and it may be would have been a little bit.
Messi or if you will not promote long term loss perspective, but more from just dealing with.
Credit issues as we always have to do on a daily basis. We do so that's how that's kind of how I think about it from a target market perspective.
We.
We continue to focus on the same call it $5 million to $30 million EBITDA market.
So there hasnt been a change there we did make a move I would say.
Five five years ago six years seven years ago.
Start moving our subordinated debt in the second lien investment, making sure they were in bigger more stable businesses.
The.
And we made that move and I think that's worked very well quite frankly.
<unk> for larger companies to withstand events, whether they are COVID-19 events or others are usually a little bit better generally speaking not in all cases, but better we still obviously are doing some smaller company deals, but more recurring revenue like software or what have you.
And we're doing a lot of those more on a first lien basis. So we've made that I would say structural change in alignment if you will.
So that's how we've managed it but I.
Our focus has not changed pre COVID-19 vs post COVID-19 other than I'd say during the COVID-19 environment, we very much were focused on.
First lien and you know obviously risk mitigation and we're still in this environment, we're still continuing that.
I'd tell you is I don't expect to change that as we move forward I think R. R.
Our client base are very.
They're embracing the solutions that we're providing so I think we're on a good path from that perspective.
Hopefully that's helpful.
That is helpful and I appreciate you taking my questions. Thank you.
Thank you good talking to you Mickey.
Likewise.
At this time there are no further questions I would like to turn the call back over to Ed for closing remarks.
Thank you Lisa and thank you everyone for joining us. This morning, we look forward to speaking with you on our second quarter call. In early August 2021 have a great day and a great weekend.
This concludes today's conference you may now disconnect.
Yeah.
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