Q2 2022 Golub Capital Bdc Inc Earnings Call
Hello, everyone and welcome to the G. Bdc's earnings call for the quarter ended March 31.
Before we begin I'd like to take a moment to remind our listeners that remarks made during this call.
May contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Statements other than statements of historical facts.
During this call may constitute forward looking statements.
Not guarantees of future performance or results.
It involved a number of risks and uncertainties.
Actual results may differ materially from those in the forward looking statements as a result of a number of factors, including those described from time to time in <unk> SEC filings.
For materials, we intend to refer to on today's earnings call.
Please visit the Investor resources tab on the homepage of our website, which is www dot Golub capital BDC Dot com.
And click on the events presentations link.
As a reminder, this call is being recorded for replay purposes.
Now I'll turn the call over to David Golub, Chief Executive Officer of G BDC David.
Thanks, John Hello, everybody. Thanks for joining us today I'm joined here by Chris Eric Steen, Our Chief Financial Officer, Greg Robbins, Senior managing director and Jon Simmons managing director here at Golub capital.
Yesterday, we issued our earnings press release for the quarter ended March 31st and we posted an earnings presentation on our website.
We're gonna be referring to this presentation throughout the call today.
For those of you who are not familiar with G. BDC. Our investment strategy is to focus on providing first lien senior secured loans to healthy resilient middle market companies that are backed by strong partnership oriented private equity sponsors.
The headline for this quarter is the G. B D C at another strong consistent performance in.
And that came despite a very challenging macro backdrop, which included rising interest rates continuing supply chain issues, the Russia, Ukraine War, and a significant downdraft in equity and fixed income markets.
The March 31 quarter, adjusted NII per share before the capital gains incentive fee accrual was 30 cents.
Adjusted EPS was 39 cents and then the NAV rose from $15 26 per share to $15 35 per share during.
During the quarter G. D C made a quarterly distribution of <unk> 30 per share.
We believe our results highlight the resilience of our strategy and we'll talk some more about that over the course of today's call.
Now I'll hand, the Florida, Gregory John and Chris to elaborate on <unk> performance for the quarter and after that I'm going to provide some closing commentary.
About our our outlook and then I'll open the floor for questions.
Gregory over to you.
Thank you David.
I'm going to begin on slide six which describes two key themes that contributed to <unk> success during the quarter.
The first theme is strong portfolio performance.
I call your attention to the Golub capital Middle market report for GC MMR for March 31.
Which we published several weeks ago.
The median earnings growth rate in January and February from 2021 for the same period in 2022 was nearly 10%.
Although GDP followed by an annualized one 4% in Q1.
Inflation adjusted terms.
Golub capital portfolio companies continue to perform well.
This is not only reflected in the strong credit results will take a closer look at the data later in the presentation. It.
It is also reflected in the second key theme for the quarter.
Net portfolio growth.
Golub capital's origination what's above our expectation.
We expected the first calendar quarter to be slow.
Yes, and we expected that dealmakers, we need to catch their breath after a really busy 2021.
We were right in part.
M&A was not particularly strong.
However, golub capital's origination in calendar Q1 exceeded our expectations, primarily because our portfolio of companies, we're playing offense.
We're closing add on acquisitions and executing growth programs, which created new investment opportunities for Golub capital.
Origination and existing borrowers what we call Incumbencies.
Across the platform represented over 70% of all originations this quarter.
In calendar Q1, JBT sees net portfolio growth.
Also had a tailwind from unusually low repayments.
Moving on to slide seven this slide provides a bridge from GTC is $15 26 per share as of 12 31. So it's increased $15 35 NAV per share as of $3 31.
Let's walk through the bridge.
Adjusted NII per share was 27.
Dividends per share paid during the quarter was 30.
And adjusted net realized and unrealized gains per share which falls.
Let's now take a closer look at our results for the quarter.
Let me hand, the call over to John Simmons to walk you through the results in more detail John .
Thanks, Gregory Slide nine summarizes our results for the quarter and over the past several quarters.
Gregory already to discuss the results for the March quarter.
This slide also shows G. BDC is consistent and solid adjusted NII <unk>.
Adjusted NII before the capital gains incentive fee accrual.
Adjusted net realized and unrealized gains.
P S and distributions over the last several quarters.
Moving to slide 10, as Gregory noted net originations exceeded our expectations this quarter.
New investment commitments totaled $323 $2 million.
After factoring in repayments on investments of $122 $2 million as well as unrealized appreciation and other portfolio activity.
Total investments at fair value increased by five 4% for $279 $4 million during the quarter.
Also as of March 31, we had $46 million of Undrawn revolver commitments and $203 $2 million of Undrawn commitments on delayed draw term loans.
Each of these unfunded commitment amounts are relatively small in the context of G bdc's strong balance sheet and liquidity position.
Finally, as shown at the bottom of the table, both the weighted average rate and spread over LIBOR on new investments remain consistent quarter over quarter.
Slide 11 shows that G D. CS overall portfolio mix by investment type.
Consistent quarter over quarter with one stop loans continuing to represent approximately 80% of the portfolio at fair value.
Slide 12 shows that G. Bdc's portfolio remained highly diversified by obligor with an average investment size of less than 40 basis points.
As of March 31, 94% of our investment portfolio was comprised of first lien senior secured floating rate loans and defensively positioned in what we believe to be resilient industries.
Turning to slide 13, this graph summarizes portfolio yields and net investment spreads for the quarter.
Focusing first on the light Blue line. This line represents the income yield or the actual amount earned on our investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium.
The income yield decreased by 20 basis points to six 9% for the quarter ended March 31.
The investment income yield or the dark Blue line, which includes the amortization of fees and discounts decreased by 40 basis points to seven 3% for the quarter driven by an unusually low level of repayments.
Repayments can be cyclical and we don't expect this low level of repayments to be sustained in future periods.
Our weighted average cost of debt or the Aqua Blue line increased by 10 basis points to two 8%.
Our net investment spread or the Green line, which is the difference between the investment income yield and the weighted average cost of debt decreased by 50 basis points to four 5%.
Both LIBOR and Stouffer base rates increased during the quarter, which increased interest expense, but did not meaningfully increase interest income because most of our loans of 1% base rate floors.
Post quarter end, we continued to see increases in base rates, which are expected to be additive to interest income and earnings in future periods all else equal.
With that I'll hand, the call over to Chris to continue the discussion of <unk> quarterly results Chris.
Thanks, John slipped.
Flipping to the next two slides nonaccrual investments as a percentage of total debt investments at cost and fair value increased to one 5% and one 1% respectively. As of March 31, due to the number of nonaccrual investments increasing from five to seven investments.
Overall fundamental credit quality remains strong with over 90% of the investments in our portfolio, having an internal performance rating of four or higher as of March 31.
As a reminder, independent valuation firms value at least 25% of our investments each quarter.
Slide 16, and 17 provide further details on our balance sheet and income statement as of and for the three months ended March 31 2022.
Turning to slide 18, the graph on the top summarizes our quarterly returns on equity over the past five years and the graph on the bottom summarizes our regular quarterly distributions as well as our special distributions over the same timeframe.
Turning to slide 19, this graph illustrates our long history of strong shareholder returns since our IPO.
As illustrated investors in <unk> 2010, IPO have achieved a 10% IRR on NAV since inception.
Slide 20 summarizes our liquidity and investment capacity as of March 31st which remained strong with over $950 million of capital available through cash restricted cash and availability in our various credit facilities.
Slide 21 summarizes the terms of our debt facilities as of March 31.
Slide 22 summarizes our recent distributions to stockholders.
Most recently, our board declared a quarterly distribution of <unk> 30 per share payable on June 29th 2022 to stockholders of record as of June 32022.
And with that I will turn it over to David for some closing remarks.
Thanks, Chris to wrap up Gbt's, he had a strong quarter our portfolio of companies continue to perform well.
And unrealized gains were solid and new commitments, coupled with low repayments resulted in healthy net portfolio growth.
Let me talk briefly about our outlook before I open the line for questions.
Said in the last couple of quarters that we're cautiously optimistic about the prospects for Golub capital and <unk> in the coming period.
But I'd say the cautiously part is increasing.
But before I talk about why we're cautious I wanted to review and highlight for reasons for optimism.
First the strength of G. Bdc's portfolio, we've talked about it on this call. Despite the recent reported a negative first quarter GDP.
Despite the downdraft in stock market prices, our portfolio of companies continue to report strong year over year growth in both revenue and EBITDA.
Do I expect it is going to slow down from the pace of 2021, absolutely, but we're still seeing robust growth and we continue to have very few companies showing signs of credit stress.
Second reason for optimism as the strength and flexibility of G bdc's balance sheet with.
With interest rates rising we are well positioned with about half of <unk> debt funding in the form of low cost fixed rate unsecured debt.
Thank G D C will benefit as rates go above the LIBOR sofer floors.
G Bdcs assets, we've already started to see this happen. This is floors are typically 1%.
Third reason for optimism is the momentum that we're seeing in the private equity ecosystem.
Many are predicting that the overall size of the private equity ecosystem is going to double in the next three to five years and this means a growing opportunity set for us and for other leading private debt players.
And finally, there is a market share shift underway with within the sponsor finance industry Theres a shift toward the market leading players.
We think the private equity winners are concentrating their business with lenders, who have scale and product breadth and expertise and or more generally strategically valuable partners.
If the story about four factors that are leading to optimism it sounds familiar it should I discuss these trends for the last several quarters.
But it's not all clear skies out there so let's talk about how our optimism is tempered by three sources of uncertainty.
Let's start with Covid, it's supposed to be over now, but it's not in fact top by urologists are now, saying that even though over 60% of Americans have had COVID-19 over 75% of youth were not only not add occurred immunity, but we may never get to herd immunity.
We're instead likely going to have to learn to live with Covid and it may not just be COVID-19. It may be global global Pandemics may be part of the new norm.
Seconds inflation and higher interest rates.
The good news here. The good news is that now everybody agrees that inflation is a problem I think this is important because the first step in solving any problem is agreeing it's a problem for an extended period of time, a lot of economists and members of the fed.
That inflation was transitory didn't need to be addressed.
That's the good news the bad news is that inflation is hard to cure.
So while I think we all as investors need to plan for a lot of different scenarios. Our base cases that inflation is going to be around for a while that higher rates are going to be around for a while and that we're all going to need to adjust to both.
The third source of uncertainty is Ukraine.
Now we've all been reading about how this is a superpower standoff in the nuclear age in their threats of escalation all that's true.
What I wanted to focus on here is the degree to which the war has led to a global reset of the international monetary and trading system.
We've basically seen the west make moves in it's restrictions on Russian foreign currency movements and tariffs on Russian goods that are fundamental changes to the post World War two liberal economic order in.
International Monetary and trading norms I think.
It's going to take some time for companies for governments for investors to understand and adjust to all the second and third order impacts of these new norms and my own view is that investors would do well to prepare for a long stretch of greater market volatility as as we all see how these second and third order impacts play out.
The good news from the perspective of G. BDC shareholders that are niche in sponsor finance, it's reasonably well insulated from these three sources of uncertainty.
We and our sponsors and our borrowers we have learned to manage COVID-19 risk.
Our loans are floating rate and so they adjust to changes in interest rates. Our borrowers are primarily U S companies selling to U S customers.
The impacts on international trade system International monetary system volatile commodity markets they matter less.
So we're not immune to what's happening with Covid and interest rates and the war, but I do think we're well positioned for continued stable results.
With that operator, please open the line for questions.
Thank you at this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Once again press star one to ask a question, we'll pause for amendment to compile the Q&A roster.
Yeah.
Okay.
We'll take our first question from Finian O'shea with Wells Fargo Securities. Your line is now open.
Hey, everyone. Good afternoon.
David I wanted to ask a question on recurring revenue loans.
You've been a.
Leader in this space for years and.
You know how the companies to our understanding.
R R.
Have less ongoing cash generation, because they're spending that on.
On marketing and research and so forth.
But that would still intuitively lead leave them.
More prone to to higher interest rates on on their debt right. They could they could cut costs, but that wouldn't necessarily be.
Good for them, so having a.
Our exposure to this and experience over the years, how well set up do you think.
This category is.
Financially it.
Its ability to withstand.
No.
Rates going up to one two maybe 3%.
Over the near term.
So a great question look, let's just take a step back and make sure everybody's familiar with with.
The category of the context of <unk> question, So things asking about recurring revenue loans. These are loans to companies generally in the software space.
That have made the decision to have high levels of Upselling or general administrative or R&D expenses are relative to their revenues in order to facilitate rapid growth, even though that's at the expense of our profitability and typically these loans are made at a lower loan to value.
But if you look at them in terms of traditional credit metrics like debt to EBITDA. They don't look very good we've been in the recurring revenue loan business for about eight years now we were.
<unk> is one of the pioneers it's been a very strong.
Experience for US we've had very good results very few loan losses.
It's been a category in which I think we've done very well for our investors.
I do think that the larger companies in the recurring revenue spirit today.
Are meaningfully less attractive than they used to be from a lender's perspective, one of the reasons is the one you mentioned.
And which is as interest rates go up you have got higher cash burn which needs to be addressed in some way by these companies. It's not addressed out of operating cash flow. So so it's address.
Through new cash that's coming into the system or cash on the balance sheet.
So bye.
By definition, if rates go up youre, putting more pressure on these companies because of the catch up the cash to pay interest has to come from somewhere.
The second reason that I think.
These loans that have become less attractive as is simply competition.
Eight years ago, when we were a pioneer in this area.
Spreads were higher.
Leverage levels as a multiple of recurring revenues were lower terms were tighter.
We've seen and this is normal part of our business as you develop a relatively new area. We've seen all of those become less attractive from a lender's perspective, particularly in the last year or so and as a consequence of that.
We focused in other areas. If you look at our loan origination I think John mentioned this in our opening remarks about 70% of our platform wide loan originations in calendar Q1, we're incumbencies where were the companies that we were already a lender too.
So we're very focused in the current environment given the uncertainties that.
That I talked about in my opening comments.
Making sure that we're lending to companies that are well positioned for rising rates for inflation for the uncertainties that we're facing.
And the single best category that we like to focus on this as companies that we know best.
Our existing portfolio companies.
So that's helpful. Thank you and.
Laying off a couple of your remarks there on on.
Competition in and an origination I know.
For the first quarter is often seasonally lower for you on origination, but what are the things looking like now the market's more volatile so there may be.
Maybe less demand and theres still a lot of them.
Inflow to direct lending products as we're all seeing.
How do you see.
Or what do you expect.
Our topline gross at least origination to be as the pipeline is.
Building up like it normally would this at this point in the year.
So again I'm just going to go back before going forward. If you look at Q1 quite as you say it Q1 tend to be seasonally low and as Greg said.
Our prepared remarks.
We expected Q1 to be unusually low because of the pull forward into 'twenty, one we thought that a substantial number of sellers.
Took their sales their company sales into 'twenty, one in order to avoid the prospect of higher capital gains tax rates and that that would have an impact on first quarter of 'twenty. Two maybe even later in 'twenty two we're partly right, but if you look at our overall platform wide origination in Q1, we were about 30%.
Up year over year.
It did slow because I mentioned.
Very significantly toward existing borrowers, but I'd say overall, we were we were pleasantly surprised by the attractive.
Attractiveness of the opportunities that we saw in Q1.
In Q2, where we're seeing some acceleration is it is faster paces 'twenty one no I wouldn't expect it to be 21, I think will prove to be.
An outlier for a bid there were some special factors that made 2001 as active as it was coming out of Covid and the pull forward impact.
The expected tax law changes that I, just mentioned, but I think Q2 will be a quite solid quarter for us from a.
On origination standpoint, I do think we're starting to see some of the <unk>.
Impacts that you would expect from the market downdraft.
New deal activity is is.
Shifting to the right to a degree.
And that's that's to be expected that as normal in this kind of environment. Despite that I think I think calendar Q2 is going to be a good origination quarter for us.
Sure.
Sure that's helpful and ASO one more if I may can you talk about credits.
And what the outlook would be.
As it relates to sort of the fed going the other way.
Which is very opposite of what happened in the 2020, Covid era, where there was.
As government monetary fiscal support all around private equity supported the company's because it was all.
Supposed to be and ended up being temporary.
Although COVID-19 is still a problem as you mentioned, but this time it feels different where the fed is addressing inflation problems and appears very serious about it and the financial conditions are therefore getting tighter.
How do you look at the outlook for you know sponsor.
Sponsor middle market.
Credit in the you know.
The overall, the overall asset class Lawson default rate.
Credit is going to get tougher I mean, if you look at not just in sponsor finance, but in liquid credit markets generally the S&P LCD index for the first four months of 'twenty two had had zero defaults.
Can't get better than zero, so it can get worse.
What are the factors that are that are going to.
Push things in the worst Directionally, you mentioned, one which is.
Higher interest rates, a second as some companies are going to find themselves on the wrong end of the inflation curve and inclusion is going to impact their costs, but they're not going to have the pricing power to raise prices enough.
I think supply disruptions or a third issue that.
Are going to impact some companies, what's going on right now in Shanghai is pretty scary for many companies that rely on tech inputs.
So I think we're going to see more credit stress across the system I feel pretty good about our portfolio as I mentioned in my opening remarks, we've been anticipating inflation for two years.
And then thinking about how to position the portfolio to be able to to have real resiliency in the context of our.
Inflation and rising interest rates.
We're not exposed to Russia, and Ukraine, we have relatively little exposure to China. So so I think we're in a good position to continue our track record of meaningfully outperforming the market.
But I think it's reasonable to expect that credit credit markets youre going to get tougher in the coming periods.
Okay.
Very well that's all for me thanks, so much.
Yeah.
Next we'll go to Ryan Lynch with K B W. Your line is open.
Hey, good afternoon.
<unk>.
I Wonder if you talk about the gala middle market capital before you guys put out it's been incredibly helpful report provides a lot of insight.
As you stated.
Today.
Still seeing good revenue and earnings growth.
In the first few months.
Q1 of 2022.
I look at the report revenue growth in the overall portfolio, 18% earnings growth of 9% to me that show pretty meaningful margin contraction in the overall portfolio and then if you look at the individual sub sectors. There are outliers in there as well we look at industrials up 12.
<unk>.
Our core revenue growth and earnings decline.
2%.
While I think things look pretty good today.
I would love to hear your comment on what are you seeing from a margin standpoint in your portfolio and what is the outlook for that going forward.
Happy to look Ryan before I get that I feel compelled to respond to something that you wrote earlier today.
You wrote that you thought that we missed on NII per share and and I don't agree with that it's been a while since we've seen capital gains incentive fee accruals. So I wanted to just review with everybody how that works because its very funky accounting. So if like Golub capital BDC that has done exceptionally well from a credit standpoint.
<unk> has net realized and unrealized gains from inception. This is very very unusual we're in extremely rare company and having that if you have that the accounting says that you're doing and as if liquidation at the end of the quarter. So you assume that all of your unrealized positions are realized.
That they're then mark and you calculate what the incentive fee.
Capital gain incentive fee would be if that all were to take place. So we had roughly four cents of capital gain incentive fee that goes above the NII line.
And that's what brought our NII down, but this is not a cash expense.
In fact, when you calculate what's payable in cash.
You do have completely different calculation you look at realized gains and you look at realized and unrealized losses.
So in fact this is not only a.
Noncash expense. It's also matched by a an income item that falls below the NII line. The only way you can get a capital gain incentive fee accrual is if you have meaningful net realized and unrealized gains which of course, we did this quarter. So.
I'm sorry to pick on you and I don't mean to pick on you, but I do disagree with that part of your analysis.
I think that we had a really good quarter that you have to book passed the capital gains incentive fee accrual and looking at NII.
And I think the best thing that could happen for shareholders is for every quarter for there to be a big fat capital gains incentive fee accrual because it would mean that we have very significant net realized and unrealized.
Our games beneath it.
I don't have that as well.
Let me jump in and I agree with everything you said.
I agree with everything you said.
Our estimate of 31 consensus was 31 wasn't adjusted.
NII adjusting for the capital gains incentive fee.
<unk>.
830.
Would be below 31 century benefits or that's what it shows on slide four unless I'm missing it.
It looked like a mess.
So youre, saying 31 versus <unk> 30, okay.
Correct.
Rounding.
Some other factors as well we had some pick income.
On preferreds I'm preferred instruments that we own that we we take that income below the line in realized and unrealized other bdcs taken above board.
I guess I have a bias I think EPS is a much better measure than NII.
We can we can continue that debate offline. Let me go back on to answer your other question, which was about company performance, you're 100% right that if you look at the most recent golub capital Middle market index that the numbers reflect a deceleration in growth from what we saw in 'twenty, one and they reverse.
That we saw pretty consistently over the course of 'twenty, one which was actually faster profit growth than revenue growth in the most recent quarter quite as you described.
Ryan we saw we saw revenue growth outpacing.
Profit growth.
I'm not sure that one quarter gives us enough data to draw a lot of really good conclusions about that if we saw that pattern continuing.
And extended period of time, and if we saw that the profit growth start to go down further to the point where in real terms. It's actually not positive then I think your point about this being up.
A sign of a.
Maybe an indicator of upcoming.
Challenges I think that'd be a.
Sure.
A more compelling argument.
Right now what I see is continuing levels of revenue growth that are very strong and continuing levels of profit growth that are that are really quite solid.
<unk> always seen on a quarter by quarter basis some volatility.
By industry and to me given the supply chain issues that we saw in Q1, not surprising that we saw worst results for industrials.
If I look across the portfolio at a bunch of different measures not just the middle market index, but also the performance ratings, 94% in category four and five the low level of non accruals one 1% at fair value the performance of specific companies and the way in which a number of companies that have been historical.
Performers are actually improving.
My overall sense for the for the.
For portfolio performance is actually quite positive.
Now all of that is a lagging indicator.
I mean not in the best in the Best case, we're looking at history. We're not looking we're not looking at projections are out looking at budgets are forecast. So we've got a we've got 11 all of that data analysis with perspectives about what youre seeing on the horizon.
Yes, I agree.
The thing is I think the paas.
Path.
It's been great I think everybody's sort of worried about the future of work for you.
But for all these private.
Businesses.
But the other one other question I had was.
What do you guys primarily play in the direct lending private credit markets, but you guys also have big broadly syndicated loan business and then there is some overlap between those two markets I'm just wondering in the last.
Call. It couple of weeks or last month, how has the broadly syndicated loan market functioning because obviously that has impacts on.
Kind of a pipeline.
People's desire to take a private solution.
In those markets.
Sure.
The broadly syndicated market has been pretty bumpy over the last month I'd say, a typical broadly syndicated loans, probably down about a point over that period and if you amortize that over an expected life of three years. That's that's an approximately 33 basis point spread widened.
We've seen some similar indicators if you look at the new issue market, which hasnt been robust, but there've been some and if you look at new issue I'd say again, there their signs and the new issue market that we've seen a modest degree of spread widening.
Yes.
The other thing we're seeing in the broadly syndicated market that I think is interesting and worth worth watching is we're seeing a slowdown in new CLO formation.
And that's important because over 70% of the buyers of new broadly syndicated loans are typically.
Clothes, and so if you see a slowdown in new CLO formation thats, taking some buyers.
Out of out of the market.
So.
I think we're likely to see some continued spread widening.
I think we're seeing it in in the high yield market. It's more marked in the high yield market and I think the usual pattern. Ryan is that these things happened first in liquid credit markets and then they.
They migrate down to the private market over time.
That's my expectation this time as well.
Got it.
That's helpful. The other question I had and <unk> talked.
Talk about EBITDA margin concerns.
These are concerns.
The private credit market.
But but they certainly impacting and love to hear your insights to Jeff great impact on the market but.
When we looked at kind of in the public markets public equity markets. I mean, there has been a huge reset.
<unk> and in particular, some of our very strong cash flow positive business days.
In our specialty strong growth, you're talking about like Adobe or salesforce or things like that you have a lot of investments like in very good strong secular growing businesses that are <unk>.
I'm going to be fine.
From a probably an earning EBITDA standpoint, but what happened here.
That valuation reset in the public market stocks down, 20%, 30%, 40% again very strong businesses.
Also gets reset in the private marks I'm, assuming that hasn't happened, yet and it may not happen but.
What was what would that mean and is that a concern for you, obviously they'll still going be able to pay interest and all that and also be strong businesses, but ultimately you have to get paid back.
And what happens.
One is that a concern that we're going to see a major pullback in valuations in the private marks will not a small one but a major one.
What would that mean.
So, let's take a couple of different pieces, but let's talk about the opportunity side first so when you have a major public market pullback when the first things we tend to see is we tend to see a bunch of take privates, we tend to see private equity firms looking at public companies and identifying undervalued ones.
And and seeking to take them into the private equity ecosystem, we started to see that and in fact, we've been involved in financing several of them in the last couple of months.
That's a positive attribute.
We don't have a particularly large equity portfolio. We have we have some that's couple of percent of the portfolio.
But we are there are other bdcs that have much larger.
<unk> of their portfolio.
In equities.
Where changes in equity market values might have a more significant impact on <unk>.
Unrealized I don't think thats going to be a meaningful factor for us and then the third way it could impact US is if we have an underperformer I mean your point is right. These companies in general are performing quite well and they are performing quite well go down in value by 25% it doesn't really impact us as the debt holder, but if they are under.
Performing than arguably we're losing some of the important cushion that make sure that we don't we don't have we don't have a credit loss.
So.
This is part of our business, we've got to always be on the lookout for underperformance and working with our borrowers and working with our sponsors to address that underperformance early so that it doesn't become a credit loss over time.
Okay.
Got you.
Very helpful.
Color on those dynamics, that's all I had today I appreciate the time and the dialogue.
Thanks Ryan.
Okay next we'll go to Robert Dodd with Raymond James Your line is open.
Hi, guys one on.
A question about software as well.
The proposed 25% software I mean, a couple of questions one I mean.
Curious how much of that is recurring revenue versus cash.
Cash flowing software businesses.
The bigger question really with software being such a large piece I mean southwest quite expensive to them.
Within your software exposure is there any color on on kind of give us about diversification in end markets.
All software graphic design.
Different things, but how diversified is that and are there any concentrations in in particular.
Subsectors that we should be aware.
So a couple of things I can say in a couple of things I think we're probably best served to take away and see if we can.
Improve our transparency next quarter.
What I can say is that most of the software exposure is not recurring revenue loans its cash flow lending to very successful very resilient mission critical business within the software companies SaaS model you know very high recurring recurring revenue is very very high repeat customer counts.
Low attrition of customers very high free cash flow. So we like that profile, we have a lot of them.
We're.
The earliest of the direct lenders to go into the.
The technology lending space and I think we still have the largest technology portfolio as well as a platform in the industry. I think this is one of our real areas of expertise and competitive advantages. If you look at end markets there.
We're very diversified.
Like to take as a homework assignment if you don't mind figuring out a way to illustrate this in our in our next 10-Q, so that we can share the information with you.
I'm confident in the conclusion.
<unk> will be the.
We don't have meaningful concentrations by end market and I think that's important because all software companies don't move together in the context of idiosyncratic using credit changes in the economy.
The better way to look at factor risks and software lending is based on end market.
I appreciate it. Thank you and then I'm fine with that work if I'm assigning it not doing it so I appreciate that.
On the healthcare side.
I mean, it's been it's been another area of focus for you over the long term and pre Covid you had a lot of what we could call discretionary well still discretionary health care, obviously, COVID-19 kind of upset the applecart that a little bit because a lot of them got shut down within the company that all of the Street got marked up this quarter do you have.
Any concerns or any material debt.
That can skew the healthcare consumer attitude has changed going forward, particularly if we see more inflation, if we do see an economic slowdown and rising unemployment.
He has his COVID-19 told them that they could defer these statements.
So for a period of time and if they have a higher risk of greater deferrals, if we see an economic issue.
In future then might might have been the case when you underwrote those businesses some of those businesses pre COVID-19.
So it's an interesting question and the honest answer is we don't know yet.
We will see over the course of coming quarters as I think about your question and think about sub specialties.
I think the answer.
Made from different by different Subspecialties. So for example, we're very active in the debt space I think <unk> is going to continue to get with vital needs. That's been the history of the vet space through prior downturns.
And given the trends toward Humanization of pets, I don't I don't think that that's likely to change.
We operate in a number of other.
Sub sub sectors.
Ophthalmology and eye care Dentistry derm.
I'm not seeing signs of what youre, describing at least not yet.
But I think it's an interesting question and look the consumer is going to have to make some changes gas prices are up in food prices are up and there are lots of consumers who who.
Yes.
Or are in the context of those two costs going up are going to have to going to have to save money somewhere else.
Okay I appreciate it thank you.
Okay.
Mr. <unk> I'll turn it over to you for closing remarks.
Great. Thank you David I appreciate everyone, taking the time today.
To share with us and your questions as always if you have any other questions before we come back and talk to you next quarter. Please feel free to reach out very much appreciate your partnership. Thank you.
Okay.
This concludes today's conference call you may now disconnect.
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