Q3 2022 Fidus Investment Corp Earnings Call
Yeah.
Good morning.
My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the fight at quarter, three 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question again press Star one on your telephone keypad.
Thank you.
Jody Bernie you May begin your conference.
Thank you Abby and good morning, everyone and thank you for joining us for brightest investment Corporation third quarter 2022 earnings Conference call.
To me. This morning are Ed Ross brightest investment Corporation's 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 depth 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.
Conference call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results and cash flows of brightest investment Corporation.
Although management believes these statements are reasonable based on estimates assumptions objections as of today November four 2022.
Shipments are not guarantees of future performance time sensitive information may no longer be accurate at the time of the telephonic or webcast replay actual results may differ materially as a result 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.
<unk> 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.
Good morning, everyone welcome to our third quarter 2022 earnings Conference call.
On today's call I'll start with a review of our third quarter performance and our portfolio at quarter end and then offer you an update of our views on market conditions and the lower middle market.
Shelby will cover the third quarter financial results and our liquidity position.
After we have completed our prepared remarks, we'll be happy to take your questions.
Yeah.
For the third quarter, our portfolio delivered strong results generating a 27% increase in adjusted NII.
On a larger debt portfolio with higher yields.
Net realized gains of $40 million or $1 64 per share for monetizing a meaningful portion of our equity portfolio.
We ended the quarter and the net originations position with a portfolio that overall remains healthy even in the face of higher interest rates.
Persistent supply chain inflationary challenges.
Tangible for a recession.
Although deal activity is slowing down relative to the high velocity, we experienced last year ample opportunities in the lower middle market and meet our investment criteria continues to be available to us.
As a result, we continue to redeploy proceeds from equity realizations into income producing assets further building our debt portfolio, while adhering to our proven strategy of investing in high quality companies that operate in industries, we know well generate cash flow to service debt and <unk>.
Port growth.
SaaS resilient business models and positive long term outlook.
Yeah.
Adjusted net investment income, which we define as net investment income excluding any capital gains incentive fee.
All the realized and unrealized gains and losses was $12 $7 million or 51 per share an increase of $2 $7 million or 11 cents per share compared to last year.
Growth in adjusted NII reflects both an increase in debt investments under management and higher yields at quarter end compared to the second quarter.
Net yields increased 100 basis points.
Yeah.
<unk> was $474.4 million or $19 41 per share at quarter end.
For the third quarter by this paid a base dividend of <unk> 36 per share and a supplemental dividend of seven cents per share.
In August the board also declared a base dividend of 36 cents per share and a minimum supplemental dividend of seven cents per share for the fourth quarter.
This skewed in a V at quarter end.
The fourth quarter, Denver dividend Declaration was recognized for GAAP purposes in the third quarter.
As a reminder, the early declaration of a fourth quarter dividend was intended to satisfy the distribution requirement of our 2021 investment company taxable income.
Adjusting for the early declaration of a fourth quarter dividend NAV at quarter end was $19 84 per share for a modest increase of four cents compared to $19 80 per share at the end of the second quarter.
As of September 30th our spillover income is estimated to be $2.86 per share.
On last quarter's call I mentioned that we were evaluating a variety of options with respect to our excess of spillover income.
Including increasing the base dividend.
Payout of incremental supplemental dividends special cash distribution and or 18 distribution.
In evaluating these options and looking ahead to 2023, we've carefully assessed our ability to continue delivering stable to growing dividends to our shareholders, while retaining liquidity to grow in a V over the long term.
If we look at the portfolio today in light of the recent period of high levels of M&A and investment activity.
We have successfully built our debt portfolio on a fair value basis from $549 $8 million as of December 31, 2021, 747 $3 million.
September 30th 2022.
In part by redeploying proceeds from equity realizations into income producing assets.
In addition, since the beginning of 2020, we have generated proceeds from equity realizations totally $192 $3 million.
Accumulated net realized gains of $155 $3 million.
Based on this performance and our strong liquidity position. We believe we are well positioned to continue growing adjusted NII.
Our track record of generating cumulative adjusted NII in excess of cumulative base dividends.
For the fourth quarter. The board of directors has increased the supplemental dividend to <unk> 15 per share.
And declared a special cash dividend of <unk> 10 per share.
Total cash dividend of 61 per share.
The fourth quarter dividends will be payable on December 16, 2022 to stockholders of record as of December 2022.
For the year, we will have paid shareholders total cash dividends of $2 per share.
25% increase over the prior period.
Okay.
For 2023, our board has approved a dividend policy that encompasses a base dividend a supplemental dividend and a special cash dividend.
First with respect to the base dividend I am pleased to announce that the board has decided to increase the base dividend of <unk> 39 per share restoring our pre COVID-19 base dividend.
In addition, we will retain our formula for calculating a supplemental dividend equal to a 100% of the excess adjusted NII over the prior quarter's base dividend.
We will also pay a pay.
Pay out a special cash dividend of 10 cents per quarter.
Finally in order to satisfy the Ric distribution requirement, we will be making a deemed distribution for 2022.
While the amount of the deemed distribution will depend on final 'twenty two 2022 results. Our planned approach as we have consistently stated is to maintain a certain level of spillover in the business to ensure the stability of our base dividend, we plan to communicate more information regarding the 2012.
To gain distribution in January 2023.
Moving to originations and repayments for the quarter, we invested $107 $9 million in keeping with our proven strategy of investing in debt securities to generate recurring interest income.
And then equity securities Securities to generate a margin of safety and incremental profits.
$75 $1 million was invested in first lien debt consistent with our focus on that security.
Of the $107 $9 million, a total of $82 $3 million was invested in six new portfolio companies comprised of $10 8 million and a mere water LLC, a leading provider of water purification systems and aftermarket parts and consumables.
Or health care, and industrial applications, consisting of $7 $8 million in first lien debt $2 million in subordinated debt and $1 million in common equity.
$21 million in B P thrift buyer L. L C.
Dress store operators specializing in the sale of secondhand merchandise consisting of $20 million in first lien debt and $1 million in common equity.
$7 $2 million in second lien debt of magenta buyer LLC doing business as <unk>, a global cyber security company.
$27 million in first lien debt of MBS, Opco LLC doing business as market drawn a leading provider of enterprise software solutions for radio and TV broadcasters.
$11.5 million in one pass systems LLC, a leading provider of a full suite of managed it services consisting of $11 million in first lien debt.
$5 million in common equity and $4 $8 million in second lien debt of Sonic while U S Holdings, Inc. A global provider of network and access security solutions.
The remaining $25 $6 million was comprised of add on investments in eight existing portfolio companies, including a $10 million subordinated debt investment in vans deal.
In terms of repayments and realizations in the third quarter, we received proceeds totaling $62 million of wage monetization of equity investments accounted for $43 million.
A little more than 70% of the total as you may recall some of our portfolio companies had initiated strategic alternative discussions towards the end of 2021.
In terms of sales and exits we received a distribution on our common equity investment and realized a gain of approximately $1 $9 million related to the sale of Palisade Company L. L C.
We received a distribution on our common equity investment and realized a gain of approximately $3 $2 million related to the sale or ban Bandon fitness, Inc.
We received payment in full of $4 $5 million on our first lien debt.
Askmen in Bedford precision parts L. L C.
Received a distribution on our common equity investment and realized a gain of approximately $9 million related to the sale of Ses investors LLC doing business as Ses foam.
We received payment in full of $5 $3 million, including a prepayment penalty on our first lien debt investment in health views L. L C.
We sold a portion of our equity investment in advance deal and realized a gain of $24 $3 million.
Conjunction with the transaction, we invested $10 million in subordinated debt and.
And we received a distribution on our equity investment and realized a gain of approximately $1 $4 million related to the sale of the Tranzonic companies.
But the originations exceeding repayments the fair value of the portfolio at quarter end reached $856 $9 million a record level and equal to 103, 6% of cost. We ended the third quarter was 75 portfolio companies and 13 companies that are sold there under.
<unk> operations.
Debt investments reached $747 $3 million demonstrated demonstrating continued success in building our debt portfolio. This year in fact, our debt portfolio.
As of September 30th 2022 is now $197 $5 million larger than it was as of December 31, 2021 on a fair value basis.
Similar to the second quarter, the total portfolio mix on a fair value basis continued to shift in favor of debt investments largely as a result of equity monetization.
September 30th debt investments comprise 87% the total compared to 83% as of June 30th and about 80% as of March 31.
First lien debt as a percentage of that has held steady at around 66%.
Equity investment investments as a percentage of the total portfolio on a cost basis was seven 1% within the boundary of our target allocation of 10%.
Taking into account the changes to the portfolio this quarter from net originations in the rotation of equity to debt investments overall, our portfolio remains healthy with credit quality is solid and well structured.
<unk> recurring income and through our equity investments to provide us with not only incremental profits, but also a reasonable margin of safety.
With a resilient business model is designed to weather adverse economic conditions and geopolitical uncertainties.
Vast majority of our portfolio companies are performing reasonably well even in the face of ongoing inflationary cost pressures and supply chain disruptions. However, risk is a bit elevated compared to the beginning of the beginning of the year as these tougher economic conditions are weighing more heavily on select company.
In the third quarter, we experienced modest depreciation in our debt portfolio due to calibration and the financial performance of various companies.
We did not place any conditional companies on non accrual and as of September 30th non accruals accounted for less than 1% of our total portfolio on a fair value basis.
We will continue to proactively monitor operations of our portfolio companies, especially in light of current market headwinds.
Subsequent to quarter end, we invested $1 million in common equity of E. B L. L. L C, which was acquired under a new holding company F. O M emblems holdings LLC doing business as that blends and became a controlled affiliate investment.
In conjunction with the transaction, we amended the terms of our second lien debt investment in committed up to $4 million in incremental common equity.
In addition, we exited our debt investment in U P. G company LLC and received payment in full of $17 million on our first lien debt, which includes a prepayment fee.
We also exited our debt and equity investment.
<unk> investors LLC doing business as Ohio Medical Corporation.
<unk> payment in full of $5 $2 million on our second lien debt, which includes a prepayment fee.
<unk> distribution on our equity investment for a realized gain of approximately $7 million.
Finally, we invested $6 million in second lien debt of education, insides, LLC doing business as acceleration academies and leading provider of alternative education academies focused on high school dropout recovery throughout the United States.
As we enter the last quarter of the year, we remain well positioned to continue building our portfolio in the current economic environment without sacrificing credit quality due to the strength of our rigorous underwriting standards strong relationships with deal sponsors and their industry knowledge for this reason even with deal activity.
Slowing down in the lower middle market, we remain optimistic about our opportunities to grow our debt portfolio for continued adjusted NII growth.
While we are focused on growth, we will as always be patient and deliberate in our selection of investments in high quality companies and we will continue to structure, our debt investments with a high percentage of equity cushion.
Our focus on managing the business for the long term continues to serve us well supporting our goals of preserving capital and generating attractive risk adjusted returns for our shareholders.
Our performance over the past two years.
Positions us to continue delivering shareholder value through increased cash dividends, while growing NAV over the long term.
Now I'll turn the call over to Shelby to provide some details on our financials and operating results Dolby.
Thank you Ed and good morning, everyone I'll review, our third 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 Q2 2022.
Total investment income was 25 million for the three months ended September 30th a $3 $8 million increase from Q2, primarily due to a $2.1 million increase in interest income, including pick a $1.1 million increase in fee income due to higher levels of investment activity and prepayment fees.
And they point $6 million increase in dividend income.
Increase in interest income was driven by an increase in average debt investment balances outstanding as well as an increase in the yield on our debt and definitely give an increase in interest rates on variable rate loans.
Total expenses, including income tax provision were $12 3 million for the second quarter.
2.1 million higher than Q2, primarily.
Driven by a one $9 million increase in the income in Tennessee as a reminder expense will be higher in the fourth quarter as we will incur an annual excise tax expense, which I would estimate to be roughly 67 cents per share.
We ended the quarter with $400 million of debt outstanding comprised of 133 million of SBA debentures $250 million of unsecured notes and 17 million of secured borrowing.
Our debt to equity ratio as of September 30th.8 times, our plane takes time statutory leverage excluding exempt SBA debentures.
The weighted average interest rate on our outstanding debt was three 9% as of September 30th.
Net investment income or NII for the three months ended September 30th, but 52 cents per share versus 45 cents per share in Q2.
Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was 51 cents per share in Q3 versus 43 cents per share in Q2.
For the three months ended September 30th we recognized approximately 40 million of net realized gains primarily from the partial sale of our equity investment in fan scale and the sale of our equity investments in S. E. A thumb bandon fitness palisade and transacting.
Turning now to portfolio statistics as of September 30th our total investment portfolio had fair value of $856 9 million, our average portfolio company investment on a cost basis was $11 million, which excludes investments in 13 portfolio companies that sold their operations and are in process of winding down.
Equity investments and approximately 77, 3% of our portfolio companies with an average fully diluted equity ownership of three 7%.
Weighted average effective yield on debt investments was 12, 9% as of September versus 11, 9% at June 30th.
Approximately 72% of our debt portfolio on a fair value basis as variable rates with interest rate floors.
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 nonaccrual if any.
Now I'd like to briefly discuss our available liquidity as of September 30th our liquidity and capital resources included cash of $40 4 million 27 million of available SBA debentures and $100 million of availability on our line of credit, resulting in total liquidity of approximately $167 4 million.
Taking into account our subsequent event, we have approximately $183 9 million of liquidity now I will turn the call back to Ed for concluding comments.
Thanks Shelby.
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 will now turn the call over to Abby for Q&A Abbey.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Well pause for just a moment to compile the question and answer roster.
Yeah.
Your first question comes from the line of Bryce Rowe from B Riley financing your line is open.
Thanks, Good morning.
Good morning Bryce.
And I think I'll try to start here on the dividend.
And I appreciate the the approach we're taking here.
Yeah, maybe maybe in terms of the deemed in trying to think about kind of what an optimized spillover level might be can you can you help us think about what that might look like and.
Well, maybe we'll just start there just what what do you think that might look like from a from an optimization perspective on the spillover.
Sure Great question Bryce I think if you look at really what we've been doing over the last couple of years spillover has been as you know.
A higher level, but call it close to.
Three quarters dividends and you know what I think our thinking is to keep it in a similar places that so somewhere.
You know close to three quarters worth of a dividend in this kind of a long term spillover position that we'd like to maintain as possible obviously the performance.
Depending.
That's the goal.
And Brian I would add that as kind of three quarters worth of base dividend.
Okay. Okay.
Okay.
That's that's helpful and so Shelby maybe you can help us kind of think about what what the deemed impacts will be depending on you know whatever the dollar amount is there will be some level of taxes I assume that you can kind of come out at that level to leave you with the retained capital.
That's correct situs will end up paying a 21% C Corp tax on the amount of the deemed distribution that is ultimately declared that will then be passed through to the shareholders, but there will be a 21% tax impact in.
In Q4 related to the deemed distribution.
Okay. Okay. That's helpful.
And then maybe shifting just to some of your prepared comments you know around the company performance.
Yeah, you talked a little bit about some unrealized depreciation within the debt portfolio.
Can you can you talk about kind of maybe what metrics are.
What what what what's happening within specific portfolio companies two of let led to some level of depreciation.
Sure.
Obviously, another very good question and a good topic I think you know as I think about the world today and the good news for our portfolios I'd.
I'd say over 90% of the portfolio companies are performing you know very well or okay, which provides very good cushion if you will.
To deal with fixed charges into you know.
And as as necessary, so very comfortable positions and then.
A very well documented issues in todays world, whether it's supply chain issues interest rate increases inflation labor cost availability of labor you you name it.
All of those are real issues of today and so we you know we do we're not immune to that and so we do have some companies experiencing underperformance or stress because of those types of issues and and obviously, we're in good contact with those companies and and.
That's the real world today, So you know as I think about as credit quality in an environment. Like this you know thankfully we've been in a very good environment.
Over the last 18 months or so and credit quality has been abnormally almost normally good.
You know what what I would expect you know over time as for credit quality. They go back to more of a normal level still very manageable.
And but that would be my expectation is just you know today's the issues of today are real and you know companies are all dealing with it most are finding it.
Easy to do so are not easy is probably the wrong word, but you know are our managing quite well.
And then there's a few that you know are obviously are things are a little tougher for and you know we're working with those companies to improve those situations and you know as we can.
Great. That's helpful I'll jump back in queue and give somebody else a chance.
Okay. Thank you good talking to you Bryce.
Your next question comes from the line of Robert Dodd from Raymond James Your line is open.
Oh, Hi, everybody then yeah yeah.
Relations on all on the call.
Obviously the outlook I mean on on that I mean, you sound quite quite bullish on the ability to.
What was the debt book and deploy more incremental capital.
Going forward and obviously at the same time like you know the environment is tougher so can you give us any.
Color on how has the the underwriting partners probably hasn't changed you always underwriting recession anyway, even if one is more in a minute, but but.
How have your what have you actually.
Changed for when when you're looking at a deal in terms of yeah.
Structure, all coupons or how much change is there on on what you are asking for in order to to commit your capital on a go forward basis to new opportunities.
Sure.
I guess I'll start Robert.
We do think despite the issues of today there are.
You know there are plenty of good opportunities to invest today and.
Then your question is okay. So how are you doing that and.
Where we're going about that.
Obviously very deliberate way, we are excited about the market opportunity quite frankly, but it.
If you think about things like pricing. So spreads you know, obviously sofer's up LIBOR is up but just spreads are up as well. So that's a good thing.
From our perspective.
And then you know leverage levels have come down.
So risk levels have come down and you know, we're obviously looking for the types of.
Companies that are not being meaningfully impacted by.
The issues of today that I just articulated.
We like this environment, we think it's a great time to invest.
At the same time, we're being very cautious and deliberate with our approach, but we think we will continue to be able to uncover opportunities as.
As we move forward at the same time, so hopefully that's helpful. Yeah, Yeah, Yeah that is.
Very helpful. Thank you and then just a question on the jeans.
And a follow up to <unk> question, you said spillover close to kind of optimize that three quarters worth of dividend, which is on the bases obviously effectively.
The Max without losing declaration dates and things like that which obviously.
Hum.
On the three quarters.
Is that.
But you're you're declaring.
The dividend plans for next year looks like basically distributing all of earnings plus 10 cents.
Especially the base plus whatever you earn it by plus another 10. So it is you know is the plan to actually take.
If if if the deemed distribution brings it down to three quarters and then you.
Over distribute them not a criticism we distribute next year is the plan to actually take that spillover, but down two to a somewhat lower level in in the near or medium term.
To take the write down I'm, sorry, there's spillover down because if you if the deemed distribution hypothetically it brings it down to three quarters that's right.
Mental 10 said.
They would would would actually make it decline for that as well the incremental 10 cents.
Special dividend each quarter next next year yeah.
That makes sense.
I would say is I don't think we've obviously, there's a lot of.
Still two quarters to go here and so we.
We're trying to stay away from giving too much information because we don't know that we don't have the details right.
But the answer today, what I would say is yes.
The deemed distribution is most likely you got to be you know.
About 50 or above.
<unk> per share and that's how we are.
Currently planning to deal with that I don't think I mean, clearly N V will drop by those 10, she just mentioned each quarter.
But you know our.
Our view is that will get us largely in line with where we need to be for Rick purposes at that point in time so.
It's unclear where it will be in the third quarter, which is really when it matters as you well know, but we'll be very close so it's a little bit fluid, but hopefully I'm trying to give you a little bit of a direction of where we are.
And how we're thinking about that.
No.
That's incredibly helpful. Robert.
Robert I would just add you know I would think about you know there's spillover level three quarters base dividend is kind of event nor desired normalized run rate. So to your point, yeah, there's a little bit of magic and how do you solve for 2022 and 'twenty 'twenty three in light of the Tencent special but I would also.
I like you know if we had net incremental realized gains in 'twenty two 'twenty three that would also increase the spillover position. So there are variety of threat factors as you had suggested they kind of go into once we see how the year end closes what's the right amount of spillover for 2022, taking into account what we've already declared for 2012.
Three.
Understood Yeah, no. None of this is a bad thing for shareholders.
Just trying to clarify a couple of points. So I appreciate it. Thank you.
Good talking to you Robert.
Your next question comes from the line of Ryan Lynch from <unk>. Your line is open.
Hey, good morning, Thanks for taking my questions.
Good morning first one the first one I just had was.
As far as as you guys are.
Monitoring your guys portfolio.
And as interest rates continue to go up could you just provide a little color on.
Where today your overall interest coverage levels on your portfolio or and how did that compare to where it was maybe six months ago for your borrowers.
Sure Great question. The answers are little confused which I'll go through so we use an average.
EBITDA to average interest coverage calculation, that's what we've done historically.
And last quarter at June 30, if I do have that in my fingertips, we were at three four times.
To be honest it actually went up this quarter from there.
It's because of the additions to the portfolio in Q2 and Q3 have been.
Under leveraged situations, our leverage has actually gone down.
You know leverage meaning a debt to EBITDA, it's about four times and that's excluding our AR are our investments as well as three what I would call very large.
You know our EBITDA businesses that arent, the norm for us and obviously those or elaborate a little bit higher and they skew the analysis. So that's why we've excluded it.
So leverage for the core portfolio was actually reduced and then we've added you know obviously eight companies here over the last two quarters that you now.
Interest coverage that are pretty high and so it skews the.
The analysis.
What I would say is we're still in pretty good interest coverage levels overall.
And I think there is plenty of cushion with the call it 90% plus of the portfolio.
For additional rate increases so we've got plenty of cushion there it really comes down to the one off situations, whether it's you know again supply chain issue or an interest rate increase, causing an issue for the a certain company.
And then inflation a lot of companies have been dealing with inflation.
And you know usually you got to raise prices to do that and you know thankfully a large large almost all of our portfolio has been able to accomplish that but.
But it's been tougher for some than others right and so there's varying degrees and so at the end of the day you know I think we feel very good about our ability to just cover general interest coverage. It is really the one offs that you know where we are spending a lot of time right now and.
That's where you know we have more work to do at the end of the day, but it's.
We feel good about.
Overall, the core part of the portfolio and really the 90% plus the.
The rest really got to work through and Theres a lot of ways to do that and we feel that that's manageable as well, but it it's obviously theres more risk.
Okay. That's helpful and definitely makes it makes a lot of sense.
The other question I just had was odd.
Obviously.
One of the main.
Core benefits of our findings with you guys have had so much success with over the years as your equity realizations overtime I would just love to get a little color. Obviously, we know that the lending environment has improved significantly.
The lenders are given some of the choppiness in the environment, but I would say that that would come.
And some of the pain from from the equity holders and so Oh, there just wanted to hear your thoughts on how has the market environment changed for companies.
Woody.
Back in an exit.
Positions as well as how are those multiples changed over the last six months or so.
Sure.
Great question, Ryan I think you know it's interesting when you think about.
The market environment 12 months ago right.
And these low level or the velocity of activity investment activity was extremely high and it's greatly reduced as we sit here today, that's because a number of M&A processes that are.
Are taking place today.
It's much lower you know the good news is and one of the things that are market offers is very fragmented. There's a lot of add on activity going on so that's creating investment opportunity. There are a few M&A processes still taking place.
And those are usually companies that you.
You know are not being material or meaningfully impacted and there's usually a reason for the transaction, whether it's growth or just liquidity what have you and so the good news is there is there continues to be.
Opportunity to invest.
The other piece of the puzzle, which is also very different at last year's repayments are at much lower levels last year debt repayments for US was extremely high and this year, it's been much lower and you know we would expect that to continue that we don't see a ton of just repayments.
Taken place anytime in the near term and but at the same time, we see ability to to make incremental investments and grow the portfolio. So it is a very different market, but the lower middle market.
Our opinion is different and you know relative to the larger market. It's just very very fragmented and there are a lot of different reasons.
For financings and.
And creating opportunity so.
Hopefully that's helpful. But it's a it's a very different market than 12 months ago, that's for sure.
Yes.
In a sense.
That's all from me I appreciate the time today.
Yeah, absolutely good talking to you Ryan.
Your next question comes from the line of Mickey Schlein Frontline Baird. Your line is open.
Yeah, Good morning, Ed and Shelby you know a lot of good questions have already been asked.
I just wanted to follow up with one question Ed.
Our company has a lot of expertise in investing in second liens, but I know that you have purposely moved away from those but in the last quarter. I think you were a little disappointed that there actually weren't more opportunities in.
And second liens.
And I'm curious whether the current market dislocation has made that segment more interesting to you notwithstanding the outlook for an economic slowdown in the coming quarters.
Sure sure.
Great question, Maggie I think you know our approach quite frankly is very much the same I mean, we have for a while.
Yeah, Ben primarily providing you know first lien solutions to our borrowers having said that second lien and sub debt investments is something we've always done and we'll continue to do and our hope.
It is we'll continue to see some.
Very high caliber.
Junior debt opportunities as we move forward, we did take advantage of a couple of them.
You know quite frankly, more liquid market opportunities there were small and I referenced those in our prepared remarks.
And you know those are more recurring revenue businesses that for technical reasons. It traded down in the overall returns look you know look to be very positive. So we did do that and then in Q2.
Our Q3, you know what we are looking for the right companies in the right situations to continue to invest in second lien and sub debt investments. There are those companies that are actually driving right now and have a outlook are thriving and you know those are the types of situations. We're looking for but you know.
As I discussed with Ryan I think overall market activity levels are down it is at a different level and so.
We haven't seen anything recently that.
But piques our interest if you will but we'll continue to make those types of investments are first lien makes a ton of sensitivity you know quite frankly, it enhances our ability to manage those.
Securities and investments and also we are providing a very a solution that is resonating in the marketplace today and so I'm you know that'll be the core and as it has been for the last really four years or so.
But we are we expect to continue to invest in all the different asset classes that we've discussed.
I appreciate that Ed can you remind me within the within first lien.
How much unit tranche or you're doing if any and do you typically sell first out pieces are in that business model.
Yeah, Great question Maggie the answer is yes, most of our first lien investments or some form of unit tranche, whether we're doing a 100% of that capital or we are bringing in first out partners I would tell you a majority of our first lien investments are first out last out structures.
Where we bring in a bank typically to partner with on that solution.
So that is the majority of the first lien, but it's not you know it's not a large large majority.
Okay, and then those unit tranche.
Deals do you typically have a call on the first lien on the first out piece in the event of a covenant breach you know when a company gets in trouble. So that you can take control of the situation.
Yes in most cases, yes, and generally speaking we are you know.
Kind of the primary mouthpiece.
To the.
The client if you will out of the borrower.
And so but the answer to that is yes. We are we do have a call on the ability to manage those kinds of issues if necessary.
We haven't encountered it thankfully and we hope not to but I am sure you never say never in this world.
Right.
I understand that that's it from me. This morning I appreciate I appreciate your time. Thank you.
Thank you Mickey good talking to you.
There are no further questions at this time, Mr. Edward Roth, Chief Executive Officer, I turn the call back over to you.
Thank you Abbe and thank you everyone for joining us. This morning, we look forward to speaking to on our fourth quarter call in early March 2023.
Great day, and a great weekend.
This concludes today's call you may now disconnect.
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