Q4 2023 Alaris Equity Partners Income Trust Earnings Call
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Okay.
Good day, and thank you for standing by.
Q4, 2023 earnings release conference call.
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I would now like to hand, the conference over to your speaker today Amanda Fraser.
Please go ahead.
Thank you Daniel we appreciate everyone, taking the time to join US. This morning, we're excited to present, our Q4 results I'm joined on this call by Steve King President and Chief Executive Officer of Alere.
After a short presentation in front of Stephen either will be a question and answer section as Daniel mentioned that.
Before we begin I would like to remind our listeners that all amounts given are in Canadian dollars unless otherwise noted listeners are cautioned that comments made today may contain forward looking information. That's forward looking information is based upon a number of important factors and assumptions and therefore actual results could differ materially.
No information concerning the underlying factors assumptions and risks is available in last night's press release, and our MD&A under the heading forward looking statements and risk factors copies of which are available on SEDAR pluses and SEDAR.
SEDAR plus dot com.
As well as our website.
Non IRS data nine I forgot sorry.
No not your birth data is also presented and may differ from the way other companies present, such data as with the forward looking statements. Please refer to last night's press release, and our MD&A for more clarification regarding non.
Sure.
So at least from our Q4 include revenue from the quarter of $41 9 million exceeding our guidance of $39 9 million as a result of higher than anticipated common distributions received and as expected was 18% lower than our Q4 2022, mainly due to one time payments on the F. N C reduction that occurred in October.
Or 2022, as well as a partial catch up payments that we received a 3 million U S. Late in 2022 from O'connor regarding deferrals of their distributions from the Covid pandemic.
For the year.
When you have a $162 6 million was a slight increase over $161 6 million.
Normalized revenue in 2022 after adjusting for both FNC in Oklahoma as well as $17 2 million U S of Kimco district deferred distributions received in Q2 of 2022.
EBITDA for Q4 up $61 3 million and per unit of $1 35 represents an increase of approximately 30% as compared to Q4 2022 and for the year.
202 million and $4 44 per unit, an increase of approximately 10% the increase in EBITDA was largely attributable to capital appreciation on our common portfolio.
For the year the trust had a net unrealized gain on investments of $65 2 million of which $58 2 million relates to alert us as common equity investment.
Realized an increase in fair value of approximately 34% on the opening carrying value of its common in addition to a seven 5% return on common distributions or $12 8 million.
Overall, the lyricism document in common equity under the total return of 41, 8% in the year.
Over the last four years, the lyricist added common equity as part of its overall investment strategy with 13 of 20 investments now containing common equity.
Key drivers of the fair value increase in the quarter of $28 3 million were Okada, formerly planet fitness growth partner.
Of $9 9 million U S.
BCC of $5 4 million U S M or a $5 6 million Canadian LMS, a $4 3 million and a decline in PWM of $3 1 million U S.
Oh on the partners finished 2023 ahead of budget and further aided by tailwind.
Positive announcements from planet fitness corporate based on budgeted growth for 2024 and continued expansion of Hana expects this momentum to continue in the coming years.
BCC continues to see impressive growth as they execute on their development and expansion plans organic growth through the year. So you see you see a 28 locations for a total of 98 centers.
Based on our marriage unaudited financial results for the year. The reset is expected to be up 6% and Marissa steady improvement throughout 2023 as borrowers positively adjusted to a more stable macro environment and customer sentiment improved.
<unk> results improved over the year with their ECR now recovering to one two times.
Arris expects this improvement in gross margin to continue into 2024 with these improvements we expect to LMS to begin catch up payments on their deferred distributions in the latter half of the year based on the 12% lease up for 2023 and forecast 2024, there was an increase in the fair value of LMS during the quarter of $4 3 million.
As discussed in previous quarters, GW AUM is not realize the growth expected at the time of our investment and a slowdown in early 2023.
Impacted their growth expectations for the year. This performance against budget a negative reset for 2024 resulted in a decrease in fair value during the quarter of $3 1 million U S.
Other less significant movements in D. N M. BNS S. E. R. S. M P Edgewater fleet and take a more rounded out our changes in the quarter.
This strategic transaction involving BCC and co sponsored Brookfield completed earlier in the year in which we exchanged 145 million U S of our traditional preferred equity for convertible preferred units resulted in <unk>, receiving an eight 5% distribution as well as an annual transaction fee of $1 5 million U S with a.
Total of $12 2 million received in 2023 during the year. There was also an increase of $13 9 million U S. In the fair value of the convertible preferred units, resulting in a total annualized rate of return of approximately 20%.
During the year Laris generated basic earnings per unit of $3.05 and paid out $1 36 per unit in distributions, resulting in total book value of 21 12 per unit, which represents a record for <unk>.
The actual payout ratio for the year was 64% after adjusting for the settlement and legal costs relating to sandbox litigation in Q1.
During the quarter, we also amended our credit facility, which included increasing the facility to 500 million expanding the leverage covenant to a permanent three times and reducing our overall pricing. We currently have approximately 185 million U S outstanding and have $258 million of capacity available on the facility.
Since converting to a trust in 2020 allowances tax profile on distributions changed from being 100% eligible dividends to a combination of return of capital eligible dividends capital gains and interest income as a result of a decline in the amount of interest income generated directly by the trust the effective tax rate of <unk>.
Distribution for in Alberta individual in the top tax bracket for 2023 with 24, 5% as compared to 34, 3% for a dividend received from our corporation.
That's an update on our partners our portfolio continues to perform well with a slight decline in weighted average E. C ours to approximately one five times with 11 out of 20 partners continuing to be above the threshold.
With the effect of higher interest rates now fully burdening the portfolio trailing 12 month period, we have seen a few partners ecr's dipped below the $1 two threshold with negative resets in these cases as well as stable interest rates in late later years decline later year declines in interest rates expected.
<unk> C is positive go forward trends in these metrics.
Oh holidays ECR is affected by the drag created by growth. We view this as a positive and it is this growth that is driving the gains in common equity value for the purposes of Bahamas Bank covenants. This drag of new clubs is excluded for 18 months, we expect <unk> to grow back to N S.
We are above one point to over the course of the year.
Dnm once the results of the acquisition in January and the lower preferred distributions. Our pro forma do you know is about 1.2 and with the pickup in lease activity forecast for the later half of 2024, we expect to see Dnm above 1.2 within the period.
<unk> services had been most affected by a slowdown in the capital project spending over the course of 2023.
<unk> business is stable, but we see the bounce back above 1.2 is likely to take longer than D. N M and honest.
Of our 20 partners 13, either no or less than one turn of debt as compared to EBITDA in the business.
Our anticipated aggregate partner resets are expected to be flat in 2024 positive resets are expected from nine partners with negative resets from eight partners and three who did not receive reset in 2020 for.
Coming off the high growth.
Growth periods for many of our partners over the last few years, we did expect to see some flattening in declining back to more normalized levels.
Our current outlook calls for $39 2 million of revenue in Q1, and a 12 month run rate of $169 6 million or <unk> expectations have increased modestly to $16 5 million, reflecting the growth in the <unk> team and a general increase in cost.
As noted in last night's release, we do have an upcoming change to reporting with the evolution of <unk> investment model over the last few years, beginning with the introduction of common equity and continuing to evolve with the expansion of SPV investments.
Sequencers yearend Dolores determined it hadn't met the requirements of <unk>.
Investment entity under Ifr S tests as a result of this prescribed to change in 2024, <unk> will no longer consolidate its investment entities subsidiaries Intuit's financial results on a go forward basis, these entities, including alerts USA, the subsidiary, which folds allowances U S investments as well as allow us equity partners.
Inc, which holds all areas of Canadian investments as well as senior credit facility and convertible debentures will be reflected in the trust as investments held at fair value.
While this method of accounting, we will have a pervasive effect on the financial information on the face of the statements supplemental disclosures of non-GAAP measures will provide will be provided to ensure a similar visibility into <unk> operations and results.
While this change has prescribed it just it does have some benefits for Laris, which include the ability to utilize our full suite of rights, including stepping in without having to consolidate the partners into our financial statements, providing more flexibility in how we address issues within the portfolio. It also allows us more flexibility in how we invest capital.
We are able to have a higher amount of influence or control and partners without navigating the accounting effects of this involvement.
And on that note I'll turn it over to Steve for his comments great. Thanks Amanda.
January marked the alere.
<unk>, 20th anniversary, which on its own is extremely gratifying companies in the private equity industry don't make it to 20 years, unless you're doing something right and creating value for the shareholders, but also happened to be one of the most exciting 12 months in our history because of the significant advances that our company has made strategically that manifested themselves in our results this year.
For the first 15 years of our existence, our unique preferred share portfolio created a low risk low volatility cash flow stream.
<unk> gave us downside protection in exchange for more control and more upside for them.
At that point, then after analyzing the returns that our cap growth preferred shares are created for the common equity holders of these companies, we decided to tack on a portion of common equity to go along with our perhaps onto every deal where it made sense, we'd hope to expand our return profile, while not materially changing the risk profile. Since we are still protected by the rights and remedies of our preferred.
The chairs.
Forward to today and the 42% total return from our roughly $200 million common share portfolio has more than justify that.
<unk> from five years ago.
The other strategic initiatives crystallize. This past year was the introduction of third party capital management that resulted in a partnership with Brookfield, along with our long standing partner body contours.
Having an economic interest of $400 million U S that we didn't have to raise ourselves is completely additive to our return profile.
Does that have the additional benefit of really putting on putting <unk> on the map in the U S private equity industry as it was one of the most high profile deals done in the U S last year investment banks and advisors are now very familiar with our company and we can and we can show potential partners are far more robust set of outcomes with soliris as a sponsor.
Prior to the BCC transaction, we were making a 13% return on that investment 2023 total return on BTC of 20% a significant transaction in many regards.
Looking forward, we expect to keep expanding our progress our traditional preferred and common equity investments into new partners.
Another third party capital transaction and we also believe that 2024 will be a year to see some profitable exits.
Because of Covid and the rising interest rate environment, we have had fewer partners decided to sell their business as unusual.
Well, we don't see a large number of them selling we do expect that one or two decided to sell this year.
Now that we have had comment now that we have common equity upside along with perhaps exits have the potential to add a really nice upside to our returns and allow us to redeploy the capital into new situations.
Also set our goal for 2024 to be a year of growing through our partners. We now have a robust portfolio of 20 platform investments.
Again, as a common equity holder and most of these companies, creating equity value, while also deploying more prep shares.
To them at highly highly accretive strategy for us.
Our business development professionals have been tasked with increasing that activity in the coming year.
From a professional and personal perspective, it's been an incredible journey to be involved with this company as we've evolved and evolved and adapted over the 20 years and I really can't wait to see what the next 20 years bring so Daniel.
Happy to open it up to any questions.
Thank you Heather.
Ponder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
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Yeah.
And our first question comes from Gary Ho with Jordan.
Little markets. Your line is now open.
Thanks, Good morning.
Great.
Good morning, So we're seeing Jordan senior common equity investment strategy shine through here.
Would you say the fair value of your common equity book now is fully marked to market ready or could there be some upside when these assets are redeemed in the coming years and I think Steve you mentioned in your prepared remarks, several potential exits this year.
So just in regards to the accounting standpoint.
The there is a difference and the.
The mark to market of our common and to what we expect to receive on an exit when we mark to market are common.
Including a discount a minority discount.
And in general we exit these investments alongside our partners and control deal.
Therefore, we will still have a pick up to the fair value on our book based on that control premium that we are not recognizing ourself.
Yes, I think Thats fair.
You know we've tried to be conservative historically on our on our fair values I don't think anything has changed in that regard so.
And that's just kind of the nature of the process. So we do think there is there are several of our companies that have had takeover offers on them recently that.
We don't think we'll go through in each of the cases they have been.
At higher valuations than what we're holding the motto.
We think there's definitely upside there.
Okay.
Perfect. Thanks for that and then on <unk>.
Planet fitness.
I think you mentioned there were some positives from the planet.
Fitness corporate.
Can you elaborate what those are and.
Also any opportunities.
For for your partner to acquire other P. Let franchisees.
Yeah. So.
Planet fitness corporate has had a change of their CEO over the last few months.
Their interim CEO is one of the original franchisees and one of the largest kind of independently owned franchisees in their system. So there is a renewed focus on franchisee economics.
Start with.
The cost of a build and <unk> so they've changed the timelines and also the equipment requirements for each club that has reduced the cost and.
Given more time in between rebuilds.
There is there are some other things around the fringes one of the other things that they're testing right now and about 250 clubs is a price increase for the first time on their base membership of $10 a month.
For our company every dollar.
[noise] based membership at $2 5 million of straight to the bottom line. So it's significant and so.
So yes it is.
It's a system that has been extremely stable over the years. That's why so many private equity firms have gone into the planet fitness system and so it's just a wonderful cash flow stream.
Membership count continues to grow past pre COVID-19 levels.
One of the things that they've really seen as that.
The Gen Z Gen Z as they call it there.
Generation is is really providing some significant growth to their membership counts they have something called the summer pass concept, where every teenager in America I guess.
Kind of June July and August for free at at every planet fitness gym, and Thats really led to follow on.
Membership growth not just for those kids as they as they age but also for their parents. So.
It's been a wonderful investment for us, where 10 years and just tremendous people and.
And.
We also do think to your to your second point.
Because private equity went into this space so hard starting about six years ago, and we were actually the first P firm into the franchisee base and planet fitness as 10 years ago.
A lot of those companies are now having to refinance and because of the stability of the cash flow stream banks were going up to six times.
Debt on these things so it's.
<unk> got two impacts one I think theres going to be assets for sale in the industry to help refinance some of those balance sheets.
There may be some territories that become available from corporate where people don't have the capital to.
To keep up to their requirements.
Corporate has a track record of showing those opportunities to us because we've been one of the top operators in the system for our for almost 20 years. So.
So yes it has been.
Per club economics is has gotten better and better.
And we will get better and better here with these moves and we do think Theres very good acquisition opportunities here as well and we are ready for that.
Okay, Great and then just last question.
Congrats for Amanda you do have your converts due in a few months.
But you do like it as a signal there have ample room on your credit facility. What's the game plan there as it stands today I am guessing you get comfortable with your dry powder position that you've been refining that on your revolver.
We have ample room on our revolver to fund continued growth and move these converts on the line.
We continue to evaluate what redemptions look like within our portfolio as well as opportunities to potentially refinance the converts so.
We continue to look at the options and I think we'll make a decision on which way we go in the next few weeks.
Okay got it thanks very much those are my questions.
Great.
Thank you one moment for our next question.
Our next question comes from Nik Priebe with CIBC capital markets. Your line is now open.
Okay. Thanks.
So fleet, partially redeemed the preferred share investment in the quarter.
That business seems like its performing pretty well lately are there plans to redeem more.
Alright.
No not at this point.
<unk> fleet has had obviously just enormous growth over the last few years.
But we have.
Ah clauses in all of our agreements, where if we own common equity they can't buy or perhaps down past a certain amount.
Unless they buy everything out all of that work. So we're kind of near that point with with fleet. So we expect that to be a stable number.
Got it and if that scenario were to materialize, how how does the common equity investment get get priced at exit like is there a mechanism as it kind of formulaic in nature like how does that work.
No with the common equity, it's not formulaic it would be market. So.
For the most part our exits are in.
And a third party transaction. So we're just selling alongside the entrepreneur at the same valuation.
Situation, where based on how our financing where they're staying and im taking us out which really hasnt happened before it.
It would be a third party valuation that we both agree on.
Got it okay interesting.
And then Amanda you'd made reference to qualifying as an investment entity under <unk>.
And it sounds like that will.
Have some changes to the P&L can you just preview for us what that will look like with this accounting change to how that might.
Just impact the look and feel of your statements might just be helpful. If you can help us kind of visualize how that change could.
Sort of impact the interpretation of your results going forward.
So from the income statement point of view all of the net operations of Canada and U S are two investment holding companies.
We'll show up as one line at a fair value change and encompassed within that one line will be both the distributions from our partners as well as the tax expense that is incurred on those.
Some of the operating expenses in each of those entities as well as interest expense. So it will be more difficult to get back to a true EBIT number.
We still have the G&A expenses.
Our staffing.
Majority of our G&A is held in an entity that will continue to be consolidated to a lot of that middle section of the income statement. We will continue to be there from a G&A legal perspective trust taxes and.
Financing costs.
Through the notes to the statements we will blow back out.
The same visibility is available.
With regards to partner distributions and.
The fair value gains and losses will be able to understand in that.
Fair value pickup sort of what is cash and what is noncash.
The notes to the statements will also give the same level of view into all of the movements in each of the partners.
I think from a net asset value is going to be very similar in fashion, although the look will be different.
We also will maintain reporting on our coverage ratio will get back to some cash flow metrics, but we'll probably lose some of that visibility and ability to get back to EBITDA as we traditionally had it.
Understood. Okay. No. That's good thanks ill pass the line.
Thank you one moment for our next question.
Okay.
Our next question comes from Jeff Fenwick.
With core.
Cormack Securities Inc. Your line is now open.
Hi, there good morning, everybody.
Steve I wanted to circle back to some of the comments in your in your MD&A around the go forward growth in some of the deal opportunities you might see there was some comment I believe around maybe becoming more involved with with M&A support for the existing partners.
You were just coming in and commenting a minute ago there on the <unk>.
What's the thinking there is that still going to be effectively the same model of calling in <unk> or are you going to be a bit more flexible in terms of what that mix might look like if you saw the right opportunity or what's the thinking there.
Yes.
Nice things about this equity accounting that Amanda and her staff of <unk>.
Have put us into as you mentioned is we will have more flexibility there.
We're still we're still a cash flow based investor, though Jeff. So I think the flexibility is more at the margin in terms of the cash versus exit.
Profile of our of our returns.
But yes, it will allow us typically we've we've kind of kept ourselves that 20% ish of the common equity.
Of the companies we've invested in we can go higher than that in certain situations, including in situations, where that company. Maybe has kind of the next transition and we can actually step in as the buyer instead of selling alongside of the owner if we're comfortable with the management team that that we have been worse.
With for years so.
It does give us a lot more flexibility, including as you mentioned on M&A.
Are we just added to our business development Department, we're going to be spending more time at at industry conferences. In addition to kind of the general list conferences. So that we can really dive into each of our platform investments that is acquisitive and kind of have the management bandwidth to be.
Rowling and acquisitions.
So I really want to make that a focus this year to grow through them.
Lower risk than than new deals.
Obviously, we're going to keep on doing every good new deal that comes our way but.
Thats.
It's very competitive.
Scope.
For 20 years been successful limit and thats not going to stop but I. Just think we can really add to our growth by really digging into our platform investments.
Quite frankly.
A lot of them now really compared to 10 years ago, they're looking for that.
They're wanting us to.
<unk> value to them.
Whereas when I started this 20 years ago people wanted us to stay out of their hair, that's completely changed in this market one of the first things we get asked in every management meeting.
As you know how can you help us go to the next level and.
So we've got one of our former partners.
The sold out that has now joined us as our.
As a full time consultant that is helping out with each of our partners and we're spending more time with them and our BD guys again have been task.
To help them grow so that's something I'm quite excited about in the near term here.
Okay, and then I just wanted to ask about a couple of investments directly I mean fleet has been obviously very successful and you referenced that earlier just in.
Maybe a matter of you might know the numbers here to remind me, but I recall at the I think the original common equity component. There was about 8 million and I think that you maybe have received close to $16 million in distributions now and I think it will continue to mark up the equity as well if that is that a correct way to characterize it.
Hard to sort of discern that the total return off of an individual investment like that.
Yes, we have.
We originally bought that comment for 8 million I think we have it.
I'm going to get this wrong, but I'm going to say $53 million of comment at the moment.
We received $60 million of distributions.
Pay down a bit of that path, which attracts favourably to the common and future distributions. So we do expect that that trend.
<unk> trend and distributions will continue if not grow a little bit.
So overall, a very successful investment with.
Our strong backlog and runway ahead of it with regards to.
Maintaining this level of growth for us.
The next cycle.
Okay, great. Thanks, and then.
Maybe you can just give us a bit of an update on gws I mean thats. One there were I think in the sort of three of the last four years, they've reset at the low end of the call or for them and what's the prospect for that business, it's still a pretty sizable investment for <unk>, but.
How are you feeling there with how that business is positioned.
Certainly the one company in our portfolio that really did get hurt by Covid and that has been much slower to recover than what we are they would have hoped.
We're still bullish on it Jeff to be honest in the management team very much as well so.
In the last three years, while they haven't grown they've done a wonderful job of diversifying their customer base, there and a lot of different areas. They have too much exposure to the hospitality sector during COVID-19.
So we think there are poised for growth, we still think it's a very good long term play for us we like the industry, we like the people so.
So while yes, it's disappointing that the last three years have not been what we'd hope for.
Certainly.
Our company in our portfolio that we actually have high hopes for okay and in terms of just their financial position. When you are sort of in that period of decline.
Whats the is that one that has.
Some senior debt sitting in front of you guys that might be a bit of a concern or how do you feel about that.
You have senior debt sitting ahead of them, we are not concerned on payments theyre above there in the one 2% to one five range with regards to cash flow.
This investment has really been hit by the growth profile on the common.
From a pure price perspective, we don't see a lot of risk there.
Yes.
They don't have a huge amount of debt.
Much lower debt then.
Most.
Companies in their sector would have so we're we think we're fine there but.
Certainly one that we've been watching closely and.
Talk to obviously very regularly but yes.
Yes, we still think theres upside there okay. Okay. Thanks for that color I'll requeue.
Yes, Thanks, Jeff.
Thank you.
As a reminder to ask a question please.
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One moment for our next question.
Okay.
Our next question comes from Zachary <unk> with National Bank Financial Your line is now open.
Good morning, everyone congrats on the quarter.
Thank you.
Could you go into a bit more detail on the kinds of actions you'll be able to take after the <unk> 10 change already outlined.
So I guess, he's asking more on the BD side or the actions we'll take post.
Plus change I don't know that it will significantly impact anything we're doing I think it gives us more flexibility and reacting.
Potentially to things within the portfolio, if we do feel the need that stepping in are directing.
Even just sitting on the board with something that we were restricted from.
From an accounting perspective, where now we can sort of take a more active position on boards on a more regular basis. So we can have a bit more structured influence within our deals board seats that we've always worked very closely with these partners more from an observatory position, we have great relationships with everyone. This just allows us the ability to be a bit.
More structured in that.
We can take.
Larger controlling positions with regards to equity, but I don't know that thats something that were really were not set up to be a controlling equity holder, we really like that that positions maintained by management.
Just in the structure and how we rely on the management team and we want them incentivized in the future. It can give us a little bit more upside there there'll be situations, where like I said, if we go in initially as a 30% shareholder and then some other legacy shareholder wants to sell we can be the buyer of that instead of that triggering an.
That event.
So it just gives us more flexibility with especially with the people that we already know and trust.
Okay that makes sense.
And so probably not.
Trolling position, but given that you will be able to strike above that 20% common equity Mark what would you say is the new ceiling on how high you'd like to take that.
It'll be situation to situation.
I don't like to put hard boundaries on it we've really over 20 years.
Become known for people that create win win situations between our shareholders and.
And our entrepreneur partners. So if there's a situation where we do have to take 55% because thats thats, what the situation requires but we're completely confident in the the alignment with management and the motivation.
And Thats something that we can now look at.
I would say, though that in a situation like that you.
It would likely be.
A situation where the common equity also pays a fairly.
Known dividend we're.
We're not going to have too high of a percentage of our portfolio and things that don't have.
Hard cash flow attached to them and from the mix of our capital going out and some of these situations.
20% of our total check can still end up being 55% of the common so it doesn't necessarily mean that we're going to change the mix of our capital we've always sort of targeted an 80 20 split perhaps comment just from a cash flow return perspective, and we would continue to maintain that perspective.
Our balance sheet side.
That makes sense. Thanks.
And then for the two deals that you outlined you walked away from that would have closed before year end, how often would you say that happens when deals are well advance and what were the factors at play there.
Both very different but.
Just through due diligence.
Raised enough concerns for us that we decided as a firm to did not close them. So.
It's disappointing.
We spend a lot of time and money.
On transactions to make sure we get it right but that.
The key phrase is to make sure you get it right and if Youre not sure. Then then you move onto the next one and Theres lots of opportunities out there. So we're only as good as our as our worst deal. So.
We've kept a very strict investment criteria and that's not going to change.
Perfect. Thanks.
And I guess last one for me.
The idea behind deploying more to existing partners for acquisitions is that driven from the partners that or is that something that <unk> will be pushing.
It's both.
Definitely our partners want it it's one of the reasons that they've chosen us.
One a deal recently that we're working through right now that that was the key.
<unk> for us.
<unk> got a lot of bids from other kind of structured equity providers, but none of them kind of gave them the upside in the value added that <unk> does so.
The term debt, where kind of the best of structured equity and in traditional private equity and the fact that we were.
It can get involved and create value, but we're not.
We're not we're.
We're not firing the entrepreneur, we're not controlling their board and all of those things and we're not controlling their their horizon as much as as private equity does so.
So yes.
It's definitely both.
And if not for everybody. It's not for all 20 of our company's Theres, probably 10 of them that would have no interest in.
And the acquisitions, but for the other Tim there are super keen in.
They just love it when our business development guys.
Find some deals at different conferences that they go to and different connections that they have that we bring to them at the very least it's great industry knowledge for them.
Great color, Thanks, I'll turn it over.
Okay. Thanks for that.
Thank you.
One moment for our next question.
Our next question comes from Geoffrey Kwan with RBC. Your line is now open.
Hi, Good morning, I apologize I joined the call late so hopefully these questions have been asked my first question was just on the deferred distributions at LMS.
It.
I guess is there any insight that you have in terms of the timing of those things because I think you've talked about wanting to get or you think you'll get in 2024 is it going to be kind of steady.
At this time.
Do you have.
Yes.
How strong is your confidence that youll get the Doe.
Payments caught up by the end of this year.
So LMS currently have I think $2 5 million outstanding and defer distributions from the first half of 2023, we expect them to Brazil payments in the latter half of the year I don't know we will have to see how the year plays out to see what the excess cash flow is to make those catch up payments. So I don't know if we'll have that all back in the latter half of <unk>.
The year or not.
We're also very cognizant, we don't want these catch up payments to be detrimental to the go forward of the business. So we're quite happy on that quantum of amount to ensure that the business is firing on all cylinders and making payments with our April with regards to <unk>. We have another $2 5 million outstanding base currently been making payments of <unk>.
<unk> hundred 1000 per month.
Those catch up payments and there'll be wrapped up at the end of the year. So we're very certain that we'll collect that two and a half at $200 per month over the next 12 months and then by the end of the year, we will be.
Fully back too.
Caught up on their distributions.
Okay. Thank you for that and just my second question was just taking a look at the reset. So we have for 2024. He had already had a good number of companies that had high.
Reset numbers, then you had a fair number that negative amounts when we kind of take a look at.
The overall portfolio portfolio health I mean, how would you kind of assess where you are today given the current macro environment.
I think we had nine up we had a down I would say out of the eight we probably were expecting six of those to be down just given the rate of growth that they had coming off of record years, we were expecting them to go back to normalized level.
We look at the weighted average of our.
[noise] Ecr's, we're targeting when we closed the deal to be at one and a half. So the fact that our portfolio is normalizing backs that one and a half number isn't concerning for us, it's probably where we're targeting to be we peaked up at 1.8, while everything was very frothy and all of our partners, we're doing extremely well, but that is in that one.
And our target I think.
For the returns that we're getting the balanced with the risk one five times is sort of where we expect it to be.
And I think.
In fairness I think 23, if you look back at our 20 years would be one of the the lowest reset.
Kind of performance years that we've had.
A choppy year, where some companies had some tailwind in but there was a lot of headwinds out there for different types of companies.
That's why we've created a portfolio like this where youre going to have different drivers.
And different things happen in different years, all of which should come out to a very low volatility.
Type of profile and Thats, what we have so.
So I'd like to see it a little higher.
But.
And I think based on the forecast that are 20 companies have for 'twenty four we do expect it to be higher in the next year, but we're not we're not completely displeased with it.
Okay, great. Thank you.
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Our next question comes.
From.
Okay.
Thanks, Robert Reynolds with acumen capital Your line is now open.
Jonathan.
Hey, guys.
So just most of my questions have been answered but.
On the last call you guys highlighted that.
More deployment potential than you've had capacity for expected.
That you you walked away from.
And the redemption is expected and the increased credit facility that is not the same issue, but I'm just looking for a little bit more color on kind of what's your expectations for 2020 core deploy guitar and what the competitive landscape is with that with peak right now.
Yes.
It's always competitive.
Right.
Really there's still so much money out there looking for a home for.
For a good company, it's always going to be competitive no matter, what interest rates are and no matter, what what's happening in the world Sweat I've seen for the last 20 years and I don't see any change in that.
There are more people now.
In the structured equity space than there used to be there's still nobody that does exactly what we do.
<unk>.
So for the deal we just won for the deal that we closed in the late fall.
There was only one choice.
Choice for them.
Both of those situations had.
130 bidders in the process and after the face to face management meetings.
Both situations stopped the process and in.
Signed exclusivity with us.
Because there is nobody else that does what we do so.
We're still we're still confident in our ability to deploy into new deals.
In terms of redemptions.
It's always a little harder to.
To forecast, but as I mentioned in my talk we do think that there will be more redemptions over the next 24 months just from the fact that there really hasnt been for the last three years.
Our average hold period, if you look back at our 20 year history has been about five and a half years.
And so when you go three years with very few.
Just know mathematically that you're probably going to get some.
As I also mentioned we have had some takeover offers on a few of our companies.
We've got companies that are doing extremely well and they get attention.
From private equity or strategics.
So we have seen kind of more activity on that front in terms of unsolicited bid.
Bids but.
We think over the next 12 months.
Probably a partner or two we'll definitely redeem and quite frankly now that we have common equity investments that's a real positive thing for us that.
That triggers nice gains triggers the ability to.
To redeploy capital that we werent getting structured revenue from into new new investments, where we've got that that 80 20 split so.
Those are real positive things for us when we get redemptions now.
That's great and so in terms of deployment.
Do you expect that to be higher likely in 2024, then 2023.
Yes.
<unk> always $200 million, we came in at 130 for this past year, if we would have <unk>.
Executed on those two deals at year end, we would have surpassed the 200 million so.
We were there in terms of deals that we that we won and Haddon house, but.
Sometimes things like that happen. So it's always the number you can't you can bank on but.
We've had other years, where it's been much higher than that so 200 million as always Mike kind of over under a.
I don't know, if maybe I'm, an optimistic guy, but I'm betting the over.
<unk>.
That's great. Thanks for taking my questions.
Yes.
Thank you.
I'm showing no further questions at this time I would now like to turn it back to Steve King CEO for closing remarks.
Great. Thanks, Danielle and thanks, everybody for tuning in and for your for your great questions as always Amanda and I are available to Anthony to answer any other further questions offline, if you'd like today and.
We look forward to.
The new year in Q1 coming out in a couple of months. So thanks very much.
This concludes today's conference call. Thank.
Thank you for participating.
You may now disconnect.
Okay.
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Okay.
Okay.
Okay.
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Yes.
Okay.