Release Date: July 10, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted net investment income per share increased by 12% compared to the last quarter.
- Net investment income of $1.5 per share significantly exceeded the $0.74 dividend by 42%.
- High-quality, resilient portfolio valued at approximately $1.096 billion.
- Strong dividend coverage with a 13.1% dividend yield and an 18.6% earnings yield.
- Substantial liquidity with $299 million of investment capacity, including $93 million in cash.
Negative Points
- No new portfolio company investments were originated during the quarter.
- Net asset value (NAV) per share decreased by 6% from last year and 1% from last quarter.
- Three investments remain on nonaccrual, representing 1.6% of fair value.
- Total expenses increased from $2.3 million to $2.9 million compared to last year.
- Overall deal market reflects slower deal volume and M&A activity, impacting new investment opportunities.
Q & A Highlights
Q: Can you provide more commentary on the investing environment and the potential for repayment activity?
A: (Mike Grisius, Chief Investment Officer) The overall deal market, especially for private equity-backed deals, is experiencing historically low M&A activity. This has resulted in fewer opportunities to invest in new portfolio companies. However, we are still seeing opportunities to support existing portfolio companies. The combination of abundant capital and low new deal activity is causing competition on price, leading to potential payoffs. Despite this, we remain confident in our ability to deploy capital effectively in the lower end of the middle market.
Q: What is the current cash position and how are you thinking about the undistributed position moving into the second half of 2024?
A: (Henri Steenkamp, Chief Financial Officer) We don't generally disclose the exact cash position, but we have had another deal repay and expect more. Regarding the undistributed position, we are still working on the timing and magnitude of declared dividends and will focus more closely on this in the next quarter.
Q: Have you seen larger private credit platforms coming down market due to lack of deal flow in the upper middle market?
A: (Mike Grisius, Chief Investment Officer) We have seen a little of this, with some large senior lending institutions offering more attractive financing. However, in terms of day-to-day competition, we don't see these larger institutions much. They are not set up to underwrite the types of credits we do, and most of our deals are smaller in size.
Q: How would you characterize the cost and terms of the Live Oak facility compared to Encina?
A: (Henri Steenkamp, Chief Financial Officer) The Live Oak facility has a tiered pricing structure, starting at the same rate as Encina but decreasing as more is drawn. We have added new banking relationships through this facility, which operates efficiently alongside Encina.
Q: Can you provide more detail on the nature of the follow-on investments?
A: (Mike Grisius, Chief Investment Officer) Most follow-on investments are for tuck-in acquisitions in existing platforms. These acquisitions are typically smaller and more accretive, allowing us to support the growth of our portfolio companies effectively.
Q: What is driving the differential between add-on acquisitions and new platform acquisitions?
A: (Mike Grisius, Chief Investment Officer) New platform acquisitions typically command higher multiples, while add-ons are smaller and more accretive. Private equity firms are focusing on add-ons to build their businesses at lower multiples, which is more attractive in the current market environment.
Q: How do you think about the timing for improvement in the KPIs of restructured companies like Zollege and Pepper Palace?
A: (Mike Grisius, Chief Investment Officer) We constantly evaluate opportunities and the best ways to maximize value. While we have work to do, we are optimistic about the potential for improvement in these businesses.
Q: How were the new management teams for Zollege and Pepper Palace sourced?
A: (Mike Grisius, Chief Investment Officer) For Zollege, we approached the original founder who had sold the business and is now helping us operate it. For Pepper Palace, we found a turnaround specialist with a successful track record in similar situations, who will also invest significant equity in the business.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
