Fidus Investment Corporation

Good day and thank you for standing by. Welcome to the FIDUS Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to one of your speakers today, Ms. Jody Berfinning. Please go ahead.

Thank you, Vic. And good morning, everyone. And thank you for joining us for FIDUS Investment Corporation's third quarter 2021 earnings conference call. With me this morning are Ed Ross, FIDUS Investment Corporation's chairman and chief executive officer, and Shelby Sherrod, chief financial officer. FIDUS 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 FDUS.com. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Finest Investment Corporation. Although management believes these statements are reasonable, Based on estimates, assumptions, and projections as of today, November 5th, 2021, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties, and other factors, including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission. BIDIS undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody, and good morning, everyone. Welcome to our third quarter 2021 earnings conference call. I hope all of you, your families, friends, and coworkers are staying healthy and well. I'm going to open today's call with a review of our third quarter performance in our portfolio at quarter end, and then offer you an update of our views on deal activity in the lower middle market. Shelby will cover the third quarter financial results in our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. As expected, activity levels in the lower middle market from both an M&A activity and refinancing perspective were healthy and robust during the third quarter, continuing a period of heightened activity that began nearly a year ago. Against this backdrop, our portfolio performed well, and we continue to see a strong flow of opportunities for investment in and high-quality businesses that possess resilient business models that generate strong levels of cash flow to service debt and that have positive long-term outlooks. Repayments remain at high levels and outpaced originations due in part to the timing of deal closings. Adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee, Attributable to realized and unrealized gains and losses was $9.8 million, or 40 cents per share, compared to $9.7 million, or 40 cents per share, last year. NAV grew to $447.5 million, or $18.31 per share, reflecting both a solid operating performance and underlying portfolio value appreciations. In addition, we reported net realized gains of $8.4 million, or $0.35 per share, as we harvested several mature equity investments in conjunction with sales and exits of portfolio companies. FIDUS paid a base quarterly dividend of $0.32 per share, a supplemental cash dividend of $0.06 per share, and a special dividend of $0.04 per share for the third quarter. As a reminder, the Board has devised a formula to calculate the supplemental dividend each quarter under which 50% of the surplus in adjusted NII over the base dividend from the prior quarter is distributed to shareholders. On November 1, 2021, Board of Directors declared a base quarterly dividend of $0.32 for share, a supplemental quarterly cash dividend of $0.04 for share, and a special dividend of $0.05. per share for a total dividends of 41 cents per share for the fourth quarter. The dividends will be payable on December 17, 2021 to stockholders of record as of December 3, 2021. In terms of originations, we invested $78.2 million in debt and equity securities, of which $39.6 million, or roughly half of the total, was invested in first lien debt, and roughly 40% was invested in second lien debt. Investments in new portfolio companies consisted of $14.3 million in first lien debt and common and preferred equity in Cardback Intermediate LLC, a leading provider of chargeback prevention and recovery services for e-commerce and card-not-present businesses. $10.5 million in second lean debt and common equity and power grid services acquisition, LLC, a leading utility services business providing repair and maintenance services for distribution, transmission, and substation infrastructure. As you can see, we continue to focus on companies with stable and diversified demand characteristics, relative insulation from the supply chain constraints, and inflationary pressures currently weigh in on many companies and strong positive long-term outlooks. The remaining $53.4 million is a new $20 million second lien loan commitment and worldwide express in a number of follow-on investments in support of M&A transactions on the part of some of our portfolio companies. Shortly after At the end of the quarter, we invested a total of $27 million in two new portfolio companies. These were $8.5 million in first-link debt, subordinated debt, and common equity of AutoCRM LLC, doing business as dealer holdings, a leading SaaS-based provider of customer communication software to the auto repair market. $18.5 million in first lien debt, common equity, and warrants of Ascendre Midco Inc., a leading provider of cloud-based talent management software solutions. In addition, we committed $16 million in second lien debt to a leading technology platform for digital customer acquisition across all consumer vehicles, including financial services, home services, and insurance, which we expect to fully fund in Q4. In terms of repayments and realizations in the third quarter, we received proceeds totaling $127.5 million, with the majority from second lien and subordinated debt investments, and $23.4 million in proceeds from monetizing equity investments. In terms of exits, we received payment in full of $21 million on our first lien debt and converted debt to equity in Hilco Technologies and realized a net loss of approximately $1 million on our original equity investment in the company. We received payment in full of $11.4 million on our second lien debt in CRS Solutions Holdings, LLC. We received payment in full of $20 million on our second lien debt in Worldwide Express, LLC, and realized a gain of $3 million on our equity investment. In conjunction with the sale of Worldwide Express, we invested $1.5 million in common equity, of which $0.8 million was rolled over from the original common equity investment and funded a $20 million second lien loan commitment. We received payment in full of $11 million on our subordinated debt investment in LNG Indy LLC and realized a gain of $4.5 million on our equity investment. We received payment in full of $21.5 million on our subordinated debt in Allied 100 and realized a gain of $1.8 million on our equity investment. We received payment in full of $11.6 million, including a prepayment penalty, on our subordinated debt in ECM Industries LLC. In addition, we received a cash distribution of $0.8 million on our equity investment. We received payment in full of $17.3 million, including a prepayment penalty on our debt investment in Routwear, Inc. Subsequent to quarter end, we received payment in full of $7.1 million, including a prepayment penalty on our subordinated debt in Transonic Companies. The fair value of the portfolio at quarter end was $719.1 million, equal to 113.9% of cost, and reflecting net repayments for the quarter partially offset by appreciation in the fair value of the portfolio. We ended the third quarter with 70 active portfolio companies and six companies that have sold their underlying operations. Our portfolio remains well-structured, positioned to produce both high levels of recurring income and to provide us with a reasonable margin of safety along with the opportunity to enhance returns. Given current market conditions, we remain focused on rotating mature equity investments into income-producing assets. With first lien debt investments exceeding repayments and second lien and subordinated debt repayments exceeding originations during the third quarter, the mix continued to shift in favor of first lien debt on both an absolute basis and as a percent of the total portfolio. At quarter end, first lien debt accounted for 41.2% of the total portfolio on a fair value basis compared to 25.2% as of December 31st, 2020, while second lien debt decreased to 28% of the portfolio on a fair value basis from 44.7% as of December 31st. Subordinate debt accounted for 9.7%, and equity investments grew to 21.1% of the portfolio on a fair value basis. Moving to portfolio performance, overall, our portfolio continues to perform well, and risk remains at comfortable levels. As of September 30th, we did not have any companies on non-accrual. Some of our portfolio companies continue to work their playbooks in terms of pricing and productivity measures in response to supply chain challenges created by the pandemic, including component shortages, material and freight cost inflation, and labor availability. In light of these unprecedented business conditions, having a well-diversified portfolio continues to serve us well. To help us assess the overall health, stability, and performance of our investment portfolio, we track several quality measures on a quarterly basis. First, we track the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperformed and a rating of 5 is an expected loss. At September 30th, the weighted average investment ratio for the portfolio was 2 on a fair value basis. Another metric we track is the credit performance of our portfolio, which is measured by our portfolio company's combined ratio of total net debt through Fridays' debt investments to total EBITDA. For the third quarter, this ratio is five times, excluding equity-only and ARR deals. The third measure we track is the combined ratio of our portfolio company's total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. For the third quarter, this metric was 3.1 times, excluding equity-only and ARR deals. As a result of the elevated velocity of M&A activity that began in the fourth quarter last year, we have seen high levels of originations and repayments in each of the past four quarters. Because repayments outpaced originations for the third quarter, We were underinvested as we started the fourth quarter. Nevertheless, we currently expect to grow the portfolio in the fourth quarter. I mentioned earlier that we closed three deals in early October for a total of $43 million in originations, including the $16 million commitment. And strong deal flow offers us opportunities to add further to originations before the end of the year. While we are encouraged by these near-term opportunities, we will continue to manage the business for the long term and not rush to grow the portfolio in a way that would have us forfeit our underwriting standards. As always, our proven underwriting discipline places greater value on quality than on quantity. In summary, I remain confident that our relationships with deal sponsors, our experience, and our strategy of selectively investing high-quality companies with defensive characteristics and positive long-term outlooks positions us well for the growth over time with a long-term goal of generating attractive risk-adjusted returns from our debt and equity investments and on preserving capital. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

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, 2021. Total investment income was 21.2 million for the three months ended September 30th, a 0.6 million decrease from Q2, primarily due to a 0.5 million decrease in fees and a $.4 million decrease in fee income offset by a $.3 million decrease in interest income. Total expenses, including investment tax provision, were $16.1 million for the third quarter, approximately $.8 million higher than the prior quarter, primarily due to A $0.8 million increase in the capital gains incentive fee accrual. In Q3, we accrued $4.7 million of capital gains incentive fees given meaningful appreciation in the fair value of the portfolio. Note the capital gains incentive fee is accrued for GAAP purposes but not currently payable. Excluding the accrued capital gains incentive fees, total expenses in Q3 were $11.4 million in line with Q2. As a reminder, expenses will be higher in the fourth quarter as we will incur an annual excise tax expense, which I would estimate to be approximately 2 to 3 cents per share, similar to prior years. As of September 30th, the weighted average interest rate on our outstanding debt was 4.2 percent, excluding secured borrowings. In Q3, we prepaid 44.3 million of SBA debentures. We ended the quarter with 360 million of debt outstanding. comprised of 95 million of SBA debentures, 207.3 million of unsecured notes, 40 million outstanding on our line of credit, and 17.7 million of secured borrowings. Our debt-to-equity ratio as of September 30th was 0.8 times, or 0.6 times statutory leverage, which excludes SBA debentures. Net investment income, or NII, for the three months ended September 30th was 21 cents per share. versus $0.26 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 $0.40 per share in Q3 versus $0.42 per share in Q2. For the three months ended September 30th, we recognized approximately $8.4 million of net realized gains primarily from the sale of our equity investments in Connectrix Energy, Worldwide Express, and Allied 100. Turning now to portfolio statistics, as of September 30th, our total investment portfolio had $119.1 million. Our average portfolio investment on a cost basis was $9 million at the end of the third quarter, which excludes investments in six portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 88.2% of our portfolio companies with an average fully diluted equity ownership of 5.6%. Weighted average effective yield on debt investments was 12.3% as of September 30th. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual, if any. Now I'd like to briefly discuss our available liquidity. As of September 30th, our liquidity and capital resources included cash of $98.8 million, $13.5 million of available SBA debentures, and $60 million of availability on our line of credit, resulting in total liquidity of approximately $172.3 million. In October, we successfully issued $125 million of unsecured notes at a 3.5% interest rate. The net proceeds and available cash were used to pay down the outstanding balance on the line of credit of $40 million at closing and to fully redeem $82.3 million of public notes due in 2024 with interest rates ranging from 5.375% to 6%. Given the notice requirements, the bond redemptions occurred on November 2nd, so we will have one month of incremental interest expense on the public notes in Q4 of approximately $0.4 million. In conjunction with the bond redemptions, in Q4, we will realize a one-time loss on extinguishment of debt of approximately $1.6 million relating to the unamortized deferred financing fee cost on the bonds. Taking into account subsequent events, including the debt refinancing, we currently have approximately $185.2 million of liquidity. Now I will turn the call back to Ed for concluding comments. Ed?

Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at FIDIS for their dedication and hard work, and our shareholders for their continued support. I will now turn the call over to Vic for Q&A. Vic?

Ladies and gentlemen, if you have a question at this time, please press the star followed by the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Nikki Schling from Lattenburg. Your line is open.

Good morning, Ed and Shelby. I guess patience is a virtue.

Hi, Mickey.

Hi. Ed, there's obviously intense competition higher up in the middle market with so much private debt and equity capital available. How would you describe the effects of that competition, if any, on the lower middle market where you operate?

Great question, Mickey. I mean, from my perspective, competition is, you know, over the last 12 months, it's been, you know, it's similar, right? It's not like there's a huge influx of capital, but there obviously is a fair bit of capital out there. It's the same players, so it's not a bunch of new entrants. And, yeah, in some cases we're seeing lenders accepting lower yields, and we've definitely seen some unnatural acts, you know, just to win business. You know, what we're doing is focusing on, you know, the nuts and bolts of our business and sticking to what we know, again, focusing on the long-term, the industries we know well and the situations we like. And so when I look at it from a pricing perspective, I'd say, you know, Market pricing is in line generally with where it was pre-COVID levels, at times a little lower. But I'd say leverage is very similar to pre-COVID levels as well. So when I think about risk-adjusted returns, I think about equity capitalization, which is typically much higher in this high-valuation environment. I think the risk-adjusted returns are quite good. And more importantly, in the lower middle market, the terms haven't changed. So terms, when I think about security, when I think about covenants, real covenants, real maintenance covenants, all those things I think are still in place, haven't changed, and I think are real positive from our perspective regarding the market that we're playing primarily in. So hopefully that helps.

Yeah, that's good news, you know, given that there's always a chance that those folks will, you know, start to look at the lower middle market down the road. Just one follow-up question, Ed. You had another strong quarter of unrealized depreciation, and if I'm not mistaken, the portfolio's valuation is now at a record level in terms of cost over fair value over cost. You know, what are the main drivers of those valuation gains, And do you see more upside when you look at your portfolio companies' performance and market trends?

Sure. Another great question, Mickey. I think, you know, when I look at the drivers, so we had, you know, 23 million of, you know, appreciation this quarter in the portfolio, most of that being a large majority of it obviously being equity companies. You know, it was driven by, you know, three things. You know, underlying company performance, that was the biggest driver by a long shot. But obviously also we got some visibility into certain M&A processes where, you know, and so that impacted things. You know, people are, for great franchises, people are paying up right now. And, you know, as I know that you've heard talked about quite a bit, so. And lastly, market calibration, but that, you know, obviously that's something that we take into account every quarter, but it's to a very small degree the rationale for the, you know, the appreciation this quarter.

That's helpful, Ed. Those are all my questions this morning. Thank you.

Okay. Thank you, Mickey. Appreciate it.

Thank you. And our next question comes from Robert Dodd from Raymond James. Your line is open.

Hi, guys. On the repayment levels in the quarter now, I think year-to-date your repayments have now exceeded the combined number in 2019 and 2020. I mean, when does the pace slow down, frankly? I mean, just activity levels on that side seem to be You know, really, really high. I mean, your originations this quarter weren't low by historic standards, but they just obviously got swamped by repayments.

Sure. Great question, Robert. I think from our perspective, and I'm hesitant to say this, because last quarter there were some surprises, literally a couple surprise repayments in September. We heard about them in September, and they happened in September. So, you know, it's hard to predict, as we've talked about in the past. But what I would tell you is, you know, Q4 is we, at least today, feel like it's going to be, you know, a limited quarter from a repayment perspective relative to last quarter. And so I don't think we'll get anywhere near last quarter. And You know, I think what I would say is, you know, the velocity and the overall market activity has been extremely high for four quarters in a row. And obviously, we've had a fair number of M&A transactions where we've also realized equity investments, but also just debt refinancings or recapitalizations where we were taken out. You know, which tells you we had a pretty strong portfolio. So, you know, our approach has always been we want to invest in, you know, high-quality businesses that can weather, you know, the various storms that we anticipate or don't anticipate but can weather the storms. And, you know, so we feel good about getting repaid. Obviously, it creates a challenge for us. in terms of reinvesting. And we're going to, you know, from that perspective, we're going to stick to our discipline. We're going to, we are sticking to, you know, how we are going about our business and self-originating a large, large majority of the investments we're making and sticking to the industries that we know well. So we, you know, I do think this quarter will, it'll slow down. And I do think originations will outpace the, repayments this quarter and the question is to what degree and you know we'll uh you know be able to tell you that in in february um but uh that's the that's that's what i'm seeing i am seeing a slowdown in terms of uh i i appreciate that ed and just on kind of a type since with so many repayments so much recycling um about roughly speaking i think half of the the

the capital you have, how after the portfolio has been originated, it might not be new businesses, you know, there's follow-ons, et cetera, et cetera, has been originated since COVID. And to Mickey's question, that portfolio turnover doesn't seem to have impacted your portfolio yield significantly. About the only thing I can think of that's really changed over that period is maybe leverage has gone up a little bit. Is that, you know, indicative more of the type of businesses? I mean, obviously you're going in firstly now with more so than second. Is it more, you know, would you say your loan-to-values or other characteristics have kind of stayed the same or even improved as that portfolio has kind of renewed? Um, and then the other bit to that is with such a, what seems like a relatively new portfolio, should we expect, um, prepayments, um, prepayment fees and things like that to be lower say next year or over the next, next 18 months with so much of that, that capital being newly out there?

Um, a lot of questions in there, uh, Robert, all of them. Um, but the, uh, So let me hit leverage first, and it's a little bit of an anomaly, to be honest. So what I cited in our prepared remarks was a five times net leverage, excluding ARR loans on our balance sheet. And that's an average number. And to be candid, it's distorted by several, but really one in particular, much larger deal that we've had in our portfolio for a very long time. It's now a very large company. And so if you excluded this name, the average leverage would be more like 4.4 times, which is more indicative of the whole portfolio. And so what I would say with regard to things like leverage, I don't think that has changed materially. Loan-to-values only improved in this environment, quite frankly. from our perspective, and I think you touched on prepayments. Prepayments are, you know, a piece of the puzzle, I think, that will always be there. You know, could they go down a little bit next year? I think the answer to that is yes, but I don't think it's material, to be honest. I think a lot of the repayments we had were in pretty mature debt investments, and, you know, many of those prepayment fees were, you know, not that sizable. I think prepayments is part of the business and will remain part of the business. Maybe it'll be a little bit lower, but I can't, you know, tell you it's going to be a lot lower. So fees, obviously, as an originator, first lien, you know, we do obviously have a healthy fee income, and that depends somewhat on activity levels, as you know. But we would expect, you know, so fees will move with activity levels. But as I look forward to next year, I expect it to be an active year. I don't know if it will be as active as this year. I doubt it. But I still think it will be an active year. There's still a fair number of companies I know in our portfolio that we expect to be sold. And, you know, that's a good thing, you know, from our perspective.

I appreciate that. Thank you.

Thank you. Good talking to you, Robert.

Thank you. Our next question comes from Ryan Lynch from KBW. Your line is open.

Hey, good morning, and thanks for taking my questions, and really nice quarter again. My first question has to do with... as far as your equity portfolio goes, you guys had a, you know, a nice exit of, you know, 23 million of equity investments this quarter. But given the strength in that portfolio, you know, it actually grew, you know, and died despite those exits. My question was, I would presume that given how active the market is today, that you would expect that equity investments or, excuse me, equity monetizations to, you know, continue at a, you know, at a fairly, you know, consistent basis, maybe not as high as we saw in the third quarter, but I would assume that you would, you know, consider those to continue to happen. But please let me know if that's not the case. And so my question would be, Is the thought process to just continue to, you know, monetize equity investments in the normal course, like we saw in the third quarter, you know, which again, because of the other strength in the equity portfolio didn't actually reduce that, which is a good problem to have, or Is there any consideration being given to, you know, selling off, you know, kind of a basket or portfolio of these minority equity positions similar to what you guys, you know, had done in early 2020? Sure.

Great question, Ryan. I think, you know, from a – let me try to hit the beginning of your comments, which is do we expect, you know – further realizations in the equity portfolio. And what I would tell you is along the lines a little bit of what I just finished with Robert is we do have portfolio companies that are evaluating strategic alternatives now. And, you know, that could mean here in the Q4. And we also have others that have spoken specifically about, you know, first half of next year planning to to also evaluate strategic alternatives. So, we continue to believe that the M&A market is going to be, you know, active, and we think our equity portfolio will participate to some degree, hopefully a very healthy degree, but to some degree in those activity levels. So, I think that's a positive, and I think that your assumption there is correct. With regard to selling, you know, part of the portfolio, if you will, like we did previously, I think that idea is definitely on the table. It's been on the table. I will also tell you it's not something that we are working actively on right now, but it is something that we, you know, do talk about and, you know, we'll consider at the appropriate time. But at the moment, it's not, and we're not actively doing that. We like the idea that we have that as an option. But it's, again, we, you know, I think we feel good about the quality of our equity portfolio. And, you know, we also don't want to rush things. So there's a balance, as you well know, with regard to monetizing equity investments. And we're, you know, trying to strike that. But you're never going to hit it perfectly. But we would, you know, we're trying to, you know, strike the right balance right now.

Mm-hmm. that's helpful, um, helpful commentary on that, on that topic. Um, the other question I had was, you know, you discussed, you know, the kind of the elevated level of, of, of repayments with Robert, hopefully those start to moderate a little bit, but you know, while we're, we're in this process of increased, you know, activity, um, have you all considered, or maybe you guys have actually done this, um, you know, sort of trying to widen the investment funnel by moving to maybe slightly different areas, for instance, like maybe moving up to slightly larger companies, you know, not necessarily, you know, loosening the underwriting procedures or weakening kind of the underwriting metrics that you guys use, but maybe just moving to larger companies that maybe have a little bit of a lower yield but will allow you to put capital to work a little bit quicker to kind of offset some of these repayments. Have you guys done any of that? Have you guys considered any of that? Why or why not?

Sure. Great question. So what I would tell you is we do play in the larger, lower middle market space, and we have a couple companies that I would argue are more just middle market, or definitely several companies that are just more middle market investments. So we do that on an opportunistic basis, typically where we've got good relationships and we've got you know, again, industry knowledge and a view that, you know, that is differentiated. So, we do participate there. You know, I would also say, you know, one of the things we've done just to widen the funnel, for instance, is over the last, you know, three, four years is focused on more the software and tech-enabled space and developed a real expertise there from a, you know, industry perspective and a financing perspective. And so we are doing those things. I would tell you our deal flow is extremely strong. So we feel good about the opportunity set. We feel very good about the opportunity set here in Q4, as I discussed in our prepared remarks. But at the same time, we're sticking to our knitting. We're sticking to the business that we have executed well over time. And we do see, again, growth here in the fourth quarter. The question is by how much, and that's going to be dependent on both deal closings as well as what level of repayments. But we do see the trend of repayments slowing. And to be honest, expect that to slow as we move forward from here. You know, we are doing a lot of the things you just talked about, but I would say, you know, obviously a very disciplined and gradual manner as opposed to, you know, just switching gears, if you will.

Okay. Understood. I appreciate the time this morning.

Yeah, nice talking to you, Ryan. Thank you.

Thank you. And, again, ladies and gentlemen, to ask the question, please press star and then 1. Our next question comes from Starkev Sherbetian from V. Riley. Your line is open.

Hi, good morning, and thank you for taking my question here. Ed, you guys have plenty of availability to deploy into earning assets, and in light of your comments just now that you said that you'd expect the trend of repayments to slow down moving forward, I guess as we step back, how long do you think it'll take to kind of get back to some target leverage levels And then if you can remind us how you're thinking about target leverage in the current environment.

Sure. Thanks, Sarkis. What I would say is over the next, I'd say, three to nine months is where we start getting closer to more of a one-to-one leverage approach. And, you know, I don't think it'll happen this quarter. We won't get there this quarter. But I think we'll make some progress. And so that's something we are positive about and excited about, quite frankly. You know, with regard to – we've always, you know, talked about target leverage as kind of one-to-one. We're obviously – and especially, you know, as our portfolio continues to migrate towards more of a first lean – portfolio, and we expect that trend to continue, you know, it's cosmetically more comfortable to operate at a little more, you know, leverage than one-to-one, but that's not the goal. We're comfortable doing it, and quite frankly, we're comfortable today doing it. You know, as you know, some of our SBIC funds are levered two-to-one, and we went through the Great Recession at a two-to-one leverage point with the SBIC funds, and so leverage is not something we're concerned about but i think there's a balance um you know as much including on a cosmetic basis and um you know there's we don't to generate you know good returns we don't need to uh to be over levered or push leverage and so you know our intent a good number for us is one-to-one that's how we've talked about it for for quite a while and i don't think that's changed Hopefully that's helpful. But we do see making progress towards that number here over the next three to nine months.

No, that's certainly helpful. And just to be clear, that's one-to-one on a statutory basis, correct?

More a gap basis, actually.

Gotcha. Okay. And as we think about kind of the cadence into the next year, you know, clearly closing out the year strong, but, you know, as we look at the cadence of activity expected next year, do you think it's going to be a little bit more elevated than historic norms, just kind of given the availability of liquidity and just kind of a generally robust environment in the space you play in?

Just to make sure, you're talking about here in Q4?

No, moving beyond Q4, just kind of looking into 2022, it just still seems like there's a lot of liquidity out there, and the pace of deals and the velocity of deals are probably going to continue. So I just want to get your sense for do you think things return to kind of a historical cadence or it will be somewhat elevated?

It's a great question and a tough one to answer, but if I were to answer that question, what I would say is I think it will be probably elevated relative to historical levels. but not what we've seen over the last four quarters. But we do just, what we're seeing is a lot of companies performing very well today. The economy, despite all the issues we discussed, you know, is growing nicely and it is growing slower today, you know, and projections have come down here recently, as we all know, but It is growing nicely, and there's a ton of companies out there that are performing quite well and have outlooks to continue to perform quite well. And so that sets up for, you know, a fair bit of deal activity. And so that's where I would fall out, is it'll be above historical norms, but not, you know, I don't think it'll be where we have been the last four quarters or so.

Very helpful. Thank you.

Yep. Nice speaking with you, Sarkis.

Thank you. And I am showing no further questions from the phone lines, and I'd like to turn the conference back over to Ed Ross for any closing remarks.

Thank you, Vic, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in early March 2022. Have a great day and a great weekend.

Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day.