Fidus Investment Corporation

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 FIDUS Quarter 3 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1 on your telephone keypad. Thank you. Jody Berfening, you may begin your conference.

Thank you, Abby, and good morning, everyone, and thank you for joining us for FIDUS Investment Corporation's third quarter 2022 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. Finest 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. Conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential operating results and cash flows of FIDUS Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, November 4, 2022, these statements 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 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. FIDUS 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 2022 earnings conference call. On today's call, I'll start with a review of our third quarter performance in our portfolio at quarter end. and then offer you an update of our views on market conditions in the lower middle market. Shelby will cover the third quarter financial results in our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. For the third quarter, our portfolio delivered strong results, generating a 27% increase in adjusted NII on a larger debt portfolio with higher yields and net realized gains of $40 million or $1.64 per share from monetizing a meaningful portion of our equity portfolio. We ended the quarter in a net originations position with a portfolio that overall remains healthy even in the face of higher interest rates, persistent supply chain and inflationary challenges, and the potential 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 that meet our investment criteria continue 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 support growth, and possess resilient business models and positive long-term outlooks. Adjusted net investment income, which we defined as net investment income excluding any capital gain incentive fee, the tributal to realized and unrealized gains and losses was $12.7 million, or 51 cents 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, debt yields increased 100 basis points. NAB was $474.4 million, or $19.41 per share, at quarter end. For the third quarter, FIDUS paid a base dividend of $0.36 per share and a supplemental dividend of $0.07 per share. In August, the Board also declared a base dividend of $0.36 per share and a minimum supplemental dividend of $0.07 per share for the fourth quarter. This skewed NAV at quarter end as the fourth quarter 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 the fourth quarter dividend, NAV at quarter end was $19.84 per share for a modest increase of $0.04 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, a special cash distribution, and or a deemed 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 NAV 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, to $747.3 million as of September 30, 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 totaling $192.3 million and 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 extending 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 $0.15 per share and declared a special cash dividend of $0.10 per share for a total cash dividend of $0.61 per share. The fourth quarter dividends will be payable on December 16th, 2022 to stockholders of record as of December 2nd, 2022. For the year, we will have paid shareholders total cash dividends of $2 per share, a 25% increase over the prior period. 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 to 39 cents per share, restoring our pre-COVID base dividend. In addition, we will retain our formula for calculating a supplemental dividend equal to 100% of the excess adjusted NII over the prior quarter's base dividend. We will also pay out a special cash dividend of 10 cents per quarter. Finally, in order to satisfy the RIC distribution requirements, we will be making a deemed distribution for 2022. While the amount of the deemed distribution will depend on final 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 2022 deemed 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 in equity 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 in AmeriWater LLC, a leading provider of water purification systems and aftermarket parts and consumables, for 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 BP Thrift Buyer LLC, a thrift store operator 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-ling debt of Magenta Buyer LLC, doing business as Trellix, a global cybersecurity company. $27 million in first-ling debt of MBS Opco LLC, doing business as Marketron, a leading provider of enterprise software solutions for radio and television broadcasters. $11.5 million in OnePath Systems, LLC, a leading provider of a full suite of managed IT services, consisting of $11 million in first lien debt and $.5 million in common equity. And $4.8 million in second lien debt of SonicWall 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 Fansteel. In terms of repayments and realizations in the third quarter, we received proceeds totaling $60.2 million, of which monetization of equity investments accounted for $43 million, or a little more than 70% of the total. As you may recall, some of our portfolio companies had initiated strategic alternative discussions toward 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, LLC. We received a distribution on our common equity investment and realized a gain of approximately $3.2 million related to the sale of Bandon Fitness Inc. We received payment in full of $4.5 million on our first lien debt investment in Bedford Precision Parts LLC. We 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 HealthFuse LLC. We sold a portion of our equity investment in Fansteel and realized a gain of $24.3 million. In conjunction with the transaction, we invested $10 million in subordinated debt, and we received a distribution on our equity investment and realized a gain of approximately $1.4 million, related to the sale of the transonic companies. With originations exceeding repayments, the fair value of the portfolio quarter end reached $856.9 million, a record level and equal to 103.6% of cost. We ended the third quarter with 75 active portfolio companies and 13 companies that have sold their underlying operations. Debt investments reached $747.3 million, demonstrating continued success in building our debt portfolio this year. In fact, our debt portfolio as of September 30, 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. As of September 30th, debt investments comprised 87%, the total compared to 83% as of June 30th and about 80% as of March 31st. First lien debt as a percentage of debt has held steady at around 66%. Equity investments as a percentage of the total portfolio on a cost basis was 7.1% within the boundary of our target allocation of 10%. Taking into account the changes to the portfolio this quarter from net originations and the rotation of equity to debt investments, overall our portfolio remains healthy with credit quality solid and well-structured, to produce recurring income and through our equity investments to provide us with not only incremental profits, but also a reasonable margin of safety. With resilient business models designed to weather adverse economic conditions and geopolitical uncertainties, the vast majority of our portfolio companies are performing reasonably well, even in the face of ongoing inflationary cost pressures and supply chain disruption. However, risk is a bit elevated compared to the beginning of the year as these tougher economic conditions are weighing more heavily on select companies. 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 EBL LLC, which was acquired under a new holding company, FOM Eblen's, Holdings LLC doing business as Eblens and became a controlled affiliate investment. In conjunction with the transaction, we amended the terms of our second lien debt investment and committed up to $0.4 million in incremental common equity. In addition, we exited our debt investment in UPG Company LLC. We received payment in full of $17 million on our first lien debt, which includes a free payment fee. We also exited our debt and equity investment in OMC Investors LLC, doing business as Ohio Medical Corporation. We received payment in full of $5.2 million on our second lien debt, which includes a prepayment fee. We received a distribution on our equity investment for a realized gain of approximately $0.7 million. Finally, we invested $6 million in second lien debt of Education Insights, LLC, doing business as Acceleration Academies, a 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 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 cushions. 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.

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 PIC, a $1.1 million increase in fee income due to higher levels of investment activity and prepayment fees, and a $.6 million increase in dividend income. The 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 investments, given 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 $1.9 million increase in the income incentive fee. 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 six to seven 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 borrowings. Our debt to equity ratio as of September 30th was 0.8 times or 0.6 times statutory leverage excluding exempt SBA debentures. The weighted average interest rate on our outstanding debt was 3.9% as of September 30th. Net investment income or NII for the three months ended September 30th was 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 with 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 Fansteel and the sale of our equity investments in SES Foam, Abandoned Fitness, Palisade, and Transonic. 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 the cost basis was $11 million, which excludes investments in 13 portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 77.3% of our portfolio companies with an average fully diluted equity ownership of 3.7%. 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 has variable rates with interest rate floors. The weighted average yield is computing 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 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 $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 events, we have approximately 183.9 million of liquidity. Now I will turn the call back to Ed for concluding comments.

Thanks, Shelby. As always, I'd like to thank our team and the board of directors at FIDUS 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.

Abby?

At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. We'll pause for just a moment to compile the question and answer roster. Your first question comes from the line of Bryce Rowe from B. Reilly Financing. Your line is open.

Thanks. Good morning.

Good morning, Bryce.

And I think I'll try to start here on the dividend and appreciate the approach you're taking here. Maybe in terms of the deemed and trying to think about kind of what an optimized spillover level might be, can you help us think about what that might look like? And maybe we'll just start there. Just what do you think that might look like 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 at a higher level, but call it close to three quarters dividends. And what I think our thinking is to keep it in a similar place as that. So somewhere you know, close to three-quarters worth of a dividend. It's kind of a long-term spillover position that we'd like to maintain if possible. Obviously, performance, depending, that's the goal.

And, Bryce, I would add that's kind of three-quarters worth of base dividend.

Okay. Okay. Okay. That's helpful. And so, Shelby, maybe you can help us kind of think about what the deemed – impact will be, depending on, you know, whatever the dollar amount is, there will be some level of taxes, I assume, that kind of come out of that level to leave you with the retained capital?

That's correct. FIDUS 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 to NAV in Q4 related to the deemed distribution.

Okay, okay, that's helpful. And then maybe shifting just to some of your prepared comments, Ed, you know, around company performance. You talked a little bit about, you know, some unrealized appreciation within the debt portfolio. Can you talk about kind of maybe what metrics or what's happening within specific portfolio companies to have led to some level of depreciation?

Sure. Obviously another very good question and a good topic. As I think about the world today and the good news with our portfolios, I'd say over 90% of the portfolio companies are performing very well or okay, which provides very good cushion, if you will, to deal with fixed charges and to, you know, spend as necessary. So very comfortable positions. And then, you know, very well-documented issues in today's world, whether it's supply chain issues, interest rate increases, inflation, labor costs, availability of labor, you name it. All 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 obviously, we're in good contact with those companies. But that's the real world today. So as I think about just credit quality in an environment like this, thankfully, we've been in a very good environment you know, over the last 18 months or so, and credit quality has been abnormally good. You know, what I would expect, you know, over time is for, you know, credit quality to go back to more of a normal level, still very manageable, but that would be my expectation. It's just, you know, the issues of today are real, and, you know, companies are all dealing with it. Most are finding it... easy to do so, or easy is probably the wrong word, but, you know, are managing quite well. And then there's a few that, you know, are obviously things are a little tougher for, and, you know, we're working with those companies to improve those situations, you know, as we can.

Great. That's helpful. I'll jump back in queue and give somebody else a chance. Thanks.

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.

Hi, everyone. Congratulations on the quarter, obviously, and the outlook. I mean, on that, you sound still quite bullish on the ability to grow the debt book and deploy more incremental capital going forward. And obviously, at the same time, the environment is tougher. So can you give us any um, color on how has your, the, the underwriting process probably hasn't changed. You always underwrite in recession anyway, even if one is more imminent, but, but how have your, what have your asks changed for when, when you're looking at a deal in terms of, you know, structure or coupon or how much change is there on, on, on what you're asking for in order to, to, to commit your capital and go forward basis to new opportunities.

Sure. I guess I'll start, Robert, with, you know, we do think, despite the issues of today, there are, you know, there are plenty of good opportunities to invest today. But then your question is, okay, so how are you doing that? And, you know, we're going about that in an obviously very deliberate way. We are excited about the market opportunity, quite frankly, but If you think about things like pricing, you know, so spreads, you know, obviously SOFR's up, LIBOR's 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. So 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'll continue to be able to uncover opportunities as we move forward at the same time. Hopefully that's helpful.

Yeah, yeah, yeah, that is very helpful. Thank you. And then just a question on the deemed and a follow-up to Bryce's question. You said spillover close to kind of optimized at three-quarters worth of dividend, which is on the basis, obviously, effectively the max without moving declaration dates and things like that, which obviously you did do this quarter. On that three-quarters, I mean, is that – You're declaring the dividend plan for next year looks like basically distributing all of earnings plus 10 cents. It's basically the base plus whatever you earn it by plus another 10. So is the plan to actually take, if the deemed distribution brings it down to three quarters and then you over-distribute, not a criticism, but over-distribute next year, is the plan to actually take that spillover down to... a somewhat lower level in the near or medium term.

To take the what down? I'm sorry?

The spillover down, because if the deemed distribution hypothetically brings it down to three quarters. That's right. But the incremental 10 cents would actually make it decline from there as well. The incremental 10 cents special dividend each quarter next year. Yeah, I don't...

What I would say is I don't think we – obviously, there's a lot of – there's still two quarters to go here. And so we're trying to stay away from, you know, giving too much information because we don't know the – we don't have the details, right? But at the end of the day, what I would say is, you know, the deemed distribution is most likely going to be, you know, $1.50 or above per share. And that's how we are. currently planning to deal with that I don't think I mean clearly NAV will drop by those 10 cents you just mentioned each quarter but you know our view is that will get us largely in line with where we need to be for RIC purposes at that point in time so it's unclear where we'll 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 direction of how we're thinking about it.

That's incredibly helpful.

Robert, I would just add, you know, I would think about, you know, the spillover level of three-quarters-based dividend is kind of a desired normalized run rate, so to your point. You know, there's a little bit of magic in how do you solve for 2022 and 2023 in light of the Tencent special. But I would also highlight, you know, if we had net incremental realized gains in 2023, that would also increase the spillover position. So there are a variety of factors, as Ed suggested, that 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 2023.

Understood, and yeah, none of this is a bad thing for shareholders. I was just trying to clarify a couple of points. So I appreciate it.

Thank you. Yep. Good talking to you, Robert.

Your next question comes from the line of Ryan Lynch from KBW. Your line is open.

Hey, good morning, and thanks for taking my questions. Good morning, Robert. The first one I just had was as far 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 are and how did that compare to where it was maybe six months ago for your borrowers?

Sure. It's a great question. The answer is a little confused, which I'll go through. So we use an average EBITDA, the average interest coverage calculation. That's what we've done historically. And last quarter at June 30th, I do have that in my fingertips, we were at 3.4 times. To be honest, it actually went up this quarter from there, and it's because of The additions to the portfolio in Q2 and Q3 have been, you know, under-leveraged situations. Our leverage has actually gone down. You know, leverage meaning debt to EBITDA, it's about four times, and that's excluding our ARR investments as well as three what I would call very large, you know, EBITDA businesses that aren't the norm for us. obviously those who levered a little bit higher and they skewed the analysis so that's why we've excluded it so leverage for the the core portfolio is actually reduced and then we've added you know obviously eight companies here over the last two quarters that you know have interest coverage that are pretty high and so it skews the the analysis. You know, what I would say is we're still in pretty good interest coverage levels overall. And I think there's plenty of cushion with the call it 90 percent plus of the portfolio for additional rate increases. So we've got plenty of cushion there. You know, it really comes down to the the one off situations, you know, whether it's, you know, again, supply chain issue or an interest rate increase causing an issue for a certain company. And then inflation, you know, 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 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, you know, our ability to just cover general interest coverage. It's really the one-offs that, you know, we're 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, again, we feel good about, you know, overall the core part of the portfolio and really the 90% plus. The rest we've got to work through, and there's a lot of ways to do that. We feel that's manageable as well, but obviously there's more risk.

That's helpful and definitely makes a lot of sense. The other question I just had was, obviously one of the main core benefits of FIDA that you guys have had so much success in over the years is your equity realizations over time. I would just love to get a little color. Obviously, we know that the lending environment has improved significantly for lenders, given some of the choppiness in the environment. But I would think that that would come at some of the pain from the equity holders. And so I would just love to hear your thoughts on how has the market environment changed for companies' ability to transact and exit positions, as well as how are those multiples changed over the last six months or so?

Sure. Great question, Ryan. I think it's interesting when you think about the market environment 12 months ago, right? and the level or the velocity of activity, investment activity was extremely high and it's greatly reduced as we sit here today. That's because the number of M&A processes that are taking place today, it's much lower. The good news is, And one of the things that our market offers is it's 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 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. So the good news is there continues to be opportunity to invest. The other piece of the puzzle, which is also very different than last year's, repayments are at much lower levels. So last year, debt repayments for us was extremely high, and this year it's been much lower. And we expect that to continue. We don't see a ton of just repayments taking place any time in the the near term, but at the same time, we see ability to make incremental investments and grow the portfolio. So it is a very different market, but the lower middle market, in our opinion, is different relative to the larger market. It's just very, very fragmented, and there are a lot of different reasons for financings and creating opportunity. Hopefully that's helpful, but it's a very different market than 12 months ago, that's for sure.

Yes, that makes a ton of sense. That's all for me. I appreciate the time today.

Absolutely. Good talking to you, Ryan.

Your next question comes from the line of Mickey Schlein from Lattenburg. Your line is open.

Yes, good morning, Ed and Shelby. A lot of good questions have already been asked. I just wanted to follow up with one question. Ed, your company has a lot of expertise in investing in second liens. 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 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, Mickey. I think our approach, quite frankly, is very much the same. I mean, we have, for a while, you know, been 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 will continue to do. And our hope is we'll continue to see some, you know, very high caliber, you know, junior debt opportunities as we move forward. We did take advantage of a couple of You know, quite frankly, more liquid market opportunities. They were small, and I referenced those in my prepared remarks. And, you know, those are more recurring revenue businesses that, for technical reasons, had traded down, and the overall returns look to be very positive. So we did do that in Q2. or Q3, you know, we are looking for the right companies in the right situations to continue to invest in, you know, second lien and sub debt investments. There are those companies that are actually thriving right now and have an outlook of 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, you know, You know, we haven't seen anything recently that, you know, piques our interest, if you will. But we'll continue to make those types of investments. First, lean makes a ton of sense. You know, quite frankly, it enhances our ability to manage those, you know, securities and investments. And also, we're providing a very, you know, a solution that is resonating in the marketplace today. And So, you know, that'll be the core, and as it has been for the last, really, four years or so. But we expect to continue to invest in, you know, all the different asset classes that we've discussed.

I appreciate that. Ed, can you remind me, within FirstLean, how much Unitronch are you doing, if any, and do you typically sell first out pieces in that business model?

Great question, Mickey. The answer is yes. Most of our first lien investments are some form of unit tranche, whether we're doing 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 a majority of the first lien, but it's not, you know, it's not a large, large majority.

Okay. And in those unit crunch deals, Do you typically have a call 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, you know, to the company. the client, if you will, or the borrower. But the answer to that is yes, 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'm sure you never say never in this world.

Right. I understand. That's it from me this morning. I appreciate your time. Thank you.

Thank you, Mickey. Good talking to you.

There are no further questions at this time. Mr. Edward Ross, Chief Executive Officer, I turn the call back over to you.

Thank you, Abby, and thank you, everyone, for joining us this morning. We look forward to speaking to you on our fourth quarter call in early March 2023.

Have a great day and a great weekend.

This concludes today's call. You may now disconnect.