Portman Ridge Finance Corporation

Good day and thank you for standing by. Welcome to the Port Manor Ridge First Quarter 2022 Financial Results 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 keypad. Please be advised that today's conference is being recorded. And without further ado, I would now like to hand the conference over to one of your speakers today. Ms. Serena Ligi, please go ahead.

Thank you. Good morning, and welcome to Portman Ridge Finance Corporation's first quarter 2022 earnings conference call. An earnings press release was distributed yesterday, May 10th, after market close. A copy of the release, along with an earnings presentation, is available on the company's website at www.portmanridge.com. in the investor relations section and should be reviewed in conjunction with the company's form 10Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors. including those described in the company's filings with the SEC. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. With that, I would like to now turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Please go ahead, Ted.

Good morning, and thanks, everyone, for joining our first quarter 2022 earnings call. I'm joined today by our Chief Financial Officer, Jason Ruse, and our Chief Investment Officer, Patrick Schaefer. I'll provide brief highlights on the company's performance and activities for the quarter. Patrick will provide commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its first quarter 2022 results, and we were pleased to report another solid quarter of financial performance. Our first quarter earnings were in line with the internal expectations taken into consideration pervasive market volatility and other macroeconomic and political factors that ultimately led to a relatively quiet quarter on the new investment front. We are happy to report that our NAV for the first quarter of 2022 remained relatively flat at $278 million, or $28.76 per share, as compared to $280 million or $28.88 per share in the fourth quarter of 2021. Excluding a one-time tax impact, NAV per share would have been $28.81 or a decline of less than 0.3% as compared to December 31st, 2021. For the first quarter of 2022, our net investment income was $7.9 million or $0.82 per share and our core net investment income was $6.1 million, or $0.63 per share. Our board of directors declared a $0.63 per share quarterly distribution, which reflects the stable performance of the company's operations and investment activities, as well as the general economic outlook and related factors. Furthermore, during the quarter, we repurchased 22,990 shares under a renewed stock repurchase program, and an aggregate cost of approximately $545,000. And we continue to be active under this program in the second quarter. Portman Ridge has refinanced our revolving credit facility agreement with JPMorgan Chase since the end of the first quarter, a milestone achievement for the business. This amended agreement shifts from LIBOR to a three-month SOFR benchmark interest rate, reduces the applicable margin to 2.80% per annum from $2.85 2.85% per annum, and extended the reinvestment period and scheduled termination date to April 29, 2025 and April 29, 2026, respectively. This combination of a lower spread and the shift to SOFR is expected to reduce borrowing costs going forward. Additionally, we are very pleased to announce that we've added two new seasoned members to our Board of Directors, Jennifer Kwon Chau and Tricia Hazelwood. Overall, we believe that we are well positioned to further improve our portfolio performance and investment income in 2022. With that, I will turn the call over to Patrick Schaefer, our Chief Investment Officer, for a review of our investment activity.

Thanks, Ted. The first quarter of 2022 was relatively low in terms of activity on the originations and investment side due to a great deal of activity at year end. which was then followed by a global geopolitical disruption. Market volatility, inflation, and rising rates have been ongoing market conditions, but the recent conflict in Ukraine had a meaningful impact on deal volumes for a period of time. Of the approximately 43 million of investments during the quarter, excluding short-term holds, 21.5 million, or 50% of these investments, were made in the last two weeks of March and therefore had minimal impact on our income statement. Excluding short-term investments that were sold prior to the end of the quarter, 67% of the new investments were first-in securities and 26% were second-leaned or unsecured securities. The way the average spread on the new investments was 811 basis points. Additionally, our Great Lakes joint venture funded a net $0.9 million during the quarter. Our debt securities portfolio at the end of the first quarter was remained highly diversified with investment spread across 30 different industries and 116 different entities, all while maintaining an average par balance per entity of approximately $3.3 million. In aggregate, our $483 million of debt securities was marked at 94.4% of par and yielding a stated spread to LIBOR of 727 basis points on accruing debt securities. As of March 31, 2022, Six of our debt investments were on non-accrual status, compared to seven at December 31, 2021. Investments on non-accrual status at March 31, 2022, were 0.2% and 1.9% of the company's investment portfolio at fair value and amortized costs, respectively, compared to 0.5% and 2.8% as of December 31, 2021. During the quarter, Roscoe Medical, which was formerly on non-accrual, and was a large second-line position, was repaid in its entirety, and we also sold Group Ahima in the beginning of the second quarter. In total, Group Ahima represents 84% of our total non-accrual portfolio as of March 31st on a cost-basis perspective, so the sale will materially clean up our non-accrual portfolio. Although investment activity and originations were lower in the first quarter of 2022 as compared to the second half of 2021, which was a sector-wide trend, we have deployed approximately $35 million of our available cash in new investments subsequent to the first quarter end and have a pipeline of an additional $20 to $30 million we are ready to deploy before the end of the second quarter. And now I'll turn the call over to Jason to further discuss our financial results for the period.

Thanks, Patrick. As both Ted and Patrick previously mentioned, similar to many other BDCs, our financial performance for the quarter was affected by market volatility and other macroeconomic and geopolitical factors. Nonetheless, we were able to maintain a relatively unchanged net asset value per share for the first quarter of 2022 at $28.76 per share, which includes a one-time tax provision of approximately $0.05 per share, as compared to $28.88 per share at December 31, 2021. Total investment income for the first quarter was $16.9 million, of which $13 million was attributable to interest income from our debt securities portfolio. Excluding the impact of purchase price accounting, our core investment income for the first quarter of 2022 was $15.1 million. As has been the case in previous reporting periods, we continue to reduce expenses. Total expenses for the first quarter of 2022 were $9 million compared to $10.1 million in the first quarter of last year. This was predominantly driven by reduced professional fees and other general and administrative expenses. At quarter end, we had total investments of $568 million, which was up from the previous quarter by approximately $18 million, as a result of purchases and originations outpacing paydowns and sales in the quarter. As we continue to see interest rates move up, we believe we are well positioned for increased investment income, as those rates have already begun to extend beyond certain rate floors embedded in our asset portfolio. Our current portfolio is approximately 77% floating rate, and we expect the majority of our future investments to predominantly be floating rate investments. Our unrestricted cash at the end of the quarter was $20.5 million, and restricted cash was $63.1 million, which along with other liquid assets places us in a good position to meet commitment obligations as they may occur and as markets continue to fluctuate. On the liability side of the balance sheet, as of March 31, 2022, we had a total of $354.2 million par value of borrowings outstanding, comprised of $80.6 million in borrowings under our credit facility, $108 million of 4.78% notes due 2026, and $163.7 million in secured notes due 2029. This remains relatively unchanged quarter over quarter. At the end of the quarter, we had $34.4 million of available borrowing capacity under the Senior Secured Revolving Credit Facility and $25 million of borrowing capacity under the 2018-2 Revolving Credit Facility. Additionally, as we have recently announced, we were successful in refinancing our Senior Secured Revolving Credit Facility shortly after quarter end, which reduces the rate of interest and extends the maturity of the facility. As of March 31, 2022, our debt-to-equity ratio was 1.27 times on a gross basis and 0.97 times on a net basis. Given that our stated objective has been to target overall leverage to a range of 1.25 to 1.4 times, we believe we remain solidly positioned to pursue growth opportunities. Lastly, and as announced yesterday, a quarterly distribution of 63 cents per share was approved by the Board and declared payable on June 7, 2022, to stockholders of record at the close of business on May 24, 2022. With that, I will turn the call back over to Ted Goldthorpe.

Thank you, Jason. Ahead of questions, I'd like to again address the impact of rising rates in relation to Portman Ridge. Portman Ridge investment income is affected by fluctuations in various interest rates, including LIBOR, SOFR, and other benchmark rates. As of March 31, 2022, approximately 87% of Portman Ridge debt securities portfolio was either floating rate with a spread to interest rate index such as LIBOR. 76.6% of these floating rate loans contain LIBOR floors ranging from 50 basis points to 200 basis points. In periods of rising or lowering interest rates, the cost of the portion of debt associated with the 4 and 7 notes due 2026 would remain the same, given that this debt is a fixed rate, while interest rate on borrowings on a revolving credit facility would fluctuate with changes in interest rates. As we mentioned in the press release yesterday, assuming a 1% increase in interest rates, our net investment income would increase by approximately $1.5 million on an annualized basis. If the increase in rates was more significant, such as 2% or 3%, the net effect on net investment income would be an increase of approximately $3.2 million and $4.8 million, respectively. I'll close by saying that we're very pleased with the progress we've continued to make this quarter in terms of active repositioning We're also pleased to be in a stable financial position to continue to generate high distributions per share for our shareholders. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll now turn over the call to the operator for any questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Again, that would be star followed by number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan. Your line is open.

Hey, guys. Just a clarification. Your interest rate sensitivity seems to have dramatically changed from year end, where you were effectively liability sensitive, so now you're now asset sensitive. Is that a fair characterization?

Yeah, that's a function of kind of where we are at quarter end versus where LIBOR has shifted quarter over quarter. So as of period in Q4, we were probably looking at the trough of that analysis, meaning we were on our way down as the rates were starting to hit that reflection point, given that 80% of our assets are variable rate, I'd say 75% of it or so is subject to a rate floor predominantly around the 75 basis points to 100 basis points, and our debt is just floored at zero. So Q1 to Q2, we're kind of looking at that inflection point, which is what's driving that up.

Yeah, the rate increases on a go-forward basis. So as of Q4, when LIBOR was 30 basis points, most of the 1% increase kind of hurt us in terms of having the LIBOR floors versus the liabilities. But where we sit today, we're kind of through those floors. So generally speaking, for the most part, rate increase is a positive for us.

Great. And then given that, and also given the solid EPS and excessive dividend, any consideration, or where should we think the dividend policy is going to go? Any consideration of a dividend supplement, and if you can tell me what the spillover is, that'd be great, and I'll get back in the queue.

Yeah, good question. So, you know, we obviously have increased our dividend the last two quarters. I think given all the volatility and given where we are leverage-wise, you know, we want to be a little bit cautious today, but I think it's something we're always looking at. You know, we're obviously over-earning our dividend. We feel very, very good about core earnings, and, you know, as Jason just outlined, you know, given where LIBOR is today, and looking at any, we're not macro forecasters, but looking where anybody would tell you it's going, we should have some pretty good earnings tailwinds. So it's something we'll revisit every quarter. We also look at our dividend yield at NAV as well as at market. But at NAV, we still think we pay out a very competitive dividend vis-a-vis the sector. So it's something we're always looking at and evaluating every quarter. I think our general policy is we prefer to pay a higher dividend stated dividend rather than use special dividends over time. And because, you know, Chris, because of our previous mergers, it actually really helped our spillover income, meaning it mitigated it. So we haven't been building material amounts of spillover income where we need to do a special. Great. Thanks, Chris. Thank you.

Again, everyone, to ask a question, just press star 1 on your telephone keypad. Your next question comes from the line of Ryan Lynch. Your line is open.

Hey, good morning. Thanks for taking my questions. First one is just a housekeeping question. You know, when you guys say you guys have a target leverage range of 1.25 to 1.4 times, is that a gross leverage range or is that a net range backing out cash?

Yeah, we think of that as a net range because we can always, particularly since we have the JPMorgan revolver, we can always use cash on our balance sheet to pay down that facility to the extent we want. There's no prepayment penalties or anything like that. So we would think of that as kind of a net range, the 1.25 to 1.4. Okay. Gotcha.

You talked about the environment being slow in Q1 and then kind of picking up in the last few weeks and being more robust in the second quarter, which I think is a pretty common trend that we've heard in the BDC sector this quarter. I'm just curious, the environment is obviously changing pretty rapidly for the economic outlook and picture. There's obviously probably the biggest concern out there is inflation and whether that's labor inflation or input cost inflation. That's kind of the key risk out there. So how are you guys looking at underwriting companies today, given that the economic environment is changing so rapidly and is so uncertain? And it's sort of, you know, those changes are occurring, you know, just really occurred recently, it feels like. When you're underwriting a company, you're probably looking at their financials. You know, from probably last year, maybe a couple months this year, you don't really have updated stuff on how they're really navigating it. So has your investment process, philosophy, target strategy changed at all given this uncertain environment?

Yeah, I think it's a great question. So trailing earnings are very, very strong. And so, you know, you haven't seen it in earnings yet, but I think we're pretty negative on the future. So we don't see us going into recession yet. anytime soon. And again, like we get data from 600 of our portfolio companies. And there's certain areas that are weak. So like consumer discretionary is definitely slowing down. Like we're seeing anything that the consumer has a choice to buy, we're actually seeing slowdowns in those areas. We tend to be more B2B focused versus B2C. And then you are, I mean, the biggest issue we're seeing is supply chain. And so inflation to date, people have been able to pass it on. although companies are now making commentary that it's becoming harder to do that, particularly in consumer discretionary. But we don't have a lot of exposure there. We are seeing weakness in industrial. So, you know, just costing people more money to make stuff, or they just can't make it fast enough. And so we are seeing weakness, generally speaking, in certain discrete sectors. So I think we're underwriting stuff, assuming we're going into recession. Again, we're not macroeconomists, but, again, we can only get paid back at par. We can't do better than that. And so we're being pretty conservative. So you can see we're way below our target range for leverage. And, you know, we've invested some of the cash. But, you know, I think I would be surprised if we're at the high end of our leverage range anytime soon.

Okay. That makes sense. And then, you know, Ted or Patrick, I'm going to ask you to get out your crystal ball on this next one. You talked about rising interest rates. One of the things we saw during the last rate hike cycle was that there was a lot of spread compression that really offset a large portion of the benefit from rising rates. It looks like this rate hike cycle is going to be much different. One, it's occurring way quicker, and then two, there's much more of an uncertain economic environment that I think it's tied to. are you seeing any spread, you know, because as borrowers are looking at the forward live worker, they're looking at the same things you are. Have you started to see any pressure on spreads yet on new deals or heard about that in the market? Or do you think they're going to hold up fine, you know, as rates continue to rise?

Yeah, it's a great question. I mean, usually you have, you know, like any time in my career, you've had rising rates in response to strong, to a strong economy. Now you're having rising rates due to inflation. So you're right, like the rates are going up for different reasons than we've had in the past. We have not seen spread compression at all in our general area. And it feels like people are being more cautious. But that being said, you know, there's less deals, right? So I would say the competitive environment, we were hoping was going to, the competitive environment is actually like pretty robust right now. Like, you know, we're losing a lot of deals. and that's surprising given the volatility, and quite frankly, the pond that we fish in tends to have people who kind of just haven't been as successful on the fundraising front. But deal flow has picked up dramatically, so I'm sure you've heard that from others. So our deal flow was down. Our traditional sponsored deal flow was down dramatically in the first quarter, and it's picked up. It's normalized pretty aggressively over the last couple weeks. So I'm giving you a long answer, but We don't see spread compression today, but if SOFR goes to 3.5%, which some people are predicting, obviously spreads could come down.

Just on that, with the deal pipeline, have you seen any change in purchase price multiples in the private markets yet? Obviously, there's been a huge change in valuations in the public markets. Has that changed? started to trickle down into the private market, I know that that takes a while. You know, it's not going to react as quickly as public markets. But have you seen purchase price multiples change at all, or are they pretty similar to how they've been in 2021?

Yeah, I'd say – so I'll give you two answers to that. One is, going back to your question earlier, we've actually tried to push on wider spreads unto people, and it's generally been unsuccessful, I'd say. And then in terms of purchase prices, you know, generally what we've seen in the first quarter – is if you have a great business, people just aren't putting them up for sale because they just don't think they're going to get maximum price. And so we have not seen purchase prices come down, but the reason for that is counterintuitive. It's just because if you have a business that you want to sell today and you want top dollar, you're not going to put it up for sale given everything that's happening. So I think I wouldn't say purchase prices are coming down, but it's like artificial just because people aren't necessarily listing great companies. So again, the quality... Not only is our deal flow down the first quarter, the quality of the deals that we're seeing was down as well. So we were pretty, you know, we've turned down a lot of stuff over the last, you know, three months.

But you're right.

I mean, listen, over time, right, over time, if this continues to happen, like what's happened in the markets, inevitably spreads will go wider, documents will get better, and purchase prices will come down. But usually, you know, our market always lags the general liquid markets for whatever reason. So we're usually on like a three-month lag. So it should be coming into our market at some point.

That's a really interesting point. Yeah, I would have thought kind of the opposite, that in a little bit more of an uncertain economic environment, only the highest quality, strong, secular growing businesses would get done or come to market versus kind of the opposite. That's interesting.

Yeah, not to belabor the point, but like, you know, again, But people are only coming to us for financing who need financing. So like the last year we were doing a lot of, quote, unquote, opportunistic refis. You know, you're not going to go out and refinance your debt now unless you need to or unless there's a transaction or you're buying something or you're doing something. So that kind of regular way of business is down a lot as well. Got it.

And then just the last one that I had, again, I just need kind of ballpark numbers. I'm just trying to get a sense of Portman Ridge where it's just kind of on the broader DC Partners platform. Out of the new deals that you guys originated in the first quarter, or you could even give me the last six or nine months if that's more reflective, how many of those deals that went into Portman Ridge were co-investments across the broader BC Partners platform? And for those deals that were co-investments across the broader BC Partners platform, what percentage of the deal is Portman Ridge taking on the total deal size that's staying in your platform? Just kind of rough estimates. I'm just trying to get a sense here.

Yeah, good question, Ryan. This is Patrick. So I had two different answers or answered two different parts of the question, which is unless there is a specific legacy asset that we took over in Portman through a different portfolio and therefore would not have the ability to to co-invest across our platform for a lot of esoteric 40-act reasons. Every new deal that comes into Portman Ridge is being done as a co-investment across our other vehicles. Now, some of it is done under the co-investment order and some is done under Mass Mutual, but broadly speaking, unless it is an add-on or some type of transaction from a legacy name that we took over, it's being done in connection with other BC funds. I can give you the specific numbers. There's maybe a small handful of deals that if there's an upsize to existing name or something like that, it'll be done only in Portman. But at a macro, 95 plus percent of deals are being done across all or a significant amount of funds here at BC. So that's point one. Point two is What percentage is Portman versus other funds? You know, we don't necessarily look at it that way. We look at it more in the sense of our individual funds have a certain deal size that they try and target. So for Portman, we try and run a very diversified fund. So they tend to be, you know, our sort of top position size in Portman is something like, you know, $10 million to $15 million in terms of a large position. And that number might be different for other funds. So depending on how much we get allocated, we kind of try and the way our allocation works is we put in what kind of our, like, I'll call it max position size by individual fund is, and then they all just get allocated based on a percentage basis what we ultimately receive. So if there happens to be a deal where a larger fund has a larger ticket size, Portman might get a smaller pro rata percentage, but we always try and target Portman to be kind of that $10 million to $15 million ticket, and then it just gets allocated what it gets allocated once we get the amount. So, again, that was a bit of a long-winded answer, but to say, you know, we try and target $10 million to $15 million positions, and if we, you know, aren't getting enough, every fund could scale back in a pro-rata manner.

Gotcha. No, that's helpful, the kind of context of where you guys fit and how you guys think about allocation, as well as it's also helpful to know that basically every deal that you guys are doing are going across the platform.

So that's all for me today. Yeah, that's right. Again, like very round numbers is, I don't know, somewhere between like – Portman might be somewhere between like 15% and 25% of a deal just depending on the specific deal. So, again, the other answer is a significant amount is across the platform and not just Portman.

Gotcha. Well, I appreciate the time today. Thank you for taking my questions.

Thanks, Ron.

Again, everyone, to ask a question, just press star 1 on your telephone keypad. Your next question comes from the line of David Miyazaki. Your line is open.

Hi, good morning. Hi, good morning, Dave. You know, I think you guys are sort of in an interesting position to comment about some middle market loans because in a lot of ways, but what you're doing is cleaning up some of the underwriting histories of other teams. And so, you know, one of the things that I think about or I worry about is rates going higher is that, you know, for BDCs that have floating rate asset portfolios, it puts, I think, Ted, you said a tailwind in your earnings, but, you know, it also would create a higher interest burden for a lot of the borrowers. So when you look at the portfolio, and I'm sure you consider this in your new originations, but how do you feel about the legacy exposure to higher rates as we're moving above the floors?

Yeah, so there's an interesting – I had the same view as you, but I actually went through our whole portfolio – So if you actually look at the high yield index, which is not a great proxy for middle market, but interest coverage today is at all-time highs. And leverage is actually most companies, including the middle market, have been deleveraging. And usually that doesn't happen. So despite the fact that rates are going up, even if you shock rates across our portfolio, we don't expect it to have a material impact on credit. Now, again, if rates go really, really high and other things happen, I think the thing we're more worried about is the other stuff. So things like supply chain, things like at what point will people push back against price increases. I think we're worried about more like some of the other risks versus interest coverage. So we've done it for our portfolio, and it doesn't have a – In a vacuum, it doesn't necessarily lead to a deterioration in credit quality or material deterioration.

Okay, that's good to hear. And regarding that supply chain comment, it doesn't sound like it's starting to get better at all, or if it is, it's only happening a small amount, or is it still getting worse, I suppose?

All the companies were telling us like two, three, four quarters ago that They thought it was temporary, and they thought it would all be cleaned up by now, and they're not saying that today. So I would say people are not indicating it's getting worse, but I don't think we have a lot of our companies telling us it's getting better. And again, when I say this, I mean it in very discrete sectors. You know, like obviously our media exposure and health care exposure and other areas, software are not affected by this. But for companies that do have supply chain issues, it doesn't sound like it's getting better. So that being said, there's more shipping capacity. There's more factory capacity. A lot of our companies just couldn't get slots to make stuff, and now they can. So I think some of this, I think some of just like the economy slowing down a little bit is helping with the supply chain in kind of a perverse way. Okay. And then obviously the other thing we're focused on is input pricing. So, you know, obviously oil, you know, retail gasoline today is at all-time highs, or not all-time highs, but near-term highs. So, you know, we've gone through a whole portfolio. Again, given where we focus, we don't think that will have a huge impact, but that's the other big area we're focused on.

Okay, great. You've mentioned Group Ahima now sort of in the past, right? recognizing that was something that you inherited, but that was a loan that was kind of all over the place in the BDC world. Do you have any, like, thoughts going through that process and looking to see what happened and what went wrong? Is there any, like, lessons learned for the industry?

Yeah, I mean, this is Patrick, by the way. How much time do you have? Look, I think that case was and still is, I mean, it's driven by massive macro factors, which is the population of Puerto Rico is declining, and particularly for a hospital chain, like the very good doctors in Puerto Rico are also leaving Puerto Rico. And the combination of maybe this is group behemoth-specific, but they didn't really have, unlike the kind of U.S. system where sort of doctors own or have some percentage of the practice and are earning some kind of variable rate, if you will, they needed to pay doctors a fixed flat rate to keep them kind of in the hospitals. And so you had just massive margin pressure over time as you had slight declines in volume and operations and things like that. So I'm not sure there's like, huge industry-wide takeaway lessons other than, you know, beware of very, very large macro trends that aren't working in your favor, such as, you know, demographics of Puerto Rico. But I'm not sure there are specific, like, takeaway lessons in terms of how various BDCs or people in our space sort of, I think, played that one, if you will.

Yeah, I think the other lesson learned is, you know, in my 25 years of doing this, when a hospital chain begins to struggle, right, I'm not sure I've ever seen the ability for them to successfully turn it around. I've just seen it many times where if this specific industry begins to struggle, it's very, very hard to turn this around because you can't cut costs because it's labor. And your revenues, it's hard to drive incremental revenue because you can't increase prices. So it's kind of a tough business once it begins to struggle to kind of like pull the plane out of its tailspin. And then again, like these guys were on the verge of turning around many times and then COVID happened and then it was hard to get, you know, they make their money on optional surgeries and there's a lot of intervening factors that were related to the pandemic.

Okay. Great. Thank you. That's very helpful. And I'm sorry to take up so much time, but I was curious, you know, when you talked about how the first quarter that some of the geopolitical issues and the volatility in the markets had really caused a slowdown in volume. And then more recently, there's a pickup. So through that sort of short cycle we've been through, do you get the sense that the slowdown and the pickup is being driven more from sponsor apprehension and then engagement again, or is it more from the lending side?

Yeah, so I'd say I make a couple comments. Everybody points to the Russian invasion as causing weakness, but if you actually look at the data and you actually look at the stats, there was a lot of weakness before that. And so there was already, you know, air coming out of the balloon on some of these valuations. You know, I think what's happening is, generally speaking, You know, private equity is almost a victim of its own success. Private equity funds have raised bigger and bigger funds faster and faster and faster, and performance has been very solid. The flip side is, you know, people are now getting their first quarter numbers, you know, endowments, foundations, and others. And, you know, treasuries are down, investment grades down, high yields down, equities are down. So generally speaking, there is a big push by investors to private equity firms to get money back. so to get what's called DPI. So there's a lot of pressure on our clients to try and find some realizations or find ways to get cash back to LPs, because generally speaking, and this is a broad macro comment, generally speaking, people are over-allocated to private equity vis-a-vis their top-down asset allocation frameworks. So I think in a perfect world, I think some private equity firms would hold onto assets longer, but there is pressure coming from the LP community to return money.

That's rather interesting. And so some of the deal volume, when you see something getting shopped, is that they're just trying to realize and then create liquidity so that the LP appetite can be satisfied?

Yeah, I mean, I think the LP community is saying, if you guys want to raise a new fund, you've got to return some money back on your old fund first. So people think there's this general view that private equity firms can just raise whatever LP capital they want. And I'm not sure that is actually the case. And just because realizations have slowed down, I think it's going to impact fundraising or they have to get realizations up. So I think that's driving some of the pickup and activity.

Okay, great. Thank you very much. That's a great overview of a lot of different topics. I appreciate your time.

Yeah, thank you.

Your next question comes from the line of Steven Martin. Your line is open.

Hi, guys. Can you hear me? Yeah. Hey, Steven. How are you? Good, good. So a couple questions. On net leverage, you admittedly are at the low end of the net leverage ratio, slightly less than one, and your target much higher. and I know you said you were intending to run at the lower end, but is one really where you're intending to run, or is it somewhere between one and one and a quarter?

No, I'd say it's certainly more in the one and a quarter range. It's a very short answer.

And again, we made some commentary to this, but we came into this quarter expecting to do a bunch of deals And just given what's going on in the world, we've, you know, we kind of pulled back a little bit. So, you know, if you look at our balance sheet, we have excess cash, but we have deployed some of that cash subsequent to quarter end.

Okay.

And given what you know, if you did our leverage today, it'd be higher.

Okay. And that's why I was giving what you know about the second quarter already, where would you expect the leverage ratio to be at the end of the second quarter?

I think we mentioned we've deployed about $35 million subsequent to quarter end and probably have another $20 million, $30 million, so like very round numbers. I think you'd probably expect to see our cash balance, again, where we sit today with our pipeline, probably more in the $30 million range, something like that. So that would be kind of a drop of $50 million-ish of cash, and obviously that can fluctuate. but, like, very round numbers. That's kind of what we're thinking right now.

Okay. And in the past, you've addressed some of the acquired portfolios, and you have the slide in your presentation. And obviously, Ojai and, you know, is sort of long. You know, there's not much left. Can you talk about the GARS and the HCAP and some of the other stuff you've acquired in the interim? Yeah, I mean, well, yeah, I mean,

I mean, the quick answer is I think all the portfolios we bought are outperforming our underwriting case. And, you know, I was giving a speech the other day. You know, when we underwrite these portfolios, we only talk about – we only value them for things that could go bad. And the thing we never take into account is things actually go good in some of these portfolio companies. So I think, generally speaking, all the portfolios we bought are – marked or valued higher than where we paid for them, and HCAP is around flat. HCAP's up a little bit, but it's around flat. So I think from where we acquired the portfolios to where they are today, I think we've proven that we've been pretty good about underwriting the portfolio valuations.

Yeah, I wouldn't say there was anything materially different about any of the quote-unquote portfolios in terms of valuation. I think generally speaking, there was a bit of a of a headwind from rate increases just in terms of valuations, you know, offset by company-specific type items, you know, to the good or bad. But I wouldn't say that there was, like, a broad brush X portfolio underperformed or Y portfolio massively outperformed.

But given where you are in the evolution of those portfolios, are you just, you know, you're sanguine with them where they are? Are you, you know, actively trying... Oh, I'm sorry.

I didn't... Yeah, I'm sorry. I didn't appreciate the question there. Look, I'd say certainly for the Ojai and Garrison portfolios, I think we're generally comfortable with where we are. The Garrison portfolio still has some liquid names in there that, to the extent that we weren't as underinvested as we are, we would maybe look to monetize some of those and rotate from a liquid to an illiquid name. but obviously we don't really need to do that now given where we are in cash. We're comfortable with the names, but obviously we kind of use that as a bit of an additional leverage mechanism to the extent that we need to for our kind of regular way origination. And then on the harvest portfolio, it's just a little bit more difficult to monetize those things. We're looking at them, and there's maybe one chunky position in that portfolio, but the rest of them are all relatively small dollar positions, so it's just tough to make a dent In that, even if we exit a position, it's still maybe $2 million or $1 million of a position, so it doesn't really move the needle in aggregate. But we obviously look at those like we do everything in our portfolio.

Yeah, and then thematically, we're very, very focused on reducing exposure to small EBITDA companies. So we do have a couple companies in the portfolio that we wouldn't have done if we underwrote them ourselves, and so those are all the ones that we're trying to be pretty aggressive about trying to get them to monetize.

Okay. With respect to the share buyback, you adjusted the plan or initiated the plan at the end of the quarter and bought back a small amount of stock. Was the amount of stock you bought back a function of the time? And given your lower leverage and the discount to NAV, what's your sort of thought on buyback and size?

Yeah, sure. So, This is Jason. Yeah, you're absolutely right. The dollar amount in the shared account that we purchased in Q1 was a function basically of the blackout windows that we were dealing with to issue the K, and we had about, what, 10 days of activity in Q1 that's reflected in the quarter results. We continue to do that at a clip at about the same pace every day as we've carried into Q2 here and, you know, We don't anticipate changing that anytime soon.

Okay. Thanks a lot, guys. Just from a cost of capital perspective, it just makes sense for us to buy back our stock.

Well, I've been on that page for a while, and I'm glad you adjusted the plan so it allows you to be a little more aggressive in quiet periods, in blackout periods.

Great.

There are no further questions. Let me turn the call over back to Mr. Tad Golddorf.

Great. Well, thank you, everyone, for joining us today. And we look forward to speaking to you in early August when we'll be announcing our 2022 second quarter results. And I'd also like to just, you know, invite anybody to call any member of management if you have any further questions or ideas. Thank you very much.

this concludes today's conference call you may now disconnect