Saratoga Investment Corp

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corp Fiscal First Quarter 2020 Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial Officer and Compliance Officer, Mr. Henri Steenkamp. You may begin.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal first quarter 2020 earnings conference call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today we will be referencing a presentation during our call. You can find our fiscal first quarter 2020 shareholder presentation in the events and presentations section of our investor relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available from 1pm today through July 18th. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henri, and welcome, everyone. During this first fiscal quarter, Saratoga continued to build on the growth of our high-quality portfolio, utilizing our strong capital base and maintaining our industry leadership within the BDC sector, as reflected in our key performance metrics and overall performance. A particular note is the continued strong credit performance of our overall portfolio this quarter. While a challenging competitive environment persists, our origination efforts, combined with our flexible capital structure and diversified sources of cost-effective liquidity, continue to support our robust pipeline of available deal sources driving greater scale. To briefly recap the past quarter on slide two, First, we continue to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality with 98.7% of our loan investments having our highest rating, generating a return on equity of 11.7% on a trailing 12-month basis with 16.6% annualized return on equity in Q1, both significantly beating the BDC industry mean of 8.7%. Recognizing a $4 million unrealized gain on the overall portfolio this quarter and registering a gross unlevered IRR of 13.4% on our total unrealized portfolio, with gross unlevered IRR of 13.9% on total realizations of $376 million. Second, our assets under management grew to $410 million this quarter, a 2% increase from $402 million as of last quarter. Thank you for joining us. Thank you for joining us. and finally, our capital structure and base of liquidity remains strong and has the potential to improve. We sold 76,448 shares with gross proceeds of $1.8 million through our ATM equity offering during the quarter and we continue to have significant dry powder to meet future potential opportunities in a changing credit and pricing environment. Our existing available year-end liquidity of $107 million Allows us to grow our current assets under management by 26% without any new external financing. This quarter saw a strong return on equity performance as noted above and continued solid performance within our key performance indicators as compared to the quarters ended May 31, 2018 and February 28, 2019. Our adjusted NII is $4.6 million this quarter up 16% versus $4.0 million last year and down 6% versus $4.9 million last quarter. Our adjusted NII per share is $0.60 this quarter, down 6% from $0.64 last year and down 9% from $0.66 last quarter. And our NAV per share is $24.06, up 4% from $23.06 last year and up 2% from 2362 last quarter. Henri will provide more detail later. As in the past, we remain committed to further advancing the overall long-term size and quality of our asset base. As you can see on slide three, our assets under management have steadily risen since we took over the BDC and the quality of our credits remain high. We look forward to continuing this positive trend. With that, I would like to now turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended May 31, 2019. When adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, Adjusted NII of $4.6 million was down 6.2% from $4.9 million last quarter and up 15.9% from $4.0 million as compared to last year's Q1. Adjusted NII per share was $0.60, down $0.04 from $0.64 per share last year and down $0.06 from $0.66 per share last quarter. Just a reminder that it is important to adjust NII for the second incentive fee expense as the significant appreciation to our portfolio which drives the incentive fee expense is not included in NII while the incentive fee expense is. So only one side of the transaction is in NII. ROE, of course, includes both the gain and the expense. The increase in adjusted NII from last year primarily reflects the higher level of investments and resultant higher interest income, with AUM up 19% from last year. The decrease from last quarter primarily reflects the deferred tax benefit recognized last quarter that did not recur. The decrease in adjusted NII per share from last year was primarily due to a steady increase in the number of shares outstanding. weighted average common shares outstanding increased from 6.3 million shares for the three months ended May 31, 2018 to 7.5 million and 7.7 million shares for the three months ended February 28, 2019 and May 31, 2019 respectively. Adjusted NII yield was 10.1% when adjusted for the incentive fee accrual. This yield is down 100 basis points from 11.1% last year and 110 basis points from 11.2% last quarter, reflecting the impact of our growing NAV and the effect of our currently undeployed capital. For this first quarter, we experienced a net gain on investments of $4.0 million or 51 cents per weighted average share, resulting in a total increase in net assets from operations of $7.7 million or 99 cents per share. The $4 million net gain on investments was comprised entirely of net unrealized appreciation on our portfolio, offset by $0.02 million of net deferred tax expense on unrealized gains in Saratoga Investment's block of subsidiaries. The $4 million unrealized appreciation reflects multiple notable changes. First, a $1.6 million unrealized appreciation on the company's census technologies investment. A $1.2 million unrealized appreciation on the company's fancy chap investment that was realized subsequent to quarter end. Third, a $1.2 million unrealized appreciation on Saratoga CLO equity investment reflecting first quarter performance exceeding projected cash flows. And fourth, a $0.8 million unrealized appreciation on our Ohio medical investment reflecting improved performance overall. This appreciation was offset primarily by $0.7 million unrealized depreciation on the company's My Alarm Center investment. Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains. Our return on equity was 11.7% for the last 12 months and 16.6% annualized for the quarter, well above the BDC industry average of 8.7%. Quickly touching on expenses. Total expenses, excluding interest and debt financing expenses, base management fees and incentive management fees, increased to $1.3 million this quarter from $1.2 million in the same period last year. Excluding the deferred income tax benefit in Q1 last year, operating expenses actually decreased 14.6% from $1.5 million last year, reflecting various operating efficiencies realized during the past year. Expenses decrease as a percentage of average total assets from 1.4% to 1.1%. We've also again added the KPI slides, starting from slides 25 through 27 in the appendix at the end of the presentation, which shows our income statement and balance sheet metrics for the past nine quarters and the upward trends we have maintained. Of particular note is slide 28. highlighting how our net interest margin run rate has more than tripled since Saratoga took over management of the BDC and increased by 25% versus last year. Moving on to slide five, NAV was $186.8 million as of this quarter end, a $5.9 million increase from $180.9 million at year end, and a $42 million increase from $144.8 million as of the same quarter last year. NAV per share was $24.06 as of quarter end, up from $23.62 as of year end, and up from $23.06 as of the same period last year. For this past quarter, $3.7 million of net investment income and $4.0 million of net unrealized appreciation were earned, partially offset by $4.2 million of dividends declared and $0.02 million deferred tax expense on the net unrealized gains in Saratoga's blockage subsidiaries. In addition, $0.7 million of stock dividend distributions were made through the company's drip plan and 76,448 shares were sold or $1.8 million raised through the company's ATM equity offering during the quarter. Our net asset value has steadily increased since 2011 and we continue to benefit from our history of consistent realized and unrealized gains. On slide six, you will see a simple reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis. Starting at the top, NII per share decreased from 66 cents per share last quarter to 60 cents per share in Q1. The significant increases were a one cent increase in CLO interest income and a two cent decrease in operating expenses. These increases were more than offset by a two cent decrease in CLO incentive fees no longer earned following our CLO reset in December, a one cent decrease in other income, three cent decrease in the deferred tax benefit earned last year that is non-recurring, and a three cent dilution from increased shares from the ATM and DRAP programs. Moving on to the lower half of the slide, this reconciles the 44 cent NAV per share increase for the quarter. The 48 cents generated by our NII for the quarter and 51-cent net realized and unrealized gains on investments were partially offset by the 54-cent dividend declared for Q4 with a Q1 record date and a 1-cent dilutive net impact reflecting the effect of the shares issued under our DRIP program in March. Slide 7 outlines the dry powder available to us as of quarter end, which totals $107.1 million. This is spread between our available cash and undrawn Madison facility. We remain pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the fact that all our debt is long-term in nature, actually all four years plus. This level of available liquidity allows us to grow our assets by an additional 26% without the need for external financing, with 62 million of it being cash and thus fully accretive to NII when deployed. Now I would like to move on to slides 8 through 10 and review the composition and yield of our investment portfolio. Slide 8 shows that our composition and weighted average current yields remain relatively consistent with the past, with $409.5 million invested in 33 portfolio companies and one CLO fund and 54% of our investments in first lien, of which 9% is in first lien lost out positions. On slide 9, you can see how the yield on our core BDC assets, excluding our CLO and syndicated loans, as well as our total assets yield has dipped slightly below 11%, yet remains strong despite high levels of repayments and the continued replacement of these assets. This quarter, our overall yield decreased slightly to 10.6%, with core asset yields decreasing from 10.9% to 10.8%, but our CLO increasing to 16.0%. The core asset yields change primarily reflects the approximately 12 basis points decrease in Q1 of LIBOR and likely not reflective of any further spread tightening. CLO yields increased as the CLO continued to outperform projections. Turning to slide 10, during the first fiscal quarter we made investments of $27.4 million in three new portfolio companies and three new follow-ons and had $26.9 million in two exits plus amortizations resulting in a net increase in investments of $0.5 million for the quarter at our BDC. Our investments remain highly diversified by type as well as in terms of geography and industry spread over eight distinct industries with a large focus on business, healthcare, and education services. We are also often asked about the business services industry as this category represents investments in companies that provide specific services to other businesses across a wide variety of industries As of quarter end, the business services classification currently includes investments in 19 different companies whose services range broadly from education to financial advisory to IT management to restaurant supply to human resources and many other services. This breakdown is provided in our featured investor presentation on our website. Of our total investment portfolio, 9.9% consists of equity interests, which remain an important part of our overall investment strategy. We had no net realized gains during Q1. However, we have seen a realization of our fancy chap investments subsequent to quarter end that will continue to add to our total net realized gains in Q2. For the past seven fiscal years, including Q1, we had a combined $16.7 million of net realized gains from the sale of equity interests or sale or early redemption of other investments. As a reminder, for tax purposes, we continue to have unused capital loss carry forwards Thanks, Henri.

I'll take a couple of minutes to describe the current market as we see it and then comment on our current portfolio performance and investment strategy. Our highly competitive landscape remains largely unchanged since we last spoke. Deal activity is healthy, but an abundance of capital persists, creating optimal issuance conditions for borrowers and a general market environment that is borrower friendly. Commercial banks and non-bank direct lenders are becoming more aggressive. exacerbating a supply and demand dynamic that tightens price and expands leverage tolerances. We continue to see no spread expansion despite the continued reduction in LIBOR experience this quarter coupled with a swing in rate expectations to one of a decreasing rate environment. In the face of this kind of market, our approach has always been to underwrite each investment working directly with management and ownership to make a thorough assessment of the long-term strength of the company and its business model. We invest capital with the objective of finding differentiated businesses where our capital can be put to work to produce the best risk-adjusted accretive returns for our shareholders over the long term. We believe this approach has contributed to our successful returns and has also positioned us well for any future market downturns. With net portfolio appreciation of $4 million in Q1, we are also pleased with how our overall portfolio is performing. We believe this reflects the strength of our underwriting approach and team and the quality of opportunities that exist in the market in which we operate. Looking at leverage on slide 12, you can see that debt multiples increase in calendar Q1 with almost 80% of multiples above five times versus two out of three deals last year. Against this backdrop, we have been able to maintain a relatively modest risk profile. Total leverage for the overall portfolio was 4.56 times, down slightly from the previous quarter. As we frequently highlight, rather than just considering leverage, our focus remains on investing in credits with attractive risk-return profiles and exceptionally strong business models where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investments. In addition, this slide illustrates our consistent ability to generate new investments over the long term, despite difficult market dynamics. With nine originations through the second calendar quarter, including three new portfolio companies and six follow-ons, as well as two more originations thus far in July, we have established an origination level that is on par with last year's record pace, while applying consistent investment criteria. We remain confident that we can continue to grow our AUM steadily over the long term, supported by a healthy pipeline as demonstrated on slide 13. As you can see on this slide, our team's skill set, experience, and relationships continue to mature, and our significant focus on business development has led to new strategic relationships that have become sources for new deals. Our number of deals source continues to grow, despite a market that is competitive and frothy. Notably, 34% of term sheets issued and two of our new portfolio companies over the past 12 months are from newly formed relationships, reflecting solid progress as we expand our business development efforts. The breadth of our deal funnel also evidences how we continue to maintain our investment discipline. Passing on a deal that is in front of you is hard, but maintaining discipline is ingrained in our culture and we will continue to say no if opportunities do not fit our credit profile. We know this is how we will preserve and grow the enterprise value of Saratoga for our shareholders. Our overall portfolio credit quality remains strong with Q1 again demonstrating this. As you can see on slide 14, the gross unleveraged IRR on realized investments made by the Saratoga Investment Management Team is 13.9%. on approximately 376 million of realizations. On the repayments in Q1, the average unlevered IRR is just over 13%. On the chart on the right, you can also see the total gross unlevered IRR on our 382 million of combined weighted SBIC and BDC unrealized investments is 13.4% since Saratoga took over management. We also highlighted last quarter that our Roscoe medical second lien investment went on non-accrual. Our total investment comprises the $4.2 million second lien that has been marked down to .1 million or has been marked down .1 million to a fair value of 2.4 million this quarter, as well as an equity investment of .5 million that has previously been written down to zero. There is no real update since we last reported. These marks reflect both fundamental weakened performance as well as operational issues. While we believe the operational issues have been largely addressed, we expect the company to continue to face headwinds in a competitive industry. We continue to work with senior lenders and sponsors to evaluate alternatives in light of the company's performance. This quarter is a good example of how a solid, high-quality portfolio interacts as a whole. Our total unrealized appreciation for the quarter was a net positive $4 million, which included significant value increases in our census, flywheel, and Ohio medical investments, among others, and more than that offset notable unrealized appreciation in my alarm center. Moving on to slide 15, you can see our SBIC assets increased to $225 million as of quarter end, up from $222 million last quarter. Our current SBIC license is fully drawn and we continue to progress the formal licensing process with the SBA on our second license following the issuance of a green light letter to us last year. Overall, we feel the operating results of the quarter demonstrate the strength of our team, platform, and portfolio while we remain extremely diligent in our overall underwriting and due diligence procedures. This culminates in high quality asset selection within a tough market. Credit quality remains our top focus, and we remain committed to this approach. This concludes my review of the market. I'd like to turn the call back over to Chris.

Great. Thank you, Mike. As outlined on slide 16, this past quarter we again increased our dividend by $0.01 to $0.55, a 2% increase, representing the 19th sequential quarter of dividend increases. Slide 17 shows that the 7.8% year-over-year dividend growth easily places us near the very top of our peers and one of only seven BDCs that have grown dividends the past year. With most BDCs having either no increases or decreasing the size of their dividend payments, our continually increasing dividend has differentiated us within the marketplace. Saratoga continues to outperform the industry. Moving on to slide 18, Our total return over the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 9%, beating the BDC index of 8%. Our longer-term performance is outlined on our next slide, 19. Our three- and five-year return places us in the top two and four, respectively, of all BDCs for both time horizons. Over the past three years, our 92% return exceeded the 30% return of the index, and over the past five years, our 146% return exceeded the index's 24% return. On slide 20, you can further see our outperformance placed in the context of the broader industry and specific to certain key performance metrics. We continue to achieve high marks and outperform the industry across diverse categories, including interest yield on the portfolio, latest 12-month NII yield, latest 12 months return on equity, Dividend coverage, year-over-year dividend growth, NAV per share growth, and investment capacity. Of note is that as our assets have grown and we are starting to achieve scale, our expense ratio is moving closer towards the industry averages. We continue to focus on our latest 12-month return on equity and NAV per share outperformance, which reflects the growing value our shareholders are receiving. Moving on to slide 21, All of our initiatives discussed on this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These characteristics include maintaining one of the highest levels of management ownership in the industry at 20%, a strong and growing dividend that is well covered by NII, access to low cost and long term liquidity with which to grow our current asset base, obtaining a triple B investment grade rating, solid earnings per share and NII yield with substantial growth potential, steady high quality expansion of AUM, and an attractive risk profile. In addition, our high credit quality portfolio contains minimal exposure to cyclical industries including the oil and gas industry. Finally, Looking at slide 22, we continue to progress on our long-term goal to expand our asset base without sacrificing credit quality while benefiting from scale. We also continue to increase our capacity to source, analyze, close, and manage our investments by adding to our management team and capabilities. Executing on our simple and consistent objectives should result in our continued industry leadership and shareholder total return performance. In closing, I would like to again thank all of our shareholders for their ongoing support. We are excited for the growth and profitability that lies ahead for Saratoga Investment Corp. I would like to now open the call for questions.

Thank you. Ladies and gentlemen, at this time, if you would like to ask a question over the phone, please press star and then one on your telephone keypad. If your questions have been answered or you wish to move yourself in the queue, simply press the pound key. And our first question will come from Casey Alexander with Compass Point. Your line is now open.

Hi, good morning. My first question relates to the amount of cash that you're holding. Are you strategically holding back some cash in the event that the second SBIC license happens to come through?

Casey, no. I think our cash levels are really more Thank you for joining us.

and feel very good about our ability to

A little better than 1.5. Is there a practical limit to the total leverage ratio that you have to keep an eye on even though it's not a part of your regulatory leverage ratio? Is there a degree to which you wouldn't want to get past as it relates to the total leverage ratio?

Casey, I don't think that there's necessarily a hard and fast line there from a regulatory standpoint. I think, as always, and looking at our cumulative performance over the last nine years at this time, we're much more reactive to the type and quality of the investments that are available to us. And then with that portfolio, we are also mindful of how to best finance that in terms of the liabilities on our balance sheet, the mix of equity and debt. and as you see we had some success in the last short period of time since the last quarter on our ATM issuance so we're able to add some equity there. We've actually repaid a bunch of our debt but that debt still remains available. So we're not really focused on some absolute leverage limit. We are more focused on what is available that fit our credit criteria. And then we have been fortunate enough and we hope to be fortunate enough going forward to be able to put together a balance sheet that is supportive of that asset base and reasonably conservatively structured. I think it's important to remember the characteristics of the debt that we have outstanding, which is it's basically all fixed rate and it's all termed out with six to 10 year Maturities from today and no covenants, no financial covenants and no amortization. So it's a very conservative, long-term, fixed-rate debt package we have. We do have a revolver, as you know, which we go into and out of depending on swing factors. At this point in time, that's essentially zero. So anyway, is that responsive to your question, Casey?

Yes, it is. Thank you. That's very responsive. Two more quick questions. I'll ask them both at once and then you can wrap me up. First of all, what is the quarter end percentage of floating rate assets in the portfolio? And secondly, could you review the Fancy Chap transaction considering the fact that it came on the balance sheet this quarter and according to your commentary All of our debt, as standard practice, has flaws.

of which we've I think more recently seen the floors moving up into sort of the 200 level.

That's typically a negotiation where the floors are, but we're mindful of the fact that we're making these floating rate investments. We try to structure them so that we get the benefit of upside if it's a rising rate environment. We also try to, and this is a negotiated term, structure it so that we – Put a floor in place that's closer to where LIBOR is in the current market. And so as the portfolio continues to build, that's something that we're mindful of going forward.

Okay, and then if you could just read this fancy chat, because obviously it's a very successful investment, but it came in and went out so fast. I just think that's an unusual circumstance.

It's a blessing and a curse because we always talk about how You work so hard to get assets deployed, and then when they come back, you've got to go redeploy that capital. I guess in this case, we're sort of between ourselves, sort of saying, well, at least it wasn't a really large debt investment. It came back and was short-lived. But the good news is that, and this is with a growing sponsor relationship that we have with the owner of this business, the good news is that we had an equity investment in this business as well As the company was growing, they were seeking some additional debt capital as well as some equity capital. They were not expecting to sell the business, but essentially got an offer that they could refuse. And so it was a short-lived investment, but thankfully we had a meaningful equity investment and enjoyed a really fantastic IRR and return on capital in a matter of a couple months.

All right, great. Well, congratulations on that outcome, and thanks for taking my questions.

Thanks, guys.

Thank you. And our next question will come from Mickey Schleen with Lattenberg. Your line is now open.

Yes, good morning, everyone. Casey asked several of the questions that I was going to ask, but I do have a couple more. There's obviously been a lot of talk about the yield curves inversion and I'm curious to understand whether you're seeing any trends in the portfolio pointing to a sharp slowdown amongst your borrowers.

We have not seen that, Mickey. I mean, we certainly are always mindful of macroeconomic trends and you see that as well. But as we look at our portfolio, we haven't seen a broader economic trend Indicators that would say that the economy is pressuring these businesses in a negative way. This is not something we've seen in our portfolio.

Mike, when you underwrite, I don't know how long the borrowers that you're invested in have been around, but do you have a sense of how much their EBITDA on average would have declined in previous recessions?

Yeah, that's a great question because several years ago we had the benefit of being able to look at how a company performed in the last downturn. We still have that benefit for a large number of our investments, but as the recovery has been so long dated, what we end up doing for some of them if they haven't been around that long is we start to dig into and look at metrics that would be good indicators of how much exposure a given business would have to a downturn if there were one. And that's something that we take very seriously and we do rigorous analysis around each of the investments we make before we do so to get a sense for whether if there were to be a downturn, we feel like the capital structure could hold up and the business could hold up.

Okay, I understand. And turning to census technology, was the upswing in valuation due to market multiples or was it operating performance? And if it's performance, is there something specific to census that would help us understand what's going on there?

It's purely operating performance. The business is performing exceptionally well. We've been in this credit for a good deal of time and thankfully have an equity co-investment in the business. The company undertook an acquisition, executed on an acquisition recently to buy the number two player in its space. And as a consequence, it had always been the number one player in its space. As a consequence of that acquisition, it is the clear and in a way largest participant in its business. So it has a major market share and it's starting to benefit that much further from that. So it's purely a reflection of exceptional operating performance.

Okay, I understand. And just a couple more questions. On slide 15 in the deck, There's a little dotted box in the SBIC breakout. Am I correct in understanding that that $21.4 million is the cash in the SBIC?

Correct, Mickey. That's currently cash sitting in the SBIC. But as you can see, from an asset perspective, the license is really fully funded at the moment. It allows us to still recycle as opportunities present itself. But that's just still cash that's We can either deploy in the SBIC or a very large proportion of it we can withdraw out of the SBIC if we wanted to. But with excess cash at the moment, that's just resident there at the moment.

And it's a good question. Let me just add to that because both you and Casey were focused on it. And we recognize certainly that the cash position that we're in is suboptimal in the long term. We, as I mentioned before, feel really good about our pipeline and our ability to deploy the capital over time. We mentioned that we've closed just in July on a couple of new deals and feel very good about our prospects for deploying that capital. One of the nice things about that is that just pure math, as we deploy that capital and its cash, We're not borrowing, so the earnings from the asset deployment fall straight to the bottom line. So we enjoy a pretty healthy spread between our NII and what our dividend rate is. As we deploy that cash capital, that spread, we would expect to grow.

Do you think that the cash which has been now are available in the SPSC for a while. Is something that's holding the SBA back from granting you the second license? In other words, are they saying, well, you've got liquidity in the first license, you don't need the second license yet?

I don't think so. I mean, I think they have their own process and they run it on a fund-by-fund basis and clearly they have pretty extensive reporting to them so they do know everything that's in the portfolio and they have known that for a while but as far as we know in terms of their decision making process the excess liquidity it's called REIT it's basically retained earnings that we're able to take out at our discretion because we're over collateralized in effect by that amount and so it's not really permanent capital and it's pretty flexible capital so So to answer your question, yes, they're aware of it because we report extensively to them. But secondarily, we don't believe that that's a factor in their decision-making for a second license.

Yeah, and just to emphasize, that's not equity, that $21 million, Mickey. The license remains $75 million equity, $150 million the benches, $225 million, which they view as fully funded. That is just excess cash and distributable earnings.

and my last question just in terms of gauging risk in the portfolio can you give us a sense what the average EBITDA is for your borrowers in the portfolio as of now?

I'd have to come back to you on that I think what I can say is that we do operate in the lower end of the middle market so The vast majority of the businesses that we're investing in have sub $15 million in EBITDA. The trick when we're underwriting those, and I shouldn't use the word trick, the key thing as we were underwriting these businesses, though, is we're looking for businesses that have durability, that are really strong businesses that we feel very comfortable investing are going to sustain their enterprise value and grow their enterprise value. Lots of people will say, gosh, that's harder to do at the smaller end of the middle market. If you really evaluate the difference between large and why people have that opinion, the difference between large middle market deals and smaller middle market deals is that the larger middle market deals sometimes have greater customer diversity. They've got deeper management teams. Mike, just to follow up.

If I look at one of your new investments, like InMotion now, which is a first lien, and assuming you're the debt capital provider, in other words, it's not a club deal, that would imply, assuming a reasonable multiple, that you're willing to do deals with borrowers in the sort of $3, $4 million of EBITDA. Is that correct?

That's right. If the credit profile is... Thanks, Mickey.

Thank you.

Thank you. And as a reminder, to ask a question, that is star and then one. Our next question will come from Tim Hayes of B. Reilly FBR. Your line is now open.

Hey, good morning, everyone. Thanks for taking my questions. Thank you very much.

obviously cognizant that as of quarter end we had some cash outstanding. We felt it notable just to mention that we have had a couple of closings since quarter end. The ones that Mike alluded to actually in July itself and so we have had multiple originations since quarter end but I think other than that we just don't comment I think in more detail on that as it continues to change on a daily basis.

Okay, fair enough. and then I know you highlighted the fancy chap exit in the press release but I obviously didn't know what type of gain you expect and we can see where it's kind of held at in the schedule of investments but just wondering if you expect a gain that's materially higher than what would be implied in the SOI.

No, when you do your fair value at the end of the quarter, you do consider and assess certain conditions that existed post-quarter end. And so we obviously factored in the realization that had occurred since off the quarter end. And so the gain that you see in Q1 is primarily the amount that we recognized. Okay, understood.

You talked about the pipeline, but if you had to describe it in a word or two, how would you describe it? Is it in line with where it's been? Is it very strong? Are any of the characteristics of the deals you're seeing any different in any way, whether it be industry or loan size or sponsored versus non-sponsored, etc.?

I would characterize it as healthy and consistent with last year, with Paul West, Timothy Wong, Richard Petrocelli, Marissa Mann Andrews Thanks for those comments, Mike. And then...

You'd also touched on this a bit on Fancy Chat, but repayments have been a bit elevated over the past six months, as I believe you mentioned. Would you say this is just a timing thing or more broadly reflects strong credit performance and companies executing on their business plans and being able to repay their loans? And if it is, whether it's the latter or not, roughly what percentage of repayments over the last six months would you say were kind of refi-driven?

I'd have to look at the numbers but I think more of them are just exits change of control driven than otherwise we're not seeing any I think just stepping back and thinking about repayments we would expect our repayment activity to be normal for a portfolio company of our size you can get surprises occasionally for sure but We would expect this year's repayment activity to be normal for a company our size and reflective of what we've had historically.

And one more just broader comment. I think that the repayment activity, on the one hand, we think is reflective of the quality of our portfolio and the quality, as you say, companies hitting their plans and ultimately reaching exits. But we're also on the origination side seeing a lot of activity as well. So we think there's pretty robust activity in the marketplace that we're serving.

Right, right, okay. Thanks for that. And then my last one here, the portfolio yield dropped a bit this quarter and the portfolio mix obviously shifted a bit more first lean as you pointed out and yields on new portfolio investments seem to be a bit lower as well. Just wondering if those trends, if you believe it reflects competition in the space and you needing to give up a little bit of yield to win deals.

We aren't seeing that so much. I think the way we've typically deployed assets is we look at what the opportunity set is, what the business is, and where we want to be on the balance sheet. And when we find a first lien senior secured investment, on average, the yield on that opportunity is going to be a little less than something that's more junior in the capital structure. We happen to be finding some good deal opportunities that are top of the capital stack. which we think is a very good thing. But the change in yield is more reflective of that. Okay.

I appreciate you taking my questions this morning.

Thanks, Tim.

Thank you. And that concludes our question and answer session for today. It is now my pleasure to hand the conference back over to Mr. Christian Oberbeck for any closing comments or remarks.

Well, we'd like to thank everyone for joining us today. We look forward to speaking with you next quarter.

Thank you everyone for joining us today. We look forward to speaking with you next quarter.