Barings BDC Inc (BBDC) 2014 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Triangle Capital Corporation's Conference Call for the Quarter Ended March 31, 2014. All participants are in a listen-only mode. A question-and-answer session will follow the Company's formal remarks. Today's call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the Company's website at www.tcap.com under the Investor Relations section.

The hosts for today's call are Triangle Capital Corporation's Chief Executive Officer, Garland Tucker; President and COO, Ashton Poole; Chief Financial Officer, Steven Lilly; and Chief Investment Officer, Brent Burgess.

I will now turn the call over to Sheri Colquitt, Vice President of Investor Relations for the necessary Safe Harbor disclosure.

Thank you, operator, and good morning, everyone. Triangle Capital Corporation issued a press release yesterday afternoon with details of the Company's quarterly, financial, and operating results. A copy of the press release is available on our website.

Please note that this call contains forward-looking statements that provide other than historical information, including statements regarding our goals, beliefs, strategies, future operating results, and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in forward-looking statements.

These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section entitled Risk Factors and Forward-Looking statements in our annual report on Form 10-K for the fiscal year ended December 31, 2013, and quarterly report on Form 10-Q for the quarter ended March 31, 2014, each as filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.

And at this time, I would like to turn the call over to Garland Tucker.

Okay, thanks very much, Sheri. Good morning. I would like to thank everyone for joining us today.

In keeping with our traditional format, I will provide a brief overview of some of our highlights for the quarter, Steven will provide more detailed information about our financial results and liquidity, Ashton will discuss our views regarding the overall investment market, and Brent will provide an update on our investment portfolio.

The first quarter of 2014 was a very active quarter for TCAP. We experienced increases in revenues, net investment income, and NII per share. We grew our investment portfolio and maintained our above average level of credit quality. Our first quarter NII per share of $0.50 increased 4% over our fourth quarter of 2013 NII per share of $0.48. In our March 31, 2014, portfolio value of $690 million increased 4% also over year-end 2013.

During the first quarter, we paid a $0.54 per share dividend and we also announced and paid an additional cash distribution of $0.15 per share, equating to total quarterly dividends and distributions of $0.69 per share.

As we previously announced, our second additional cash distribution of $0.15 per share will be paid on June 25, in addition to our regular quarterly dividend. And finally, in the second half of 2014, assuming an active investment environment, we expect to over earn our regular quarterly dividend.

The last piece of material information I would like to focus on before I turn the call over to Steven is a portfolio exit that occurred during April, which generated a realized capital gain of more than $11 million. The portfolio company is Workforce Software and was an investment we made in 2011. After such a very productive 2013 in which we generated over $18 million of net realized long-term gains, the Workforce realized gain of $11 million represents a tremendous start for 2014. These successful equity investments continued to be a very important component of our overall investment strategy.

And with that, I would like to turn the call over to Steven.

Thanks, Garland. During the first quarter of 2014, we generated total investment income of approximately $24 million as compared to $24.5 million of total investment income during the first quarter of last year. And our total investment income represented a sequential increase of 9.3% from our fourth quarter 2013 total investment income of $22 million.

Our total operating expenses during the first quarter of 2014 was $10.2 million as compared to $9.2 million during the first quarter of 2013. Our operating expenses consist of interest and other financing fees and general and administrative expenses.

For both the three months ended March 31, 2014 and March 31, of last year interest and other financing fees totaled $5.1 million. General and administrative expenses for the first quarter of this year totaled $5.1 million as compared to $4.1 million for the first quarter of 2013. The $1 million year-over-year increase in G&A was primarily due to increased cash and equity-based compensation expenses primarily due to an increase in head count.

From an efficiency ratio standpoint with efficiency ratio being defined as total G&A divided by total revenues, our first quarter 2014 efficiency ratio was 21%. Net investment income for the first quarter of 2014 was $13.8 million, or $0.50 per share as compared to $15.2 million, or $0.56 per share during the first quarter of last year, and as Garland mentioned earlier $0.48 during the fourth quarter of 2013.

Our net increase in net assets resulting from operations during the first quarter 2014 totaled $12.5 million as compared to $18.4 million during the first quarter of last year and $17.8 million during the fourth quarter of last year. On a per share basis, our net increase in net assets resulting from operations during the first quarter of 2014 was $0.45 as compared to $0.67 during the first quarter of last year and $0.64 during the fourth quarter of last year.

Our net asset value on a per share basis at March 31, 2014, was $15.72, representing a decrease of $38 per share since December 31, 2013. The primary components of the decrease in our NAV during the first quarter were the impact of the special cash distribution of $0.15 per share, the impact from stock-based compensation expenses allocated in February of $0.15 per share, the $0.04 per share by which our first quarter dividend exceeded our first quarter net investment income, and our unrealized depreciation which totaled approximately $0.04 per share.

As we discussed on our fourth quarter earnings call in the latter part of 2013 and the first part of 2014, we have been in the natural part of a U-shaped curve, but we have been recycling assets across our investment portfolio. And so it was not to steal any of Ashton's fund during his portion of the call, I would simply say that as 2014 progresses, we are continuing to see an uptick and investment activity, as we redeploy assets and expand our investment portfolio.

We continued to believe that DDC portfolio sizes and values should naturally fluctuate over time, and that the primary keys to a successful long-term track record in the DDC industry are to maintain once credit focus remain conservative and consistently apply an underwriting formula that produces solid results.

And finally, to reiterate what we have said on our last two earnings calls on a go-forward basis, we expect to under earn the dividend in the first half of this year and look to over earn the dividend during the second half of the year.

Turning briefly to liquidity and capital resources from a liquidity standpoint as of March 31, we had approximately $91 million in cash on hand, 31 million of undrawn SBA debentures, and $154 million available under our senior credit facility. Our liquidity totals approximately $275 million, which equates to approximately 40% of the value of our investment portfolio. As a result, we are pleased with our liquidity position especially taking into account the conservative composition of our balance sheet.

And with that, I will turn the call over to Ashton to talk a little bit about the general investing market.

Thanks, Steven. The first quarter an indeed the early part of the second quarter as well has been an active period for Triangle. During the first quarter, we originated $77.5 million in total investments, of which $63.7 million were new investments and $13.8 million were follow-on investments in existing portfolio companies.

From a volume perspective, the first quarter of 2014 represented the fourth most active quarters since our IPO in February of 2007. We closed six new investments with an average size of $10.6 million, driven by our relationship-based style of investing. The weighted average interest rate associated with all the investments made during the first quarter including follow-on investments in existing portfolio companies was 13%, while the weighted average interest rate associated with new debt investments was 12.8%, which is almost exactly in the middle of the long-term range of sub-debt pricing of a 11% to 14%.

Our new investments were also made at average leverage levels of approximately 3.2 times EBITDA and average fixed charge coverage levels of approximately 1.3 times, both of which were also in the middle of our long-term range of experiences in the lower middle market. Still while we are certainly pleased with the start to the year, it's also fair to say we are very content, continued focusing on quality over quantity in terms of our investment pace per quarter.

From a more macro standpoint as we analyzed the lower middle market, we see certain trends that we believe are interesting, in which we think will prove to be positive for our business. If you analyze available external data, private equity fund raising is on the rise with 2013 representing one of the better years on record. As these funds begin to look for new investments, we believe the natural effect will be an increase in M&A activity across the lower middle market.

We also believe that many of the funds will focus on making investments in the sub $100 million enterprise value segment of the market. This segment is comprised of literally thousands of privately held companies with revenues of $50 million to $150 million, which account for between 60% and 70% of the total M&A market volume in any given year.

The sub $100 million enterprise value segment of the market is also the portion, which experienced significantly less activity during 2013, as financial sponsors were more focused on refinancing existing portfolio company balance sheets than they were purchasing new companies.

As funds look for new investments, they will be hunting alongside existing companies with well-constructed flexible balance sheets and supportive sponsors who are very focused on making acquisitions for growth and diversification purposes. So when bankers, advisors, and sell-side M&A boutiques indicate that they are extremely busy and that their pipelines are full, we believe them because based on our analysis of the trends in the market, they not only should be busy, but they also should remain busy for at least the next several quarters.

Since I started with an extremely positive tone, let me temper it by reminding you the Triangle is keenly aware that the best time to sell businesses may not always be the best time to buy businesses. It is this aspect of our analysis of the market, which continues to make us cautious.

On a percentage basis, we are passing on more transactions now than we were two or three years ago as we remain focused on the credit statistics we continue to believe are important. Said another way, we would much prefer to wait a few extra quarters to recycle our investment portfolio and ultimately increase our dividend, in order to avoid many of the pitfalls that frequently are associated with those firms that focus too much on growth and lose sight of stability and quality, which we believe should be the hallmarks of any well run BDC.

And with that, I'll turn the call over to Brent to discuss some additional details associated with TCAP's investment portfolio.

Thank you, Ashton. Well, as Garland stated in his opening comments, 2014 has started out as another strong year for Triangle from our portfolio performance perspective. Our investment portfolio currently consists of 83 companies and we remain very pleased with the performance of those investments. While our portfolio did experience approximately $1.5 million of unrealized depreciation in the first quarter, we continue to experience a very healthy level of net realized gain.

With the gain in Workforce Software in April that Garland mentioned earlier, which, of course, will show up in our second quarter filing, we've generated approximately $30 million of net realized gains over the last 16 months.

During the first quarter, we received four repayments totaling $30.3 million, partial loan prepayments of $19.3 million and proceeds relating to equity securities totaling $2.3 million, resulting in a net new investment during the first quarter of approximately $25.7 million.

The weighted average IRR on our exited investments during the fourth quarter was 18.7% and the weighted average life of those investments was 2.2 years. As of March 31, the weighted average debt yield on our investment portfolio was 13.9% as compared to 14.1% at December 31, 2013.

From a credit quality standpoint, two accounts were removed from non-accrual status during the first quarter. The first account, Minco Technology Labs, was moved from non-accrual status to PIK nonaccrual status, as the Company resumed making cash interest payment.

The second account is SRC, which we mentioned during our fourth quarter call, completed its restructuring on January 9, 2014. As part of this restructuring, we converted our debt investments in SRC into an equity investment, where Triangle is now the company's controlling shareholder. Our non-accrual assets as of March 31 totaled 2.2% of our portfolio on a cost basis and 0.2% on a fair value basis.

In conclusion, as we continue in 2014, we remain very pleased with the performance of our investment portfolio.

And with that, operator, we would like to open the call for questions.

Certainly. (Operator Instructions) And our first question comes from John Hecht, with Stephens. Your line is open.

Good morning, guys. Thanks a lot and I appreciate all the color on the marketplace. Two quick modeling questions. You might have mentioned this, so I apologize. The 2Q gain, what's the difference between the realized gain versus the last fair value?

John, sorry, John, it's Steven. There is not a lot of difference between where were carrying the investment when we reported the -- when we filed the 10-K versus what we realized in the April timeframe. So I don't think it will be a material impact.

Okay. And then second, you guys still have a great deal of spillover income and you are engaging into special dividends, but how do you think about redistributing the remainder?

Good question. I think, if you look at the $18.4 million of long-term capital gains we realized during 2013, we have -- on a per share basis that's somewhere about $0.66 per share on the existing share count. We've announced two special dividends or distributions that collectively comprised $0.30 share. So there certainly is a logical question of what we might do with the remaining $0.36 per share.

And we certainly have two alternatives. One is to pay that to shareholders the way we did the first half of it so to speak, and the other would be to pay tax and retain the capital. And then I think the -- with the $11 million realized gain for Workforce, obviously, we're still in the first half of the new fiscal year 2014. So there could be other events during the year that might either increase that amount or decrease that amount on a true net realized gain basis.

So I think we would wait until the end of this year to figure something out about what special distributions we might announce that would be paid in 2015, if that makes sense John. But certainly, I think your question is a good one in terms of the remaining $0.36 for this year that as we meet with our Board over the next couple of months, we'll certainly evaluate that. But we're pleased with what we've done in the first half of the year. I guess I'd just say in that way.

That makes a great deal of sense. And then two quick questions about portfolio companies. Number one is how is SRC performing since you restructured it? And the second one is, if you could go over the Frozen Specialties, it looks like to PIK won a nonaccrual.

John, it's Steven. I'll give a quick on Frozen Specialties maybe, and then let Brent talk about SRC and where we are there. On Frozen Specialties, it's a company that if you were to Google the website, you would see they manufacture frozen pizzas predominately. We've been in the investment for three, four years. And it's -- by virtue of the industry they play in, a little bit of a lower margin business, but it has been a good business. The company has had a bit of liquidity shortfall with some commodity pricing and things of that nature.

And I think it's one that had it not occurred at the exact quarter end when it did, it's probably something that would never have gone on PIK nonaccrual. I think it's a reasonable situation where folks around the table are acting as you would expect and hope everybody around the table would act. So it's not one that we are losing sleep over at this point. The PIK that we sacrificed, I guess, I would say in the first quarter was 137,000. So it wasn't overly meaningful to us and we think we will have a very good resolution there in the near-term.

So had this happened in February or something, my guess is we would have had an agreement, things would have worked out, the Company would have been funded with incremental capital, and it would not have gone on PIK nonaccrual. So not that you're asking this precisely, but I think if you look at our total nonaccrual and PIK nonaccrual assets is maybe a watch list concept so to speak.

Once FSI is worked through in the next call it 30 days, then I think you would see that our ratio for the first quarter would be total nonaccruals of 2.2%, as we mentioned in the call and then PIK nonaccruals of about another 1.9% for total nonaccrual and PIK nonaccruals of 4.1% of the portfolio, and this is on a cost basis, as you know we like to think about it.

And that would compare to the last four or five quarters average of about 4.4%. So we're a little below average, once this is worked through. So a bit of a pro forma analysis there, but hope that gives you color on FSI before I turn it over to Brent for a few comments on SRC.

Yes, John, thanks for the question. Without going into a lot of detail, I would say we are very pleased with how SRC is performing. There have been some macro headwinds in the business over the last couple of years, believe it or not, directly related to the tsunami that hit Japan. And so those macro headwinds began to create challenges for the business, and then in addition last year, they had some operational issues.

We stepped in and put in some additional capital to help resolve the operational issues, and now those really are resolved. And so we are still facing the macro headwinds, but sort of the event or specific events that caused some distress last year have now been resolved and we're working closely with management, and very pleased with how things are proceeding there.

Great. I really appreciate the color, guys.

And our next question comes from Bryce Rowe of Robert Baird. Your line is open.

Thanks, good morning. Just a few questions here. Number one, I noticed that the nonrecurring dividend and fee income in the quarter totaled about $2.7 million. Just wondering Steven, if you have any visibility into what you might expect for the remainder of the year and maybe specifically, was that dividend and fee income, was it relatively lumpy and tied to just a couple transactions?

Bryce, thanks. As you know, our policy has been to call out nonrecurring dividends and nonrecurring fees when they've been at what we would call elevated levels for us in any given quarter. And the nonrecurring fees this quarter and the nonrecurring dividends taken as two distinct buckets there, we're frankly sort of right on our long-term historical averages as we would calculate it for the last eight quarters or so.

So there wasn't a specific call out for those on the call and that's the reason. But I think in terms of the nonrecurring fees, usually kind of the rule of thumb is 20%, 25% of those equate to amendment fees and 75% of the amount relates to either prepayment penalty fees with transactions or the remaining OID when a loan pays off early. And then dividends are obviously tough to forecast as ours, you've heard us say for several quarters, it's tough to forecast repayments. But I think there is some continued element of normal churn in a portfolio that reaches the $700 million-ish size as ours has been for the last year plus roughly.

So I think it's normal to project something not just similar from this level, I guess I would say. You may see a quarter that's a little above or a quarter that's a little below, but it's a pretty good long-term trend line I think. Does that help?

Yes, that's helpful. And just one more question. You talked about the increase in SG&A of $1 million year-over-year primarily to headcount. Is there any, I guess, any nonrecurring incentive-based compensation in there tied to the realized activity that we've seen already in the first quarter?

Good question. The short answer is no, there is not. The single biggest impact to the $1 million is -- year-over-year -- is really the stock component, the restricted stock that the Board grants in February of each year as a component of compensation to the officers of the Company. And what the phenomenon that we've experienced is they're four-year divestitures. Those grants divest over four years, so we recognize the expense on a ratable basis.

And the price of the stock is higher now than it was four years ago. So you have the phenomenon of a grant made two, three, four years ago is at a lower amount in terms of the impact. That rolls off and then you have the new grants that are coming on with more officers of the Company and a higher stock price. So that sort of compounds it. So that's the single biggest piece of the equation for us. Obviously, we've added to the team, including frankly, Ashton on this call as a key component of that. So that's a lot of the other piece of it, but just normal things that we would focus on, probably just those two buckets.

Okay. Thank you.

Thank you.

Our next question comes from Greg Mason of KBW. Greg, your line is open.

Great. Good morning, gentlemen. First, just a follow-up on Bryce's comment there then, is the logical extension that we should be thinking about G&A at this kind of $5 million level going forward?

Greg, it's Steven. I think the way that we tend to think about it for better or for worse is the efficiency ratio concept, which some people define as a percentage of revenue. We look at it that way and it's typically been plus or minus 20% for us on our quarterly and then annual basis. And then obviously it can move around quarter-to-quarter a little bit. But for annual basis, modeling has been kind of historically kind of right plus or minus 20%.

Some people think of it as a what's your total cost to run the business as a percentage of assets. And I think we've been sort of there in kind of the low twos, between 2% and 2.5%. So I think if you were to look at your model and bracket it using both of those guidelines to be sure you were in what I might call a tolerance range, I think you would probably come to a pretty good answer as opposed to just trying to peg a single dollar amount.

Okay, great. And then couple of questions on the overall market environment. Are you still getting the opportunity to make equity co-investments in all your deals and have you been doing that?

Yes, this is Ashton, thanks for the question. The answer is yes. As you know, it's a core part of our strategy and as Garland alluded to, the gains that we've been able to achieve both in 2013 and with Workforce, it's a key part of our focus. If you look at the deals, the new investments that we made in Q1, virtually all of them with the exception of one event contained equity components.

So yes, to answer your question. I would be lying to you if I didn't say it was harder to get equity in today's market, but it is certainly one that we are keenly focused on and thankfully our results show that we are able to continue to be able invest in equity alongside our subordinated debt in most of the deals. On average, kind of our hit rate is about 80%. So we are still doing pretty well.

Great. And then, Ashton, you gave some color on the leverage levels of the new portfolio investments. And I'm just curious about you being able to maintain kind of low 3.2 times leverage on your new investments when we're clearly seeing leverage going up across the market, and even look at S&P middle market data, we are seeing lots of increases in leverage on companies' balance sheets. So can you just give us some of how you're keeping the leverage low, when we are clearly seeing it pick up across the market?

Your observations about the broader market, I think we would agree with you that as a general statement that leverage levels are definitely on the rise. I think the way that we, when we dissect the market, what we see is a difference in leverage levels in terms of the what I would characterize as general middle market deals versus the lower middle market deals. And so where we're particularly focused and where our sweet spot is, we are finding that leverage levels and coverage levels are very consistent with where they have been historically for us in our transactions. And certainly, the numbers that I mentioned to you for our first quarter investments would be consistent with that. In fact, I think Steven, correct me, if I'm wrong, but that first quarter was lower than what it was in 2013.

Yes, and Greg, I think you're keenly observant of the market and just echoing what Ashton said, it's the transactions we completed in the first quarter frankly a little below our kind of more longer term in recent quarters leverage levels. I think 2013, our total average leverage was about 3.5 times, 3.6 times. These companies had, as we look at both leverage and fixed charge, I think you'll see that leverage is a little lower than average for us this quarter. I think you would also see that fixed charge is a little lower than average or in the lower band of the range.

And so those kind of work together. These companies had, in some cases, a little more from a tax standpoint that they're paying. They had amortization of some senior that's ahead of us that we wanted to be cognizant of. So there are things like that. But I think the transaction we have announced post quarter end, Ashton, is -- correct me if I'm wrong, but I think our leverage there is 3.65 times and our fixed charge coverage is like 1.8 times. So sort of a bit of a difference, a little bit higher leverage but higher fixed charges as well.

Greg, just to add on to Steven's points. You may recall in my prepared remarks that I mentioned we were passing on a greater percentage of transactions than we have historically. I think what we do find is that often there are outliers and certain investment opportunities. And those outliers are not the same in every situation. On one case it could be leverage; on another case it could be pricing; on another case it could be upfront fees; on another case it could be repayment terms. And in situations where we find outliers to be the case, and we are not convinced of the investment mirrors, we simply are passing.

And so I think we've gotten more discriminate in how we are reviewing opportunities and choosing to invest. And fortunately, the ones where we are making decisions to do so have been at leverage levels and coverage levels that are very consistent with where we are have invested in the past. But I think your general observations about the market are spot on. You just have to pick your places.

Great, thanks guys.

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

Hi guys, thanks. Following on some of Greg's questions and your answers there, on -- you mentioned that there is a lot of reasons you might be turning down a greater proportion now. Is there any particular threat? I mean obviously, we know there's rising prices, compressing spreads. You mentioned it's harder to get equity now. Is there any particular thing that is kind of the dominant factor that's affecting the increase in your rejection rate? And if there is, how do you expect that to evolve over the next year with the private equity marketplace being as you described it earlier?

Robert, it's a great question. I'm not sure there is an exact answer to it. I would just say that part of the overall environment we are seeing more opportunities to look at, which by definition means we're going to have more chances to reject. I would say that from where I sit, I see a real bifurcation in the market. Given the environment, it's clearly a good time to sell. And I think you're seeing a rush of certain management teams and owners to sell businesses.

And I think there's a bifurcation in the market of A deals and B deals. And fortunately, we maintain relationships with really high quality sponsors and really high quality advisors. And so what we are trying to do is just parcel through and make sure that of all the deals that we see come across our desk that we try to really filter out what we think are the B deals and focus on the A deals. So it's really trying to maintain a differentiation of what we are seeing in the market is where we're focused.

Okay, great.

Robert, responding to your question and also to Greg's previous one, I think this is a good lead-in to one of the basic reasons we like the lower middle market so much. Whatever is going on in the general market, the lower middle market is always more fragmented and more open to relationship deals. And the opportunity at least to get in and look for, as Ashton was saying, to differentiate among the deals and that's exactly what we see going on in this market. You all have spotted the overall trends, but the lower middle market is much less uniform than the middle market above. That's one reason we like to operate down in this market.

Understood. I mean to that point, I mean on the relationships you have with your obviously, partners with your private equity firms that you've been involved with a lot of them for a very long time. Are you seeing anything from them in terms of more concentration, in terms of -- and obviously, you don't want to be able to concentrate with one particular partner. It's a relative term, but anything where you're seeing a better flow from certain areas of the market, either geographically industry wise or just certain categories of private equity sponsors that maybe you're going to focus on more heavily?

Robert, as you mentioned we have had long relationships with very high quality sponsors. From an origination standpoint, it's not too surprising that if you were really to dissect the data, just as it would be with most firms, I guess the old 80-20 rule applies. One of my key initiatives and focuses for us is to not only maintain and continue to develop the relationships that we've enjoyed over time, but also to be very selective in expanding the relationships that we've had.

And I think when you go out and look at the range of a number of sponsors that focus on the middle market, there are many with whom we do not have relationships with. So I think part of this is to keep what I'll call fresh new blood in the mix, and new relationships. And I'm continually challenging our team to really dissect market. Let's focus on the right sponsors, not only with whom we've had current relationships, but also with whom we don't, who we would like to have relationships with.

So I don't see really any shift in the traditional mix that we've had. Many of the familiar names I see regularly come across our desk, because they are trusted relationships both ways and that counts in droves when you are in this environment. So we will continue to focus on the high quality relationships we have and treat them accordingly. We will also opportunistically expand our range of relationships with whom we think are additional high quality longer-term potential partners.

Great thank you. Just one other question, if I can. You covered all the others. DCW, which is on PIK nonaccrual now. I mean is there any additional color you can give us there, I mean I guess do you expect it to be a transient issue as is -- as with Frozen Specialties or is there something maybe longer-term there?

Yes, Robert I would be happy to answer that question. And the short answer is we do think it is transitory. Actually, a management transition was affected last year and we are delighted with the new CEO there. There is really some legacy issues that he has been dealing with that we think are pretty much cleaned up now. And so we think the picture to the windshield is a lot more attractive than the picture through the rearview mirror.

But in our valuation approach, we had to take into account the fact that we did have some negative or some negative unexpected surprises that occurred in Q1. But again, were really related to things that were put in place before the new CEO. And so we felt it was the right thing to do to reflect that in our valuation, but -- and in the PIK nonaccrual. But we are very, very -- well, I should, very is too strong a word. We feel, I feel very strongly that the new CEO has the company in the right direction and I am certainly optimistic that we're going to see improvements there going forward in the valuation. And commensurate with that, we would hope to be able to take if off the nonaccrual.

Okay. Thank a lot, guys.

And our next question comes from the Ron Jewsikow of Wells Fargo. Your line is open.

Good morning and thank you for taking my questions. Just a real quick question on Workforce Software. And I always appreciate the color and visibility you guys provide on your assets. But looking at the quarter end marks and your commentary on realized gains, it looks like there might be another $1 million to $1.5 million in upside there on the exit? Is that close?

Ron, it's Steven. There is an escrow component to the transaction. And I'm not sure I would go that high with it and we can certainly talk offline. But I think there is -- I think the amount of the escrow was maybe around $600,000 if memory serves. So maybe a little bit high, but again if you've got a specific question relating to that, we certainly can catch up after the call, but there is that $600,000 escrow component.

All right, and then most of my other questions have been asked, but just kind of a high-level market question. You guys talked about the new money and deals coming in 2014 potentially or at least the activity picking up. Do you guys see that as an opportunity to ramp your new money exposure or would it just be more on the front of increasing your -- monetizing your equity positions in 2014?

Ron, it's Ashton. I think probably it's a little bit of both. If you go back and you look at the facts, in 2013, there was about $180 billion of new private equity funds that were raised and that was across 212 funds. If you look within that amount, $111 billion was raised by middle market private equity funds, which is about 62% of the overall total, and then of that it was 156 funds, or 73% of the 212 total funds.

So consistent with my remarks earlier about the lower, the middle market accounting for 60% to 70% or the sub, I think it was the sub-150 enterprise value accounting for 60% to 70% of the M&A activity, the fundraising amounts would be consistent with that as well. So I think we are thinking about it as a great way to continue to prudently invest the liquidity that we have had over the last year and the firepower that we've reserved for a more fruitful investing environment, which we believe is clearly unfolding or has unfolded as we've seen in Q1 and hopefully will continue to do so in Q2, Q3, and Q4.

As far as the monetization side goes, as you know, we are typically not in the driver's seat from the equity perspective. We're usually along for the ride. And so the decision to monetize is often not our primary decision, it's the equity sponsors' decision. So we are more subject to their disposal about when to exit. But I would say that from my perspective and where I sit, many private equity firms that have high quality assets and have embedded gains that can be monetized, we're certainly looking at those options given the current environment that we're in now.

Yes, that's great color. And then just one follow-up on your liquidity position and kind of replacing some of the assets that have come off the books. One of your competitors with let's say a similar premium in the book and an attractive cost of capital that you guys have earned through the cycle certainly has kind of shifted maybe to have a bucket of their portfolio into larger deals or club deals that are more liquid as a kind of a way to enhance return for shareholders. Have you guys thought about that or is it just not something you guys want to do? Do you feel comfortable in your slice of the market and you feel that's where the best risk adjusted returns are?

Ron, it's Steven, I'll give you a quick thought, and you may get a few other opinions as well. I think that not to oversimplify, but from where we sit, I think you hear us say frequently on these calls how much we do enjoy, where we play in the lower middle market. And as Garland has said so many times over the years, the risk adjusted returns that can be created there.

So I think we're very comfortable where we are and certainly would not impugn anyone else's strategy that folks are looking at. But I think if you look at return on equity on a quarterly basis and an annual basis, we hope that shareholders are very pleased with how we would look on both an absolute basis and also a relative basis within the industry. But Garland you may add something to that and Ashton you too?

So Ron, we have certainly looked at it as a strategy and at least as of yet have not convinced ourselves that it really does enhance the return to shareholders. So until we can be convinced of that, I don't think we will do it. But we have looked at it and will continue to look at opportunities like that. But I think Steven is right, return to shareholders is what drives our decision.

Ron, I would just add finally to your question that in general, the concept of club deals is something that has historically not been a major part of TCAP strategy, and I don't think we would envision would be a major part moving forward. We typically like to drive the bus in transactions from a structuring and pricing perspective. We have certainly a handful of partners who we trust and they trust us. And in situations where investment sizes may be a little bit out of our comfort zone, we will often bring in partners, as they will often bring in us to lighten the load, if you will.

But in the concept of just broadly participating in a club type transaction that is something historically we have shied away from. And again, it gets back to the point of we like to drive the bus on transactions and that typically has resulted in -- we would like to think industry-leading results on pricing and terms, and at the end of the day, return on the shareholder equity, which we will hopefully continue to outperform.

Yes, that's great color. Thanks for the time guys.

And our next question comes from Mickey Schleien of Ladenburg. Your line is open.

Yes, good morning. Lot of good questions have been asked, but I do have one, which is related PCX, the new investment. Many BDCs are sort of shying away from aerospace investments given the headwinds that exist in that industry. So I'm curious what was relatively unique or what's that PCX part that made it an interesting investment for you?

Mickey, it's Ashton. Thanks for the question a very good one. This was an interesting transaction. It was a spin out from SPX Corp. It's a company that had leading positions in multiple different platforms and in some cases was the sole supplier on mission critical parts for different aircraft types in the industry. The sponsor also brought in a very, very accomplished CEO who has, we believe, very good plans for the company going forward.

And so when you look at the combination of existing platform ownership, mission critical parts that really have no substitute, the fact that the transaction was transacted at a fairly modest purchase level and relatively modest leverage levels, and a terrific CEO, we got very good comfort that not only was it a good transaction from a debt perspective, but also provided some potential interesting longer-term opportunities for equity value creation as well.

Okay. Thank you for that. And one last question. SCL Holdings remains on PIK nonaccrual. I think you've touched on most of the others, but is the business stable, or is there a chance that that could go onto full nonaccrual?

Yes, the business is stable, actually has been stable for many years at a lower level. So we don't at this point anticipate any change in its status.

Okay, thanks for your time today.

I'm showing no further questions at this time. I would now like to turn the conference back over to Mr. Tucker for closing remarks.

Okay. Thank you, operator, and thanks all of you for being on the call. We appreciate your interest and support. Look forward to talking to you in the interim and to being back on next quarter. Thanks, again. Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.