BCP Investment Corp (BCIC) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Portman Ridge First Quarter 2022 Financial Results Conference Call. (Operator Instructions)

And without further ado, I would now like to hand the conference over to one of your speakers today, Mr. Serena Liegey. 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 10 after market close. A copy of the release along with our 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 10-Q 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 Roos; and our Chief Investment Officer, Patrick Schafer. 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 taking 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 $2.88 per share in the fourth quarter of 2021. Excluding a onetime tax impact, NAV per share would have been 28.81% a decline of less than 0.3% as compared to December 31, 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 our renewed stock repurchase program at 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 3-month SOFR benchmark interest rate, reduces the applicable margin to 2.80% per annum from 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 2 new seasoned members to our Board of Directors, Jennifer [Kwan Chow] 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 Schafer, 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 2 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 lien or unsecured securities. The weighted average spread on new investments was 811 basis points. Additionally, our Great Lakes joint venture funded at net $0.9 million during the quarter.

Our debt securities portfolio at the end of the first quarter remained highly diversified with investments 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, 6 of our debt investments were on nonaccrual status compared to 7 at December 31, 2021. Investments on nonaccrual status at March 31, 2022, was 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 nonaccrual and was a large second lien position was repaid in its entirety, and we also sold Grupo HIMA in the beginning of the second quarter. In total, Grupo HIMA represents 84% of our total nonaccrual portfolio as of March 31 on a cost basis perspective. So the sale will materially clean up our nonaccrual 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 and new investments subsequent to the first quarter-end and have a pipeline of an additional $230 million we are ready to deploy before the end of the second quarter.

I'll now 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 onetime tax provision of approximately $0.05 per share as compared to $2.88 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 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 pay downs 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 7/8% 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, we have recently -- as we have recently announced that 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 1.27x on a gross basis and 0.97x on a net basis. Given that our stated objective has been to target overall leverage to a range of 1.25 to 1.4x, we believe we remain solidly positioned to pursue growth opportunities.

Lastly, and as announced yesterday, a quarterly distribution of $0.63 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 7/8% notes due 2026 would remain the same given that the debt is a fixed rate, while interest rate on borrowings on our 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. 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 have 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. I will now turn over the call to the operator for any questions.

(Operator Instructions) Your first question comes from the line of Christopher Nolan.

Just a clarification. Your interest rate sensitivity seems to dramatically changed from year-end where you're effectively liability sensitive. So now you're now asset sensitive. Is that a fair characterization?

Yes. 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 our 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 0. So Q1 to Q2, we're kind of looking at that inflection point, which is what's driving that up.

Yes. The rate increase is 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 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 in excess of the 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 would be great. And I'll get back in the queue.

Yes. Good question. So we obviously have increased our dividend the last 2 quarters. I think given all the volatility and given where we are leverage-wise, we want to be a little bit cautious today. But I think it's something we're always looking at. We're obviously over earning our dividend. We feel very, very good about core earnings. And as Jason just outlined, 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. And we always -- 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. We would -- I think our general policy is we prefer to pay a higher stated dividend rather than use special dividends over time. And because -- Chris, because of our previous mergers, it actually really helped our spillover income mitigated it. So we haven't had -- we haven't been building material amounts of spillover income where we need to do a special.

Your next question comes from the line of Ryan Lynch.

First one is just a housekeeping question. When you guys say you guys have a target leverage range of 1.25 to 1.4x. Is that a gross leverage range? Or is that a net range backing out cash?

Yes, 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. Got you. And then 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, whether that's labor inflation or input cost inflation, and 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 it's so uncertain and it's sort of -- those changes are occurring -- just really occurred recently, it feels like. I mean you're underwriting a company, you're probably looking at their financials from probably last year, maybe a couple of 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?

Yes, I think it's a great question. So trailing earnings are very, very strong. And so 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 a recession anytime soon. And again, like we get data from 600 of our portfolio companies and there are 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 are being 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 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 a recession. Again, we're not a macroeconomist, 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 we've invested some of the cash. But 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 Ted or Patrick, I'm going to ask you to get out your crystal ball on this next one. One of the things that we saw during the -- because you talked about rising interest rates, one 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 2, there's much more of an uncertain economic environment that I think it's tied to.

So are you seeing any spread -- because as borrowers are looking at the forward LIBOR curve, 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 as rates continue to rise?

Yes, it's a great question. I mean, usually, you have -- like any time of my career, you've had rising rates in response 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 regions 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, 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 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've kind of just -- haven't been as successful on the fundraising front. But deal flow has picked up like dramatically. So I'm sure you've heard that from others. So our deal flow was down -- our traditional like sponsored deal flow was down dramatically in the first quarter, and it's picked up -- it's normalized pretty aggressively over the last couple of 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 started to trickle down into the private market? I know that, that takes a while that'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 had in 2021?

Yes. So I'll give you 2 answers to that. One is, going back to your question earlier, we've actually tried to push on wider spreads on the people and have generally been unsuccessful, I'd say. And then in terms of purchase prices, 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 is 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 like listing great companies.

So again, the quality -- not only is our deal flowed down in the first quarter, but the quality of the deals that we're seeing was down as well. So we were pretty -- we would turn down a lot of stuff over the last 3 months. 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 -- our market always lags the general liquid markets for whatever reason. So we're usually on like a 3-month lag. So it should be coming into our market at some point.

That's a really interesting point. Yes, 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 (inaudible) interesting.

Yes. Not to belabor the point, but like again, people are only coming to us for financing who need financing. So like the IP -- last year, we were doing a lot of clinical opportunistic refis. 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 business is down a lot as well.

Okay. 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 sits kind of on the broader BC Partners platform. Out of the new deals that you guys originated in the first quarter or you could even give the last 6 or 9 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, like what percentage of the deal is Portman Ridge taking on of the total deal size that's staying in your platform? Just kind of rope that for me, just trying to get a sense here.

Yes. Good question, Ryan. This is Patrick. So 2 different answers or I'll answer 2 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 co-invest across our platform for a lot of esoteric port 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 (inaudible). 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 upside to existing name or something like that, it will 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 2 is what percentage is Portman versus other funds. 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 our sort of top position size in Portman is something like $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 are 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 to allocate what it gets allocated once we get the amount. So again, it was a bit of a long-winded answer, but to say we try and target $10 million to $15 million positions and if we aren't getting enough, every fund could scale back in a pro-rata manner.

Got you. No, that's helpful kind of context of where you guys sit and I guess things 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 -- Like very round numbers, 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.

(Operator Instructions) Your next question comes from the line of [David Miyazaki].

You guys are sort of in an interesting position to comment about some middle market loans because in a lot of ways, what you're doing is cleaning up some of the underwriting histories of other teams. And so one of the things that I think about or I worry about as rates going higher is that for BDCs that have floating rate asset portfolios, it puts -- I think, Ted, you said a tailwind in your earnings, but 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?

Yes. 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 today.

Now again, if rates go like 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. And so we've done it for our portfolio, and it doesn't have -- (inaudible) shock interest rates. 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 the supply chain comment, it doesn't sound like it's starting to get better at all or if it is, it's only happening in a small amount? Or is it still getting worse, I suppose?

All the companies were telling us like 2, 3, 4 quarters ago that they thought it was temporary and they thought it'll all be cleaned up by now, and they're not seeing 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 when I say this, I mean, in very discrete sectors, 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 it -- just like the economy slowing down a little bit is helping with the supply chain in a kind of a perverse way. And then obviously, the other thing we're focused on is input pricing. So obviously, oil -- retail gasoline today is at an all-time highs or -- not all-times, but near-term highs. So we're -- we've gone through our 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 mentioned Grupo HIMA now sort of in the past recognizing that was something that you inherited, but that was a lot -- it's 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?

Yes. I mean -- this is Patrick by the way. I mean how much time do you have? Look, I think that increase 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 Grupo HIMA specific, but they didn't really have like -- unlike the kind of U.S. system more 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 be aware of very, very large macro trends that aren't working in your favor, such as demographics in Puerto Rico. But I'm not sure there is 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.

Yes, I think the other lesson learned is in my 25 years of doing this, when a hospital chain begins to struggle, it's -- I'm not sure I've ever seen the ability for them to successfully turn it around. Like I -- and 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 of labor. And your revenues, it's hard to drive incremental revenue, right, because you can't increase prices.

So it's a -- 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, like were on the verge of turning around many times, then COVID happened and then it was hard to get -- they make their money on optional surgeries and there's a lot of intervening factors that were related to the pandemic.

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

Yes. So I'll make a couple of 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's a lot of weakness before that. And so there's already air coming out of the balloon on some of these valuations. I think what's happening is, generally speaking, 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 people are now getting their first quarter numbers, endowments, foundations and others. And treasurers are down, investment grade's down, high yield's 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 cashback 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 on to assets longer, but there is pressure coming from the LP community to return money.

That's rather interesting. And so some of the deal volumes, 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 satisfying?

Yes. I mean I think the LP community is saying if you guys want to raise a new fund, you 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 there's been -- 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.

Your next question comes from the line of Steven Martin.

Can you hear me?

Yes, Steven.

Good, good. So a couple of questions. On net leverage, you admittedly are at the low end of the net leverage ratio slightly less than 1 and your target much higher. And I know you said you were intending to run at the lower end. But is 1 really where you're intending to run? Or is it somewhere between 1 and 1.25?

No, I'd say it's certainly more in the 1.25% range. It's a very short answer.

Yes, Stephen. And again, like 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 kind of pulled back a little bit. So if you look at our balance sheet, we have excess cash but we have deployed some of that cash subsequent to quarter-end. Point in time, if you did our leverage today, it would be higher.

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

Yes, 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, OHAI and -- was sort of long -- 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?

Yes. I mean -- well, yes, I mean, here's -- the quick answer is I think all the portfolios we bought are outperforming our underwriting case. And I was giving the speech the other day, 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 the 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.

Yes. I wouldn't say there was anything materially different about any of the "portfolios" in terms of valuation. I think, generally speaking, there was a bit of a headwind from rate increases just in terms of valuations, offset by company-specific type items to the good or bad. But I wouldn't say that there is 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're sanguine with them where they are? Are you…

I'm sorry I didn’t -- yes, I'm sorry. I didn't appreciate the question there. Look, I'd say certainly for the OHAI 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 position. 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.

Yes. And then thematically, we're very, very focused on reducing exposure to small EBITDA companies. So we do have a couple of 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 -- we're pretty aggressive on 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 as you -- given your lower leverage and the discount to NAV or what's your sort of thought on buyback and size?

Yes, sure. So this is Jason. Yes, you're absolutely right. The dollar amount and the share discount that we purchased in Q1 was a function of basically of 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 I don't anticipate changing that anytime soon.

Okay. 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 period.

There are no further questions, let me turn the call over back to Mr. Ted Goldthorpe.

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 invite anybody to call any one of -- 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.