Fidus Investment Corp (FDUS) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fidus Investment Corporation's Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead ma'am.

Thank you, Josh, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's Fourth Quarter 2019 Earnings Conference Call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer.

Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd like to remind everyone that today's call is being recorded. A replay of the call can be available by using the telephone numbers and conference ID provided in the earnings press release.

In addition, an archived webcast replay will be available on the Investor Relations page of the company's website following the conclusion of this call.

I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable, based on estimates, assumptions and projections as of today, February 28, 2020, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements.

With that, I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody. And good morning, everyone. Welcome to our fourth quarter 2019 earnings conference call. I'll open today's call with a high-level commentary on our quarterly results. And then, I'll cover our investment portfolio performance and conclude with comments regarding our view of the market and activity levels for 2020. Shelby will cover the fourth quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.

Consistent with the first three quarters of the year, our fourth quarter results demonstrate the effectiveness of our strategy and inception to build a well-diversified portfolio debt and equity investments in lower middle-market businesses that we believe will produce high levels of recurring income and offer us the opportunity to participate in equity gains, thereby over time preserving capital and generating attractive risk-adjusted returns. We continue to build our portfolio, carefully selecting companies that have strong yet defensible market positions and positive long-term outlooks, deliberately opting for quality over quantity.

As a result, we grew NAV to $412.3 million, or $16.85 per share, as of December 31, 2019, compared to $16.47 per share as of December 31, 2018. This represents the fifth consecutive year of NAV per share increases.

Another way we evaluate the effectiveness of our strategy is by tracking the net increase to net assets. For 2019, we generated $1.98 per share, amply covering our dividend payment of $1.60 per share for the year. For each year, since 2015, the net increase and net assets is equal or exceeded dividend payments, resulting in a 5-year average of $1.95 per share, relative to the dividend payment of $1.60 per share.

From our perspective, these matrix demonstrate the deliberate value creation that our portfolio is designed to produce over time. Finally, our return on equity is the testament to the effectiveness of our strategy. For 2019, our model generated an ROE of 11.9%. Regardless of whether you measure ROE over 3 years or 5 years, our ROE stands out in the BDC universe.

On December 20, 2019, Fidus paid a regular quarterly dividend of $0.39 per share, and a special dividend of $0.04 per share. At December 31, estimated spillover income or taxable income in excess of distributions was $15.3 million, or $0.63 per share. On February 12, 2020, the board of directors declared a regular quarterly dividend of $0.39 per share, which will be payable on March 27, 2020, to stockholders of record as of March 13, 2020.

Our operating results for the fourth quarter were solid. Adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized and unrealized gains and losses was $8.3 million or $0.34 per share, compared to $11.3 million or $0.46 per share for the same period last year.

In terms of originations for the fourth quarter, we invested a total of $43.6 million in debt and equity securities during the quarter. Similar to the third quarter, the majority of the fourth quarter originations were add-on investments in 8 existing portfolio companies, primarily in support of M&A activity. Investments in new portfolio companies consisted of $6 million in first lien debt and common equity in Haematologic Technologies Inc., a leading provider of biologic products and GMP-compliant assay development and testing services to the biopharmaceutical industry.

$8 million in first lien debt and preferred equity in Prime AE Group, Inc., a multifaceted architecture and engineering services firm focused on domestic infrastructure projects. Subsequent to year-end, we invested another $26 million in debt and equity securities in two new portfolio companies. These investments consisted of $11 million in a revolving loan in first lien term debt of Combined Systems, Inc., a leading designer, manufacturer and marketer of non-lethal security products for the global defense and law enforcement markets.

And $15 million in first lien debt of Routeware, Inc., a leading provider of highly integrated fleet automation software and systems for waste haulers and municipalities. In terms of repayments and realizations, we received proceeds totaling $21.8 million, which included payments totaling $8.1 million related to the exit of our debt and equity investments in Simplex Manufacturing Company. And payments totaling $9.8 million related to the exit of our debt and equity investments in U.S. Pack Logistics LLC. In connection with the exits of these 2 portfolio companies, we realized gains totaling $3.8 million, which was offset by a $13.8 million realized loss on our investment in Oaktree Medical Centre for a net realized loss of $10 million for the fourth quarter.

Subsequent to year end, we received proceeds totaling $20 million, including a realized gain of approximately $9.8 million on a distribution of our equity investment in Fiber Materials, Inc., and a $9.2 million repayment in full on our first lien debt investment in Hunter Defense Technologies.

Turning to our portfolio construction and matrix, the fair value of our investment portfolio as of December 31, 2019, grew to $766.9 million, equal to 108.9% of cost. We ended the quarter with 61 active portfolio companies and 3 companies that have sold their underlying operations. On a fair value basis, the breakdown of the portfolio by investment type as of December 31 was as follows: first lien debt, 14.1%; second lien debt, 49.9%; subordinate debt, 18.4%; and equity, 17.6%.

With this mix, our portfolio remains well-positioned to provide us with a high level of current and recurring income from debt investments, along with the opportunity for incremental returns from monetizing equity investments. As of December 31, 2019, we had debt investments in 1 portfolio company on nonaccrual status. Accent Food Services, equal to 4.3% of our portfolio on a fair value basis.

While the company and its management team implement operating improvements, we are having to be patient until the company delevers. We continue to believe in the long-term prospects of the company as reflected in our Q4 fair value. GreenFiber was moved back to accrual status as a result of its improved financial performance.

Moving to our portfolio performance. We tracked several quality measures on a quarterly basis to help us monitor the overall quality, stability and performance of our investment portfolio. First, we tracked the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperform, and a rating of 5 is an expected loss. At December 31, the weighted average investment ratio for the portfolio was 2 on a fair value basis, in line with prior periods.

Another metric we track is the credit performance of our portfolio which is measured by our portfolio company's combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the fourth quarter, this ratio is 4.6x, compared to 4.7x for the third quarter.

The third measure we track is the combined ratio of our portfolio company's total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio of companies have in aggregate to meet their debt service obligations to us. For the fourth quarter, this metric was 3.4x, compared to 3.3x for the third quarter.

We believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our borrowers' enterprise value, in support of our capital preservation and income goals.

In closing, 2019 was a year of accomplishment in terms of our overall portfolio performance, proactive portfolio management and equity appreciation. Originations, which totaled a record $219.2 million, continued to encompass a diversified mix of first lien debt, second lien debt, subordinated debt and equity investments, reflecting our ability to offer customized and flexible financing solutions to lower middle market businesses and steadfast commitment to underwriting disciplines.

Within this mix we consistently deployed more capital and first lien debt investments during the year so that in aggregate first lien debt accounted for $84 million, or 38% of 2019 originations compared to $25.4 million, or 12% of total originations for 2018. Proceeds from repayments and realizations were $120.6 million for the year, including proceeds of $20.3 million from equity investments.

As a result of these achievements during 2019, we extended our track record of capital preservation, grew NAV per share for the fifth consecutive year and continued to create value for our shareholders.

Since the beginning of 2020, we received a distribution on our equity investment in Fiber Materials, Inc. which resulted in a $9.8 million gain. We also just completed a significant transaction with an undisclosed institutional investor for the sale of 50% of our equity investments in 20 portfolio companies, including Pfanstiehl, Inc., our second largest equity investment. We received net proceeds of $35.9 million from this transaction, and realized an approximate net gain of $20.4 million. Reflecting our continued belief in these 20 portfolio companies, we retained 50% of our equity investments in them.

With this opportunistic transaction, we have proactively moved the needle in a meaningful way toward our goal of reducing the percentage of equity in our portfolio on a fair value basis, generating $66.8 million in proceeds from equity investment dispositions since the beginning of 2019 to be redeployed into income producing assets.

Looking ahead into 2020, M&A activity in the lower middle market is reasonably sound. And with our strong relationships and deals with deal sponsors, our industry expertise, and ability to provide customized and flexible solutions, originations should remain solid.

Our equity portfolio has given us incremental capital to redeploy into income-producing debt investments, and continues to offer us attractive opportunities to realize gains and boost returns. Our debt portfolio remains well-positioned to provide us with current and recurring income and to withstand an economic downturn should one occur.

As always, we remain focused on managing the business for the long term with an emphasis on capital preservation and generating attractive risk-adjusted returns.

Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

Thank you, Ed, and good morning everyone.

I'll review our fourth quarter results in more details and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q3 2019.

Total investment income was $19.5 million for the 3 months ended December 31, 2019, a $0.3 million increase from Q3 2019, primarily due to a $0.6 million increase in dividends, offset by a $0.2 million net decrease in interest income primarily related to placing Accent Food Services on nonaccrual status, and a $0.1 million decrease in fee income.

Total expenses, including tax provisions, were $14.1 million for the fourth quarter, approximately $2.3 million higher than the prior quarter, primarily due to an increase in the capital gains incentive fee accrual of $1.6 million related to meaningful appreciation and the fair value of the portfolio, a $0.5 million increase in interest expense related to the $63.3 million public notes offering completed in Q4, and the annual excise tax expense.

In Q4, the excise tax expense was $0.4 million as a result of $15.3 million or $0.63 per share of spillover income. As of December 31, 2019, the weighted average interest rate on our outstanding debt was 4.7% versus 4.6% in Q3. As of December 31, we had $364.8 million of debt outstanding, comprised of $157.5 million of SBA debentures, $182.3 million of public notes, and $25 million outstanding on the line of credit. Our debt to equity ratio was 0.88x or 0.5x statutory leverage, excluding exempt SBA debentures.

Net investment income, or NII, for the 3 months ended December 31, 2019, was $0.22 per share, versus $0.30 per share in Q3. Adjusted NII, which excludes any capital gains, incentive fee, accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.34 per share in Q4 versus $0.35 per share in Q3.

For the 3 months ended December 31, 2019, Fidus had approximately $10 million of net realized losses related to a $13.8 million of realized losses on Pain Management Associates, offset by $2.9 million realized gain on the exit of our equity investment in Simplex Manufacturing Co. and a $0.8 million realized gain on the exit of our equity investment in U.S. Pack Logistics.

Now turning to portfolio statistics. As of December 31, our total investment portfolio had fair value of $766.9 million. Our average portfolio company on a cost basis was $11.5 million at the end of the fourth quarter, which excludes investments in 3 portfolio companies that have sold their operations or in the process of winding down.

We have equity investments in approximately 93.7% of our portfolio companies with a weighted average fully diluted equity ownership of 5.3%. Weighted average effective yield on debt investments was 12% as of December 31. The weighted average yield is computed using the effective interest rate for debt investments at cost, including the accretion of original issued discount and loan origination fees, but excluding investments on nonaccrual status, if any.

Now, I'd like to briefly discuss our available liquidity. As of December 31, our liquidity and capital resources included cash of $15 million, $75 million of availability in our line of credit, and $6 million of available FMC 3 debentures, resulting in total liquidity of approximately $96 million.

Taking into account subsequent events, we currently have $125.6 million of liquidity and access to $161.5 million of additional SBA debentures under our third SBIC license subject to SBA regulatory requirements and approvals.

Now, I will turn the call back to Ed for concluding comments. Ed?

Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work, and our shareholders for their continued support. I'll now turn the call over to Josh for Q&A. Josh?

(Operator Instructions) Our first question comes from Paul Johnson with KBW.

Congratulations on the equity exits and as well as the GreenFiber recovery. Those are obviously 2 real positive developments for shareholders. And the exits obviously are always difficult to effect. So once again, congratulations for that.

On the GreenFiber recovery, I'm just curious, was the investment accruing any income for the quarter or for any sort of partial period of the quarter?

I'll let Shelby answer to that, but…

It was. We put it back on accrual status effective October 1. So we had a full quarter's worth of interest income.

Okay, thanks. Great. And then, do -- sorry, excuse me. Did the portfolio exits, I mean did those make you anymore comfortable around, obviously, operating earnings getting up back into covering the dividend? I mean when I run the math I think I get to around $0.03 to $0.04 or so for redeploying the capital from both the portfolio of equity investments as well as the individual separate exit that you had earlier in year as well.

Right. Sure. So I guess you're talking about dividend coverage for a second. I think what our belief system is, is we have a well-diversified portfolio that's performing in a very solid manner, a very strong and now previously over-weighted equity portfolio that can be rotated into higher-yielding investments and a strong balance sheet, including a modestly leveraged one.

Over the past 6 months we've realized over $60 million of proceeds from equity investments, and we plan to invest a large part of those proceeds into income-producing assets that should enhance the current income portion of our P&L.

The quality of our portfolio positions us well to continue to perform well for our shareholders over the long term. This recent equity monetization event only enhances this ability. And we also like having $15.3 million of spillover income to support any shortfalls along the way. So in short, we are very comfortable with our dividend as we sit here today.

And I think more importantly, we're confident in our strategy to invest in the debt and equity of lower middle-market companies. We target 90% debt and 10% equity asset mix on a cost basis. We believe this approach generates high levels of recurring revenues and the opportunity for capital gains.

We also believe NAV preservation is imperative over time, if you're going to run a BDC well. And if you can grow NAV while running a BDC well, it only puts you in a better position. So finally, we believe our track record. Our NAV track record and overall track record support these thoughts.

Yes. And I would just add to note that particularly the exit the Fiber Materials and then the monetization of a portion of our equity portfolio happened here as a subsequent event kind of mid- to late-Q1. So it will take a little while to redeploy those proceeds. But big picture, your math is right, it's just a question of timing in terms of when we start to get those redeployed into yielding assets.

Sure. Sure. And thanks for all that commentary. There is no doubt that your strategy has obviously worked very well in the equity investments. It's been very beneficial over time for shareholders. And on that exit with the portfolio of equity investments this quarter, I'm just curious, is there any sort of chance for future transactions similar to that to take place either for a basket of investments or even just one-off individual equity investments?

That's a great question. And I'd say, "Is there a chance?" I'd say, "Absolutely." But it's not something we are working on right now. We very much like our equity portfolio, and so plan to take those to the end if you will. But if there is a reason to think about a similar transaction whether on a one-off basis or a portfolio, then we'll clearly do that. But we like the portfolio and the construction of it as it sits today.

Sure. And my last question was just on the pressure of the portfolio yield. Obviously that's just been coming down naturally over the years with declining rates. But just given that you have a less exposure to floating rate assets than most other BDCs, I'm just curious for the decline this quarter, has that been because of lower LIBOR or just continued spread tightening in the lower middle-market or perhaps just some higher-yielding investments that repaid during the quarter?

Sure. Let me -- I'll give you a little perspective here I guess real quickly. So debt yields in our portfolio have dropped about 100 basis points, from 13 to 12, I guess over the last 24 months. In 2018, new investment yields were lower than debt repayments, which is what you just mentioned, the fact that new investments, they were at 11.9% in 2018, whereas repayments were in the 13.5% range. In 2019, new investment yields were 11.8%, and repayments were approximately 14.1%.

So to summarize, I think in this quarter repayments for higher-yielding debt investments clearly impacted things. I think the decline in Libor had a impact as well. And finally, moving tax in nonaccrual also impacted. So I'd say those 3 things were the reasons for this quarter's decline.

On a go-forward basis, I don't think we expect to see material declines. So, we -- I think we would plan on it being pretty stable from this perspective, but small declines could happen, could LIBOR go down more. I would tell you, on the LIBOR side of things we have floors on LIBOR of 1.5% to 2% in most of our floating rate deals, not all, but most. So that largely protects incremental reductions in LIBOR. Hopefully that's helpful.

Our next question comes from [Matt Jayden] with Raymond James.

I guess two quick questions on the equity exits on February 25. So first, can you just give any general guidance were those exits at the marks close to or at the [14 99] marks?

Yes. Great question. And the answer to that is the net purchase price was very -- approximately the fair value of the Q4 marks on all the names.

Okay. And then what about, were there any NOLs to shield some of those gains?

There are a few NOLs that -- Ed mentioned the net -- approximate the net proceeds of the $20.4 million we had taken into account as some of these equity investments in fact were held at some of our blockers. But the NOLs with the grand scheme of things were not hugely material. But we do have a few NOLs and some blockers that will offset some of this.

And I would also just mention, it's a difficult thing to model, but for the RIC we do have some capital loss carry forwards that were -- further offset some of the gains recognized by the RIC in terms of distribution requirements.

Okay, that is all helpful. And then, I guess one follow up quickly on that. How should we be thinking about spillover income just with all this coming back to Fidus?

So again, that's where I would kind of point you to, the capital loss carry forward that we have available at the RIC. It's about, call it $20 million to $22 million at the end of '19. So that will not completely shield the gain recognized by the RIC, but it will definitely offset a large majority of it.

Yes. And then, to pivot a little on to Accent Food. So still some pretty confident marks on the Accent. Can you give any guidance on kind of timeline? I mean it still seems like things are looking okay there. Any timeline on guidance of when we could see this maybe coming back to accrual?

It's a great question, and I wish I had a crystal ball. But let me just touch on the Accent Food situation which again we do have a fair bit of confidence in, and the numbers are pretty stable to improving. But to refresh for the group, Accent is a leading provider of customized refreshment and break room, food and beverage services to a diverse base of over 3,500 customers, primarily in the Texas market but they are also in other geographic regions. Their core services include vending services, micro markets and coffee services, focused on really the small- and medium-size business segment, also the government market. So it's pretty much a day-in, day-out business, and it has pretty meaningful size which we like. Since our involvement began, the company has been acquisitive. They've also invested in the infrastructure of the company to help facilitate its growth objectives.

Companies had some missteps along the way of this growth path. Recently though, and thankfully the company hired a new CEO early last fall, a new COO earlier in the year, and more recently hired several additional senior team members to round out the team. To be succinct, these were badly needed changes and hires. We're seeing significant positive changes and meaningful change in the operating performance of the company. I would say the situation is very stable and we're hoping for continued improvement.

You know, as a second-lien lender in this situation, we are having to be patient for the time being, post negotiation with the sponsor and the senior lenders, meaning we're not getting paid, and thus the nonaccrual status. So hopefully that gives you kind of some perspective on the whole situation. That's about as much as I can talk about, but…

Okay. Great. And then I guess last question, just a quick one, dividend and fee income came in a little lighter than we were expecting, and I know it can be inherently lumpy. But is there anything structurally in the portfolio that's changed, that could lead the lower dividend or fee income in the future that we should be taking note of?

Sure. Great question. I'd say dividend income is truly episodic for us these days. And we did have a dividend in the fourth quarter. But if you looked at it for the whole year, dividends were down in a material way. And so, they truly are episodic. And so it's hard to forecast dividends from our perspective.

On the fee side, the quarter ended up being, I would say lackluster, from an originations perspective. I think deal flow is pretty good. But we did have 2 deals fall apart for diligence reasons. So we had to walk away from 2 situations which did impact our final originations number. But again, deal flow was fine. It's just that's kind of how cookie crumbled, as a result of having kind of lackluster originations, fee income was down a little bit relative to some more robust quarters, I'd say.

Yes, on the dividend question, the only other comment I'd make is that as Ed mentioned, we did sell a portion of our investment in Pfanstiehl. That was one of the portfolio companies that provided a kind of annual dividend if you will, so that'll get reduced going forward subsequent to the sale. So looking forward to 2020, dividends will continue to be episodic. But we have exited some of the portfolio companies that kind of generated some of the routine annual dividends.

Our next question comes from Mickey Schleien with Ladenburg.

High-level question, if I could start. As we look out through the balance of the year, Ed, what are you thinking in terms of the performance of your borrowers? If you can give us an update on how the revenues and margins have been behaving. And what is your expectation for demand for the sort of middle market loan capital that you provide this year?

Both great questions. I'll start with the portfolio and what we've seen. I think we're pleased with the overall quality of our portfolio. And what we've seen is revenue and EBITDA grew overall and grew in a good majority of our portfolio company. So through the end of last year we saw -- I'd say, healthy, maybe not robust, but healthy growth, which we were pretty pleased with.

And your second question, what was the second one?

Just your overall sense of demand for middle market loans this year, taking into consideration the dry powder that private equity still has and the likelihood that the economy will continue to grow this year.

Sure. It's a tougher year to forecast, this is what I'd say. It's an election year. We do have the coronavirus out there. That could impact, probably will impact deal volume a little bit. But there is quite a bit of gunpowder out there in terms of folks wanting to buy companies. And assuming performance is stable, I also think the M&A market will remain vibrant, if you will, maybe not robust but vibrant. So if for some reason there's a slip, it's going to slip on both the origination side as well as repayments or realization side. So we're prepared for that as well. Either one of those scenarios is okay. But it's -- I think it's tough to forecast. But we're anticipating at the moment a reasonably sound M&A environment, albeit I think it'll slow a little bit in the second -- towards the election time, so.

I understand. And in terms of the virus, I know it's very hard to determine with accuracy what the ultimate impact will be. But looking at your portfolio, are there any obligors in there that are just -- where there are red flags already in the sense that we've seen stocks exposed to travel or anything dealing with the global supply chain, those are obvious situations where the virus is going to impact results. But BDCs in general tend to be domestically focused, but we could see situations where they're importing products from abroad, or maybe they're selling their services or products abroad. And I'm trying to get a handle on whether that would be an issue in general, and in Fidus' case specifically?

Sure. Great question. Great question. It's -- and we are very domestically focused, which I think is a positive here. We have reached out to all of our portfolio companies over the past couple of weeks. And what I would say at a high level, none of the companies expressed high concern. Unfortunately, in a couple of cases, people had contingency plans that they were working on if supply was delayed. Clearly we have some manufacturers in our portfolio that do rely on parts of China and then other parts of the world. But thankfully, they have second sources and other places to get those materials and aren't solely dependent on China, for instance.

So I'd say -- what I'd say is the situation is dynamic, and everyone, including our portfolio companies, is learning more each day as it goes by. At the moment, we don't see anything meaningfully problematic, unaware of anything in our portfolio that is a big concern. But as you would imagine, we're staying close to our portfolio companies given the fluid nature of the situation. And I'll just highlight, I do think it's a bit of an unknown that will this coronavirus impact deal volume. And if it does, it'll be both on the originations and the repayment side of things. But it's an unknown at the moment. We're still seeing deal flow as we sit here today, obviously, and they're pleased with what we're working on at the moment. So -- but we'll be taking it into account, obviously, as we move forward.

And just a couple of sort of housekeeping questions. Was there any reversal of previously accrued income for Accent Foods?

There was not. It's just that we did place it on nonaccrual status at the beginning of the quarter, so there was no interest accrued in Q4.

Okay. And lastly, Ed, you mentioned LIBOR floors, which is an interesting topic given the shape of the forward curve. But I'm going to start asking about how documents, particularly for older vintage deals handle the transition from LIBOR to SOFR, is that language that generally exists in your documents. Or do you have to go back to all of your borrowers and amend the documents because that's supposed to take effect next year, right?

Sure, sure. The documents have -- if LIBOR is not available, they go to different avenues, if you will. So they're already in the documents. Does it -- I still think there's going to be discussions. But we're covered in the documents.

Our next question comes from Tim Hayes with B. Riley FBR.

Most have been asked and answered at this point, but just one from me. Can you give us a little color on the pipeline right now if the mix of potential investments is largely consistent with what you've seen? As you think about redeploying capital from the equity exits and just asset mix in general, do you see shifting, continuing to shift more first lien? Or does it just depend on what comes your way?

I mean, I do think there'll be a continued shift towards first lien. But -- and it's what we're seeing in the market. We're having good success in the market with it. And we're pleased with it, the ultimate returns that we're modeling in those situations. And I think we're also providing solutions in the marketplace that are being well-received. From a pipeline perspective, we are working on a couple of deals that hopefully will make it to the finish line and we're evaluating a fair number of deals for later on, but those aren't in kind of an awarded state, if you will.

So we're continuing to be busy, if you will. And -- but I wouldn't say that the M&A market coming into this year is robust. And now you've got the coronavirus that you got, at least everyone's got to be thinking about and what is that, how does that impact things. It's a little bit of an unknown. But I do think the market is open, there's equity capital available, there's debt capital available. And thus, high-quality companies, I think people will be looking to transact on as we move forward. So I'd say it's not robust but it's active and we're trying to participate in that activity.

Okay, that's helpful. And if I could just pick on that a little bit more though, those deals that you're working on that may or may not close, are they largely first-lien, are they kind of in industries that are consistent with the ones you're already playing in the portfolio? Any I guess any other characteristics that are either usual or unusual?

Yes, they are primarily first lien. And I'll also say there is one second-lien deal that we are looking at. And then another thing I would mention is, our portfolio continues to be pretty active from an acquisition perspective. And we are obviously deploying capital in those situations where we see it being prudent. So that's a third source of deal volume, if you will. So first lien, second lien and then add-ons to existing positions.

Understood. That's helpful. And then, as you continue to shift a little bit more first lien, how do you think about leverage on the portfolio shifting as well?

I think it could come down over time. I bet it will. I do -- what I don't want you to come away with is think we're just doing first lien because it's not the case. We are continuing to invest in second lien and subordinated debt securities. The bar has -- it's high, has been high always for us. I think we're primarily investing in second lien in little bit larger businesses and really high quality ones. And so we're still searching for those. But I do think as a percentage over time, the first lien portfolio will grow. And those, generally speaking, are our lower-lever deals. So you could see leverage come down a little bit because of that, but I don't want to oversell that point, but it's a good question.

Okay. Yes. And I really appreciate those comments. And I guess when I meant leverage and it's kind of financial leverage on your balance sheet technically, but that's -- that was good color as well.

I got you. So, yes, at the moment what we've talked about is kind of a point A to 1x GAAP leverage is the target. And could we -- if the portfolio morphs into mostly a first-lien portfolio over time, could we increase that a little bit? I think the answer to that is yes. But at the moment, we are sticking to kind of what we said. And I don't think the mix will skew that much. But from time to time, if we need to we can go over 1. But the goal is to stay kind of 1 and under as we look forward.

Our next question comes from Bryce Rowe with National Securities.

Couple of questions for you. On the equity sale, obviously Pfanstiehl accounted for a good chunk of the dollars for the proceeds and the gain. Curious, the other 19 equity investments that were sold, did they all carry realized or unrealized gains as of 12/31? Or was there some mix of gains and losses?

I don't have the list in front of me, but substantially all of them had some verse, a little bit of unrealized gain in them at Q4. Maybe there is one or two that (inaudible), but do you have it, Shelby?

Yes, I have the list. There was only one that had just a very modest loss.

Okay. And, any commentary you can give around why those 20 versus the other, the other 40 that are in the portfolio? Was it ones that you guys had kind of targeted to try to dispose of a portion? Or was there specific interest from that institutional investor?

Sure. Great question. I mean to be honest, we sat down around the table and said let's put together a portfolio that we think is a very high quality portfolio and also accomplishes some of our goals. And I think it -- and so that's -- so it was -- we've structured it for the most part. Clearly there were some conversations with the institutional investor on certain names. But at the end of the day we wanted to put something together that we thought had a high likelihood of getting done and we felt really good about. And so that was the group of names that. And also there's a limit in a situation like this of how many names you can put in the portfolio. We actually push that limit. I think there was a goal to have fewer names. And so -- but that's -- that's kind of how it came together.

Okay, that's good. That's good color. And then, next question. Now that you've got, you've obviously got some proceeds that have come in here recently, stocks have been weak, BDC stocks are weak. You've got plenty of uncertainty around this coronavirus situation. You've got a buyback in place. Any thoughts on being active with that buyback now?

It's a great question, Bryce. It's -- we've been getting closer and closer to NAV until the last 5 or 6 trading days.

I know.

And so it's something we haven't put a ton of thought into, but I have been actually in the last 2 or 3. What I'd say, to be more formal, is we have a $5 million share repurchase program in place that was reaffirmed in the fourth quarter of last year.

We're obviously mindful of the value of our investment portfolio, may not always be reflected in our stock price. And for that reason we continue to look for ways to enhance shareholder value. And this buyback may be one of those ways. When we evaluate it, I just want to highlight we're going to look at the liquidity of our, we're going to look at our capitalization, we look at our banker agreements, a leverage ratio and just make sure we're being prudent. But if the opportunity arises and we think it's the right thing to do, then we clearly we will be evaluating that.

(Operator Instructions) And I'm not showing any further questions at this time. I would not like to turn the call back over to Ed Ross for any further remarks.

Thank you, Josh, and thank you everyone for joining us this morning. We look forward to speaking with you on our first quarter call in early May 2020. Have a great day and a great weekend.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.