Fidus Investment Corp (FDUS) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Fidus Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to one of your speakers today, Ms. Jody Burfening. Please go ahead.

Thank you, Vic, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's Third Quarter 2021 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 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 to Fidus Investment Corporation.

Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, November 5, 2021, 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 third quarter 2021 earnings conference call. I hope all of you, your families, friends and coworkers are staying healthy and well. I'm going to open today's call with a review of our third quarter performance in our portfolio at quarter end and then offer you an update of our views on deal activity in the lower middle market. Shelby will cover the third quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions.

As expected, activity levels in the lower middle market from both an M&A activity and refinancings perspective were healthy and robust during the third quarter, continuing a period of heightened activity that began nearly a year ago. Against this backdrop, our portfolio performed well, and we continue to see a strong flow of opportunities for investments in high-quality businesses that possess resilient business models, that generate strong levels of cash flow to service debt and that have positive long-term outlooks. Repayments remained at high levels and outpaced originations due in part to the timing of deal closings.

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 $9.8 million or $0.40 per share compared to $9.7 million or $0.40 per share last year. NAV grew to $447.5 million or $18.31 per share, reflecting both a solid operating performance and underlying portfolio value appreciation. In addition, we reported net realized gains of $8.4 million or $0.35 per share as we harvested several mature equity investments in conjunction with sales and exits of portfolio companies.

Fidus paid a base quarterly dividend of $0.32 per share, a supplemental cash dividend of $0.06 per share and a special dividend of $0.04 per share for the third quarter. As a reminder, the Board has devised a formula to calculate the supplemental dividend each quarter, under which 50% of the surplus in adjusted NII over the base dividend from the prior quarter, is distributed to shareholders.

On November 1, 2021, the Board of Directors declared a base quarterly dividend of $0.32 per share, a supplemental quarterly cash dividend of $0.04 per share and a special dividend of $0.05 per share for a total dividends of $0.41 per share for the fourth quarter. The dividends will be payable on December 17, 2021, to stockholders of record as of December 3, 2021.

In terms of originations, we invested $78.2 million in debt and equity securities, of which $39.6 million or roughly half of the total was invested in first lien debt and roughly 40% was invested in second lien debt. Investments in new portfolio companies consisted of: $14.3 million in first lien debt and common and preferred equity in Cardback Intermediate, LLC, a leading provider of chargeback prevention and recovery services for eCommerce and Card Not Present businesses; $10.5 million in second lien debt and common equity and PowerGrid Services Acquisition, LLC, a leading utility services business providing repair and maintenance services for distribution, transmission and substation infrastructure.

As you can see, we continue to focus on companies with stable and diversified demand characteristics, relative insulation from the supply chain constraints and inflationary pressures currently weighing on many companies, and strong positive long-term outlooks. The remaining $53.4 million is a new $20 million second lien loan commitment in Worldwide Express and a number of follow-on investments in support of M&A transactions on the part of some of our portfolio companies.

Shortly after the end of the quarter, we invested a total of $27 million in 2 new portfolio companies, these were: $8.5 million in first lien debt, subordinated debt and common equity of Auto CRM LLC, doing business as Dealer Holdings, a leading SaaS-based provider of customer communication software to the auto repair market; $18.5 million in first lien debt, common equity and warrants of Acendre Midco, Inc., a leading provider of cloud-based talent management software solutions.

In addition, we committed $16 million in second lien debt to a leading technology platform for digital customer acquisition across all consumer vehicles, including financial services, home services and insurance, which we expect to fully fund in Q4. In terms of repayments and realizations in the third quarter, we received proceeds totaling $127.5 million, with the majority from second lien and subordinated debt investments, and $23.4 million in proceeds from monetizing equity investments.

In terms of exits, we received payment in full of $21 million on our first lien debt and converted debt to equity in Hilco Technologies and realized a net loss of approximately $1 million on our original equity investment in the company. We received payment in full of $11.4 million on our second lien debt in CRS Solutions Holdings LLC, received payment in full of $20 million on our second lien debt in Worldwide Express LLC and realized a gain of $3 million on our equity investment. In conjunction with the sale of Worldwide Express, we invested $1.5 million in common equity, of which $0.8 million was rolled over from the original common equity investment, and funded a $20 million second lien loan commitment.

We received payment in full of $11 million on our subordinated debt investment in LNG Indy, LLC and realized a gain of $4.5 million on our equity investment. We received payment in full of $21.5 million on our subordinated debt in Allied 100 and realized a gain of $1.8 million on our equity investment. We received payment in full of $11.6 million, including a prepayment penalty, on our subordinated debt in ECM Industries, LLC.

In addition, we received a cash distribution of $0.8 million on our equity investment. We received payment in full of $17.3 million, including a prepayment penalty, on our debt investment in Routeware, Inc. Subsequent to quarter end, we received payment in full of $7.1 million, including a prepayment penalty on our subordinated debt in Tranzonic Companies.

The fair value of the portfolio at quarter end was $719.1 million, equal to 113.9% of cost and reflecting net repayments for the quarter, partially offset by appreciation in the fair value of the portfolio. We ended the third quarter with 70 active portfolio companies and 6 companies that have sold their underlying operations. Our portfolio remains well structured, positioned to produce both high levels of recurring income and to provide us with a reasonable margin of safety, along with the opportunity to enhance returns.

Given current market conditions, we remain focused on rotating mature equity investments into income-producing assets. With first lien debt investments exceeding repayments and second lien and subordinated debt and repayments exceeding originations, during the third quarter, the mix continued to shift in favor of first lien debt on both an absolute basis and as a percent of the total portfolio.

At quarter end, first lien debt accounted for 41.2% of the total portfolio on a fair value basis compared to 25.2% as of December 31, 2020, while second lien debt decreased to 28% of the portfolio on a fair value basis, from 44.7% as of December 31. Subordinated debt accounted for 9.7% and equity investments grew to 21.1% of the portfolio on a fair value basis.

Moving to portfolio performance. Overall, our portfolio continues to perform well and risk remains at comfortable levels. As of September 30, we did not have any companies on nonaccrual. Some of our portfolio companies continue to work their playbooks in terms of pricing and productivity measures in response to supply chain challenges created by the pandemic, including component shortages, material and freight cost inflation and labor availability. In light of these unprecedented business conditions, having a well-diversified portfolio continues to serve us well.

To help us assess the overall health, stability and performance of our investment portfolio. We track several quality measures on a quarterly basis. First, we track 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 September 30, the weighted average investment ratio for the portfolio was 2 on a fair value basis.

Another metric we track is the credit performance of our portfolio, which is measured by our portfolio companies' combined ratio of total net debt to Fidus' debt investments to total EBITDA. For the third quarter, this ratio was 5x, excluding equity-only and ARR deals.

The third measure we track is the combined ratio of our portfolio companies' total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have, in aggregate, to meet their debt service obligations to us. For the third quarter, this metric was 3.1x, excluding equity-only and ARR deals.

As a result of the elevated velocity of M&A activity that began in the fourth quarter last year, we have seen high levels of originations and repayments in each of the past 4 quarters. Because repayments outpaced originations for the third quarter, we were underinvested as we started the fourth quarter. Nevertheless, we continue -- we currently expect to grow the portfolio in the fourth quarter.

I mentioned earlier that we closed 3 deals in early October for a total of $43 million in originations, including the $16 million commitment. And strong deal flow offers us opportunities to add further to originations before the end of the year. While we are encouraged by these near-term opportunities, we will continue to manage the business for the long term and not rush to grow the portfolio in a way that would have us forfeit our underwriting standards. As always, our proven underwriting discipline places greater value on quality than on quantity.

In summary, I remain confident that our relationships with deal sponsors, our experience and our strategy of selectively investing in high-quality companies with defensive characteristics and positive long-term outlooks positions us well for the growth over time with a focus -- with a long-term goal of generating attractive risk-adjusted returns from our debt and equity investments and on preserving capital.

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 third quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter, Q2 2021.

Total investment income was $21.2 million for the 3 months ended September 30, a $0.6 million decrease from Q2, primarily due to a $0.5 million decrease in fees and a $0.4 million decrease in fee income, offset by a $0.3 million decrease in interest income. Total expenses included -- including investment tax provision, were $16.1 million for the third quarter, approximately $0.8 million higher than the prior quarter, primarily due to a $0.8 million increase in the capital gains incentive fee accrual.

In Q3, we accrued $4.7 million of capital gains incentive fees given meaningful appreciation in the fair value of the portfolio. Note, the capital gains incentive fee is accrued for GAAP purposes, but not currently payable. Excluding the accrued capital gains incentive fees, total expenses in Q3 were $11.4 million, in line with Q2. As a reminder, expenses will be higher in the fourth quarter as we will incur an annual excise tax expense, which I would estimate to be approximately $0.02 to $0.03 per share, similar to prior years.

As of September 30, the weighted average interest rate on our outstanding debt was 4.2%, excluding secured borrowings. In Q3, we prepaid $44.3 million of SBA debentures. We ended the quarter with $360 million of debt outstanding, comprised of $95 million of SBA debentures, $207.3 million of unsecured notes, $40 million outstanding on our line of credit and $17.7 million of secured borrowings. Our debt-to-equity ratio as of September 30 was 0.8x, or 0.6x statutory leverage, which excludes SBA debentures.

Net investment income, or NII, for the 3 months ended September 30 was $0.21 per share versus $0.26 per share in Q2. Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments, was $0.40 per share in Q3 versus $0.42 per share in Q2. For the 3 months ended September 30, we recognized approximately $8.4 million of net realized gains, primarily from the sale of our equity investments in Kinetrex Energy, Worldwide Express and Allied 100.

Turning now to portfolio statistics. As of September 30, our total investment portfolio had $719.1 million. Our average portfolio investment on a cost basis was $9 million at the end of the third quarter, which excludes investments in 6 portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 88.2% of our portfolio companies, with an average fully diluted equity ownership of 5.6%.

Weighted average effective yield on debt investments was 12.3% as of September 30. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual, if any.

Now I'd like to briefly discuss our available liquidity. As of September 30, our liquidity and capital resources included cash of $98.8 million, $13.5 million of available SBA debentures and $60 million of availability on our line of credit, resulting in total liquidity of approximately $172.3 million.

In October, we successfully issued $125 million of unsecured notes at a 3.5% interest rate. The net proceeds and available cash were used to pay down the outstanding balance on the line of credit of $40 million at closing and to fully redeem $82.3 million of public notes due in 2024, with interest rates ranging from 5.375% to 6%. Given the notice requirements, the bond redemptions occurred on November 2, so we will have 1 month of incremental interest expense on the public notes in Q4 of approximately $0.4 million.

In conjunction with the bond redemptions, in Q4, we will realize a onetime loss on extinguishment of debt of approximately $1.6 million relating to the unamortized deferred financing fee cost on the bonds. Taking into account subsequent events, including the debt refinancing, we currently have approximately $185.2 million of liquidity.

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 will now turn the call over to Vic for Q&A. Vic?

(technical difficulty)

It appears that the operator is having technical difficulties. So I know we can certainly hang on the call for a couple more minutes. But otherwise, I would suggest, unfortunately, we might need to -- well, I think they're trying to work on it. So hopefully, they'll figure it out. But absent that, we might have to adjourn the call. But we did get a message that folks are trying to work on getting the operator back to allow for Q&A.

Thanks for your patience, everyone. Sorry about this.

(Operator Instructions) Our first question comes from Mickey Schleien from Ladenburg.

Shelby, I guess, patience is a virtue. Ed, there's obviously intense competition higher up in the middle market, with so much private debt and equity capital available. How would you describe the effects of that competition, if any, on the lower middle market where you operate?

Great question, Mickey. I mean, from my perspective, competition is -- over the last 12 months, it's been -- it's similar, right? It's not like there's a huge influx of capital, but there obviously is a fair bit of capital out there. It's the same players, so it's not a bunch of new entrants.

And so -- and yes, in some cases, we're seeing lenders accepting lower yields. And I'm seeing -- we've definitely seen some unnatural acts just to win business. What we're doing is focusing on the nuts and bolts of our business and sticking to what we know, again, focusing on the long term, the industries we know well and the situations we like.

And so when I look at it from a pricing perspective, I'd say market pricing is in line generally with where it was pre-COVID levels, at times a little lower, but I'd say leverage is very similar to pre-COVID levels as well. So when I think about risk-adjusted returns, I think about equity capitalization, which is typically much higher in this high-valuation environment. I think the risk-adjusted returns are quite good.

And more importantly, in the lower middle market, the terms haven't changed. So terms, when I think about security, when I think about covenants, real covenants, real maintenance covenants, all those things, I think, are still in place, haven't changed, and I think a real positive from our perspective regarding the market that we're playing primarily in. So hopefully that helps.

Yes, that's good news, given that there's always a chance that those folks will start to look at the lower middle market down the road. Just one follow-up question, Ed.

You had another strong quarter of unrealized depreciation, and if I'm not mistaken, the portfolio's valuation is now at a record level in terms of cost over -- fair value over cost. What are the main drivers of those valuation gains? And do you see more upside when you look at your portfolio companies' performance and market trends?

Sure. Another great question, Mickey. I think when I look at the drivers, so we had $23 million of appreciation this quarter in the portfolio, most of that being -- and a large majority of it, obviously, being in equity. It's driven by 3 things: underlying company performance, that was the biggest driver by a long shot.

But obviously, also, we got some visibility into certain M&A processes, where -- and so that impacted things. People are for great franchises. People are paying up right now, and as I know that you've heard talked about quite a bit.

So -- and lastly, market calibration. But that -- obviously, that's something that we take into account every quarter, but it's, to a very small degree, the rationale for the appreciation this quarter. Hopefully that helps.

And our next question comes from Robert Dodd from Raymond James.

On the repayment levels in the quarter, now -- I think, year-to-date, your repayments have now exceeded the combined number in 2019 and 2020. I mean, when does the pace slow down, frankly? I mean just activity levels on that side seem to be really, really high. I mean, your originations this quarter were below by historic standards, but they just obviously got swamped by originations -- by repayments.

Sure. Great question, Robert. I think from our perspective, and I'm hesitant to say this because, last quarter, there were some surprises, literally, a couple of surprise repayments in September. We heard about it in September, and they happened in September.

So it's hard to predict, as we've talked about in the past. But what I would tell you is Q4, as we, at least today, feel like it's going to be a limited quarter from a repayment perspective relative to last quarter. And so we -- I don't think we'll get anywhere near last quarter.

And I think, what I would say is, the velocity in the overall market activity has been extremely high for 4 quarters in a row. And obviously, we've had a fair number of M&A transactions, where we've also realized equity investments, but also just debt refinancings or recapitalizations, where we were taken out, which tells you we had a pretty strong portfolio.

So our approach has always been we want to invest in high-quality businesses. They can weather the various storms that we anticipate or don't anticipate that can weather the storms. And so we feel good about getting repaid.

Obviously, it creates a challenge for us in terms of reinvesting. And we're going to -- from that perspective, we're going to stick to our discipline. We're going to -- we are sticking to how we are going about our business and self-originating a large, large majority of the investments we're making and sticking to the industries that we know well.

So we -- I do think this quarter will -- it'll slow down. And I do think originations will outpace repayments this quarter, and the question is to what degree. And we'll be able to tell you that in February, but that's what I'm seeing. I am seeing a slowdown in terms of [repayments].

I appreciate that, Ed. And just on kind of a time since -- with so many repayments, so much, recycling about -- roughly speaking, I think half of the capital you have after portfolio has been originated. It might not be new businesses, there's follow-ons, et cetera, et cetera, has been originated since COVID.

And so with Mickey's question, though that portfolio turnover doesn't seem to have impacted your portfolio yield significantly, but the only thing I can think of that's really changed over that particularly, this is maybe leverage has gone up a little bit. Is that indicative more of the type of businesses? I mean, obviously, you're going in first lien now with more so than second.

Is it more -- would you say your loan to value or other characteristics have kind of stayed the same or even improved as that portfolio is kind of renewed? And then the other bit to that is, with such a -- what seems like a relatively new portfolio, should we expect prepayment fees and things like that to be lower, say, next year or over the next 18 months, with so much of that capital being newly out there?

A lot of questions in there, Robert. [I'd say that you did] all of them. But the -- so let me hit leverage first, and it's a little bit of an anomaly, to be honest. The -- so what I cited in our prepared remarks was a 5x net leverage, excluding ARR loans, on our balance sheet, and that's an average number. And to be candid, it's distorted by several, but really one, in particular, much larger deal that we've had in our portfolio for a very long time. It's now a very large company. And so if you excluded this name, the average leverage would be more like 4.4x, which is more indicative of the whole portfolio.

And so what I would say with regard to things like leverage, I don't think that has changed materially. Loan to values only improved in this environment, quite frankly, from our perspective. And I think you touched on prepayments. Prepayments are a piece of the puzzle, I think, that will always be there. Could they go down a little bit next year? I think the answer to that is yes, but I don't think it's material, to be honest.

I think a lot of the repayments we had were in pretty mature debt investments. And many of those prepayment fees were not that sizable. But I think prepayments is part of the business and will remain part of the business. Maybe it will be a little bit lower, but I can't tell you it's going to be a lot lower.

So -- and so fees, obviously, as an originator of first lien, we do obviously have a healthy fee income and that depends somewhat on activity levels, as you know. But we would expect -- so fees will move with activity levels. But as I look forward to next year, I expect it to be an active year. I don't know if it will be as active as this year, I doubt it, but I still think it will be an active year. There's still a fair number of companies I know in our portfolio that we expect to be sold, and that's a good thing from our perspective.

Our next question comes from Ryan Lynch from KBW.

My first question has to do with, as far as your equity portfolio goes, you guys had a nice exit of $23 million of equity investments this quarter. But given the strength in that portfolio, it actually grew and died despite those exits. My question was, I would presume that, given how active the market is today, that you would expect equity investment -- or excuse me, equity monetizations to continue at a fairly consistent basis, maybe not as high as we saw in the third quarter, but I would assume that you consider those to continue to happen. But please, let me know if that's not the case.

And so my question would be, is the thought process to just continue to monetize equity investments in the normal course like we saw in the third quarter, which, again, because of the order strength in your equity portfolio, didn't actually reduce that, which is a good problem to have? Or is there any consideration being given to selling off kind of a basket or portfolio of these minority equity position, similar to what you guys had done in early 2020?

Sure. Great question, Ryan. I think from a -- I mean, I'd try to hit the beginning of your comments, which is, do we expect further realizations in the equity portfolio. And what I would tell you is, along the lines, a little bit what I just finished with Robert, is we do have portfolio companies that are evaluating strategic alternatives now. And that could -- meaning here in the Q4 as -- and we also have others that have spoken specifically about first half of next year, planning to also evaluate strategic alternatives.

So we continue to believe that the M&A market is going to be active, and we think our equity portfolio will participate to some degree. Hopefully, a very healthy degree, but to some degree, in those activity levels. So I think that's a positive, and I think that your assumption there is correct.

With regard to selling a part of the portfolio, if you will, like we did previously, I think that idea is definitely on the table. It's been on the table. I will also tell you, it's not something that we are working actively on right now, but it is something that we do talk about, and we'll consider at the appropriate time. But at the moment, it's not, and we're not actively doing that. We like the idea that we have that as an option.

But it's -- again, we -- I think we feel good about the quality of our equity portfolio, and we also don't want to rush things. So there's a balance, as you well know, with regard to monetizing equity investments. And we're trying to strike that, but you're never going to hit it perfectly, but we would -- we're trying to strike the right balance right now.

That's hopeful commentary on that topic. The other question I had was you discussed the kind of the elevated level of repayments with Robert. Hopefully, those start to moderate a little bit. But while we're in this process of increased activity, have you all considered -- or maybe you guys have actually done this, sort of trying to widen the investment funnel by moving to maybe slightly different areas, for instance?

Like maybe moving up to slightly larger companies, not necessarily loosening the underwriting procedures or we've been in kind of the underwriting metrics that you guys use, but maybe just moving to like larger companies that maybe have a little bit of a lower yield but will allow you just to put capital to work a little bit quicker to kind of offset some of these repayments, have you guys done any of that? Have you guys considered any of that? Why or why not?

Sure. Great question. We -- so what I would tell you is we do play in the larger, lower middle market space, and we have a couple of companies that I would argue are more just middle market. There are definitely several companies that are just more middle-market investments. So we do that on an opportunistic basis, typically, where we've got good relationships, and we've got, again, an industry knowledge and a view that is differentiated. So we do participate there.

I would also say, one of the things we've done just to widen the funnel, for instance, is -- over the last 3, 4 years, is focused on more the software and tech-enabled space and developed a real expertise there from an industry perspective and a financing perspective. And so we are doing those things. I would tell you our deal flow is extremely strong.

So we feel good about the opportunity set. We feel very good about the opportunity set here in Q4, as I discussed in our prepared remarks. But at the same time, we're sticking to our knitting. We're sticking to the business that we have executed well over time. And we do see, again, growth here in the fourth quarter. The question is by how much? And that's going to be dependent on both deal closings as well as what level of repayments.

But we do see the trend of repayment is slowing. And to be honest, we expect that to slow as we move forward from here. So we are doing a lot of the things you just talked about, but I would say in, obviously, a very disciplined and gradual manner as opposed to just switching gears, if you will.

(Operator Instructions) Our next question comes from Sarkis Sherbetchyan from B. Riley.

Ed, you guys have plenty of availability to deploy into earning assets and in light of your comments just now that you've said that you'd expect the trend of repayments to slow down moving forward. I guess, as we step back, how long do you think it will take to kind of get back to some target leverage levels? And then if you can remind us how you're thinking about target leverage in the current environment.

Sure. Thanks, Sarkis. The -- what I would say is, over the next, I'd say, 3 to 9 months is where we start getting closer to more of a 1:1 leverage, and I don't think it will happen this quarter. We won't get there this quarter, but I think we'll make some progress. And so that's something we are positive about and excited about, quite frankly.

With regard to -- we've always talked about target leverage as kind of 1:1. We're obviously -- and especially as our portfolio continues to migrate towards more of a first lien portfolio, and we expect that trend to continue, it's cosmetically more comfortable to operate at a little more leverage than 1:1, but that's not the goal. We're comfortable doing it. And quite frankly, we're comfortable today doing it.

As you know, some of our SBIC funds are levered 2:1, and we went through the Great Recession at a 2:1 leverage point with the SBIC funds. And so leverage is not something we're concerned about, but I think there's a balance as much, including on a cosmetic basis. And there is -- we don't -- to generate good returns, we don't need to be over-levered or push leverage.

And so our intent -- a good number for us is 1:1. That's how we've talked about it for quite a while, and I don't think that's changed. Hopefully, that's helpful. But we do see making progress towards that number here over the next 3 to 9 months.

No, that's certainly helpful. And just to be clear, that's 1:1 on a statutory basis, correct?

More a GAAP basis, actually.

Got you. Okay. And as we think about kind of the cadence into the next year, clearly closing out the year strong, but as we look at the cadence of activity expected next year, do you think it's going to be a little bit more elevated than historic norms, just kind of given the availability of liquidity and just kind of a generally robust environment in this space you play in?

Just to make sure, you're talking about here in Q4 you're talking about?

No, moving beyond Q4, just kind of looking into 2022. It just still seems like there's a lot of liquidity out there, and the pace of deals and the velocity of deals are probably going to continue. So just want to get your sense for, do you think things return to kind of a historical cadence or it will be somewhat elevated?

It's a great question and a tough one to answer. But if I were to answer that question, I'm going to do -- what I would say is, I think it will be probably elevated relative to historical levels, but not what we've seen over the last 4 quarters. But we do just -- what we're seeing is a lot of companies performing very well.

Today, the economy, despite all the issues we discussed, is growing nicely. And it is growing slower today. And projections have come down here recently as we all know. But it is growing nicely, and there's a ton of companies out there that are performing quite well and have outlooks to continue to perform quite well. And so that sets up for a fair bit of deal activity. And so that's where I would fall out is, it will be above historical norms. But I don't think it will be where we have been in the last 4 quarters or so.

And I am showing no further questions from the phone line. I'd like to turn the conference back over to Ed Ross for any closing remarks.

Thank you, Vic, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in early March 2022. Have a great day, and a great weekend.

Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.