Gladstone Investment Corp (GAIN) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's Third Quarter Earnings ended December 31, 2018. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, David Gladstone. Sir, you may begin.

Thank you, Heather, and good morning to you all. This is David Gladstone, Chairman of Gladstone Investment, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment, common stock traded on NASDAQ, trading symbol G-A-I-N. And the preferred stocks are out there, G-A-I-N-M and G-A-I-N-L.

Thank you all for calling in. We're always happy to talk to shareholders and potential shareholders and certainly, our analysts and like to give you an update on the company and its investments, provide a view of the current business environment as well as something in the future. I wish to do this more often but this is the appointed time.

Also, you have an invitation to stop by and see us. We're here in McLean, Virginia, just outside Washington, D.C. So stop by if you're in the area and say hello.

We'll start out now with the General Counsel and Secretary, Michael LiCalsi. Michael?

Good morning, everybody. Today's call may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties although they're based on our current plans, which we believe to be reasonable.

Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors listed in our Forms 10-Q, 10-K and other documents that we file with the SEC, all of which can be found on our website, www.gladstoneinvestment.com, or the SEC's website, which is www.sec.gov.

We undertake no obligation to publicly update or revise any of forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please also note that past performance or market information is not a guarantee of any future results.

We also ask that you take the opportunity to visit our website, once again, gladstoneinvestment.com, sign up for our email notification service. You can also find us on Twitter at @GladstoneComps and on Facebook, keyword there is The Gladstone Companies.

Today's call is simply an overview of our results through December 31, 2018. So we ask that you review our press release and Form 10-Q, both of which were issued yesterday, for more detailed information.

With that, I'll turn the presentation over to Gladstone Investment's President, David Dullum. Dave?

Mike, thanks very much and so good morning all. I'm pleased to report that we did actually have solid operating results this quarter in that we increased our net asset value, or NAV, or book value to $12.53 per share. That was at 12/31/18. This compares to $12.30 per share at 9/30/18 and $10.85 per share at 3/31/18. So very nice progression in our NAV.

The continuing increase in NAV really resulted in part from the improvement and the growth in the equity values of our buyout portfolio companies, along with some successfully completed exits at very significant realized gains.

So this quarter, we also closed one new buyout investment, and in line with our approach of increasing the size and the value of existing portfolio companies, we made several add-on investments. We also continued our semiannual supplemental distributions program with a payment of $0.06 per common share in December of 2018.

We expected that a significant portion of distributions would be made from capital gains, and to that end, for calendar year 2018, our total distributions were about 18.2% from cap gains and about 81.8% from ordinary income. Now this compares to the distribution percentages of calendar 2017 where ordinary -- cap gains was about 6.2% and ordinary income was 93.8%. Now recognizing also that overall, distributions increased as well.

So as our CFO, Julia, will discuss in a bit more detail, our adjusted NII for the quarter ended December 31, 2018, was also higher than each of the last 2 quarters. Now this is important because as I've mentioned previously, while we do strive for our quarterly results to generally be relatively stable, there can be and generally is variability, which is why we focus and operate the business based on the fiscal year-end results, which is March 31, in order to meet our distribution goals and to maximize our shareholder value. We reiterate that we believe our core business, including new investments, exits and underlying portfolio company values, is indeed very strong.

Now we have seen some continuing decline in BDC stock prices, including our own, which was down to $9.32 at 12/31 and quarter-over-quarter, which does affect, of course, the total return inclusive of dividends for the 12 months ended December 31. However, good news is we're seeing the share price bounce back after quarter end, and indeed yesterday close about $11 a share. And continue to believe that these results that we're providing the investor community, with the support of the value proposition of the continuing growth and distributions from the adjusted NII and realized capital gains, and also the upside of the equity component of our buyout business model is helping provide this, again, increase back in share price.

The differentiated investment strategy and the business model, I always try to stress, is first to invest in a sizable portion of equity and the debt capital in buyouts where we are significant capital providers to the transaction. These companies have annual earnings before interest, taxes depreciation, amortization or EBITDA, generally between $3 million and $20 million and the structure we use for funding our buyouts, again, consists of a direct equity investment for a significant ownership position in combination with secured first or second lien debt.

Again, this differentiates us from the traditional credit oriented BDCs in that proportion of equity to debt in our portfolio could be around 25% equity, 75% debt at cost. However, any one new investment of course could be up to 30% of equity, 70% debt, as compared to most other credit oriented BDC portfolios, which typically are around 10% equity and 90% debt.

So again, it might very deal to deal, but generally it's going to work out to around 25% equity 75% debt. So what are some of the practical and let's call it expected outcomes of our approach? We'd like to summarize somewhat as follows.

First, the interest and success fees on the debt portion of our investments is what provides steady stream of income to pay, and of course over time, grow our monthly distributions. And currently, we're at $0.82 per common share annually. And as we have mentioned on prior calls, we will experience fluctuation on a month-to-month and quarter to quarter adjusted NII, such as this quarter compared to last quarter.

However, we manage the business, again, with a view to fiscal year-end results and a goal of having our adjusted NII support and cover our annual distribution to shareholders, other than any of these supplemental distributions that we have been making and hope to continue making.

Secondly, with the significant equity positions that we own in each portfolio company, we do look for increasing value so that an increase in the equity provides cap gains and other income over the life of the investment or upon the exit. These potential capital gains and other income may then be distributed to our stockholders in part as supplemental distributions. So as our portfolio matures, we should continue to realize gains from exits somewhat consistently.

We have made 4 such planned supplemental distributions in the amount of $0.06 per share to common stockholders in June and December 2017 and again in June and December 2018.

The third aspect of our plan or approach is that the differentiated investment approach of being a provider of a significant portion of the equity and most of the debt in our transactions gives us an advantage in that we do have some influence over the companies that we buy. Thus, we not only limit the risk of our debt being refinanced, but our involvement with management provides an interaction with the company similar to what you would find in a traditional private equity fund.

This interaction gives us the ability to proactively work with our portfolio companies that do need assistance or sometimes turnaround action, management changes, or other means of value creation. Again, with a large portfolio, you will have issues from time to time with individual portfolio companies and we are in a position to take the action and indeed, we do that.

So let's just take a quick look at our historical performance as we try to just keep us in line with where we've been and where we're going. So from March of 2014 through 12/31 of 2018, we'll just give you a very quick update and then of course, you can find more information in graphical form in our quarter presentations, which are posted on the website.

We have grown total assets from about $331 million to over $619 million in this period of time. This is at fair value. And as noted earlier, we had some significant exit successes this period. So this caused a little decrease in the total assets quarter over quarter. The debt portion of our portfolio at cost has grown from about $279 million to about $457 million, which is supporting the growth in our regular monthly distributions per common share from roughly $0.66 in fiscal year 2014 to a run rate of $0.82 per share annually in October 2018 and at this point.

The equity portion at cost over assets has grown from about $105 million to about $145 million. Of course, this includes exits that have come out of this, so the gross amounts are actually higher. The NAV per share has increased from about $8.34 to $12.53 over the same period. We had 30 companies in our portfolio 12/31/18. From inception in all 5, through 12/31/18, we've exited 16 buyout companies and these exits have generated over $185 million in net realized capital gains and about $22.8 million in other income on the exits.

So these exits achieved an aggregate cash-on-cash return on the equity portion of the investments of approximately 4.6x. Again, this is in line with our overall goal and objective of creating equity value while we continue to make new buyout investments. And again, it is this equity growth and the exit activity that has allowed us to deliver our objective of generating capital gains from the equity portion of our assets, which we do look to continue into the future.

So let's think about going forward and some of our exits. We talked a lot about exits. So as we build our investment portfolio with new buyouts, we also will be managing the sale, or the exit as we call it, of the portfolio companies. And this is consistent with the strategy of providing realized capital gains from the equity portion of our portfolio.

So a quick review. Year-to-date this year, we sold Drew Foam in June of '18 with a gain of about $14 million; Logo Sportswear in November 2018 with a gain of about $13 million; Cambridge Sound in December 2018 with a gain of about $66 million; and Star Seed in December 2018 with a gain of about $5 million. So again, this is gains just on the equity portion of these investments that we've made.

So the total gain from these exits was about $98 million, but we also partially offset them against a couple of things. One, we exited our investment at NDLI at a loss of about $4 million and we sold the equity investments in CCE for a loss of about $8 million. However, we did retain -- are retaining a performing and an income producing debt investment. So that portfolio company still is existing. We're simply a debt holder at this point.

Subsequent to 12/31/18, we did restructure 2 of our loans to SOG and we did realize a loss of about $10 million. Now there were -- this was a conscientious action on our part, allowing us to take advantage of some tax planning frankly and to preserve shareholder value in SOG. And we really do anticipate a recovery. And again, it's one of those where we've had to take action. We are taking action. The company fundamentally is in a good position. We have to be a little patient with where we're going with this one.

So in all, we will be guided by market conditions when we assess whether we want to sell a business, look at the risk return of continuing to hold the investment versus exiting and also remaining sensitive to our portfolio of assets, which is necessary to continue producing the income for monthly distributions.

Now how are we doing on new buyouts? Let's see. So developing new buyout activities continues as a really high and significant part of our daily activities. It's what we do every day. We're actively calling on the various sources, independent sponsors, middle-market investment bankers and so on to try to help create these new buyout opportunities. And generally, of course, our investments are partnering with the management teams when we do buy a business.

We do believe that our strict adherence to investment fundamentals and our thorough due diligence process has enabled us to provide shareholder returns in both our consistent regular monthly distributions as well as the supplemental distributions that we have been making. Now at any point in time, we are reviewing and conducting due diligence on a number of new potential investments with an eye on achieving our new acquisition goals.

In addition, though, to new standalone acquisitions, we're actively pursuing accretive add-on investments for some of our existing portfolio companies. Of course, if we do this, it allows for building of assets while accelerating the value creation of the existing companies. To this point and year-to-date, we invested about $29 million in Bassett Creek, which was a new buyout deal that was in April; $29 million in Educators Resources, which was also a new buyout investment in November; and we made a [$15] million incremental investment in J.R. Hobbs that made them a powerhouse, so it could make an add-on acquisition that was in October.

I would also mention that certainty Bassett Creek is one of those platforms where we would look to be able to continue making incremental investments as it continues to grow and we build value there. And then we also had another roughly $11 million in various add-ons to some of our existing portfolio companies.

So all in all, we still really though are in a buyout environment where the competition for new investments is high versus prices that are being paid is still pretty high. And this does make it challenging for us to close new investments because we are really conservative in our value approach and also what our expected financial returns, certainly on the equity, needs to be.

So while this might lead to an appearance of a low rate of new investment production at any point in time, it's important to know that this is what we do again every day and we look at it on an annual basis. And we continue trying to strive and build value in our portfolio in both income and equity to satisfy our distribution goals. So as a result of that, we're not going to be a volume-driven investment firm but we will try to achieve our goals with good solid new acquisitions.

We will continue to target equity investments providing 2x to 3x cash on cash equity return. As I mentioned earlier, we've had over 4x cash on cash equity return and the debt investments, which we do make, generally are secured and primarily first lien loans, typically are carrying a cash yield in the low teens. And these debt cash returns do balance the equity portfolio of our investment, which produces this blended current cash yield that we need to support our stockholder distribution expectations.

Our investment focus hasn't really changed. It continues to basically be in companies, as I mentioned earlier, lower middle-market, some areas such as light specialty manufacturing, specialty consumer products, and services, and so on.

So all in all, going forward, we will continue executing our plan. We're going to be adding accretive investments, which will both grow the income generating assets of our portfolio and the equity portion of our assets, while we position the portfolio for potential exits hopefully and thereby maximizing distributions to shareholders.

We do anticipating paying semiannual supplemental distributions as the portfolio continues to mature and we are able to manage that existing realized additional capital gains. These distributions are generally expected to be made from undistributed net capital gains and undistributed net investment income. We and our Board of Directors will evaluate the ability to make additional supplemental distributions, including the amount and the timing of such semiannual, as well as now potentially [deemed] distributions of capital gains to shareholders. And we will be doing this as we continue with our fundamental strategy.

So all in all, a good quarter. We feel good about where we're headed and where we're looking at in the future. And I'm now going to turn it over to Julia Ryan, our CFO, and she can give some more detail on the actual financial performance. Julia?

Thanks, Dave, and good morning, everyone. Looking at the balance sheet as of December 31, we had over 619 million in total assets, which included $607 million in investments. And as you all heard Dave discuss earlier, we had some exciting successes this quarter, which caused the apparent decline in investment quarter-over-quarter.

Our liabilities consisted primarily of roughly $50 million in borrowings outstanding on our line of credit, which was lower compared to prior quarter, again, as a result of pay downs with proceeds from investment exits. We also had the pre-existing $132 million in term preferred stocks.

Our net assets totaled about $411 million or $12.53 per share as of the end of this quarter, which is an increase of $0.23 compared to last quarter, and that is primarily a result of net realized gains, which were partially offset by unrealized depreciation.

As for operating results, we ended the December quarter with NII of $6 million, which compared to a net investment loss of $4 million in the prior quarter and let's look at the factors driving those results. So interest income increased about $0.6 million this quarter, which was largely due to additional debt investments, as well as the timing of exits later in the quarter.

Other income increased $1.3 million given the variable nature and timing of dividend and success front-end income. Then looking at expenses, they decreased by $8.1 million in the current quarter, which was driven, one, by lower tax and bad debt expenses. As I discussed last quarter, we incurred $1.1 million of bad debt expenses, which were primarily due to placing one investment on non-accrual last quarter. And then two, higher credits from the advisor this quarter and three, a $5 million decrease of the capital gains based incentive fees.

These decreases were partially offset by a $2 million increase in the income-based incentive fee, which was a result of the higher debt investment income and partially offset by an increase in net assets, which drives the hurdle to determine the income-based incentive fee.

Now looking at the details behind the capital gains-based incentive fee, which was $2.1 million this quarter and was the result of the realized gains, which were partially offset by unrealized depreciation, last quarter's accrual was $7.1 million.

And I know I've said this a million times, but the capital gains-based incentive fee is required to be accrued under U.S. GAAP but is not currently due under our investment advisory agreements, which provides that a capital gains-based incentive fee is determined and paid annually with respect to realized capital gains, but not unrealized appreciation, if such realized capital gains exceed realized losses and unrealized depreciation.

Under GAAP, however, a capital gains-based incentive fee is accrued if realized capital gains, plus unrealized appreciation, so that's the differentiator here, exceed the sum of realized capital losses and unrealized depreciation. So it's as if you were liquidating our balance sheet today.

And when we adjust our GAAP net investment income to exclude that capital gains-based incentive fee accrual, our adjusted NII per weighted average companies was roughly $0.25 this quarter compared to $0.10 in the prior quarter. And we believe that adjusted net investment income is and continues to be a useful and representative indicator of operations exclusive of the capital gains-based incentive fee, as the NII does not include the realized and unrealized investment activity that gives rise to the capital gains-based incentive fee.

So coming full circle, current and prior period adjusted net investment income, again, covered our current quarter and annual distributions, and not doing so by a significant margin.

But our balance sheet at 12/31 may show a line item that's called over distributed net investment income to the tune of almost $10 million. That is a direct result of the capital gains based incentive fee accrual of roughly $20 million.

So as of this quarter end, per our balance sheet, undistributed or over-distributed income, and net realized gains totaled almost $77 million or $2.34 per common share. When removing the $20 million of cap gains-based incentive fee accrual, the amounts would be roughly $97 million or almost $3 per common share. This is the amount that would be available for distributions to shareholders in future periods in either cash or as a deemed distribution.

So looking at the realized gains and unrealized gains this period, which again, you looked at and saw that they were quite significant, given all the exits, we recognized almost $77 million of realized gains, and the largest portion of that was Cambridge, which included about $66 million of such gains. But again, there were others like exits of Logo and Star Seed that were very successful and were partially offset by those losses that Dave mentioned.

We also recorded net unrealized depreciation of investments of about $66 million and that consisted significantly -- and by that, I mean $59 million of previously recorded net unrealized appreciation related to those exits. The remainder or about $7 million of unrealized depreciation relates to the existing portfolio. And the depreciation of those assets was predominantly due to a decline in operating performance, such as EBITDA of certain of those portfolio companies. All in all, the fair value to cost was still over 100% this quarter and we continue to use an external third party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments.

We continue to have 4 loans that are on non-accrual and they represent about 7.5% of the fair value of our total debt investments. And we continue to work with those companies to improve operating performance, liquidity and value.

Our portfolio's approximate allocation between debt and equity securities was 76% to 24% equity at cost as of December 31. The debt portfolio is well positioned for any interest rate increases with about 97% of our loans having variable rates with a minimum of floor and the remaining 3% having fixed rates.

The weighted average cash yield on interest bearing debt this quarter was 13% and of course, this yield continues to exclude success fees. At the end of December, we had unrecognized contractual success fees totaling over $32 million or roughly $0.99 per common share. There's no guarantee that we'll be able to collect these success fees or have any control over timing and collection.

From a credit priority standpoint, we have 100% of our loans being secured, 78% of which having a first lien priority and 22% having a second lien priority, all measured at cost.

And that covers my part today, and I'll turn it back over to David Gladstone.

All right. Julia, Dave, Michael, a lot of good information to our shareholders in that presentation that you both -- all 3 made and the 10-Q that filed yesterday should bring everyone up to date of where we are in this company. The team has reported some great accomplishments this quarter, including significant investment exits with realized gains and new buyout investment, and a number of add-on transactions all bringing the company an increase in net investment income.

The team is in a good position to continue these successes going forward in the fourth quarter, which will end March 31, 2019. The economy has stuttered a little bit, the quarter ending December 31, '18, and since then, I believe the economy is getting stronger. But we have no way of knowing what the future is going to bring. So the team is being careful with their investment.

And to counter the unforeseen, we're seeking to build a strong balance sheet. Paying dividends is way of -- one of our primary goals, and a strong balance sheet certainly adds to being able to achieve that goal. Now that the administration, the government is delivering on changes to the tax code and continues to reduce regulations of businesses, I think the U.S. middle-market business, like the ones we finance, is going to have a strong performance in 2019.

The middle-market is less impacted by the questions about tariffs, but nonetheless we hope that matters can be settled soon in that area so all businesses get stronger. We are excited about the new business environment in the U.S. and the U.S. middle-market is the third largest economy in the world. And it's -- that's the market that we love. We've been in that since founding this fund and the middle-market is booming, and this company will benefit from the strengths of the middle-market.

On the distribution front, our Board of Directors declared monthly distributions to our common stockholders of $0.068 per share for each of the months of January, February and March in 2019. It's an annual run rate of $0.82 per share per year. Through the date of this call, we've made 163 sequential monthly cash distributions to our common stockholders and in addition have made 4 of these supplemental distributions as well.

As of December 31, 2018, the company has distributed a total of $244 million or about $9.91 per share for common stockholders based on the number of shares outstanding at the time the payments of these distributions were made. The company continues to be a solid dividend payer and I don’t see anything in the future that's going to stop us from continuing to do that.

At the current distribution rate and a common stock -- with a common stock price of -- at $11 yesterday's close, the yield is currently on the regular distributions about 7.45%. And if we look at the future and make the assumption that the company will pay the 2 supplemental distributions of $0.06 per share as it did last year, then the annual payout is $0.94 and that's about 8.5% yield.

Our Board will look at the payments of supplemental distributions for the calendar 2019 at the regular board meeting in April. The team is trying hard to increase the payouts. Please know that it's no guarantee that the regular or even the supplementals will be paid, that is the central role of this company.

And most of you know the regulated investment company that is our company, in simple terms has to distribute 90% of its earnings. For the current calendar year, the estimated capital gains portion of the distribution is 19%. The 2 series of preferred stocks, for those of you who like steady dividend payers, are about 6.2%, 6.3% in yield. Each of the $25 preferreds are trading at somewhere between $0.23 and $0.30 above their $25. So good place to park some money if that's what you need to do.

In summary, we believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and also supplemental distributions from potential capital gains and other income. We hope to continue to show you a strong return on investment in this fund.

But now let's stop and have Heather come back on and we'll have some questions from analysts and friends of the company.

(Operator Instructions) Your first question comes from Kyle Joseph with Jefferies.

David, you mentioned -- you talked a little bit about how broader market volatility picked up towards the end of the quarter. Two questions related to that. First, in terms of your company performance, how -- any impact on growth and outlooks for growth you’ve seen recently? And then any impact in terms of competition from the increased market volatility?

Dave Dullum, why don’t you take that question?

So Kyle, when you say market volatility you mean our stock, common stock action?

Oh no. I'm talking about a broader equity indices, high-yield markets.

Got you. Okay. No problem. So to be honest, I don’t think if it really -- and if I suggested more volatility this quarter than before, not really. This is in terms of looking at the new deals that we look at and the opportunities that we look at. I'd say it's about the same. There is looking like a potential moderation, [ABIT] in overall valuation partially as a result of, I think, the amount of leverage that a more traditional private equity firm can now get or put on a deal.

I think we're starting to see a little bit of a change in that regard but overall, I'd say it's competitive this past quarter. It's competitive this current quarter as it's been the last, say, 12 months. And what we're doing is just keeping -- trying to find those companies that we can buy in the 6x to maybe 7x EBITDA, which works for our model and still has the sort of growth that you need to get the kind of returns.

So all in all, I'd say it's just about the same. Just continuing just slogging it out day in and day out where we're working on a number of opportunities. We are submitting the respective number of indications of interest that we put out, ending up with the 1 or 2 that, frankly, are the companies that we can buy.

So I don’t know if that helps to answer, Kyle, but I'd say we're positioned about where we've been and I'm not worried about where we are. We just have to keep being consistent with our approach.

To add onto that, Kyle -- this is David Gladstone -- the marketplace has changed completely in the last 15 years. It used to be that we competed with banks and other lending institutions like banks. Now maybe the banks are making 10% of the loans in the middle marketplace. The government, through places like the SBA, is maybe making 1%.

So the rest of the marketplace is really being covered today by private lenders like us, private meaning not banks, and not government. So the marketplace is more volatile because of that. It's a different world today and people will raise a little money and do some crazy deals. And we might lose out to them but better to have lost out to them than to do something that was really risky.

So I think you're going to see more volatility in the marketplace but we're going to stay steady and continue to do what we do best, and that is underwriting businesses. Go ahead, Kyle.

Obviously, your leverage from a debt to equity perspective came down given the elevated repayments, but can you guys refresh us if you have any sort of target range and if that's changed at all given some of the changes we've seen in the BDC industry regarding leverage.

No.

Julia, why don’t you -- the answer is already -- Dave jumped on with a no, but Julia, any comment?

Kyle, nothing has really changed in our approach to leverage as it has before. If you recall, our Board did approve our "asset coverage" to be reduced from 200% to 150%, which would go into effect this April. But as you noted, pay downs have been significant so we're nowhere close to those metrics.

And Kyle, what I would add to that, I've got to keep in mind and a little bit relating to the earlier question and answers we gave you, keep in mind that we consider ourselves more private equity oriented than as a traditional lender. So we're driven more by opportunities in buying companies that provides a sort of enterprise value that we're looking for.

So the fact that -- 2 things. One, as David Gladstone mentioned, there is certainly more volatility potentially in the debt side of markets. But where we struggle is against the private equity guys that are able to get some of that leverage and then pay up for companies that we think are overvalued and we're not going to go there.

So there's that part. But then from a leverage perspective, again, we're not looking to increase our leverage even with the changes in the regulations, so to speak, to then put a marginal, let's say, loan on the books. That's not our business, right?

So the leverage -- we will utilize leverage as necessary. I don’t think we're going to, as Julia said, change our policies around that and get any more highly levered. That does not lend itself to the sort of business we're in. What we have to just keep doing is finding good values, enterprise values of companies we buy, and those are the ones that we will leverage as within reason so that we can know those companies withstand any downturns and so on and so forth.

(Operator Instructions) Your next question comes from Mickey Schleien with Ladenburg.

Just wanted to start with congratulating you on the Cambridge Sound exit. Obviously, a very good result. I'm curious what caused that to be sold for so much more than its previous fair value mark. I'm just interested in how the market is behaving, if you can give us some insight.

Dave, maybe you can answer that.

Mickey, thank you for the comment, and I think, Julia, correct me on this, but I think relative to where we had it valued in the prior quarter, we were relatively close in terms of the value that we got for it because we'd been working on it, frankly, obviously for a while, which we could not disclose, in terms of what we saw indications of value.

So having said that, this company is pretty representative, I would say, of the good quality businesses that are being sold in the middle-market. And as David had said earlier, middle-market is in pretty decent shape all around, pretty robust. And the multiple that we got for this company was certainly at the higher end of a range, in part because it fit all of the criteria. Good quality management. Had good growth. We had had good growth since we acquired it. Of course, we bought it at a good value ourselves a few years ago, about 3 years ago, and just representative of a good quality asset that the folks out there that want to put money to work are willing to pay a sensible kind of multiple for.

So we were very pleased with it and again, we sold it because, in part, our work overall with the management team, we all were in agreement on doing it. We didn’t force an exit. We were happy to have kept the company, frankly, but it was a good timing for all the participants.

I'm not sure the investors are aware that the external manager on occasion provides some very meaningful credits to the base management fee for advisory services and those were pretty large this quarter. Can you give us a little bit of an idea or a breakdown of what went into that and sort of how that process works?

Julia, why don’t you take that?

Sure. So Mickey, you hit the nail on the head here. The advisor, obviously, were externally managed, and as the advisor received fees for incremental advisory services provided to our portfolio companies, those payments from the portfolio company to the advisor are generally credited back to the fund, meaning a direct offset to what we would otherwise pay the advisor in management fees.

So again, they can be variable. It really depends on timing of those payments and what the advisor provided in types of -- in terms of services. So that's probably the best explanation I can give.

Just if I could follow up, Julia. I understand the mechanics. What I'm curious about is, was this the advisor helping, for example, negotiate the Cambridge sale? Or was it more advice on the 4 non-accruals? Or what is the nature of the work that the external advisor is doing?

That could be part of it, yes. So financing transactions are part of those types of services.

Okay. A couple more questions if I can. Dave, how do you feel about the size and quality of your pipeline today?

I'd say on a scale of 1 to 10, Mickey, a 10 is really robust and so I'd say it's probably about a 7. The pipeline is pretty good. As I said -- mentioned, day in and day out, that's all we focus on obviously beyond when we have to work on exits or work on other things with existing portfolio companies.

But right now, I'm not -- I feel we're in good shape. I think we, again, as I keep mentioning, these things are, so to speak, you can't predict them, say, every quarter we're going to have one new investment. But because of the buildup in the pipeline, the activity levels, I think we have a reasonable shot generally at our overall objectives and goals for new acquisitions on a sort of an annual basis.

So again, a 7 out of a 10 if you want to think of it that way in my mind.

And on the flip side, Dave, are you -- to what extent can you give us some insight as to whether you expect some very meaningful exits over the course of the next few quarters?

Sure. As I mentioned in the first part of my talk, it is now something that we continue to look at, continue to think through with the managements of some of these various companies. And again, based on either timing with a company that as you sort of alluded to a little bit in the way, the market from an exit perspective with multiples is pretty good if you're on the sell side. And we do want to think about our ability going forward, not just in the next, you know, 6, 9, 12 months but going forward. Because we build our portfolio, think about exits that we can start managing those.

And I think we're getting better at that and more in a position now to be able to do that so we can try to create consistent -- somewhat consistent incremental either distributions or gains based on cap gains from exit. So short answer is we keep working on it. We'll be working on it and think we'll see some new stuff coming over the next year or so.

Wanted to ask you also about PSI. I think in the last earnings call you were somewhat optimistic about the outlook for the company, but you marked down the debt this quarter fairly meaningfully, which would imply there's still problems. Can you qualitatively give us an update on the company?

Sure. They actually started out this year pretty well. I'm still optimistic about the business. It's still overall a pretty good-sized business with very significant EBITDA. The valuation, obviously, is a result of overall call it decline in EBITDA just because of some issues internally with how they managed through the business. So yes, we decided and it made sense just given valuations where we were to do what we did. But I feel pretty good about the business fundamentally and some of the things we have been working on over the last, say, quarter in terms of management issues, et cetera. And so again, short answer, I feel pretty decent about it at this point.

And in terms of SOG, you restructured it I guess last month. I wasn’t clear, though, whether that will be put back on accrual or is that still going to take some time?

I'd say that will take some time. Again, it's one where we've got good fundamentals. For a variety of reasons that we won't get into here, we've made changes, done some things that we think are right and I think we now just have to again be patient with that one looking forward. But it's not going to happen overnight.

Okay, and appreciate your time this morning. I just have one sort of housekeeping question. I think there was a reversal for affiliated dividends in the quarter. I'm curious how that works and what caused that?

Mickey, that sort of thing happens as estimates change. As you know, the recording of dividend income is driven by tax estimates. So we use the best estimates we have at the time that we receive a payment as to whether that payment constitutes dividend income or should be record in a different manner. And this is one of those reversals that is a result of a change in estimate that gets cleaned up as we get better information.

Okay, Julia. That's it for me this morning and congratulations on a solid quarter.

I am showing no further questions at this time. I'd like to turn the call back over to David Gladstone for closing remarks.

All right. Thank you all for calling in and listening, and we'll see you next quarter. That's the end of this call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you all may disconnect. Everyone, have a wonderful day.