Main Street Capital Corp (MAIN) 2016 Q1 法說會逐字稿

Greetings and welcome to Main Street Capital Corporation first-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jenny Zhou.

Thank you. You may begin.

Thank you, David, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation first-quarter 2016 earnings conference call. Joining me on the today on the call our Chairman and CEO, Vince Foster; President and Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith.

Main Street issued a press release yesterday afternoon that details the Company's first-quarter 2016 financial and operating results. This document is available on the investor relations section of the Company's website at mainstreetcapital.com. A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until May 13.

Information on how to access the replay is included in yesterday's press release. We also advise you that this conference call is being broadcast live through internet webcast that can be accessed on the Company's webpage. Please note that information reported on this call speaks only as of today, May 6, 2016, and therefore, you are advised that time sensitive information may no longer be accurate at the time of any replay listening.

Our conference call today will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. These statements are based on Management's estimates, assumptions and projections as of the date of this call and they are not guarantees of future performance.

Actual results may differ materially from the results expressed or implied in these statements 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, which can be found in the Company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law.

During today's call, management will discuss non-GAAP financial measures, including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified.

And now I'll turn the call over to Vince.

Thanks, Jenny, and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend announcement and conclude by commenting on our investment pipeline. Following my comments, Dwayne Hyzak, our President, and Brent Smith, our CFO, will cover operating performance in more detail and comment on our first-quarter financial results, originations and exits, our recent announcements, our current liquidity position and key portfolio statistics, and our expense ratio, after which, we will take your questions.

Our investment portfolio again delivered solid operating results during the first quarter. Our lower middle market portfolio, our primary area of focus, depreciated by $3.5 billion on a net basis, with 28 of our investments appreciating during the quarter and 21 depreciated.

Our middle market loans depreciated by roughly $9 million during the quarter on a net basis, approximately two-thirds of which was energy related. And our private loans depreciated by $3 million during the quarter.

We finished the quarter with a net asset value per share of $21.18, a sequential decrease of $0.06 over the fourth quarter. Our lower middle market companies, with nearly $150 million of cash on their balance sheets, continue to exhibit highly conservative leverage ratios on a relative basis, which Dwayne will cover in greater detail.

Earlier this week, our Board declared regular monthly dividends for the third quarter of $0.18 a share in each of July, August and September, maintaining second quarter dividend payout amounts. The X dates for these dividends are June 29, July 19, and August 17 respectively. These dividends represent an increase of 3% over the monthly payout of $0.175 a share in the third quarter of last year.

Last month, we declared a semiannual supplemental dividend of $0.275 per share. 2016 represents our fifth consecutive year of supplemental dividends beginning with the 2012 dividend declared in the fourth quarter of that year. We currently expect to ask our Board to declare our next semiannual supplemental dividend in the fourth quarter in the range of $0.25 to $0.30 a share.

Primarily as a result of our recently announced exit of our investments in SambaSafety, we currently estimate that 100% of our third-quarter regular dividends will constitute long-term capital gains for federal income tax purposes, taxable to our individual shareholders at highly favorable rates. As of today, I characterize our investment pipeline as about average, with a higher winning of the lower middle market opportunities. We continue to seek and receive significant equity participation in our lower middle market investments and, as of quarter end, we own an average of 35% of a 35% fully diluted equity ownership position in the 96% of these investments in which we currently have equity exposure.

Our Officer/Director group has continued to be regular purchases of our shares, investing at approximately $0.5 million during the first quarter. With that, I'd like to turn the call over to Dwayne to cover our portfolio performance in more detail.

Thanks, Vincent, good morning, everyone. We are please to report another quarter during which we generated distributable net investment income in excess of our current monthly dividends and continued favorable performance in our lower middle market portfolio.

We believe that our unique investment strategy, focused primarily on the underserved lower middle market, combined with our efficient operating structure, provide a unique value proposition that differentiates Main Street from most yield-oriented investment options and generates the premium total returns realized by our shareholders.

As we've discussed in prior quarters, we believe that the primary driver of our long-term success has been and continues to be our focus on the underserved lower middle market, and specifically, our investment strategy of investing in both debt and equity in the lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market companies and not just a financing source. Over the last few quarters, we provided some highlights on different aspects of a focus on the lower middle market to demonstrate the significant benefits of our unique investment strategy.

In addition, for the last few quarters, we noted that we had elevated levels of exit activities in our lower middle market portfolio. Those exit activities in two portfolio campaigns have been completed over the last four months, so this quarter, we'd like to highlight several points related to the recent exits of our investments in Southern RV and SambaSafety.

The first point I want to highlight is the comparison of the actual realized value from our equity investments in each of these completed transactions to the valuations of these investments at September 30, 2015 and December 31, 2014. In the case of Southern RV, which we exited in January, our actual realized value from the exit of our equity investments was 36% or $4.4 million greater than our fair value estimates at September 30, 2015, and 207% or $11.2 million greater than our fair value estimate at December 31, 2014.

In the case of SambaSafety, which we exited in April, our actual realized value from the exit of equity investment was 49% or $10.1 million greater than the fair value estimates at September 30, 2015 and 405% or $24.4 million greater than our fair value estimate at December 31, 2014. The second point we would like to highlight is the favorable investment returns that our lower middle market investments can generate for our shareholders. In the case of Southern RV, the exit generated a cumulative 45.9% internal rate of return a 2.3 times money investor return on our cumulative debt and equity investments in Southern RV, with our debt investments representing greater than 87% of our total invested capital.

In the case of SambaSafety, the exit generated a cumulative 34.7% internal rate of return and a 2.3 times money investor return on our cumulative debt and equity investments in SambaSafety, with the debt investment representing greater than 93% of our total invested capital in Samba. We believe that both of these exits provide evidence of the conservative nature of the valuations of our lower middle market equity investments and the opportunity for significant upside in the ultimate value realized when these equity investments are marketed for sale in a competitive process or in a sale to a strategic investor.

In addition, both cases provide evidence of the significant value and investment return opportunities provided by the equity investments in our lower middle market companies and the significant benefits of being both a debt and equity investor in these companies as opposed to just being a lender. Without our unique investment focus on a combination of senior secured debt with meaningful direct equity investments in our lower middle market companies, it would be very difficult to deliver these types of returns and benefit to our shareholders.

Consistent with prior quarters, we also want to highlight that the contributions from our lower middle market portfolio continue to be well diversified. With 46 of our 69 lower middle market equity investments having net appreciation at March 31 and with the 28 companies in our lower middle market portfolio, or approximately 67% of our investments in flow-through entities for tax purposes contributing to our dividend income over the last 12 months. We believe that the diversity of a lower middle market portfolio is very important when analyzing the benefits from our lower middle market investments and we believe that this diversity provides visibility to the recurring nature of these benefits in the future.

Now turning specifically to our investment portfolio at quarter-end and our investment activity in the first quarter, we are pleased to report that our overall portfolio performance remains strong. Our investment activity in the first quarter included total investments in our lower middle market portfolio for approximately $37 million, primarily as a result of our investments in two new portfolio companies, which after aggregate repayments on debt investments and return of invested equity capital, resulted in a net increase in our lower middle market portfolio of approximately $7 million.

We had a net decrease in our middle market portfolio of approximately $2 million and a net increase in our private loan portfolio of approximately $26 million. As a result, at March 31, we had investments in 198 portfolio companies that are in more than 50 different industries across the lower middle market, middle market, and private loan components of our investment portfolio.

The largest portfolio company represents approximately 3.5% of our total investment income and approximately 3% of our total portfolio fair value, with the majority of our portfolio investments representing less than 1% of our income and our assets. Additional details on our investment portfolio at quarter-end are included in the press release that we issued yesterday, but I'll touch on a few highlights.

Our lower middle market portfolio included investments in 72 companies, representing approximately $860 million of fair value, which is approximately 24% above our cost basis. At the lower middle market portfolio level, the portfolio's median net senior debt to EBITDA ratio was a conservative 2.7 to 1, or 2.9 to 1, including portfolio company debt which is junior in priority to our debt position.

As a compliment to our lower middle market portfolio and our middle market portfolio, we had investments in 84 companies, representing approximately $580 million of fair value, and in our private loan portfolio, we had investments in 42 companies, representing approximately $270 million in fair value. The total investment portfolio at fair value at March 31 was approximately 106% of the related cost basis and we had six investments on [honor] pool status, which comprised approximately 0.5% of the total investment portfolio at fair value, and 3.8% at cost.

In summary, Main Street's investment portfolio continues to perform at a high level and continues to deliver on our long-term goals. With that, I will turn the call over to Brent to cover our financial results and liquidity position.

Thanks, Dwayne.

We are pleased to report that our total investment income increased by 13% for the first quarter over the same period in 2015, to a total of $42 million. Interest income increased by approximately $2.1 million. Dividend income increased by approximately $2.5 million and fee income increased by approximately $0.5 million when compared to the prior year.

The amount of income that is less consistent on a recurring basis was approximately $0.6 million or $0.01 per share in the first quarter of this year, which is consistent with the amount in the first quarter of 2015. First-quarter 2016 operating expenses, excluding non-cash share-based compensation expense, increased by $0.8 million over the first quarter of the prior year to a total of $13.3 million.

The increase was primarily related to a $0.7 million increase in compensation and other general and administrative expenses and a $0.4 million increase in interest expense. These increases were partially offset by a decrease in net expenses of $0.3 million due to an increase in the amount of cost allocated to our external investment manager.

The ratio of our total operating expenses, excluding interest expense, as a percentage of average total assets, which we believe is a key metric in evaluating our operating efficiency, remain constant at 1.4% on an annualized basis for the first quarter and continues to compare very favorable to other BDCs and other yield oriented investment options.

Our increased total investment income and continued leverage of our efficient operating structure resulted in a 16% increase in distributable net investment income for the first quarter of 2016 to a total of $28.8 million or $0.57 per share, exceeding our recurring monthly dividends paid for the quarter by over 5%.

Our external investment manager's relationship with the HMS Income Fund benefited our net investment income by approximately $1.9 million in the first quarter of 2016 through a $1.2 million reduction of our operating expenses or costs we allocated to the external investment manager for services we provided to it and $0.7 million of dividend income from the external investment manager.

We recorded a net realized gain of $13.6 million during the first quarter, primarily relating to a $14.4 million realized gain on the exit of lower middle market investments in Southern RV and, as Vince discussed, we recorded net unrealized depreciation on the investment portfolio of $14.8 million in the first quarter. Primarily relating to $9.3 million of net depreciation on our middle market portfolio, $3.2 million of net depreciation relating to our private loan portfolio and $6.3 million of net depreciation relating to our other portfolio.

This net depreciation was partially offset by net appreciation related to our lower middle market portfolio of $3.5 million. Additional details for the change on our net unrealized appreciation can be found in our earnings release.

Looking forward to the second quarter of 2016, and consistent with the information we provided on our last earnings conference call, we wanted to provide an update regarding the market movement relating to our middle market portfolio. The overall market for the middle-market debt investments has continued to improve during the second quarter.

Based on a static middle market portfolio as of March 31, 2016, not taking into account any new investments or sales or repayments during the second quarter, and based on quoted market prices for our underlying middle market debt investments, our middle market portfolio has generated approximately $5 million to $6 million in net unrealized appreciation to this point in the second quarter.

Our operating results for the first quarter of 2016 resulted in a net increase to net assets of $16.8 million or $0.33 per share. On the capital resources front, our liquidity and overall capitalization remains strong. At the end of the first quarter, we had $17.2 million of cash, $1.5 million of marketable securities and $249 million of unused capacity under our credit facility.

Today, we have approximately $17.9 million of cash, $1.5 million of marketable securities and $299 million of unused capacity at our credit facility. We also recently received a green light letter from the SBA allowing us to continue our application process for our third SBIC license. Obtaining our third SBIC license and having the ability to access the incremental SBA debentures will significantly benefit our capital structure and enable us to maintain our long-term focus on growing our lower middle market portfolio.

As we look forward to the second quarter of 2016 and consider the impact from the recent exit of lower middle market debt and equity investments in SambaSafety, we currently expect that we will generate distributable net investment income of $0.57 to $0.58 per share during the quarter. This estimate is $0.03 to $0.04 per share above our previous announced monthly dividends for the second quarter of $0.54 per share.

In addition, we want to provide guidance on the expected per share difference between our distribute net investment income and net investment income due to our non-cash restricted stock expense. We currently expect the different to be approximately $0.04 per share per quarter for the remainder of 2016.

With that, I will now turn the call back over to the operator so we can take any questions.

(Operator Instructions)

Robert Dodd, Raymond James.

First on HMS and the Department of Labor rules. Have you seen any change in inflows to HMS or have they changed their strategy or anything like that? Can you give us color on whether we can expect any material change? Because obviously, it's a pretty big positive contributor right now and been growing.

Robert, the initial offering period expired earlier this year or late last year. Was it last year, Nick?

December.

So they had a choice as to whether or not just to close the offering and maybe launch a second fund, Robert, or do a follow-on. They decided to file for a follow-on and they did that. It was declared effective by the SEC, but what that entails is re-signing all of these selling agreements with the underlying broker dealers that distribute the product and that process is undergoing now and it's probably in the second or third inning.

So we've seen significantly less volume on the capital raising front, probably 75% less or something like that but there's probably 75% fewer selling agreements at this point that have been signed up and each offering is distinct. They have to conduct either their own due diligence or have third-party due diligence conducted or both, legal due diligence, et cetera. So it's kind of a long process. It's kind of hard to say.

There probably will be headwinds as a result of the Department of Labor, although the non-listed BDCs did fall under this BICE exception, the best interest of the client exception, and it remains to be seen how all that works, but I think they emerged from the Department of Labor regulations better off than they otherwise feared. So that's kind of the update. Anything else you would add, Nick?

I think that covers it.

Okay. Thank you. Just another one. On the lower middle market and the valuations, because obviously, when we look at M&A multiples or buyout multiples in the lower middle market there, they're pretty high. A lot of that on the software side that obviously played to your benefit with Samba. How are you addressing that?

Your pipeline is pretty good on the lower middle market side. There is obviously a wide range of multiples. You're dealing with smaller-than-average businesses. Can you give us a bit more color on that range of and do you anticipate activity, given the multiples are still fairly elevated, which may -- in net activity -- which may result in realizations being higher versus originations.

We are a little agnostic about these exits. It's nice to have our strategies and our valuations validated, et cetera, when an exit happens. On the other hand, we end up with the reinvestment risk and having to go try to put the money in a company that realistically might not be as nice as the company that was sold because the companies that are sold typically are first quartile companies, right? They are kind of good news, bad news.

In the case of Samba, it was completely unsolicited. It wasn't for sale. Someone contacted them. It's kind of a household name type of a buyer and management said, at a certain number, I guess we would be willing to sell. We tend to like to go along with management and the soliciting party hit the number and closed.

Was that a first quartile company? I'm not sure. It was an RV dealership that, it was performing well and it was growing. It wasn't the type of company you would envision a huge multiple someone coming in and paying, but clearly it was a multiple that we found attractive relative to our NT price and relative to our carrying value.

We have no way to predict those. They're probably going to continue to happen. If someone held a gun to my head, I would say there's probably going to be a couple of those that happen a year. We were the majority shareholder of Samba, or excuse me, with respect to the Southern RV.

Now with respect to Samba, that was quite a bit different. I'll let Dwayne give you the circumstances there because that was software as a service. We did have a relatively high valuation on it relative to our other lower middle market valuations.

Rob, when you look at SambaSafety, and I've referenced in my comments that these two exits, one was a strategic acquirer that Vince touched on as it relates to Southern RV. The other was a competitive process. So a lot of these companies like Samba and like we've seen several years ago with stuff like Drilling Info, when the company has significant historical growth, but even more importantly, significant growth opportunities in the future, they become something that's very much on the radar of larger private equity groups as well as other strategics.

They will start receiving inbound interest from those parties and that's what happened in the case of Samba, so as we sat around the table talking to management and the other equity owners, we decided that it made sense to explore the market opportunities, hired an investment bank, ran a competitive process, and obviously, as you can see from the results of the exit that I touched on in my comments, you end up with a very, very nice outcome from an exit standpoint.

So as Vince said, these are not, it's not going to be the same type of outcome for every single company that we have, but for ones that are either attractive to a strategic industry acquirer or ones that have more significant historical and projected future growth, with usually these type of outlier valuations that obviously generate significant results for us and our shareholders as well as the management teams of these portfolio companies.

Okay. Thank you.

Bryce Rowe, Robert W. Baird & Company.

I just wanted to follow-up to Robert's question. I know they are hard to predict, but as you guys talked about within the pipeline, higher mix maybe of lower middle market within the pipeline and clearly you have your sights on growth in the lower middle market portfolio.

How do you think we handicap what we're hearing about as being the more active M&A market at least for the second half of the year? How do we handicap that against the growth originations you might have and how do you think about net portfolio growth in the lower middle market and then how will the portfolio, the overall portfolio, trend from a mix perspective within the three buckets?

The first question I will repeated because it's kind of a compound question. The first question is what do we see in terms of our lower middle market origination forecast as a result of an improving tone being reported in the M&A market generally? What I would say there, Bryce, is we're really not impacted one way or the other by the tone of the overall M&A market, because the overall M&A market is focused on companies where there is a pretty visible exit strategy if you can grow it or bolt onto it and it's driven by the ability to finance inexpensively and to put a fair amount of leverage on your equity

Where as when we're underwriting, we're looking, we don't underwrite to a exit strategy. So we have a wider range of industries we'll invest in. We'll get our returns by having a modest entry multiple going in and not having to compete for the company that's the most likely to have a real attractive exit, IPO or what have you. So were really kind of disconnected with all that.

Now, if we're looking at a company and our view is that it's a nice permanent long-term hold at a modest valuation and someone else is looking at it differently and says I got the financing and I really think I can do something with this, generally it's going to be adding the company we're looking at as a platform company to an existing company as a bolt-on. We will lose, generally.

So when the market tone goes up, or is more favorable, and there's a broader range of companies, target companies, out there that have a exit strategy, arguable exit strategy, and the financing markets are accommodated, then things will get more competitive with respect to the more attractive companies. But that's probably only 25% of what we're looking at.

The other, wouldn't you say, Dwayne? The other 75% is recap situations, it's family situations, it's situations that don't really lend themselves to traditional private equity LBO with a near-term exit.

That's why, Bryce, you always hear us talking about being a partner to management as opposed to being a financing source. Because, as Vince touched, the deals that fit us really, really well are situations where the management team and owner/operators do not want to sell 100% of the company.

They're looking to do some estate planning or liquidity planning that they very much want to be involved in the ownership and management of the company going forward and just really want to achieve a personal goal as opposed to trying to maximize value and get 100% liquidity. It's just a different approach to the marketplace.

And what drives our conversion of pipeline in the closed deals is the due diligence process. We could easily kill them all in diligence or we might get lucky and they all come through diligence just fine and the diligence process includes, these companies are not audited. We're generally the first institutional investor. You've got to get through documentation.

We generally are not bringing in management, so we need to be comfortable with respect to the management team that we're investing with and we do expect the management team to invest with us to the extent they have the capability to do that. The outcome of diligence creates the lumpiness in our business. It's not so much the lumpiness in the pipeline. The pipeline is pretty much always there.

And Bryce, the only other thing maybe to add one, because I think part of your question was looking at the net portfolio growth. You've heard us talk about accelerator elevated amounts of exit activity in the portfolio. I would say that, for the last two quarters, or three quarters, when we've been talking about that, Southern RV and Samba were big parts of that activity.

So two of those have gone and while we always have some level of exit activity in the portfolio, that level of activity is always subject to change. A big chunk of that activity has transacted now.

Yes and I would just as soon not have anymore for the next few quarters.

That's good color. I appreciate it. One follow-up and kind of unrelated. It looks like and we've seen this with some of the companies too that pricing, really within all three buckets of your portfolio, has stabilized and is even showing some level of increase.

How comfortable do you guys feel that we've seen the compression kind of come to an end from the last few years and then maybe we'll see stabilizations and maybe increases in pricing going forward?

Lower middle market really is uncorrelated to the middle market. It's more a function of how large the companies are, if you're competing with someone and the relative attractiveness of their industries at the moment. We don't really, pricing hasn't really changed too much there, other than if you're looking at a relatively large, attractive company, then you begin to have some correlation. But Nick, what is your forecast in terms of middle market pricing?

It's clearly widened down the last six months, but it usually has little speed bumps every 18 months or so that kind of widens pricing out. That old [Brian tiger] in the market fuels himself. That's what I would expect over the next six to nine months is you will see it tighten up a little bit, but I do think we'll still be off of the [tighth] of 12, 18 months ago.

All right. Great. I appreciate it. I'll jump out of queue.

Christopher Nolan, FBR Capital Markets.

Vince, can you give some detail in terms of how the overall energy sector down in Houston is actually reacting given that oil is coming off the lows and how what implication that might have for your portfolio investments?

I guess you are reading more about it and hearing more about the market being over-supplied and have being over-supply for some time. You're seeing people now forecast that we're going to come into balance maybe sometime later on this year or next year. I think there's some guarded optimism.

Around here, we're as probably as gas-focused as we are oil-focused and as offshore-focused as we are onshore-focused. And offshore is, if you're in any business that's related to off-shore, that's still very tough out there right now. And people aren't talking about a turnaround in the next couple of years. Whereas if you're in the Permian and you are more oil-centric, you're feeling pretty good right now with prices above the break-evens that you're hearing about.

So I think it's overall guardedly optimistic. That doesn't mean people are running around hiring a bunch of people or anything. The commercial real estate guys are probably seeing their vacancies grow. If you're getting ready to sign a lease, the pendulum swung back to the tenant. If you're getting ready to hire someone, the pendulum swung back to you.

We're still creating jobs to the local economy. The question is are we replacing an engineering job with a lower paying service sector job? The answer is we probably are, but nonetheless, you're seeing population growth and the homebuilding is relatively robust. I think people feel better now, obviously, than they did than a couple of months ago. Would you guys add anything else?

No, I think you covered it.

Okay. And the follow-up question is on the green light letter. Generally, what is the timeframe between receiving a green light letter and actually getting the third license?

Well, I think there's historically SBA has timelines of, and I haven't memorized these, a first license takes the longest because you're being vetted for the first time. I think the goal is from the green light letter to a first license might be something in the six-month type range, maybe as long as nine months. But it's all comment letter dependent, much like the SEC. You get a bunch of comment letters. If you don't turn around quickly, or you don't adequately address the comments, it's going to stretch longer.

Or stuff comes up in your background check, particularly stuff that you did not disclose, you're going to have a problem. But in general, you should be able to get some done in six to nine months. With respect to a second license, that timeframe is truncated and they actually have a mechanism for kind of more rapidly getting you a second license if you're performing adequately with respect to your first license, although I'm not sure -- and there's a terminology for that, it's like a fast-track.

I don't think BDCs qualify for the fast-track, though, for a second license. But the second license are typically quicker, so you might expect four to six months, let's say. And with respect to the third license, we don't know because it's new to kind of have three at once. Certainly, there's groups out there that have had a third license as the first one goes into liquidation, et cetera.

So we're a little bit in unexplored territory here. I would expect that if you've received a first and a second and you've done well and you can effectively turn around your comment letters and everything and you haven't had a lot of turnover on your team or in your portfolio's performance, I would expect that you could improve even on that four months. So that's what we're shooting for, but again, we're in a little bit uncharted territory.

Great. Thanks for the color.

Mickey Schleien, Ladenburg Thalmann.

This might be an opportune time to revisit the strategy on the club deals because we saw some growth there. But in the past, you've commented that you haven't always been very happy with some of the underwriting by other folks in that space. Just curious what your thinking is there and did you lead the deals this quarter?

Our thinking there is, I suppose you could say, a lesson learned, is the club deals for non sponsored companies we have found have performed, significantly under-performed where we would have liked, where we would have expected and the deals that were sponsored. So we're going to be a lot more skeptical as it relates to non sponsored club deals. So I don't know what the percentage would be that are sponsored at this point that we're looking at in 20, but it's vast majority, isn't it?

It is definitely the vast majority.

On the other hand, we will do deals, there's crossover deals I would characterize, Mickey, where us and a group we've known for a decade in Dallas get together and finance a family-owned business. They are familiar with, in Dallas, buying a family-owned business, a competitor basis in Houston that we're familiar and we jointly lead it.

And something like that, it is non sponsored, but it's in the context of something we have a lot of control of. We're jointly documenting. We're jointly diligencing. We can easily diligence the, acquire the target, et cetera.

So those types of things we probably like even better than the traditional sponsored club deals. So there's kind of three buckets of them, but the first bucket, we're not that familiar with the target company, it's not sponsored and we're not leading it. That's increasingly tough for us to get comfortable with. Any other comments, Dwayne?

No. I think you covered it well.

Just one follow-up, then. I appreciate that, Vince. In the press release, you mentioned the return of equity capital from several LMM investments. Are these dividend recaps or what was the nature of the capital upstream to Main Street?

Mickey, when we give that guidance, we're trying to give you guidance on the net change and the cost basis. So when you have something like Southern RV that was exited in the first quarter, obviously, a significant part of the proceeds to Main Street are going to be the realized gain. But a part of it is obviously going to be the original invested capital, so we're giving you that guidance so you can take our numbers and role forward the portfolio.

In other words, Samba, we are allowed to retain the original principal, the original cost basis of the investment. And at some point, you have to distribute the capital gain piece of it either currently or through the spillover process or a special dividend or something.

There is a mechanism where we can pay the tax on it on behalf of the shareholders and give the shareholders a tax credit for that tax which that's something we need to continue to think about. That's why we think it's important to give you the information.

I understand. Those are all my questions. I appreciate your time today.

(Operator Instructions)

Christopher Testa, National Securities Corporation.

Out of the 28 lower middle market companies you said appreciated, just wondering if there were any specific sectors that appreciated the most, whether you saw energy kind of balance into the end of the quarter with the price of oil. Just any detail there would be appreciated.

I don't think there's anything you could really generalize on. When we underwrite these deals, we expect slow, steady appreciation due to de-levering if nothing else. So if you have no EBITDA growth and no multiple expansion, what EBITDA there is that converts to free cash flow should de-lever the company. And that de-leverage times our percentage should result in appreciation, quite simply.

So a lot of times, we would expect to see that. And there's always companies, of course, that are growing organically, companies whose industry is in favor and you might see some multiple expansion, et cetera. But I can't think of anything I would generalize about. The energy companies have not recovered. That's for sure.

That's the one thing we can tell you definitively, that when you look at the appreciation, it would've been outside of energy and I think before energy really starts to appreciate, we're going to need to see continued improvement in the commodity price and overall general activity in the industry.

Got it. And have you been seeing any kind of ancillary pressure from obviously the layoffs in energy, given your geographic focus? Have you seen some businesses maybe struggling outside of the energy sector because they have so many customers who were employed in the industry? Is that something that you've noticed kind of in the southwest?

Yes. Well one I'll give you anecdotally, we have a restaurant chain we've been in, really light, we've been in for 15 plus years in and around Dallas/Fort Worth. And they love low fuel prices, the restaurant industry does, historically, right? So you think low gas prices would help them. On the other hand, they are in the Dallas/Fort Worth area. You're not necessarily in the basins, but you're pretty close.

And their same-store sales were down 1% year-over-year and so that was kind of, it wasn't an alarming metric, but it's an interesting one because you almost have to attribute that to the fact that they're probably in an energy-oriented region. We don't really have retail restaurant exposure in and around Houston or anywhere else in the state. But I think, anecdotally, I thought that was very interesting. Because that's what I would attribute it to. It's more along the lines of the growth has stopped and their flat-lining rather than the wheels are coming off.

Got it. Okay. That's helpful. And just with the lower middle market, it seemed in the quarter that the originations were somewhat light. Are you seeing, was there just a lack of good opportunities? Were the structures not right in terms of the leverage the companies wanted? Just any detail on whether you were kind of holding back there or whether there is just not as much activity as was anticipated.

You've heard us talk about, in the past, the lower middle market being a very, very attractive sector, but it being very lumpy, and I think when you look at our efforts there, we did have some closings, had several additional closings kind of in early second quarter, as well as the exit activity that takes time as well as you're looking at exiting activity, exiting portfolio company, that takes attention from the teams.

But overall, I think we continue to be happy with the portfolio and the pipeline, as Vince touched on earlier, and if there is lumpiness or slow times in that part of our sector, one of the things that we always is try and take a look at ways to look at opportunities within the portfolio, whether that's organic growth, acquisition growth or otherwise, and I would say that we spent some additional time in those areas during the first quarter.

You got to remember to is there's some seasonality in the business, where first quarter is light, and, although it really shouldn't be, if you think about it. This shouldn't be a seasonal business. I think what that could be attributable to, if you're sitting here in February before you pull a trigger on a deal, you'd really like to see calendars 2015 numbers or fourth-quarter 2015 and if it's in an audited context, you'd like to see that.

Well the public companies have a hard time getting their audits done by mid- to late-March, much less the private companies because the private companies get to stand in line behind the public companies. So I think that really causes a lot of what deals that would happen in the first quarter to get pushed into the second quarter.

And I've heard some other CEOs in our space comment on just that, that first quarter is seasonally light. So I don't read too much into, I don't know why it is and it's frustrating to me personally, but it happens every year and so I try not to read too much into it.

All right. Appreciate you taking my questions.

Ladies and gentlemen, there are no more questions at this time. I would like to turn the call back to management for closing comments.

Great. Well, thank you all for attending today. We will talk again later on this summer. Bye.

Thank you. This does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.