Fidus Investment Corporation (FDUS) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by and welcome to the Fidus Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Jody Burfening. Please go ahead, Ma'am.

Thank you, Josh and good morning everyone. Thank you for joining us for Fidus Investment Corporation's third quarter 2019 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd like to remind everyone today that this call is being recorded. A replay of today's call can be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the company's website fdus.com following the conclusion of this conference call. I'd also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, November 1, 2019, 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 like to now turn the call over to Ed. Good morning, Ed.

Good morning, Jody and good morning, everyone. Welcome to our third quarter 2019 earnings conference call. I'll open today's call with a high level commentary on our quarterly results, and then I'll cover our investment portfolio performance and conclude with comments regarding our view of the market and activity levels, as we move into the final quarter of 2019. Shelby will go into more detail about the third quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'd be happy to take your questions. From my perspective during the third quarter we executed well on our strategy of building a well-diversified portfolio debt and equity investments in lower middle market businesses that we believe will perform well over the long-term, generate high levels of current and recurring investment income and offer us the opportunity to boost returns through the monetization of equity investment. In addition, we continue to execute well against our primary goals of delivering stable dividends and growing net asset value per share. Adjusted net investment income, which we define as net investment income excluding any capital gains, incentive fee attributable to realized and unrealized gains and losses was $8.7 million or $0.35 per share for the quarter compared to $8.9 million or $0.37 per share for the same period last year. As of September 30, 2019, our net asset value or NAV was $402.8 million or $16.47 per share. On September 20, 2019 Fidus paid a regular quarterly dividend of $0.39 per share, estimated spillover income for taxable income in excess of distributions was $16.9 million or $0.69 per share. Earlier this week, the Board of Directors declared a regular quarterly dividend of $0.39 per share and also declared a special dividend of $0.04 per share, both of which will be payable on December 20, 2019 to stockholders of record as of December 6, 2019. Q4 dividends bring total distributions this year to $1.60 per share, and represent the seventh consecutive year paying the special dividend. Terms of originations, we invested a total of $47 million in debt and equity securities during the quarter. In contrast to the second quarter, third quarter originations were weighted toward add on investments to eight existing portfolio companies, which amounted to roughly $36.3 million of the $47 million. Substantially all these add on investments supported M&A activity by our portfolio companies. Largest of these was a $21.5 million subordinated debt investment in allied 100. The remaining amount was invested in a new portfolio company Bandon fitness, Inc. largest franchisee of anytime fitness gyms in the United States, with 12 locations across 11 states. We invested $10.8 million in the first lien debt and common equity. Subsequent to quarter end we invested in another new portfolio company hematologic technologies, Inc., a leading provider of biologic products and GMP compliant that say element and testing services to the biopharmaceutical industry. We invested $6 million in the first lien that in common equity. As expected, we generated some capital gains during the quarter in terms of repayments and realizations we received proceeds totaling $23.5 million of which $12.7 million came from the monetization of equity positions and three portfolio companies that were sold the new private equity owners. In connection with these exit we recorded gains totaling $10.7 million in each case, we generated over three times our initial investment demonstrating the strength of our investment strategy. Just after the quarter on October 1. We exited our debt and equity investments and system plaques manufacturing company. We received payment in full of our $4.1 million on our subordinated debt investment and sold our won investments of $4.1 million, realizing a gain of approximately $2.9 million. Including our exit in simplex manufacturing we received the proceeds from the sale of equity positions totaling $16.8 million and realized gains totaling $13.6 million since the end of the second quarter. Turning to our portfolio construction and metrics, the fair value of our investment portfolio as of September 30, 2019 read $729.4 million equal 10.5% [ph] of cost. On a FairValue basis, the breakdown of the portfolio by investment type as of September 30 was as follows. First lien debt 11%, second lien debt 52%, subordinated debt 20% and equity 17%. We ended the quarter with 62 active portfolio companies, and four companies that have sold their underlying operations. This mix of investment types reflect the positioning of our portfolio to provide us with a high level of current recurring income from that investments along with the opportunity for incremental returns from our equity investments. As of September 30, 2019, we had debt investments on two portfolio companies on nonaccrual status, US Green fiber and Oaktree Medical Center equal to 1.2% of our portfolio on a fair value basis. With respect to US Green fiber in early September, we took control of the company via a recapitalization transaction investing $2.8 million, primarily in the second lien debt, alongside the previous control investor in a new investor. This recapitalization is intended to provide the company with sufficient liquidity to execute its strategic plan. Moving to our portfolio performance and track several quality measures on a quarterly basis they help us monitor the overall quality and stability and performance of our investment portfolio. First, we track the portfolios weighted average investment rating based on our internal system, under our methodology a rating of one is outperform and a rating of five is an expected loss at September 30, the weighted average investment ratio for the portfolio is 1.9 on the fair value basis in line with prior periods. Another metric, we track it to credit performance of the portfolio, which is measured by our portfolio companies combined ratio, total net debt, debt investment to total EBITDA. With the third quarter this ratio is 4.7 times compared to 4.6 times for the second quarter. 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 portion of our portfolio companies have an aggregate to meet their debt service obligations to us. For the third quarter this metric was 3.3 times compared to 3.8 for the second quarter, we believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our borrower’s enterprise value in support of our capital preservation and income goals. In closing, as we look toward the end of 2019, we believe business conditions in our targeted lower middle market remained solid, providing us with opportunities to selectively grow our portfolio in a cautious and delivered manner while leveraging our experience in relationships. Our investment strategy and underwriting principles ensure that we remain focused on investing in high-quality companies that possess defensible market positions and less cyclical business models that generate excess cash flow for debt service and growth and they have positive long-term outlooks. At the same time remain focused on rotating mature equity investments into income producing assets. Overall portfolio is in good shape and well-positioned to provide us with current and recurring investment income even with the potential for softening economic conditions on the horizon. In addition, our equity portfolio continues to show promise through solid execution we intend to continue to manage the business with a long-term, with an emphasis on capital preservation in generating attractive risk-adjusted returns. Now, I turn the call over to Shelby to provide some details on our financial 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, 2019. Total investment income was $19.2 million for the three months ended September 30, 2019, a $1.1 million decrease from Q2, 2019. Interest and PIK income increase by $1.6 million, primarily due to incremental assets under management. Fee income increased by 0.2 million in Q3 which is more than offset by 0.7 million decrease in dividend income related to an episodic dividend from our equity investment and strategy declared in Q2. Total expenses, including income tax provision, were $11.8 million during the third quarter, approximately $3.4 million higher than the prior quarter, primarily due to an increase in incentive fees. Capital gains incentive fees increase by $2.6 million and income incentive fees increase by $0.9 million, both primarily related to overall appreciation of the portfolio in Q3 versus the write down in new status of investments in Oaktree Medical Center in Q2. Interest expense increase by 0.4 million and base management fee increased by 0.2 million which was offset by 0.5 million decrease in G&A expenses in Q3, as Q3 as the lowest G&A expenses. In the fourth quarter we will incur annual estimated expense. Interest expense includes cash interest, amortization of differed financing cost as well as increment on our use volume base. As of September 30, 2019 the weighted average interest rate on our outstanding debt was 4.6%. As of September 30, 2019, we had $343 million of debt outstanding comprised of $157.5 million of SBA debentures, $119 million of public notes and $66.5 million outstanding on the line of credit. In Q3 we paid the remaining 21.3 million of SBA debentures for our first SBI fund and surrender our SBA license. Our debt to equity ratio was 0.85 times or 0.46 times statutory leverage excluding exempt SBA debentures. Net investment income or NII for the three months ended September 30 was $7.4 million or $0.39 per share versus $0.39 per share in Q2. Adjusted NII was $0.35 per share in Q3 versus $0.35 per share in Q2. Adjusted NII is defined as net investment income excluding any capital gains incentive fee expense or reversal attributable to realized and unrealized gains and losses on investments. A reconciliation of NII to adjusted NII can be found in our earnings press release that was issued yesterday afternoon and is also posted on the Investor Relations page of our website. For the three months ended September 30, 2019 Fidus had approximately $10.6 million of net realized losses primarily related to the exit of our equity investment as I discussed. We incurred $22 million of realized loss on extinguishment of debt related to the repayment of SBA debentures and associated accelerate amortization expenses. Our net asset value as of September 30, 2019 was $16.47 per share versus $16.29 per share in Q2 an $0.18 increase highlighting the overall half of the portfolio as benefits of our equity strategy. Turning now to portfolio statistics; September 30, our total investment portfolio had a fair value of $729.4 million. Consistent with our debt oriented investment strategy, our portfolio on a cost basis was comprised of approximately 13% first lien debt, 57% second lien debt, 21% subordinated debt and 9% equity securities. Our average portfolio company investment on a cost basis was $11.1 million at the end of the third quarter which excludes investments in four portfolio companies that sell their operations they're in the process of winding down. We have equity investments in approximately 92% of our portfolio companies with a weighted average fully diluted equity ownership of 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 investment of cost including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual if any. Now I'd like to briefly discuss our available liquidity. As of September 30, our liquidity and capital resources included cash of $17.5 million and $33.5 million and $6 million of availability on our line of credit, an FNC3 debenture respectively resulting in total liquidity of approximately $57 million. Subject to SBA regulatory requirements and approval, we have access to 167.5 million of additional SBA debentures under our third SBIC license. We're pleased to report that in October we completed a public debt offering at attracting pricing. We issued $63.3 million in aggregate principal of 5.375% due 2024 raising net proceeds of approximately 61 million including the exercise of the overall allotment option which was used to pay down the line of credit. Taking into account subsequent event including the net proceeds from the debt offering and repayment of the line of credit we currently have $120.2 million of liquidity. Now, I'll 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 Josh for Q&A. Josh?

Our first question comes from Robert Dodd with Raymond James. You may proceed with your question.

On your comments about the potential softening economic conditions on the horizon and then most of the activity was follow once to credit obviously you know really well already rather than the new one that you have to do. Is there any connection between the two, is there been a shift that we should expect on a forward basis to maybe follow on in the near-term because you know them better and the economy is little uncertain versus newer credit swap that's in more risk?

Great question, Robert. From an economic conditions perspective, obviously we've been thinking about it for 3, 4 years, quite frankly because the economic cycle's longer than two. What we have seen in our portfolio is slower growth, but it's still in a growth mode. And so with that, I'm just - there's an appropriate level of caution as we enter in new investments, and in particular, obviously companies that have more cyclicality inherent in their business are ones that we're generally staying away from. In terms of the fact that we only have one new investment, we had a couple push out. We've had a deal recently that didn't qualify for - we won the deal, and we're doing diligence and we kind of backed away. So we are being obviously very prudent with the capital base and being careful as we move forward. But I don't - I do think deal flow is quite good right now, but I'll tell you quality's hit or miss. And we're being very careful as we move forward and what we're not doing is chasing deals, even good deals, from a price perspective. We're trying to be very prudent. And so I think that's what that reflects.

Got it. I appreciate that. And then just a really hard question as always, repayments. I mean ex the realized gains, right? The repayments on debt investments in the quarter were quite low and they were relatively low last quarter as well. I mean is there anything thematic going on that things are getting harder for people to refi so that the cycle's stretching a little bit? Or is it just a normal - hey, it's impossible to call quarter-to-quarter?

One moment, please. Please stand by.

Hello? Can you hear?

Robert, we didn't change a thing but it sure went dead quickly; so I'm not sure what happened. Apologize about that.

Yes, no - did you cut off before I asked that…

I asked about repayments. I don't know if I heard the end of the question though. So why don't you recite it again for me?

Yes, it was just around that repayment number and extra gains. The debt repayments in the quarter were quite low and they were last quarter as well, relative to some recent quarters. I mean is there anything thematic going on there or is that just the randomness of repayments?

I think it's the randomness of the repayments. What I will tell you is for a large majority of our deals, both on the front end of the business being originations and repayments, they are M&A related. So it's somewhat episodic from that perspective. Yes, when we have companies that are paid out a bunch of our debt and de-leveraged to where they can - the portfolio companies can actually at a much lower cost of debt capital, that happens from time to time. But in this case, it just - there's just not a lot of M&A activity where we had debt investments. So I don't - that's what I would say from that perspective.

Got it. Thank you. And then just on green fiber, I mean you obviously - you took control of GreenFiber this quarter. It's been a bit of a problem asset for a few quarters. So was there anything that precipitated the action this quarter in terms of the - that made taking control attractive or was that just a timing thing as well?

I don't know if it was a timing thing. It was, to be honest, in the works for quite a while. We were in a situation where the, quite frankly, the private equity group did not have a lot of capital left in the fund that they invested out of. And we worked through this over a period of time. It took longer than it should have, unfortunately, but that's what happened. They did invest in a small dollar amount in this; they're still involved with the company. But we did invest a majority of the capital and did take control of the business on a go-forward basis. And the - you're right. The company's had numerous - and I'm not going to get into them, just exogenous events, if you will, that impacted the performance. Having said that, it's a niche leader, it has real presence in its marketplace. And it's a company that we think has some staying power, and that's why we invested in it. And our hope is that there are better times ahead. But if it remains a fluid situation, and obviously we kept it on non-accrual, it did pay our cash portion of our interest this quarter, but we've kept it on non-accrual for obvious reasons. So our hope is that we see good improvement here over time.

Got it. Okay, I appreciate. There's no more questions. Thank you.

Great. Thank you, Robert. Good talking to you.

Thank you. Our next question comes from Ryan Lynch with KBW. You may proceed with your question.

Hey, good morning. Thanks for taking my questions. First one, when you mentioned your EBITDA to cash ratio, while still at a healthy level of 3.3x this quarter, it had a pretty meaningful drop from 3.8 last quarter. Can you just talk about what drove that change?

Sure. It's a very good question, Ryan. It is multiple things and I'm probably not going to go into all of them, but what I'll tell you is the biggest change is that Pinergy is no longer part of the equation so this in an average, right, of our portfolio. It's almost like treating the portfolio as one company, if you will. And Pinergy, that has a larger EBITDA than average by multiples and a very nominal interest expense, left the equation. And that's the biggest thing. I think I also would say over the last several - over the last year, we've done more senior debt and unitranche investing, and in those cases, obviously there's more cash pay. There's not pique in those investments, and so I think there's a myriad of things here that have taken place, but the biggest one is Pinergy.

And that's because of Pinergy debt paid in Q3.

That's right.

Okay. That makes sense actually in Pinergy. One kind of longer-term question. If I just look at the equity as a percentage of fair value of your portfolio, over the last several years, it has grown from kind of the 10%, 11% range in 2015 to all the way to 17%, 18% this quarter, dropped down about 16%. I would assume that there's been no change in your investment philosophy that you guys try to take some equity positions in every debt deal that you guys do. The growth of that equity portfolio over time - is there anything changing over the last several years as far as equity investments just taking a longer time to be able to exit those positions? Or what's really accounting for the growth of that portfolio in relation to maybe the time and your ability to exit those?

Sure. Great question. With 60 companies or close to 55 call it where we have equity investments, every situation's obviously a little different so it's hard to generalize. I will tell you obviously our two largest equity investments today have performed extraordinarily well. And I will say in both cases there, they are not owned by financial sponsors. And we do not control those exits. And so those companies are performing very well, but it takes a collective group to engineer those exits on those. And then, it kind of leads into a little bit of the conversation we had with Robert regarding repayments. A lot of the time, not always, but long stretch, but a lot of the time, we see our debt investments through the maturity or the exit of the equity as well. And that does take longer in some cases, in the lower middle market and I think our debt turns over last. So I did - I think the length of time where our equity investments are outstanding, this is a little bit longer in this market than you might find in the broader markets. That's the only thing I can think of, but I do - at the same time, we're pleased that we had four exits here recently. We do have several companies that are evaluating strategic alternatives as we said here today. But it's too early to tell if those transactions will take place. We went four-for-four in the last 4 months or so, which is great. But who knows what happens here going forward.

Sure. And yes, certainly recognized that that part of the growth of that bucket is due to the success of those equity investments and it increased in fair value. So it's only been a good driver of value for shareholders. Just one last one, maybe Shelby, you mentioned an excess tax in the fourth quarter. I believe last year; it was just around $700 000. Do you know - do you have any sort of estimates for what you're expecting in the fourth quarter for excess tax?

I would expect it to be called around $350 000, give or take.

Our next question comes from Mickey Schleien with Ladenburg.

I want to start off with a top-down question. So when we look at the performance of larger companies - much larger companies that you're investing in, we're seeing consistent sort of duration in their fundamentals and that showing up in metrics like downgrades of leverage loans and declines in revenue growth and margins. On the other hand, I think as you've pointed out, the middle market continues to plug along and do fairly well. So I'm interested in understanding what you think is causing that divergence.

That's a tough question, Mickey. I - what we are seeing and it's crop off the board, I mean we really - I mean do you see pockets of whether a company that - manufacturing company has some exposure to tariffs? At the end of the day, do we see a little bit of that? Yes. But nothing that's overly alarming that's usually heading margins more than anything. Do we see a little bit of slowdown in certain regions if you will, on the building product side? I'd say yes, but it nominal. So we are - I mean what we're seeing is continued slow growth and all of the different pockets. I do think it's slowed down. I do think earlier in the year, there was a slowdown on the industrial side of things and we're also seeing that our logistics - we have a large logistics investment, company that does a lot of third part LTL as well as overnight and that company is a good company and continues to grow, whereas the industry obviously slowed and actually backed up a little bit earlier in the year. But that company, for us, is continuing the growth. So I don't know that I can - I'm trying to just go through it here a little bit with you, but I think what we're seeing is high-quality businesses that add a lot of value to their sectors and to their customers, are continuing to thrive in this environment in the lower middle market and finding ways to perform though I do think growth has slowed a little bit, definitely from last year and clearly there was a little bit of a slowdown earlier in the year. But it's pretty stable at the moment.

If I could follow up, Ed. Presumably the middle market and the lower middle market companies ultimately are related to the larger companies. They may be selling to those larger companies for example. In your experience, is there a point, where we do see it trickled down and more of an impact or could it be that the companies that you're targeting and many of the other BDCs are targeting, you generally are focused on U.S. business and relatively speaking, U.S. business is doing better than international and large companies have more exposure than international.

I think that's a very good point, Mickey. I do think we are focused on U.S. companies, really 100% today. I mean, clearly, most companies have international business but we - I think that is an extremely good point. I think the other thing - one of the [indiscernible] of our investment strategies and we talked about it as investing in companies that have more recurring revenues than recurring cash flows in nature. And so, I think that also helps. Companies that are either have a lot of aftermarket content if you're more on the manufacturing side or software names, if you think about it, subscription names, things like that, which is something we've focused a lot on here recently. I think part of our performance from a portfolio company perspective is the types of companies that we're investing in. I think that's the other piece of the puzzle.

Okay, that's helpful. Just a couple more sort of housekeeping questions. I notice that you reported unrealized depreciation on your debt investment, so about $2.5 million. And I just want to confirm that that was a functional that impacted declining interest rates on your fixed rate investments or was it something else like perhaps accruals for prepayment fees?

I don't think we did. I may have to get back to you on that. I don't think we had debt overall that backed up. I think we clearly had a couple names that were - backed up a little bit and those are more individual situations where it is just more leveled today and type of thing than they were last quarter. But and Shelby is looking at some information but I don't think we had - on the debt side actually we had appreciation as we think about it.

Right, that's - that was my question. You had appreciation and I just wanted to know - understand if that's just a functional movements and interest rates were something else. But we can talk about that offline. Lastly...

I don't think - it's not movement and interest rates. I think it's just performance of those companies.

And lastly, I think previously you've talked about a target leverage ratio. This would be total leverage of 0.7 to 0.9. So you're sort of in that range now. Is that still your target and do you have target regulatory leverage ratio that you can share with us?

I don't think we have a specific target of regulatory. I think we liked the position that a big piece of our data is SPIC. They have the [indiscernible] equity for regulatory purposes. I don't - we don't really target a number there given we're so far away from any regulatory concerns. I would say on the GAAP leverage, if you will, we are more 0.7 to 1.0 is how we're thinking about it from a target perspective of 0.8 to 1.0. And so that's where we are at the moment from the target perspective. So we have a little bit of room to run.

Our next question comes from Chris Kotowski with Oppenheimer.

You mentioned that you paid down and surrendered your first SPOC license and I was wondering, was that a prerequisite for getting the new licenses finalized and can you update us in general on your - where you stand in your process with the SBA?

No, it wasn't a prerequisite and we just - to be honest, what happens if you don't pay it down. You can only pay back debentures twice a year. Once is at the end of August and the other one is at the end of February and so the other time period. So we obviously took advantage of that. We didn't want to - because every payment in the interim, the cash just sits there until you can repay that capital. So it's a good time to get it repaid. And it was not a prerequisite for the third license. We receive the third license in the Q1 I think. So we have that. It's up and running and - but it was not a prerequisite, no.

But you haven't been drawing on the third license. Is there more to do there?

No, we have drawn on the third license. We have $7.5 million of SBA debentures outstanding on the third license.

Okay.

We're in the very early stages of building that out.

Okay. And then given the notes offering, I assume the immediate use of proceeds is to pay down the credit line and then - but and I guess as we're modeling out the next couple of quarters and if we're assuming some growth, just what should we expect on the funding side of the equation? Should we expect most of the incremental funding to come from the SBA debentures or should we expect it just to draw down on the credit line from here?

I think a majority of it will probably end up being a draw down on the line of credit, would be my guess. But clearly, we are looking for opportunities, and quite frankly, assets that qualify for the SBA program. And when they do qualify, then we will obviously use that capital. But I would think a majority of it will be line of credit; so maybe 2/3 - our kind of thought process.

All right, that's it from me. Thank you.

Thank you, Chris. Good talking to you.

Thank you. Our next question comes from Tim Hayes with B. Riley FBR. You may proceed with your question.

Hey. Good morning, guys. Thanks for taking my questions. My first one, just to follow up on Chris's question there on the SBA debentures, what's the cost of drawdowns today and how does that compare to your blended cost from across these three facilities?

Clearly, the SBIC debt is definitely more attractive in terms of the cost of capital, so it's around - I think it was around - Our weighted average cost to capital in our existing SBA data is about 3.3 versus 4.6 on an overall basis. And then also keeping in mind we just did another baby bond [ph], so we might do the 4.6 tick up to about 4.7 next quarter.

Okay. And then I wanted to just circle back on the question about equity position exits specifically as it relates to Pinergy and Advanced Steel [ph]. Understand now might not be the right time and that isn't necessarily in your control to exit these positions, but have you had any more conversations with new third parties, whether it be companies interested in M&A or investors potentially maybe looking to take down some of your equity? Just wondering if these conversations have progressed or if you've had any new ones and are actively working towards that.

Yes, I think the way to answer that is we are - I mean the two names are different if you think about it. I mean Pinergy obviously in the oil field and services performing very well. But it's a tougher time in that industry. The sector's in a bit of malaise, as you well know. And so it - working on that is we got to be patient is how I would think about it. Pan and steel, yes, there are discussions that we are having on a variety of fronts, but there's no telling exactly where that ends up. We are working actively on the equity portfolio and looking for ways to monetize it where possible. But it's sometimes easier said than done. But we are working hard at it and hopeful that we can make some progress on the overall portfolio in the medium term if you will.

Okay. Makes sense. And I guess in that vein, just thinking about the dividend, interest income was up a good amount this quarter as you got a full quarter's impact from last quarter's growth, and then it looks like a good amount of investment activity this quarter as in the first half of the quarter. And then you mentioned you rotated out of some of the smaller equity positions, and I know you still have a good amount of wood to chop there. But adjusted NII still came in well below the dividend and I understand fee and dividend income can be lumpy as well, but just wondering what your confidence level is on your ability to eventually earn the dividend with adjusted NII and if there's any view internally on a potential timeframe.

Sure. Great question, Tim. I think there are two things we need to do to get back to covering comfortably, and one is we need to grow the portfolio a little bit and we are working to do that. But we're doing that in a very deliberate manner, if you will, and cautious manner. So we're not in a rush. And but we do think there'll be opportunity over the next four or five months to get the portfolio to a level that we're happy with. And the second piece of the puzzle is rotating some of these equity investments into debt investments or income producing assets. And so that is a harder equation to solve and it's one that is multi-faceted, and in many cases, we're not in control of it. As I mentioned earlier, I do think we have several companies that are evaluating strategic alternatives right now. So we're hopeful some good events take place. But that is something we do not control at all. And then we're doing what we can as well in different situations to try to monetize some equity investments because it's critical. But I think it's a tougher piece of the puzzle to solve and it's one we're not going to move towards in an irrational manner. We're going to - we're focused on the long-term and long-term performance, and we want to do it in a very deliberate manner. And so yes, that's a tougher one to answer. We're doing the best we can; I can't answer that one in a specific manner.

Understood. Just good to get your thoughts around that. Sorry, Shelby, go ahead.

I was going to say in the meantime, we do have a healthy amount of spill over income in terms of $0.59 per share.

Right.

And I think the point is where we are - we obviously have a fair bit of comfort of where we sit here today.

Got it. Appreciate the comments around that. And then just turning back to your comments about maybe expecting softening economic conditions, you've been going more first lean over the past several quarters and I know you mentioned some of the steps you're doing to I guess approach that type of environment. But what would you say that going more first lean in reflects you guys getting more defensive? And on the other hand, as many of your other lower middle market lending peers focus on first lean in debt, does that create opportunities for your second lean strategy?

Sure. I'll take that last one first. I think it does. We are continuing to see second lean investment opportunities. Earlier in the year we had a fair number of new deployments; very high-quality situations that we were pleased with. I think the quality over quantity mantra is definitely there, has been there for a long time for us, and so that's what you'll see as we move forward. But we're clearly still looking for second lean investments. But it's more episodic. And then first lean is - we are finding nice opportunities either in a first lien dollar one or situation where we're the last out, we originate the paper and we bring in someone to play a first out piece of the transaction. And we are seeing a fair number of those opportunities in the marketplace today, and obviously - and that's what you're seeing. We're having good success there. So I think we're looking for both but it's more episodic on what deals come in that quarter.

Got it. And then just one more from me around this. When you say you're expecting or preparing for softening economic conditions, is there an internal view that there will be a big inflection in 2020? I know you also mentioned you've been kind of preparing for this for several years now, but if that's the case, what would your outlook for M&A and exit events be in that type of environment?

Sure. Great question. I think it's obviously - we're concerned about a slowdown. A slowdown has occurred. I think obviously the set is being pretty aggressive and out in front of it, and that's helping a little bit. And the U.S. continues to chug along relative to the global economy that's slowing down a little bit more. Our hope is that it's a softer landing and we don't have anything that's - anything that's really - that really hurts the credit world, if you will. And we've been careful and we just didn't want to take chances that we're aggressive and that we were depending on a soft landing type of thing. So we've been very careful for a long time. So the types of businesses I mentioned earlier, these more recurring revenue businesses, Think Software, or companies that are aftermarket on the manufacturing side. So that's how we've been trying to play it. We're not seeing - as I mentioned earlier, we're not seeing any real problems from a - in industry segments or overall just performance. So we feel good about that. How do I think the M&A world - right now, deal flow is good? As I mentioned earlier, quality's been hit or miss and we are very much staying on the quality - the high end of the quality spectrum, if you will. I do think as we move towards an election, and I think M&A could slow down a little bit, but the economy right now and what we're seeing is it's pretty vibrant from a M&A activity or M&A opportunity perspective, and we're obviously hoping to participate in some of those opportunities. But I think that what I'm seeing right now is I think the election could be a period of time where things do slow down as we get closer to it.

Okay. Thanks for the comments there. Appreciate it.

Thank you. Appreciate it, Tim.

Thank you. Our next question comes from Bryce Row with National Securities. You may proceed with your question.

Great, thanks. Good morning. Just wanted to just go a little deeper on the monetization's topic. Obviously, a strategic priority that you executed on here this past quarter. I was curious looking at the equity portfolio and some of the - I guess the write-ups on a handful of your equity investments from second quarter to third quarter, does that reflect maybe the ongoing processes that you mentioned in terms of those particular companies exploring strategic options?

In one or two situations, the answer to that would be yes where we've - have some knowledge of the process. And again, these M&A processes, as you well know, it's really hard to tell if the deals are going to happen or not. But there's some numbers that are being thrown out in a couple situations that are positive relative to where we entered those investments for sure from a multiple perspective, and those - we have reflected that in our valuation to a certain extent. So there is some of that. I wouldn't say overall that's what's happened, but there are a couple names where that's the situation.

Okay. That's great. I think all the other topics I wanted to cover were covered, so appreciate the time. Thanks.

Thank you, Bryce. Good talking to you.

Thank you. [Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Ed Ross, CEO, for any further remarks.

Thank you, Josh. And thank you, everyone, for joining us this morning. We look forward to speaking with you on our fourth quarter call in late February. Have a great day and a great weekend.

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