Fidus Investment Corporation (FDUS) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Fidus Investment Corporation Fourth 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. 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 fourth quarter 2019 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd like to remind everyone 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 following the conclusion of this call. I'd also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, February 28, 2020, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would like to now turn the call over to Ed. Good morning, Ed.

Good morning, Jody. And good morning, everyone. Welcome to our fourth quarter 2019 earnings conference call. I'll open today's call with a high-level commentary on our quarterly results. And then I'll cover our investment portfolio performance and conclude with comments regarding our view of the market, and activity levels for 2020. Shelby will cover the fourth quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. Consistent with the first three quarters of the year, our fourth quarter results demonstrate the effectiveness of our strategy and inception to build a well diversified portfolio of debt and equity investments in lower middle market businesses that we believe will produce high levels of recurring income and offer us the opportunity to participate in equity gains. Thereby over time preserving capital and generating attractive risk-adjusted returns. We continue to build our portfolio carefully selecting companies that have strong yet defensible market positions and positive long-term outlooks. Deliberately opting for quality over quantity. As a result, we grew NAV to $412.3 million or $16.85 per share as of December 31st, 2019 compared to $16.47 per share as of December 31st, 2018. This represents the fifth consecutive year of NAV per share increases. Another way we evaluate the effectiveness of our strategy is by tracking the net increase in net assets. For 2019, we generated $1.98 per share amply covering our dividend payment of $1.60 per share for the year. For each year since the 2015, the net increase and net assets is equal or exceeded dividend payments resulting in a five-year average of $1.95 per share relative to the dividend payment of $1.60 per share. From our perspective, these metrics demonstrate the deliberate value creation that our portfolio is designed to produce over time. Finally, our return on equity is a testament to the effectiveness of our strategy. For 2019, our model generated an ROI of 11.9% regardless of whether you measure ROI over three years or five years our ROE stands out in the BDC universe. On December 20th, 2019 Fidus paid a regular quarterly dividend of $0.39 per share and a special dividend of $0.04 per share. At December 31st, estimated spillover income or taxable income in excess of distributions was $15.3 million or $0.63 per share. On February 12, 2020, the Board of Directors declared a regular quarterly dividend of $0.39 per share which will be payable on March 27th, 2020 to stockholders of record as of March 13th, 2020. Our operating results for the fourth quarter were solid. Adjusted net investment income which we define as net investment income excluding any capital gain, incentive fee attributable to realize and unrealized gains and losses was $8.3 million or $0.34 per share compared to $11.3 million or $0.46 per share for the same period last year. In terms of originations for the fourth quarter, we invested a total of $43.6 million in debt and equity securities during the quarter. Similar to the third quarter, the majority of the fourth quarter origination was add on investments in eight existing portfolio companies primarily in support of M&A activity. Investments in new portfolio companies consisted of $6 million in first lien debt and common equity and Hematologic Technologies Inc, a leading provider of biologic products and GMP compliant assay development and testing services to the biopharmaceutical industry. $8 million in first lien debt and preferred equity in prime AE Group Inc, a multi-faceted architecture and engineering services firm focused on domestic infrastructure projects. Subsequent to year end, we invested another $26 million in debt and equity securities and two new portfolio companies. These investments consisted of $11 million in a revolving loan and first lien term debt of Combined Systems Inc, a leading designer, manufacturer and marketer of non-lethal security products for the global defense and law enforcement markets. And $15 million in first lien debt of Routwere Inc, a leading provider of highly integrated fleet up, fleet automation software and systems for waste haulers and municipalities. In terms of repayments and realizations, we receive proceeds totaling $21.8 million which included payments totaling $8.1 million related to the exit of our debt and equity investments in Simplex manufacturing company and payments totaling $9.8 million related to the exit of our debt and equity investments in US Pack Logistics LLC. In connection with the exits of these two portfolio companies, we realized gains totaling $3.8 million which was offset by a $13.8 million realized lost on our investment an Oaktree Medical Center for a net realized loss of $10 million for the fourth quarter. Subsequent to year end, we received proceeds totaling $20 million including a realized gain of approximately $9.8 million on a distribution of our equity investment in Fiber Material Inc, and a $9.2 million repayment in full on our first lien debt investment and Hunter Defense Technologies. Turning to our portfolio construction and metrics, the fair value of our investment portfolio as of December 31st grew to $766.9 million equal to 108.9% of cost. We ended the quarter with 61 active portfolio companies and three companies that have sold their underlying operations. On a fair value basis, the breakdown of the portfolio by investment type as of December 31st was as follows. First lien debt 14.1%, second lien debt 49.9%, subordinated debt 18.4% and equity 17.6%. But this mix of portfolio remains well positioned to provide us with a high level of current and recurring income from debt investments along with the opportunity for incremental returns from monetizing equity investments. As of December 31st, 2019 we had debt investments in one Portfolio Company on non accrual status. Accent Food Service equal to 4.3% of our portfolio on a fair value basis, while the company and its management team implement operating improvements, we have to be patient until the company delver. We continue to believe in the long-term prospects of the company as reflected in our Q4 fair value. Green Fiber was moved back to accrual status as a result of its improved financial performance. Moving to our portfolio performance. We tracked several quality measures on a quarterly basis to help us monitor the overall quality, stability and performance of our investment portfolio. First, we track the portfolio's 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 December 31st, the weighted average investment ratio for the portfolio was two on a fair value basis in line with prior periods. Another metric we track is the credit performance of our portfolio which is measured by our portfolio companies combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the fourth quarter, this ratio is 4.6x compared to 4.7x for the third quarter. The third measure we track is the combined ratio of our portfolio company total EBITDA total cash interest expense which is indicative of the cushion our portfolio of companies have in aggregate to meet their debt service obligations to us. For the fourth quarter, this metric was 3.4x compared to 3.3x for the third quarter. We believe that soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions through our bars enterprise value in support of our capital preservation and income goals. In closing, 2019 was a year of accomplishment in terms of our overall portfolio performance, proactive portfolio management and equity appreciation. Origination which totaled a record $219.2 million continued to encompass a diversified mix of first-lien debt, second lien debt, subordinated debt and equity investments reflecting our ability to offer customized and flexible financing solutions to lower middle market businesses in steadfast commitment to underwriting disciplines. Within this mix, we consistently deployed more capital in first lien debt investments during the year so that in aggregate first lien debt accounted for $84 million or 38% of total of 2019 origination compared to $25.4 million or 12% of total origination for 2018. Proceeds from repayment and realizations were $120.6 million for the year including proceeds of $20.3 million from equity investments. As a result of these achievements during 2019, we extended our track record of capital preservation, grew NAV per share for the fifth consecutive year and continue to create value for our shareholders. Since the beginning of 2020, we received a distribution on our equity investment in Fiber Materials, Inc which resulted in a $9.8 million gain. We also just completed a significant transaction with an undisclosed institutional investor for the sale of 50% of our equity investments and 20 Portfolio Company including Pfanstiehl, Inc, our second-largest equity investment. We received net proceeds of $35.9 million from this transaction and realized an approximate net gain of $20.4 million reflecting our continued belief and these 20 portfolio companies we retained 50% of our equity investments in them. With this opportunistic transaction, we have proactively moved the needle in a meaningful way toward our goal of reducing the percentage of equity in our portfolio on a fair value basis generating $66.8 million in proceeds from equity investment dispositions since the beginning of 2019 to be redeployed into income producing assets. Looking ahead into 2020, M&A activity in the lower-middle market is reasonably sound with our strong relationships and deals -- with deal sponsors, our industry expertise and ability to provide customized and flexible solutions origination should remain solid. Our equity portfolio has given us an incremental capital to redeploy into income producing debt investments and continues to offer us attractive opportunities to realize gains and boost returns. Our debt portfolio remains well positioned to provide us with current and recurring income and to withstand an economic downturn should one occur. As always remain focused on managing the business for the long term with an emphasis on capital preservation and generating attractive risk-adjusted returns. Now I'll turn the call over to Shelby to provide some details on our financials and operating results. Shelby?

Thank you, Ed. And good morning, everyone. I'll review our fourth quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter Q3, 2019. Total investment income was $19.5 million for the three months ended December 31st, 2019, a $0.3 million from Q3, 2019 primarily due to a $0.6 million increase in dividends offset by a $0.2 million net decrease in interest income primarily related to placing Accent Food Services on non-accrual status and a $0.1 million decrease in fee income. Total expenses including tax provisions were $14.1 million for the fourth quarter, approximately $2.3 million higher than the prior quarter primarily due to an increase in the capital gains incentive fee accrual of $1.6 million related to meaningful appreciation and the fair value of portfolio. $0.5 million increase in interest expense related to the $63.3 million public notes offering completed in Q4 and the annual excise tax expense. In Q4, the excise tax expense was $0.4 million as a result of $15.3 million or $0.63 per share of spillover income. As of December 31st, 2019, the weighted average interest rate on our outstanding debt was 4.7% versus 4.6% in Q3. As of December 31st, we had $364.8 million of debt outstanding comprised of $157.5 million of SBA debentures; $182.3 million of public notes and $25 million outstanding on the line of credit. Our debt to equity ratio was 0.88x or 0.5x statutory leverage excluding exempt SBA debentures. Net investment income or NII for the three months ended December 31st, 2019 was $0.22 per share versus $0.30 per share in Q3. Adjusted NII which excludes any capital gains, incentive fees, accruals or reversals attributable to realized and unrealized gains and losses on investments was $0.34 per share in Q4 versus $0.35 per share in Q3. For the three months ended December 31st, 2019 Fidus had approximately $10 million of net realized losses related to a $13.8 million of realized losses on Pain Management Associates offset by $2.9 million realized gain on the exit of our equity investment in Simplex Manufacturing Co and $0.8 million realized gain on the exit of our equity investment in US Pack Logistics. Now turning to portfolio statistics. As of December 31st, our total investment portfolio had fair value of $766.9 million. Our average portfolio company on a cost basis was $11.5 million at the end of the fourth quarter which includes investments in three portfolio companies that have sold their operations or in the process of winding down. We have equity investments in approximately 93.7 % of our portfolio companies with a weighted average fully diluted equity ownership of 5.3%. Weighted average effective yield on debt investments was 12% as of December 31st. The weighted average yield is computed using the effective interest rate for debt investments to costs including the accretion of original issue discount and loan origination fees but excluding investments on non accrual status, if any. Now I'd like to briefly discuss our available liquidity. As of December 31st, our liquidity and capital resources included cash of $15 million, $75 million of availability in our line of credit and $6 million of available FMC -3 debentures resulting in total liquidity of approximately $96 million. Taking into account subsequent events, we currently have $125.6 million of liquidity and access to $161.5 million of additional SBA debentures under our third SBIC license subject to SBA regulatory requirements at approval. Now I will turn the call back to Ed for concluding comments. Ed?

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

[Operator Instructions] Our first question comes from Paul Johnson with KBW. You may proceed with your question.

Good morning, guys. Thanks for taking my questions. Congratulations on the equity exits and as well as the Green Fiber recovery, those are obviously two real positive developments for shareholders and the exits obviously are always difficult to affect. So once again congratulations for that. On the Green Fiber recovery, I'm just curious was the investment accruing any income for the quarter or for any sort of partial period of the quarter.

I'll let Shelby answer to that but --

It was, we put it back on accrual status effective October 1st. so we had a full quarters worth of interest income.

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

Sure. So I guess just talking about dividend coverage for a second. I think what our belief system is we have a well diversified portfolio that's performing in a very solid manner. A very strong and now previously over weighted equity portfolio that can be rotated into higher yielding investments and a strong balance sheet including a modestly leveraged one. Over the past six months, we've realized over $60 million of proceeds from equity investments and we plan to invest a large part of those proceeds into income producing assets that should enhance the current income portion of our P&L. The quality of our portfolio positions as well to continue to perform well for our shareholders over the long term. This recent equity monetization event only enhances this ability. We also like having $15.3 million spillover income to support any shortfalls falls along the way. So in short, we are very comfortable with our dividend as we sit here today. I think more importantly we're confident in our strategy of investing in the debt and equity of lower middle market companies. We target in 90% debt and 10% equity asset mix on a cost basis. We believe this approach generates high levels of recurring revenues and the opportunity for capital gains. We also believe NA preservation is imperative over time if you're going to run a BDC well. And if you can grow NAV while running a BDC well, it'll only put you in a better position. So finally we believe our track record, our NAV track record and overall track record supports these thoughts.

Yes. And I would just add to note that particularly the exit of fiber materials and then monetization of a portion of our equity portfolio happen here as a subsequent event kind of mid to late Q1. So it will take a little while to redeploy those proceeds, but big picture your math is right. It's just a question of timing in terms of when starts -- get those redeployed in the yielding asset.

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

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

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

Sure. Let me -- I give you a little perspective here I guess real quickly. So debt yields in our portfolio have dropped about 100 basis points from 13 to 12 I guess over the last 24 months. In 2018, new investment yields were lower than debt repayments which is you just mentioned the fact that new investment were 11.9% in 2018 whereas repayment were in the 13.5 range. In 2019, new investment yields were 11.8% and repayments were approximately 14.1%. So to summarize I think in this quarter repayment for our yielding debt investments clearly impacted things. I think the decline in LIBOR had impact as well. And finally moving accident to non accrual also impacted. So I’d say those three things were the reasons for this quarter’s decline. On a go forward basis, I don't think we expect to see material declines. So we -- I think we would plan on being pretty stable from this perspective but small declines could happen, could LIBOR go down more. I would tell you on the LIBOR side of things, we have floors on LIBOR of 1.5% to 2% and most of our floating rate deals, not all but most. So that largely protects incremental reductions in LIBOR. Hopefully that's helpful.

Thank you, our next question comes from [Matt Jaden] with Raymond James. You may proceed with your question.

Hi, all. Good morning. I guess two quick questions on the equity exits on February 25th. So first can you just give any general guidance? Were those exits at the marks close to or at the -- for [40.99] marks?

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

Okay and then what about were any NOLs to shield some of those gains?

There are a few NOLs that Ed mentioned, the net -- approximate net proceeds of the $24 million we had taken into account as some of these equity investments in fact were held at some of our blockers. But then NOLs with the grand scheme of things were not hugely material, but we do have a few NOLs and some blockers that offset some of this. And I would also just mention it's a difficult thing to model, but for the RIC, we do have some capital loss carryforwards that were further offset some of the gains recognized by the RIC in terms of distribution requirements.

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

So again that's where I would kind of point you to the capital loss carryforwards that we have available at the RIC. It's about call it $20 million to $22 million at the end of 2019. So that will not completely shield the gains recognized by the RIC but it will definitely offset a large majority of it.

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

It's a great question and I wish I had a crystal ball. But let me just touch on the Accent Food situation, which again we do have a fair bit of confidence in it and the numbers are pretty stable to improving. But to refresh for the group, Accent is a leading provider of customized refreshment and break room food and beverage services to a diverse base of over 3,500 customers primarily in the Texas market but they also are in other geographic regions. Their core services include vending services, micro markets and coffee services focused on really the small and medium sized business segments, also the government market. So it's very much a day-in day-out business and it has pretty meaningful size which we like. Since our involvement began the company has been acquisitive. And they've also invested in the infrastructure of the company to help facilitate its growth objectives. Companies had some missteps along the way of this growth path. Recently though and thankfully the company hired a new CEO early last fall, a new COO earlier in the year. And more recently hired several additional senior team members to round out the team, to be succinct; these were badly needed changes and hires. We're seeing significant positive changes and meaningful change in the operating performance of the company. I’d say the situation is very stable and we're hoping for continued improvement. As a second lien lender in this situation, we are having as a second lien lender in this situation; we have to be patient for the time being post negotiations with the sponsor and the senior lenders, meaning we're not getting paid. And that's the nonaccrual status. So, hopefully that that gives you got some perspective on those whole situation. That's about as much as I can talk about but --

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

Sure, great question. I'd say dividend income is truly episodic for us these days. And we did have a dividend in the fourth quarter. But, if you looked at it for the whole year, dividends were down in a material way and so they truly are episodic. And so it's hard to forecast dividends from our perspective. On the fee side, the quarter ended up being, I would say lacklustre from an originations perspective. I think deal flow is pretty good, but we did have two deals fall apart for diligence reason. So we had to walk away from two situations which did impact our final originations number. But, again, deal flow was fine. It's just that's kind of how the cookie crumbles as a result of having kind of lacklustre originations, fee income was down a little bit relative to some more robust quarters update.

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

Thank you. Our next question comes from Mickey Schleien with Ladenburg. You may proceed with your question.

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

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

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

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

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

Sure. Great question. Great question. It's, and we are very domestically focused, which I think is a positive here. We have reached out to all of our portfolio companies over the past couple of weeks and what I would say at a high level, none of the companies expressed high concern. Unfortunately, in a couple cases people had contingency plans that they were working on if supply was delayed with, clearly we have some manufacturers in our portfolio that do, now do rely on parts of China and other parts of the world but thankfully they have second sources and other places to get those materials and are not solely dependent on China for instance. So I'd say -- what I'd say is the situation dynamic and everyone including our portfolio companies is learning more each day is it goes by. At the moment, we don't see anything meaningfully problematic and aware of anything in our portfolio that is a big concern. But as you would imagine, we're staying close to our portfolio companies given the fluid nature of the situation and I just highlight I do think it's a bit of an unknown that, will this coronavirus impact deal volume? And if it does, it'll be both on the originations and the repayment side of things. But it's an unknown at the moment. We're still seeing deal flow as we sit here today, obviously, and are pleased with what we're working on at the moment. So, but we'll be taking it into account obviously, as we move forward.

Okay, that's really helpful. And just a couple of sort of housekeeping questions. Was there any reversal of previously accrued income for Accent Food?

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

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

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

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

I mean, it, I do think there'll be a continued shift towards first lien, but and it's -- what we're seeing in the market, we're having good success in the market with it, and we're pleased with it. The ultimate returns that we're modelling in those situations, and I think we're also providing solutions in the marketplace that are being well received. From a pipeline perspective, we are working on a couple of deals that hopefully will make it to the finish line and we're evaluating a fair number of deals for later on, but those aren't in kind of an awarded state, if you will. So we are we're continuing to be busy, if you will. And but I wouldn't say that the M&A market coming into this year is robust. And now you've got, the coronavirus that you got at least everyone's got to be thinking about and what is that? How does that impact things? It's a little bit of an unknown. But I do think that the markets open. There's equity capital available, there's debt capital available, and that's high quality companies. I think people will be looking to transact on as we move forward. So I'd say it's not robust, but it's active and we're trying to participate in that activity.

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

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

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

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

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

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

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

Thanks. Good morning Ed and Shelby. I'm good. Couple questions for you on the equity sale. Obviously, Pfanstiehl accounted for a good chunk of the dollars, were the proceeds in the game. Curious the other 2019 equity investments that were sold. Did they all carry realized or unrealized gains as of 12.31or were there some mix of gains and losses?

I don't have the list in front of me, but substantially all of them had some versus, a little bit of unrealized gain in a mid Q4, maybe there's one or two the more cost but yes --

Yes. I have the list. There was only one and this is a very modest loss.

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

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

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

It's a great question, Bryce. It's -- we've been getting close, closer and closer to NAV until this last five or six day trading data. And so it's something we haven't put a ton of thought into, but I have been actually in the last two or three. I -- what I'd say to be more formal, as we have a $5 million share repurchase program in place that was reaffirmed in the fourth quarter of last year. We're obviously mindful of -- that the value of our investment portfolio may not always be reflected in our stock price. And for that reason, we continue to look for ways to enhance shareholder value and this buyback may be one of those ways. When we evaluate it, I just want to highlight we're going to look at the liquidity of our, we're going to look at our capitalization, we look at our bank group agreements, a leverage ratio, and just make sure we're being prudent. But if the opportunity arises, and we think it's the right thing to do, then we clearly are will be evaluating. End of Q&A And I'm not showing any further questions at this time. I would not like to turn the call back over to Ed Ross for any further remarks.

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

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