Fidus Investment Corporation (FDUS) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Fidus First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to your speaker today, Jody Burfening.

Thank you, Lisa, and good morning everyone and thank you for joining us for Fidus Investment Corporation's first quarter 2021 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company’s website at fdus.com. I would 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, cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, May 07, 2021, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors including, but not limited to the factors set forth in the company’s filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody, and good morning everyone. Welcome to our first quarter 2021 earnings conference call. I hope all of you, your families, friends and coworkers are staying healthy and well. I am going to open today’s call with a review of our first quarter performance and portfolio at quarter end, and then share with you our views on deal activity in the lower middle market. Shelby will cover the first quarter financial results and our liquidity position. Once we have completed our prepared remarks, we'll be happy to take your questions. Our first quarter results demonstrate the stability of our portfolio and the effectiveness of our strategy 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 preserving capital and generating attractive risk adjusted returns over time. We carefully select companies that have strong yet defensible market positions, resilient business models that generate free cash flow and have positive long-term outlooks for growth over the long-term. Our first quarter operating results were solid and our portfolio performing well in generating adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee, trivial to realized and unrealized gains and losses of $11.2 million or $0.46 per share. This compares favorably to adjusted NII for the fourth quarter of last year of $0.44 per share. Fidus paid a base quarterly dividend of $0.31 per share and a supplemental cash dividend of $0.07 per share to stockholders of record as of March 12 on March 26, 2021. As a reminder, the Board has devised a formula to calculate the supplemental dividend each quarter, under which 50% of the surplus and adjusted NII over the base dividend from the prior quarter is distributed to shareholders. For the second quarter, the surplus is $0.15 per share. Therefore, on May 03, 2021, the Board of Directors declared a base quarterly dividend of $0.31 per share, and a supplemental quarterly cash dividend of $0.08 per share. The base quarterly dividend and the supplemental cash dividend will be payable on June 28, 2021 to stockholders of record as of June 14, 2021. Our NAV continued to improve as a result of both our solid operating performance and the underlying portfolio of fair value appreciation. We ended the quarter with net asset value of $413 million or $16.90 per share, a level that is I’d like to point out above the NAV of our portfolio as of December 31, 2019 before we were all dealing with the pandemic. Deal flow activity during the first quarter was at reasonable levels driven by both M&A and refinancing opportunities. In terms of originations, we invested $63.1 million in debt and equity securities, the [$6.9] million or 58.5%, was invested in first lien debt. Investments in new portfolio companies consisted of $1.5 million in first lien debt and common equity in Garlock Printing and Converting and converter of plastic film into flexible packaging solutions, $6.5 million in first lien debt in core business technology provider of revenue management and payment solutions to government healthcare and education sector. We also made a $2 million delay draw term loan commitment to this company which was unfunded at close. $8.9 million in first lien debt and Xeeva, Inc., a global provider of intelligent cloud based direct spin management software solutions. We also made a $0.4 million delayed draw term loan commitment to this company, which is unfunded at close. And finally $17 million in subordinated debt and common equity in LifeSpan Biosciences, Inc, a global provider, developer and distributor of antibodies and related reagents, primarily to the academics and pharmaceutical research markets. The remaining $19.2 million consisted of add-on investments in six portfolio companies primarily related to recapitalizations of [technical difficulty]. Turning to repayments and realizations, we received proceeds totaling $98.6 million in another quarter of relatively strong M&A activity and higher debt refinancing volume. In terms of exits, we received payment in full of $15.6 million including a prepayment penalty on our first lien debt in Bandon Fitness Inc. We received payment in full of $6.6 million, including a prepayment penalty on our first lien debt in Alzheimer's Research and Treatment Center, LLC. We received payment in full of $10 million on our subordinated debt investment in OMC investors and reinvested $5 million in new second lien debt. We exited our debt and equity investments and FDS Avionics Corp receiving payment in full of $5.1 million on our revolving, and subordinated debt investments and realized the gain of $0.9 million on our equity investment. We receive [$0.1] million in first lien debt and common equity of the acquired Spectra Aerospace and Defense acquisition Inc. Received payment in full of $20.4 million on our second lien debt in Wheel Pros, Inc. including prepayment penalties, received payment in full of $4.2 million on our first lien debt in French Transit LLC. We exited our debt and equity investments in Software Technology LLC, receiving payment inflow of $10 million on our subordinated debt investments and realized a gain of approximately $1.4 million on our equity investment. And we exited our debt and equity investments in [Monroe] Corporation receiving payment in full of $14 million in our subordinated debt investments and realized a gain of approximately $0.9 million on our equity investment. Subsequent to quarter end, we invested $11 million in first lien debt of Winona Foods Inc., a leading provider of natural and processed cheese products, sauces, and plant based alternatives. We invested $5.5 million in first lien debt and $1 million in common equity of Level Education Group, LLC doing business as CE4Less, a leading provider of online continuing education for mental health and nursing professionals. We exited our debt investment debt investment in Kyjen Company, LLC, doing businesses as outward hound, and receive payment in full of $15 million on our second lien debt, which includes a prepayment fee. We invested $25.5 million in first lien debt, common equity, and made a commitment up to $2 million of additional first lien debt of ISI PSG Holdings, LLC doing businesses Incentive Solutions, Inc., a tech-enabled incentive rewards and digital marketing firm that facilitates and optimizes its clients’ indirect sales channel strategies. We exited our debt investment in Medsurant Holdings, LLC, and received payment in full of $8 million on our second lien debt. And we exited our debt investment in Virginia Tile Company, LLC, and we received payment in full of $12 million on our second lien debt. With repayments and exits, outpacing originations during the first quarter assets under management as of March 31, 2021, was as expected lower than December 31, 2020. As of March 31, the fair market value of our portfolio was $711.9 million equal to 108.4% of costs and we ended the first quarter with 67 active portfolio companies and four companies that have sold their underlying operations. In terms of portfolio construction, we continue to increase the mix of first lien debt investments on an absolute basis, and as a percent of the total portfolio and at quarter end first lien debt accounted for 27.5% of the portfolio on a fair value basis compared to 25.2% as of December 31, 2020. The breakdown of the rest of the portfolio by investment type as of March 31, was as follows: second lien debt 41.5%, subordinated debt 14%, and equity since 17%. With this security mix, our portfolio remains well structured for current economic conditions and position 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 investment. Moving to portfolio performance overall, our portfolio is performing well and risk is at comfortable levels. Some of our portfolio companies have encountered supply-chain disruption, higher input costs, including freight costs, but overall they are managing these issues well. And the long-term fundamentals of their businesses remain in good shape. [indiscernible] representing 0.8% of total fair value of the portfolio. We tracked several quality measures on a quarterly basis to help us assess the overall health, 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. March 31, the weighted average investment ratio for the portfolio was two on a fair value basis. Another metric we track is the credit performance of our portfolio which is measured by our portfolio companies combined ratio of total net debt through Fidus’ debt investments total EBITDA. For the first quarter this ratio is 4.4 times excluding equity only and ARR deals. The third measure we track is the combined ratio of our portfolio companies totally EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. For the first quarter this metric was 3.4 times, excluding equity only in ARR deals. With high levels of repayments and exit exceeding originations recently, we were pleased to see that M&A activity in the lower middle market remains robust and is expected to remain strong throughout the year, offering us opportunities to invest in high quality companies that meet our underwriting standards and supporting our positive outlook to build our portfolio of debt and equity investment in a disciplined and measured way as we have in the past. At the same time, we do expect repayments to continue through the year, but at a slower pace than the recent past. Overall, we believe the portfolio is headed in the right direction and remains well structured in support of our capital preservation and income goals. Our strategy is working and we remain committed to our goal of growing net asset value over time through careful investment selection, and focus on preservation and on generating attractive risk adjusted returns. I will now turn the call over to Shelby to review our financial results and liquidity position. Shelby?

Thank you, Ed, and good morning, everyone. I'll review our first 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 Q4, 2020. Total investment income was $23.3 million for the three months ended March 31, $0.3 million decrease from Q4 primarily due to a $1.7 million decrease in dividend income, offset by a $0.9 million increase in fee income from new investments, amendments and prepayments, and a $0.5 million increase in interest income. Interest income in Q1 included approximately $1 million of accelerated amortization of closing fees and OID from the abandoned fitness and will pros repayments. Total expenses, including income tax provision were $12.2 million for the first quarter approximately $5.4 million lower than the prior quarter primarily due to a $4.6 million decrease in the capital gains incentive fee accrual. In Q4, we accrued $4.7 million of capital gains incentive fees giving meaningful appreciation and the fair value of the portfolio and a decreased related $2.7 million of annual excise tax which was accrued in Q4 related to estimated 2020 spillover income. Note the capital gains incentive fee is accrued for GAAP purposes, but not currently payable. As of March 31, the weighted average interest rate on our outstanding debt was 4.3%. And we had $356.1 million of debt outstanding, comprised of $133.8 million of SBA debentures, $207.3 million of unsecured notes and $15 million outstanding on our line of credit. In Q1, using the proceeds from our December bond offering, we fully redeemed our 5.875% $50 million notes due 2023 and partially redeemed $50 million of our 6% public notes due 2024. In addition, we paid down $19.2 million of SBA debentures and our second SBIC fund. We realized a one-time loss on extinguishment of debt in Q1 of approximately $2.2 million from the acceleration of unamortized deferred financing cost on the redeem bonds and SBA debentures. Our debt to equity ratio as of March 31 was 0.9 times or 0.5 times statutory leverage excluding exempt SBA debentures. Net investment income or NII for the three months ended March 31, was $0.45 per share versus $0.25 per share in Q4. Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was $0.46 per share in Q1 versus $0.44 per share in Q4. For the three months ended March 31, we recognized approximately $3.2 million of net realized gains from the sale of several equity investments including Software Technology a $1.4 million gain FDS $0.9 million gain and roar $0.9 million gain. Turning now to portfolio statistics as of March 31, our total investment portfolio had fair value of $711.9 million down from $742.9 million at year end as repayments outpaced new investment activity in Q1. Our average portfolio company investment on a cost basis was $9.8 million at the end of the first quarter, which excludes investments and four portfolio companies that sell their operations and are in the process of winding down. We have equity investments and approximately 87.3% of our portfolio companies with weighted average fully diluted equity ownership of 5.3%. Weighted average effective yield on debt investments was 12.3% as of March 31. The weighted average yield is computed using the effective interest rates for debt investments at cost including the accretion of original issue, discount and loan origination fees, but excluding investments on non-accrual, if any. Now I'd like to briefly discuss our available liquidity. As of March 31, our liquidity and capital resources included cash of $60.2 million, $5.5 million of available SBA debentures and $85 million of availability on our line of credit, resulting in total liquidity of approximately $150.7 million. Taking into account subsequent events, we currently have approximately $142.8 million of liquidity, GAAP leverage of 0.8 times and access to $150 million of additional SBA debentures under our third SBIC license subject to SBA regulatory requirements and 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 will now turn the call over to Lisa for Q&A. Lisa?

[Operator Instructions] Your first question comes from the line of Ryan Lynch with KBW.

Thanks for taking my questions. The first one I had was you guys obviously had very strong fee income in Q1, I'm assuming that was driven by the strong level of repayments that you had? Can you just talk about, I know repayments have been pretty strong so far in Q2. Can you just talk about your expectations for fee income levels in Q2 compared to Q1?

Sure, good morning, Ryan. Yes, what I would say Q1 fee income was a little higher than normal. There were some events there that were large events, not small, that’s been obviously positive, and it's a benefit of our model. But it's not something that I would say is going to reoccur every quarter for sure. So, when I look at Q2 from a fee perspective, my current expectation would be for fees to be lower. And that also is dependent on what activity happens here the rest of the quarter, which as you know, is there some number of unknowns, what deals that we're working on now do actually close and what repayments actually occur. And so, but my expectation would be for fees to come down a little for sure.

Ryan, I would just add to that to put it in perspective. In Q1, we had about $3.1 million of fees approximately half of that was from prepayments. And so in Q2, I would expect our fees to really be driven more from origination activity and maybe to a minor extent, maybe a few amendment fees, but not the level of prepayment fees we saw in Q1.

Okay. And then a question kind of on the market environment in your outlook, kind of a two part question. You talked about M&A continuing to be pretty active in that space, obviously that presents a lot of deal activity for you guys to deploy capital, but also it can put pressure on repayments. Can you just talk about first what do you think that your guides ability to actually grow the portfolio over the next coming quarters is? Again I know, it's hard to tell I’m not asking necessarily forward prediction, but just high level thoughts on that and then also, the environment and very competitive, certainly in the upper middle market certainly back to pre-COVID levels. I'm just wondering as far as the terms and structures that you guys are seeing kind of - in the lower middle market and middle market. Have those sort of returned back to pre-COVID levels, are those still a little bit more favorable?

Great question, questions should I say. And so, let me - maybe I'll start with just the market and give you a little context on originations and repayments and then try to address those last questions. From a market perspective, as Q1 started out I'd say a little slow and that was just timing given their Q4 activity levels. I would say towards the end of Q1 things started to pick up in the M&A market in a meaningful manner and our market at least the lower middle market. In Q4, we saw high level of deal flow more importantly a lot of high quality and actionable opportunities as the market was flocking to very high quality businesses that hadn't been impacted by COVID. I would tell you the market seems to be - continue to be focused on those businesses that haven't been meaningfully impacted by COVID. And so, we are - in fact, I'd say there's a premium paid for those businesses. So there is a fair bit of activity today. As I sit here today, I would suggest activity levels are good, and we expect [technical difficulty] what I would say robust M&A market throughout the year at this point, anything can change, but that's what we're hearing. That's what we're seeing. So from an originations perspective, obviously, we're focused on capital preservation, attractive risk adjusted returns, and we're being very disciplined. We're going to continue to focus on first lien investments and strong credits. And we will continue to opportunistically focus on second lien investments, and what I would call, just superlative type situations. And so, we expect Q2 to be relatively busy from origination perspective this quarter was I guess in April, we had $43 million in origination. We're working hard on several opportunities right now. But as you know, it's - hard to tell, what will close and what will - anything can happen with the deal. And so that's the challenge that I look at it, but I do expect some incremental originations obviously. With regard to repayments, we've had three debt repayments this quarter. At this point, we do expect some additional realization activity, one company that's in the process of refinancing its balance sheet. And we have two others that are in the market executing its strategic alternatives process, don't know the timing or certainty of those, but that's going on. So overall, what I would expect is originations this quarter to - I'd say maintain or exceed repayments. And it's really just it depends on what occurs here in the last 50 days of the quarter. So it's dynamic it's fluid, but it's very active. As I look forward or I try to answer your two last questions, can we grow the portfolio? As I see it today, is I do think repayments will slow down a bit, I think a lot of the low hanging fruit in our portfolio is kind of transpired if you will. And so, I do expect for - the portfolio to grow the rest of the year, what happens this quarter, it's kind of hard to tell, but just based on activity levels, and expect activity levels, compared to repayments that we can see. I would expect originations to outpace repayments and exits. In terms of the competitive environment and obviously is competitive. Good news is we're participating in the lower middle market that's highly fragmented and represents close to 90% of the transactions that take place in the marketplace. So, we like what we're seeing, what I would tell you is, from a competitiveness terms, terms aren't changing, leverage is probably lower levels than pre-COVID levels overall. So I think that's a positive. And pricing is probably in line with pre-COVID levels at this point. For the last year, obviously pricing has been above where things were. And I do think pricing overall has come down here over the last three or four months to more of pre-COVID levels at least, that's what we're experiencing. So that's a long winded way to try to answer those questions, but hopefully that's helpful.

Yes, I really appreciate the color and commentary on the market environment and also on your kind of thoughts for portfolio growth the rest of the year - fully knowing that you don't have a crystal ball, sitting on your desk. So understanding that, so I appreciate the time today. I'll hop back in the queue?

Okay. Thanks, Ryan. Good talking to you.

Your next question comes from the line of Bryce Rowe with Hovde.

Great, thank you. Good morning, Ed and Shelby.

Good morning Bryce.

Ryan asked some good questions there on repayments and originations and appreciate the color you gave on the market and the pace of deal flow. Maybe just wanted to ask a little bit about the SBA and the use of SBA debentures, it's a topic that we've talked about in past calls quite a bit and understand that you all look to redeem those that are kind of coming due a little bit early in terms of the SBA debentures? But it was good to see you will draw some again here in the quarter. And so just kind of curious what your outlook is for newer originations kind of fitting the SBIC bucket, whereas maybe it's been a little bit more limited, over the last couple of years in terms of being able to use that bucket?

Sure, great question, Bryce. I think, just our SBA situation, we are generally winding down SBIC-2 too and obviously starting to build in a more meaningful manner SBIC-3. From an origination perspective, expectations we're continuing to play in the same old market, we played in for a long time. My expectation would be for SBIC-3 to grow here over the next whatever 12, 24 or 36 months in a reasonably meaningful way. As you know, there are hurdles, we have to get over from a qualification perspective, that do impact and sometimes, companies don't qualify, do they have too many operations, overseas, things like that. But at the same time, we're very focused on the U.S. market, as you well know. But there are a lot of nuances that get in the way sometimes for deals qualifying for the SBA, but when they do qualify. We intend to use the - our funding, our vehicle, to the largest extent that we can. The SBA has been a great partner for Fidus and we continue to want to build that portfolio and be a good partner for the SBA as well. So hopefully, that's helpful. I would expect it to grow, at what pace it's impossible to kind of know.

Sure.

And Bryce.

that’s helpful Ed. Go ahead Shelby sorry.

I would just add that prior to COVID and this is just a function of timing, we had a number of repayments in FMC-2. And so as we had new SBIC eligible originations, we actually use funds out of SBIC-2 to redeploy capital, as opposed to growing the third bond at that point in time. Then we kind of had a little pause with COVID. But I'd say as I mentioned now, we've really got SBIC-2 in wind down mode. And so any new originations will place in three, so you'll start to see a little bit more growth in three.

Okay, okay. Maybe one follow-up on the liability structure, you've got some cash sitting on the balance sheet. It sounds like you've got uses for them from an origination perspective, but also pressure from repayment. So Shelby just curious how you think about the remaining more expensive notes that are sitting out there, tied to the - tied to those that you've already redeemed a portion of?

Yes, we've been - just in subsequent events. We did pay down that $15 million outstanding on our line of credit with excess cash. That being said, as you noted, we did have some repayments, so we do still have some excess cash. But right now, I'd say we've kind of really got that more queued up for origination activity. From a maturity date perspective, there's not really a real need to pay down the other baby bonds. Certainly, it's something that if we found ourselves in a situation where repayments started outpacing investments, we'd reevaluate that just because it is more cost effective. And then the only other thing I'd add is right now, most of our cash is really sitting at the BDC as opposed to draft in the SBIC. So really is available for any type of origination activity.

Great, that's good stuff. Thanks.

Thanks, Bryce. Good talking to you.

Our next question comes from the line of Matt Tjaden with Raymond James.

Hey all, good morning and appreciate you taking the time. First question maybe for you Ed on the, I know over the past couple quarters, we've talked on the transition to a higher percentage of first lien investments in the book. I'm interested, is that driven by a desire to be higher in the capital structure or is it driven by less second lien opportunities available or kind of some combination of the two?

Great question, Matt I think in short and in summary, I'd say it's a couple things. We are, we made a strategic decision several years ago, to focus a little bit more on first lien investments, we thought it would enhance really quite frankly, our opportunities that and it has done that. And it gives us a chance to provide full solutions, which we liked that aspect of it as well. And then your comment on orders many second lien opportunities out there today vis-à-vis I would say, three or five or seven years ago, the answer is no. There is more first lien unitranche investments being made. So I think, the move we've made - we like from a lot of angles, but we do think it's increased our opportunities stack as we look forward, and as - what we've had over the last several years. So it is, first lien investments represent a majority of what we're doing from an origination perspective, and has done so really the last three years or so. Hopefully, that's helpful, but it's been a good transition for us. We've always made first lien investments, but we are now it's a majority of what we're doing. And we're very much going to market as a solution provider. And, I think that's working very well.

Okay, that's helpful. I guess, kind of as a follow-up to that as well, as first lien continues to trend higher. How do you think about leverage? Are you are you comfortable taking leverage, modestly higher with a higher first lien book?

Great question, comfortable the answer is yes. We've - quite frankly, as you know and SBIC fund can be funded two one and even with junior capital investments. And when we were private, that's where we were levered. So we're comfortable with junior debt investments, So being levered, higher, so comfortable absolutely. We think though, as we just thinking about the market and what not, we've targeted a one-to-one leverage number. Our plan is not to exceed that greatly for sure. And we don't - we haven't changed those thoughts. But from a comfort, we're very comfortable with those levels, and even higher it’s just, that's the general kind of view is with the complexion of our portfolio, it makes sense to be more in the one-to-one leverage. And I think we like that kind of flexibility that it gives us. We've always operated with - carefully and with, sometimes in abundance of caution, and that's kind of how we think about it at this point.

Great, that's it from me. Appreciate the time.

Yes, thank you, Matt appreciate it.

Your next question comes from the line of Chris Kotowski with Oppenheimer.

Yes, there may not be an answer to this question. But I'm kind of thinking back at this time last year, we were all just kind of wondering, how much the economy would slowdown and how high unemployment would go and how much damage it would do to debt payment capacity. And now we have the vaccines and the stimulus in place, and it just seems too good to be true? And so I'm wondering, are there any signs as you look through your portfolio companies of companies overheating labor shortages, pressure on, inflationary pressures or any other adverse impact of like, too much good news?

Sure, great question, Chris. Yes, it's amazing a year later the difference, right.

Yes.

Close to 10% of our portfolio and being impacted meaningfully by shelter in place orders a year ago when we spoke to you. So it is - it's a very different time period, which is good obviously. The answer to your question is, yes we are seeing certain companies impacted by labor shortages, it's tougher to get people to work in certain environments, when there's opportunity that's being provided by the government that sometimes exceeds that pay. Hopefully, that subsides at some point later in the year, but it's something that our portfolio companies are managing and dealing with, but at the same time, I'd say it's far from perfect. And then from input cost perspectives, whether you name it, I do think there has been an increase in prices, and it just kind of varies by portfolio company, what the reason is. As we all know, freight costs for instance are very high today relative to a year ago. And someone - you got to pass those costs on. So that's one very good example that we're seeing, and more than a few companies, and the good news is the environments good enough to where you can pass those, where you can implement price increases to offset those types of situations. But the short answer is, yes that's very real in the environment today. And the good news is, the portfolio companies that we have are dealing with it and addressing it in couple cases to be honest, it took a couple quarters to figure it out and to do address it. But what we've seen is pretty healthy ability to manage through those issues. Albeit labor is difficult and sometimes limits capacity at certain manufacturing companies, but they're still operating it just maybe not at the optimum level if you will.

Okay, all right. Like I said, I've not, but I guess it doesn't sound like it's impacting to a significant degree, the financial performance of the portfolio companies?

That's what we're seeing that's exactly right. I think it's given the overall environment. What we're seeing is there's an ability for the companies to manage through the issues, but the real world is there are issues that they're having to address and find ways to improvise and deal with.

Okay, thank you. That's it from me.

Okay, thank you, Chris. Good talking to you.

Your next question comes from a line of Sarkis Sherbetchyan with B. Riley Securities.

Hey, thanks for taking my question here. Most of them were asked, but I do want to ask and learn if your team sees more opportunities in certain industries that fit your risk profile better in this current environment. Just looking at the industry composition table on an invested cost basis, a quarter-on-quarter looks like manufacturing and healthcare moved up. So any insight you can share here?

Sure, I mean I think what I would say from strategy and approach perspective, we're focused very much on cash flow and high free cash flow businesses, and you can find those in a large variety of markets, right. So recurring revenue close to recurring revenue type business models with positive outlooks and have been greatly impacted by this environment. Those are the types of end markets and situations that we're looking for. And we also have the ability and do execute some more asset oriented type situations. I can think about from a recurring revenue perspective, ARR deals that's something that we view that very much is and those [technical difficulty] lien investments, but that's been a big focus for us in the - I'd say software space and tech enabled space. And so that is something we've done a lot over the years. But now, I'd say an increased focus even over the last several years, and in this COVID environment again for looking for recurring revenue. So healthcare clearly is an area where we've spent a lot of time over the years. We're staying away from more companies that can be impacted by reimbursement rate changes. But there is obviously a lot of other opportunities in the healthcare arena or businesses that serve the healthcare arena that fit in [ph] and that we see. And that's an area we like very much again looking for more repeat type business situations, recurring revenue type situation.

Got it. That’s all from me, thank you.

Okay. Good talking to you Sarkis. Thank you.

Our next question comes from the line of Mickey Schleien with Ladenburg.

Yes, good morning, Ed and Shelby, congratulations on another strong quarter. Ed, I sort of wanted to follow-up on a previous question in terms of looking back over the last year. It is amazing to see how well your lower middle market portfolio has performed as well as some of your peers. And I'm curious to understand whether you've sort of done a postmortem on that performance given the government’s strong support of the economy? In other words, if the Fed hadn't come in with trillion dollar checks the way it did, and the stimulus payments and PPP Main Street lending and everything. Do you have a sense of how the portfolio would have performed? And is that impacting your target market in terms of perhaps going a little bit more upmarket to avoid having to count on the government in the future?

Sure. Great question, Mickey, a tough one postmortem, what I would say is clearly, what the government did the CARES Act and whatnot. What's helpful to our portfolio companies, we're the ones that utilize the program. And so, clearly that was helpful having a private equity driven portfolio where it represents it include some sponsors 90%, 95% of our portfolio companies having some stewardship there and capital behind you is - was helpful. But they weren't huge investments made, but in certain cases, it was helpful. So, what I would say, what's important in times like this as you know is having a business that can weather storms, but also just the underlying long-term fundamentals are positive right, and should be strong, sustainable cash flow generator and good times and in bad quite frankly. And so, that's been our focus, we clearly haven't been perfect. But at the same time, I think we've done a good job of investing in businesses that had a real reason for being and had good long-term outlooks and good cash generation capabilities. And so, I think that's ultimately more important than the support that the government gave, as all the support that the government gave clearly has I think put us in the position we're in today. I still think we’d have gotten to this position, but my guess the timing of it would have been different. And it may be would have been a little bit messier if you will, not from a long-term loss perspective, but more from just dealing with credit issues as we always have to do - on a daily basis we do. So that's how that's kind of how I think about it from a target market perspective. We continue to focus on the same, call it $5 million to $30 million EBITDA market. So, there hasn't been a change there. We did make a move, I'd say five years ago, six, seven years ago to start moving our subordinated debt and second lien investments, making sure they were in bigger, more stable businesses. And we made that move. And I think that's worked very well quite frankly, our ability for larger companies to withstand events, whether they're COVID-19 events or others are usually a little bit better generally speaking, not in all cases, but better. We still obviously are doing some smaller company deals, but more recurring revenue like software what have you. And we're doing a lot of those more on a first lien basis. So we've made that I'd say structural change in alignment if you will. So that's how we've managed it. But our focus has not changed pre-COVID versus post-COVID. Other than I'd say, during the COVID environment, we very much were focused on first lien and obviously risk mitigation. And we're still in this environment, we're still continuing that and what I would tell you is I don't expect to change that as we move forward. I think our client base are very, they're embracing, the solutions that we're providing. So I think we're on a good path from that perspective. Hopefully, that's helpful.

That is helpful and I appreciate you taking my question. Thank you.

Thank you, good talking to you Mickey.

Likewise.

At this time, there are no further questions. I would like to turn the call back over to Ed for closing remarks.

Thank you, Lisa. And thank you everyone for joining us this morning. We look forward to speaking with you on our second quarter call in early August 2021. Have a great day and a great weekend.

This concludes today's conference. You may now disconnect.